Verni Tax Law

TRANSFERRING PROPERTY TO AVOID PAYING TAXES

Why it’s a Very Bad Idea?

A taxpayer who owes or anticipates owing a substantial amount of income tax to the IRS may be tempted to transfer his or her property to a spouse, a relative or a nominee entity with the hope of preventing the IRS from collecting the outstanding tax debt. Similarly, a taxpayer may have an incentive to transfer property to a third party, in circumstances where the taxpayer may be subject to the 26 U.S.C. § 6672(Trust Fund Penalty). The taxpayer usually justifies such a transfer as “strategic planning.” Sometimes the taxpayer acts alone. In other instances, the taxpayer may be aided by a complicit, inexperienced or incompetent attorney.

These tactical maneuvers almost always fail and invariably result in the property transfer being judicially set aside, and/or the imposition of personal liability on the part of the transferee. In addition, the illicit transfer of property can result in significant civil and criminal penalties as well as criminal prosecution.

The discussion that follows examines the judicial remedies available to IRS including the commencement of a fraudulent conveyance action in either a state or federal court pursuant to state law or the Federal Debt Collections Practices Act (“FDCPA”). The discussion will also examine the imposition of transferee personal liability under 26U.S.C. § 6901.

Fraudulent conveyance

In general, a fraudulent conveyance represents a conveyance of property to a third party without consideration or for less than adequate consideration. Procedurally, the IRS has the burden of proving that either constructiveor actual fraudexists. Constructive fraudexists where a taxpayer’s property is transferred for less than its fair value and the taxpayer is insolvent at the time of the transfer or is rendered insolvent following the transfer. Actual fraudexists where a taxpayer transfers property to a third party with actual intent to hinder, delay, or defraud the IRS in the collection of the tax debt.

Constructive fraud

In the context of constructive fraud, the IRS must establish the following elements in order to set aside a transfer of property:

1. That the alleged transferee received property of the transferor.
2. That the transfer was made without consideration or for less than adequate consideration.
3. That the transfer was made during or after the period for which the tax liability accrued.
4. That the transferor was insolvent prior to or because of the transfer of property or that the transfer of property was one of a series of distribution of property that resulted in the insolvency of the transferor.
5. That all reasonable efforts to collect from the transferor were made and further collection efforts would be futile.

The above elements suffice to establish constructive fraud and it is unnecessary for the IRS to prove actual intent to defraud.

Actual fraud

In order to establish actual fraud, the IRS must prove the taxpayer’s actual intent to hinder or delay or defraud the IRS. The FDCPA identifies eleven non-exclusive factors to be considered including:

1. Whether the transfer was made to an insider.
2. Whether the transfer represents substantially all of the taxpayer’s assets.
3. Whether the value of consideration received by the taxpayer was reasonably equivalent.
4. Whether the taxpayer was insolvent or became insolvent shortly after the transfer was made.
5. Whether the transfer occurred shortly before or shortly after the tax debt was incurred.

In addition to commencing an action to set aside a fraudulent conveyance, IRC § 6901provides the IRS with a procedural mechanism for holding the transferee personally liable for the debt of the taxpayer. In contrast to an action to set aside a property transfer, Section 6901 is focused on the transferee rather than to the property. It is noteworthy that commencing an action to set aside a fraudulent transfer and imposing personal transferee liability under Section 6901 are not mutually exclusive remedies. The IRS may consider reliance on the FDCPA or a state’s fraudulent conveyance statute as the basis for imposing personal transferee liability and may also pursue multiple remedies.

Transferee liability

To establish personal transferee liability, the IRS has the burden of proving the existence and extent of the transferee’s liability. In addition, where the taxpayer unsuccessfully contests the liability in a judicial proceeding, the taxpayer as well as the transferee is estopped from contesting the liability either in a fraudulent conveyance action or for purposes of imposing personal transferee liability. The IRS has the burden of establishing the taxpayer’s tax liability and the amount. However, the transferee’s liability is capped at the value of the property transferred. The transferee seeking to avoid or mitigate transferee liability must prove the taxpayer’s liability is less than the amount asserted by the IRS.

A taxpayer, who is considering making a transfer of property to avoid his or her income tax obligations is creating a substantial risk that the transfer will be set aside and/or the transferee will be personally liable. Moreover, a taxpayer may soon find himself/ herself the subject of a criminal investigation. When considering such a decision, a taxpayer should always first consult with a knowledgeable and experienced tax attorney for a comprehensive review of all the relevant facts. Depending on the circumstances, payment arrangements can be made with the IRS.

August 28, 2020/by Anthony N Verni, Attorney at Law, CPA

IRS Payments, Law Office News, Tax Audit, Tax Returns

Trust Fund Recovery Penalty

The Trust Fund Recovery Penalty: Are You At Risk?

Introduction

The assessment of the § 6672 penalty can be devastating, and in some cases, life changing. Individuals who are subject to the penalty usually state that they were unaware that failure to collect and pay employment taxes to the IRS could result in personal liability for unpaid payroll taxes. The § 6672 penalty, commonly known as the “Trust Fund Recovery Penalty” (“TFRP”) imposes personal liability on individuals who are required to collect, account for, and pay over employment taxes and who willfully fail to collect such tax, or truthfully account for and pay over such tax.The requirements for imposition of the penalty are:

The penalized person is deemed to be a “responsible person” or someone responsible for having collected and paid the tax in the first place; and
The penalized person must have willfully failed to collect and pay that tax (Godfrey v. United States, 748 F.2d 1568, 1574 (Fed. Cir. 1984)).

The TFRP provides the IRS with an alternate means of collecting unpaid employment taxes, when the employer is unable to do so, by permitting the IRS to pierce the corporate veil and hold those responsible for the employer’s failure to pay the outstanding taxes (White v. United States, 372 F.2d 513, 516, 178 Ct.Cl. 765 (1967)).

The TFRP usually comes into play when a business is experiencing a financial crisis. The disruption to an employer’s cash flow requires making tough decisions by those in charge of deciding which creditors get paid. The list of creditors usually involves the IRS. Employers are required to withhold income and FICA taxes from employee salaries and must also contribute the employer’s share of FICA taxes. The withheld funds are to be placed in trust with the government designated as the beneficiary. Often times employers will utilize trust funds, which are a ready source of cash, in order to satisfy operating expenses with the justification that the business is merely receiving a loan from the government. In more egregious cases, trust funds have been used to continue to pay for the personal expenses and lavish lifestyle of those who are in charge of paying the bills. These individuals are usually, but not always, the corporate officers, directors or managers of a business, but also include others. Suffice it to say, the IRS views the dissipation of trust funds by those in charge as stealing.

The IRS commitment to pursue those who have failed to account and deposit payroll taxes on behalf of their employees is underscored by the remarks made by the Assistant Attorney General at a Federal Bar Association Conference:

“Since January 2015, the Tax Division has sharpened its focus on civil and criminal employment tax enforcement. As most of you know, these cases involve employers who fail to collect, account for, and deposit tax withheld from employee wages. These withholdings represent 70 percent of all revenue collected by the IRS, and as of September 2015, more than$59 billion of tax reported on Forms 941 remained unpaid. These employers are literally stealing money, knowing that their employees will receive full credit for those amounts when they file their returns. The employers gain an unfair advantage over their competitors and the U.S. Treasury is left holding the bag.”

Acting Assistant Attorney General Remarks at Federal Bar Association Tax Law Conference (March 4, 2016). The 26 U.S.C § 6672 (a) provides in part that:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

The following discussion identifies persons who may be at risk, the common mistakes made during an IRS examination and the assessment process as well as procedural options that may be utilized to contest the assessment of the TRFP.

Who Is Responsible For The Collection, Accounting And Payment Of Payroll Taxes?

The assessment of the TRFP requires that the IRS establish that the person against whom enforcement is sought had a duty to collect, account and pay over employment taxes. The term “person” is defined in 26 U.S.C. § 6671(b) and includes:

“an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.”

The courts use the term “person” and “responsible person” interchangeably. While the term “person” is statutorily defined, the latter is not. Rather, the term “responsible person” is a creation of the courts (Slodov v United States, 436 U.S. 238 – Supreme Court 1978). In order to be considered a responsible person, the taxpayer must be “under a duty” to collect, truthfully account for, and pay over” any taxes.
The inquiry will always focus on whether the person has “significant control over the enterprise’s
finances” ((Fiataruolo v. United States, 8 F.3d 930, 939 (2d Cir. 1993), (quoting Hochstein v. United States, 900 F.2d 543, 547 (2d Cir. 1990)).

While many of the cases involve officers, directors and shareholders, the courts have expanded who qualifies as a responsible person to include creditors, employees, accountants and attorneys. If the responsible person could have impeded the cash flow of the business to prevent the trust funds from being squandered, then he or she will be held liable (Thomas v. United States, 41 F.3d 1109, 1113 (7th Cir. 1994)). Furthermore, the TFRP can be assessed against more than one person (Thibodeau v. United States 828 F.2d 1499, 1503 (11th Cir. 1987)). Consequently, each person found liable can be held responsible for the full amount of unpaid trust fund taxes.

The IRS considers the following factors when making a determination of whether a person is a responsible person:

Does the person(s) have a duty to perform?
Does the person(s) have the power to direct the act of collecting trust fund taxes?
Does the person(s) have the accountability for and authority to pay trust fund taxes?
Does the person(s) have the authority to determine which creditors will or will not be paid?
Does the person(s) have the status, duty and authority to ensure that the trust fund taxes are paid?
Is the person(s) an officer, director, or shareholder of the corporation?
If the person(s) is an officer, what do the corporate by-laws state regarding the person(s) responsibilities as it relates to financial matters?
Does the person(s) have the ability to sign checks?
Does the person have the authority to hire and fire employees?
Does the person have the authority to sign and file the excise tax or employment tax returns, such as Form 941, Employer’s Quarterly Federal Tax Return?
Does the person control payroll/disbursements?
Does the person control the corporation’s voting stock? and
Does the person(s) make federal tax deposits?

While no one factor is dispositive, check-signing authority is considered strong indicia of responsibility, even in cases where the check signer is instructed by a superior not to pay the taxes (Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983)). The facts in each case are evaluated by the IRS when making a determination as to responsibility. As the Court of Appeals pointed out in Godfrey:

“. . . the case law makes abundantly clear, a person’s “duty” under § 6672 must be viewed in light of his power to compel or prohibit the allocation of corporate funds. It is a test of substance, not form” (Godfrey 748 F.2d at 1576).

What Constitutes Willfulness Under 26 U.S.C. § 6672?

In addition to establishing that the individual is a “responsible person”, it is necessary that the Government prove that the person acted willfully. The Internal Revenue Manual defines “willfulness” in the context of the TRFP as: “intentional, deliberate, voluntary, and knowing, as distinguished from accidental. Willfulness is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements” (I.R.M. § 8.25.1.3.2).

Some of the factors the I.R.S will consider in making a determination of whether a responsible person was willful include:

Whether the responsible person had knowledge of a pattern of noncompliance at the time the delinquencies were accruing.
Whether the responsible person had received prior IRS notices indicating that employment tax returns have not been filed, or are inaccurate, or that employment taxes have not been paid.
The actions the responsible party has taken to ensure its Federal employment tax obligations have been met after becoming aware of the tax delinquencies.
Whether fraud or deception was used to conceal the nonpayment of tax from detection by the responsible person. Id.

The courts have construed “willfulness” under § 6672 to mean the “voluntary, conscious and intentional act” of paying creditors other than the IRS when the company is financially troubled (Phillips v. IRS, 73 F.3d 939, 942 (9th Cir. 1996) (quoting Davis v. United States, 961 F.2d 867, 871 (9th Cir. 1992)); Klotz v. United States, 602 F.2d 920, 923 (9th Cir. 1979)).

While evidence of willfulness requires proof of a voluntary, intentional, and conscious decision not to collect and remit taxes thought to be owed, it does not require proof of a special intent to defraud or deprive the Government of monies withheld on its account (Godfrey 748 F.2d at 1576, citing Scott v. United States, 354 F.2d at 295). The Court of Claims has consistently rejected the view that “a finding of willfulness entails a showing of evil motive, bad purpose, or calculated malevolence” (Id. at 1576). The focus of inquiry is rather “on the deliberate nature of the individual’s election not to pay over the money and the circumstances of that refusal” (Id. at 1576). Consequently, if a person deemed a responsible party discovers that there are unpaid taxes, the responsible person has an immediate duty to use all unencumbered funds to pay taxes (United States v. Kim, 111 F.3d 1351, 1357 (7th Cir. 1997)). Failure to pay the back taxes will result in personal liability on the part of the responsible person.

The Court of Appeals in Godfrey echoed the White definition of willfulness as meaning “a deliberate choice voluntarily, consciously, and intentionally made to pay other creditors instead of paying the Government.” Godfrey 748 F.2d at 1577, citing Scott 372 F.2d at 521. The Court of Appeals citing Feist v. United States, 607 F.2d at 961 also noted that willful conduct may also include a reckless disregard of an “obvious and known risk” that taxes might not be remitted. Finally, the Godfrey Court citing Bauer v.
United States, 543 F.2d at 150; stated: “Mere negligence in failing to ascertain facts regarding a tax delinquency,” however, “is insufficient to constitute willfulness under the code” (Godfrey 748 F.2d at 1577).

Assessment of The Trust Fund Penalty

When an employer falls behind on the payment of its payroll taxes, the IRS will send out a Federal Deposit Tax Alert Notice to the business. If unanswered a Revenue Officer (“RO”) is assigned to the business to investigate the reason the business in non-compliant. The RO will attempt to bring the business into compliance by directing the business to set up a special trust account for the deposit of employment taxes. If the business fails to come into compliance, the next step will be to conduct an investigation of potentially responsible individuals against whom the § 6672 penalty can be assessed. The RO will then attempt to secure the business’s bank records and other records of the business. The RO will also issue Letter 3586 to the potentially responsible individuals setting a meeting (“Interview”). Letter 3586 is accompanied by Notice 784 “Could You Be Personally Liable for Certain Unpaid Federal Taxes.”

At this point the potentially responsible should seek the advice of a tax attorney. Most individuals are ill equipped to handle an IRS Interview and may unwittingly say something that will be used to establish responsible party status. In some cases, an individual’s statements may serve as a basis for a referral to the Criminal Investigation. Remember, the IRS is not there to help you. The RO will use Form 4180
(“Report of Interview With Individuals Relative to Trust Fund Recovery Penalty”) when conducting TFRP Interview. “The Form is intended to be used as a record of a personal interview with a potentially responsible person.” I.R.M. § 5.7.2.4 1. At the conclusion of the Interview, the individual will be asked to read and sign the Form. If you are not represented, there is a very good chance the IRS will deem you to be a responsible person. More often than not, Form 4180 is used to ensnare a person as a responsible person.

Depending upon the circumstances, and particularly where criminal exposure exists, a good tax attorney may advise the individual not to sign Form 4180. The attorney might also request that the Form be completed outside of the presence of the RO to provide the taxpayers additional time in which measured responses to the questions can be framed. Finally, if the Individual plans on attending the Interview, it is extremely important that he or she be represented by tax counsel.

Following the Interview, the RO will determine whether to proceed with the proposed assessment. If the RO decides to move forward, he or she will generate and send the responsible person a 60 day Preliminary Notice styled as “Letter 1153” together with Form 2751 (“Proposed Assessment of Trust Fund Penalty”) Thereafter, the IRS must wait 60 days after the issuance of Letter 1153 and the Proposed Assessment before issuing a notice and demand for payment. The responsible party has 60 days to respond and 75 days if the letter is addressed out of the country. In response to the Notice the Taxpayer has the following options:

Panic and take no action (Can be fatal to your chances).
The individual can sign Form 2751 in which he agrees with the assessment.
File a protest letter and then proceed to IRS Appeals.
Request mediation.
If the individual disagrees with the decision from Appeals, he or she has a right to judicial review.

There are also alternatives with respect to post assessment including Offers in Compromise, Installment Agreement, Partial Pay Installment Agreements and Currently Not Collectible that may serve as a basis for minimizing the financial impact associated with being subject the assessment of the TFRP.

Conclusion

If you are involved in a business that is delinquent on its payroll taxes, there is a high likelihood that you will be investigated by the IRS. Those individuals responsible for management of the business are particularly vulnerable to the TFRP should the business ultimately fail to pay its employment taxes.
When looking into the issue of responsibility, the IRS will most always pick the low hanging fruit. Since the IRS considers failure to pay your employment taxes stealing, the necessity of legal representation cannot be understated. If the IRS is currently conducting an investigation into the employment taxes of your business, it is advisable to get ahead of the curve particularly if there is a risk of a referral to Criminal Investigation of the IRS. A potentially responsible person should never attend an Interview without the assistance and advice of counsel. Many individuals I have counseled simply waited too long. You cannot hide your head in the sand!

By Anthony N. Verni.

February 11, 2019/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, FBAR, IRS Payments, Tax Audit, Tax Returns

The Non-willful FBAR Penalty and the Slow Death of Reasonable Cause.

Non Willful FBAR Penalty Ruling.

A December 2017 decision of the Court of Federal Claims in Jarnagin v. United States begs the question: Whether a Taxpayer can ever have a reasonable cause defense to the assessment of the Non-Willful FBAR Penalty. The Court concluded that a Taxpayer, who failed to read his return and correctly ascertain that a timely FBAR was due could not have a reasonable cause defense. This may have serious implications in light of the recent announcement by the IRS that the Offshore Voluntary Disclosure Program will end on September 18, 2018 and their suggestion that the Streamline Filing Compliance Procedures may also be scrapped in the future.

The Jarnagin decision involved a Taxpayers’ suit to recover $80,000 in Non-Willful FBAR penalties assessed over a four-year period for their failure to file FinCen Form 114 (FBAR). The Taxpayers were successful business people, who maintained Foreign Financial Accounts in Canada. They used a return preparer during the four-year period but did not tell the return preparer about the accounts. They argued that they were unaware of the FBAR filing obligations and that their return preparer should have raised the issue based on the information the Taxpayers furnished the return preparer. The Court disagreed.

The Court relied upon the meaning of reasonable cause found in Title 26 (the Tax Laws) under I.R.C. §§ 6651(a) and 6664(c) (1) in sustaining the penalties. Citing Moore v. Unites States, the Court concluded that “there is no reason to think that Congress intended the meaning of ‘reasonable cause’ in the Bank Secrecy Act to differ from the meaning ascribed to it in the tax statutes.” Consequently, those who have yet to come forward and make a disclosure of their Foreign Financial Accounts could face the assessment of the Non-Willful FBAR penalty for each of their accounts for multiple years. Furthermore, if the Streamlined Filing Compliance Procedures survive, routine rejection of a Taxpayer’s reasonable cause defense may become the order of the day.

April 8, 2018/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, IRS Payments, Law Office News, Tax Returns

Immigration and Lying on your Tax Return: The Quickest way to deportation.

Lying on tax return as an immigrant.

The IRS has identified a rise in the number of immigrants who routinely lie on their tax returns in order to secure large refunds to which they are not entitled. To address this trend, the IRS has vowed to heighten scrutiny with the commitment to go after these taxpayers with vigor. As such, you will see increased civil, and in certain cases, criminal penalties being assessed on the perpetrators.

As an immigrant, lying on your Federal Tax Return can also have other consequences such as; denial of citizenship during the naturalization process and deportation. Immigration law considers tax fraud to be a crime of moral turpitude and an aggravated felony, which upon conviction can result in the commencement of removal proceedings and deportation. Immigrants include individuals who are here legally such as those with student visas as well as lawful permanent residents.

Some of the things that the Internal Revenue Service has been focusing on include; under-reporting income, fabricating expenses and claiming refundable tax credit.

False claims by taxpayers include:

Claiming increased federal and state withholding which does not correspond to the taxpayer’s W-2;
Claiming additional child tax credits to which a taxpayer is not entitled to;
Claiming additional dependents to which the taxpayer is not entitled to claim;
Claiming a false earned income credit;
Making up itemized deductions such as medical expenses, charitable contribution and miscellaneous expenses;
Claiming false employee business expenses on Schedule A including business mileage and unreimbursed employee business expenses;
Filing Form 1040, Schedule C and reporting made up income and expenses on a nonexistent business in order to generate a loss;
Failing to disclose foreign financial accounts and other foreign financial assets and income from these assets on FinCen Form 114 and Form 8938;
Lying on Schedule B, Part III, questions 7(a) and 7 (b) by checking “no” in response to questions concerning the existence of foreign bank accounts and the obligation to file FinCen Form 114 (FBAR); and
Obtaining a false social security number and filing an income tax return, while at the same time, applying and receiving government benefits using the individuals actual social security number.

The above list is only a partial list of things that some immigrants routinely lie about on their tax returns.

It makes no difference whether you self-prepared your tax return or you went to a questionable tax preparation firm to have your return prepared. If you signed the return under “penalty of perjury” you are responsible for its contents. “Willful Blindness” is not a defense.

My office handles hundreds of offshore disclosure cases a year and I routinely come across the above irregularities when reviewing taxpayer returns. If your return was prepared by a third party and the tax return was filed as “self-prepared,” you can be certain that the return is inaccurate and contains material misrepresentations and omissions. If you received a large refund, do not assume it is the generosity of the U.S. Government. There is chance that the refund was generated through fraud.

Remember, you have invested a great deal of time and money in order to pursue your dream in America. Processing your status from visa, to permanent resident and ultimately, to naturalization is a great accomplishment. Lying on your taxes is the fastest way to denial of citizenship and in some cases, a one way ticket back to your home country. It’s not worth it!

April 6, 2018/by Anthony N Verni, Attorney at Law, CPA

IRS Payments, Offer in Compromise

Making Appeals to the IRS: What You Need to Know

How to Make an Appeal to the IRS: What You Need To Know

Tax cases fall into two categories:

First, where there is no dispute over the amount of tax that is due, the only remaining question is how the taxpayer will satisfy the outstanding liability. The taxpayer can pay the amount in full, enter into an Installment Agreement or submit an Offer in Compromise. Where the taxpayer is suffering from financial hardship, it may be possible to be placed in uncollectible status.

The second type of tax case involves a dispute between the IRS and the taxpayer. A taxpayer, with the assistance of an attorney, should consider each of the various methods for resolving a tax dispute and select the method that makes most sense. The Appeals process is one such method for handling disputes with the IRS, but by no means the exclusive method. The following is a brief discussion of the Appeals process and the basic rules of engagement.

The IRS Office of Appeals (“Appeals”) is tasked with the responsibility of resolving tax controversies without recourse to litigation. The Appeals Mission Statement provides that resolution of tax disputes should be fair and impartial both to the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service. I.R.M.8.1.1.1 (1) (10/23/07).

The cornerstone for the preservation of the integrity in the Appeals process is independence. In this regard, Congress reaffirmed its commitment to “ensure an independent appeals function” within the IRS. RRA’98 § 1001(a) (4). In order to avoid undue influence or even the appearance of impropriety, exparte communications between Appeals and other IRS employees are prohibited.

IRS Appeals hear taxpayer disputes in a number of ways and may conduct a hearing at one of its campuses or field offices in person. Appeals may also hear taxpayer disputes by way of correspondence or telephonically.

Jurisdiction for Appeals is very broad and may cover a variety of matters, including deficiency determinations, collections, penalty abatements and trust fund recover penalties. Taxpayer disputes are segregated into docketed and non-docketed cases.

An Appeal is typically generated in response to a proposed audit or examination adjustment. After the examiner completes the audit or consideration of a refund request, the taxpayer will be given the opportunity to file a protest with Appeals. Typically, Exam will issue what is known as a “30 day letter,”unless the statute of limitations has less than nine months to go until expiration. In such cases, Exam will not issue a 30 day letter since Appeals will not accept a case with less than six months left on the statute of limitations. When faced with the expiration of the statute of limitations, however, it is not uncommon for Appeals to solicit Form 872 from the taxpayer as a means of extending the statute.

In most cases, the taxpayer will need to file a formal written protest with Appeals. Smaller cases involving $25,000 or less may be subject to a small case request process that does not require a formal protest letter.

In cases where there is less than nine months left on the statute of limitations and the taxpayer refuses to sign an extension of the statute of limitations (Form 872), Exam will issue a Notice of Deficiency, which is sometimes referred to as a”90 day Letter.” The issuance of a 90 day letter will toll the statute of limitations. In addition, the filing of a tax court petition with the U.S. Tax court will further toll the statute of limitations until 150 days after the Tax Court Decision is final.

If the taxpayer wants to contest a revenue agent’s proposed adjustments, the taxpayer can:

File a protest, resulting in a non-docketed Appeals case;
Pay the proposed deficiency, file a claim for refund and, if that claim is denied, file a protest at that time;
Request early referral under Rev. Proc. 99-28;
File a Tax Court petition in response to a statutory Notice of Deficiency (90 day letter) and go to Appeals in docketed status; or
Request Fast Track (Rev. Proc. 2003-40 for LB&I taxpayers and Announcement 2006-61 for SB/SE taxpayers).

The protest letter is filed with the examining agent within 30 days of receipt of the 30 day letter. If the taxpayer needs additional time, an extension may be granted, but any request by the taxpayer should be made in writing. In response to the taxpayer’s protest letter, the Agent will prepare a written response. The Agent will send both the protest letter and the Agent’s response, together with the case file to Appeals.

Thereafter, Appeals will contact the taxpayer to schedule a conference, generally within 60-90 days of the taxpayer’s filing of the protest letter.

In preparation for the Appeals conference, the taxpayer should be prepared to discuss the factual disputes, applicable law, and any additional research or the facts that need to be developed.

Following the initial conference, Appeals will expect the taxpayer to make the first settlement offer. In developing a settlement offer the taxpayer needs to be realistic. He must determine the maximum concession he is willing to make, while at the same time gauging what Appeals would likely accept. If the taxpayer is sincerely interested in settling, the offer has to be reasonable.

Appeals will attempt to bring about a settlement based upon what the probable outcome would be if the parties were to litigate. In cases where there is substantial uncertainty as to how a court would decide the matter, the parties will be expected to make concessions to reflect the strength or weakness of each position. In some cases, the parties will agree on a split issue settlement, where the parties stipulate to a percentage or dollar amount of the adjustment or the tax that is due.

There are certain instances where filing an Appeal may not be advisable, particularly where there are sensitive issues and where there is a possibility that Appeal may uncover additional issues.

If the parties are unable to successfully negotiate a settlement, the taxpayer, in non-docketed cases, has the option of going to non-binding mediation, as an additional step in which to try and settle the case. It is important to note that mediation is not an available alternative in collection cases or in cases where the taxpayer did not act in good faith.

In addition to non-binding mediation, a taxpayer may elect to arbitrate following unsuccessful Appeals negotiations. The arbitrators are selected from an approved list of arbitrators. Unlike mediation, an arbitration decision is binding and considered final.

The takeaway here is that the Appeals process is one alternative available to the taxpayer as a means of resolving a tax dispute. It is by no means, however, the exclusive method for addressing a tax dispute. A decision to file an Appeal should only be made after thoughtful consideration and discussions with an experienced tax attorney for purposes of identifying the relevant and material facts of the case, assessing the taxpayer’s strengths and weaknesses, and developing an Appeal’s strategy designed to bring about the best possible outcome.

December 13, 2016/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, IRS Payments, News

Delinquent IRS Trust Fund Taxes Update

The Trust Fund Penalty for Delinquent IRS Trust Fund Taxes

If you owe back payroll taxes, you should hire a capable Tax Attorney, who is experienced and familiar with the rules pertaining to the application of the Trust Fund Penalty. The IRS considers unpaid Trust Fund Taxes a serious matter and has made collection of these taxes a priority.

This is based upon two factors. First, as of September 2015, $59 Billion in payroll taxes remained outstanding.Second, approximately 69% of all taxes collected by the IRS are income taxes that are withheld from employers. The heightened scrutiny is evidenced by Assistant Attorney General, Caroline D. Ciraolo’s, statement made during a key note address at the American Bar Association’s 27^th annual Philadelphia Tax Conference on November 2, 2016.

“Among our top priorities is civil and criminal employment tax enforcement. Employment tax violations represent $91 billion dollars of our country’s $458 billion dollar gross tax gap, and as of June 30, 2016 more than $59 billion reported on quarterly employment tax returns remained unpaid.”https://www.justice.gov/opa/speech/principal-deputy-assistant-attorney-general-caroline-d-ciraolo-delivers-keynote-address

In addition, recent prosecutions and convictions make clear that “the willful failure to comply with employment tax obligations is a crime – plain and simple.” https://www.justice.gov/opa/pr/nevada-business-owner-and-bookkeeper-sentenced-employment-tax-crimes.

The following is representative sample of criminal prosecutions and convictions for unpaid employment taxes.

On October 26, 2016, Michigan owners of sixteen adult foster care homes were indicted for failure to pay employment taxes. From September 2010 through 2014, the owners withheld payroll taxes from their employee paycheck, but failed to file employment tax returns and also failed to pay over the trust fund taxes they collected.https://www.justice.gov/opa/pr/michigan-owners-sixteen-adult-foster-care-homes-indicted-failure-pay-employment-taxes

On October 25, 2016, Kyle Archie was sentenced to 10 months in prison for failure to pay over employment taxes for the tax years 2003-2009 related several entities including Reno Rock, Inc., GKPA Inc. and D Rockeries, Inc. . https://www.justice.gov/opa/pr/nevada-business-owner-and-bookkeeper-sentenced-employment-tax-crimes

On October 18, 2016 two West Virginian business owners pled guilty for failing to pay employment taxes. The defendants operated a construction business from July 2007 through 2010. The defendants also failed to pay over $490,000 in employment taxes for a prior business. https://www.justice.gov/opa/pr/west-virginia-business-owners-plead-guilty-failing-pay-employment-taxes

On September 15, 2016 a North Carolina man pled guilty to failing to pay employment taxes. The defendant operated an audio business in Burlington, North Carolina. From 2008-2011 the defendant failed to pay over employment taxes withheld from his employees. Instead, the defendant used the trust fund taxes https://www.justice.gov/opa/pr/north-carolina-man-pleads-guilty-failing-pay-employment-taxes

In April of 2015 the IRS launched the Federal Tax Deposit X Coded Pilot Program.

The Program was designed to test the impact of alternate Alert treatments such as Soft Notices and Revenue Officer visits and identify which taxpayers benefit most from the alerts. In addition, In addition, the IRS plans to roll out Electronic Federal Tax Payment System (“EFTPS”) in 2017. According to the IRS, the EFTPS will modify the Federal Tax Deposit platform by creating a near real time system to identify variances in Federal Tax Deposits. These initiatives are designed to improve collection case selection, assignment to agents, and enable the IRS to make data driven decisions regarding taxpayer contacts.

The takeaway here is that failure to pay Trust Fund Taxes can result in substantial penalties as well as imprisonment. If you have unpaid payroll taxes you should immediately contact a Tax Attorney.

11/10/2016

November 10, 2016/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, FBAR, IRS Payments, News, OVDI, OVDP

FBAR Collections Ten Billion and Counting

IRS Releases 2016 Offshore Voluntary Compliance Statistics

On October 21, 2016 the IRS released the latest statistics on Taxpayers who have made disclosures under the Offshore Voluntary Disclosure Program (OVDP) or by using the Streamline Procedures.

According to the News Release, a total of 55,800 taxpayers have come into compliance since 2009, resulting in the collection of approximately $9.9 billion in taxes, interest and penalties.

An additional 48,000 Taxpayers have made disclosures using the Streamlined Procedures, paying $450 million in taxes, interest and penalties.

In its News Release, the IRS implies that IRS detection is inevitable for those who fail to come forward.

The foregoing is based upon Taxpayer information received by the IRS through a number of initiatives including:

(i) inter-governmental agreements (IGA’s) executed between the U.S. and its international partners under FATCA providing for the exchange of Taxpayer financial information;

(ii) Taxpayer information provided by institutions participating in the Swiss Bank Program;

(iii) criminal prosecution of Foreign Financial Institutions, institution relationship managers, bank officers, attorneys and other facilitators;

(iv) information gathered in response to the issuance of a John Doe Summons;

(v) Taxpayer information obtained from IRS “Whistleblowers;” and

(vi) Taxpayer information gathered through IRS participation in various international task forces.

For those who elect to proceed under the Streamline Procedures, the bar to establish “non-willfulness” has been raised. The IRS will no longer accept Taxpayer applications under the Streamlined Procedures unless the Taxpayer provides a “narrative statement of facts,” pays the tax due, and submits the required information returns.

This statement must clarify why the particular party failed to disclose offshore assets. Accordingly, a request for relief that fails to contain a detailed explanation, in all likelihood, will result in a denial of relief. Similarly, a statement that the Taxpayer was unaware of the filing and reporting requirements will not meet the threshold for non-willfulness.

Finally, taxpayers, who self prepared their returns and who answered “no” to questions 7a and 7b on Schedule B pertaining to the existence of an interest in or signatory authority over a foreign financial account, will find it difficult, if not impossible, to establish “non-willfulness.”

https://www.irs.gov/uac/newsroom/offshore-voluntary-compliance-efforts-top-10-billion-more-than-100000-taxpayers-come-back-into-compliance

October 24, 2016/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, IRS Payments, News

Tax Resolution Firms – Scams and Scoundrels

There are many reasons why clients with Tax issues with the IRS should avoid the use of Tax Resolution firms.

The “Tax Resolution Company“, a relatively recent development, has become a serious problem for consumers in our country and is not dissimilar to those companies that promise to solve your credit card debt, student loans, or help you save your home from foreclosure.

The Tax Resolution business model looks something like this:

Tax resolution firms typically advertise heavily and/or may have a significant organic presence on leading search sites, offering to settle Federal tax obligations for a fraction of the amount owed. These claims are for the most part false
Tax resolution companies typically claim to have tax attorneys, CPAs, and enrolled agents within their employ, when in many cases, no such personnel exist or professional licenses are merely “parked” for appearance purposes
The principals of many tax resolution companies are rarely, if ever, disclosed in any organization document filed with either the state of incorporation or with any state where the Firm conducts business. Ownership is usually in the form of a limited liability company whose members include either other entities or individuals (spouses, relatives, etc.) who have nothing to do with the firm. There are two reasons for this. One is to limit liability. The second reason is to prevent the client from uncovering prior unfavorable history about the Firm’s undisclosed principals
Tax Resolution Companies may also attempt to pass themselves off as either a non-profit consumer group or a Christian business. This is simply another tactic to suck the consumer in
A taxpayer who calls the Tax Resolution Firm is generally greeted by a high-pressure salesperson, who has neither the tax knowledge nor the experience to appropriately assess a particular tax situation. This should be the first signal to run! These individuals will say anything to force you to part with your hard earned money since their compensation is strictly commission based
Tax resolution firms take large retainers, typically $5,000-$10,000.

The settlement of any tax debt for less than its face value is based upon a myriad of factors, including but not limited to, the financial condition of the taxpayer and collectability, the number of years remaining on the statute of limitations for collections, and whether the tax debt was created based upon the IRS filing of substitute returns.

While reputable Tax Resolution Firms do exist, there are other reasons why hiring a reputable tax attorney is always the preferred choice.

First, Enrolled Agents and CPAs cannot litigate tax cases. A reputable tax lawyer who is also a certified public accountant, and/or who has an LLM in tax law is the best combination of credentials to look for. Tax attorneys focus their practices on tax law and are trained in the art of advocacy. Most tax attorneys also focus their continuing legal education on relevant tax topics and actively participate in organizations focusing on tax matters.
Next, attorneys are licensed professionals, and as such, are subject to disciplinary authority of their state bar. Tax Resolution Firms are not subject to any professional licensure or professional regulation. An aggrieved client’s only recourse is to file a complaint with the relevant State Attorney General’s Office, the Federal Trade Commission, or to file a lawsuit against the Firm.
Finally, communications between a client and his attorney are privileged. This generally means that neither the attorney nor the client can be forced to divulge those communications, unless the privilege has been waived. No such privilege exists in the case of communication between an accountant, enrolled agent, or other Tax Resolution personnel and the client.

For the above reasons, any client looking to settle a tax debt for less than its face value should steer clear of any business operating under the Tax Resolution Firm model and hire a reputable tax attorney.

April 10, 2015/by Anthony N Verni, Attorney at Law, CPA

Expat Taxes, IRS Payments, News

Don’t pack your bags just yet

Don’t pack your bags just yet; you may not be going anywhere.

The Senate bill 1813 may just be the reason why you as a tax payer that owes the IRS taxes might just not be in a hurry to pack up your bags. In case you are planning on going anywhere, don’t pack your bags just yet; you may not be going anywhere. If this bill goes through, you might want to consider your tax debt first.

If your tax debt amounts to $ 50,000 and above, you may as well say bye to your traveling rights.

This is because your passport may be revoked soon. As a tax payer, you may want to consider the Senate bill 1813 introduced by Senator Barbara Boxer (D-Los Angeles) in November and passed by Senate on a 74 – 22 vote on March 14^th 2012. The Highway Bill, also known as MAP-21 (Moving Ahead for Progress in the 21^st Century) is to “reauthorize Federal-aid highway and highway safety construction programs and for other purposes.”

Your concern as a US citizen should be in the “Other purposes” section of the bill. Part of this is an amendment written by Senate Majority Leader Harry Reid, seeking to prevent any American citizen from leaving the country based upon a determination by the Internal Revenue Service (IRS) that you owe the government back taxes. The amendment, under Section 40304 of the legislation provides for “Revocation or denial of passport in case of certain unpaid taxes.” This would authorize the State Department to revoke passports for anyone the IRS certifies as having “a delinquent tax debt in an amount in excess of $50,000. The responsibility to prove that you owe taxes is solely vested in IRS and not any court. All the IRS need to do is to prove this without following any due process. IRS can move to suspend or revoke your passport on pure suspicion of tax delinquency before you even have a trial. Nothing will stop an IRS agent from flagging you with a lien to stop travel, even if the lien turns out to be false. It is important to note that the bill does not allow for exceptions in the following cases; emergency, humanitarian situations, limited return travel to the U.S., tax debt is being repaid in a timely manner and in situations where collection efforts have been suspended.

This bill is a step away from becoming law.

There is a high possibility that this bill will become law despite the stiffer opposition it is expected to face from Republicans in the House of Representatives. The provision for passport provocation is not so conspicuous; it is sandwiched deep within the very important transportation bill. The importance of saving the Highway Trust Fund from becoming bankrupt seems to be a priority overshadowing your need to travel freely. The need for the government to raise more finances in light of the shrinking economy may be the driving force to this provision. According to Lesniewski, passport provision has a good chance of becoming law for one reason; money. This provision is expected to raise almost $750 million in the 10-year budget window period. According to Senator Barbara, thousands of businesses are at stake, and nearly three million jobs at stake. She notes that, “there are many people on both sides of the aisle in the Senate who want to get our bill … passed into law, and I am going to do everything I can to keep the pressure on the Republican House to do just that.”

What does this mean to a U.S citizen with a delinquent tax debt in the excess of $50,000?

It means that if the house passes the bill, which has already been passed by Senate, then the IRS will have the power to revoke your passports. Constitutional Attorney Angel Reyes notes that this provision takes away your right to enter or exit the country based upon a non-judicial IRS determination that you owe taxes. Many businesses will be affected and so is the economy.

To be able to survive this, those with delinquent tax debts should make an effort to clear their debts with the IRS to avoid falling prey to this part of the bill; that is if it becomes law. Those with foreign bank accounts should report them and pay their taxes promptly to avoid this trap.

By Anthony N. Verni

November 7, 2013/by Anthony N Verni, Attorney at Law, CPA