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Case Where Texas Ranchers Were Victorious in IRS Appeal

Dallas Appeals Officer Reverses IRS Decision
Allows Business Expenses and Ranching Losses for 2011 & 2012 and Abates the 20% Accuracy Related Penalty

If you have been contacted by the IRS concerning your business expenses and the losses reflected on your Federal income tax returns, you should contact a competent tax attorneyBack in 2014, I represented a Texas couple in connection with an Appeal from an IRS decision disallowing the Taxpayers’ business expenses and losses associated with the Taxpayers’ ranching operations for the tax years 2011 and 2012 as well as the assessment of the I.R.C. § 6662(a) 20% accuracy related penalty.

The client names have been changed due to confidentiality. The Appeal was successful and resulted in the allowance of 100% of the Taxpayers’ business expenses and losses associated with their ranching operations for the relevant tax years, as well as the abatement of the 20% accuracy related penalty. The Appeal resulted in a total tax savings of approximately $300,000.

The Facts of the Case

Kenneth Johnson* and Pamela Johnson* (the Taxpayers) are residents of the State of Texas with their principal place of domicile located in Brownwood. Mr. Johnson comes from a long line of ranchers and farmers. His grandfather came to Texas in a covered wagon and started raising cotton and cattle. The family tradition continued with his father and uncle and subsequently with Mr. Johnson.

In July 2001 the Taxpayers purchased, a 100 acre property located in Brownwood, Texas. The original property consisted of a 2,650 square foot home, barns, sheds, stock tanks, as well as corrals and a cattle chute. In November of 2002, the Taxpayers purchased the adjoining 120 acres. The Taxpayers subsequently leased an additional 403 Acres. The leased property has three stock tanks, is cross fenced and has corrals for working livestock. All of the foregoing was acquired with the intent of establishing a viable ranching operation, consistent with Mr. Johnson’s rich family history in ranching.

Beginning in 2010 and continuing through 2012, Central Texas experienced a severe drought. Farmers and Ranchers in this area saw their earthen tanks as well as rivers and creeks dry up. In order to survive many ranchers and farmers had to haul water to their livestock. In addition, due to the lack of rainfall, ranchers, including the Johnson’s, were forced to purchase more hay and feed to try and make it through the drought. Ultimately, many ranchers, including the Taxpayers, were forced to mitigate their losses by selling off their livestock. As a result of the drought, ranchers were faced with a shortage of breeding stock available for sale, which in turn, resulted in higher livestock prices. Consequently, ranchers required additional time in order to replenish their herds.

In addition to the Taxpayers’ ranching operations, Mr. Johnson* was employed full-time in the oil and gas industry. The Taxpayer and his wife also owned and operated several other enterprises including a sales and marketing and mud logging business and also owned several rental properties. For the Tax Years 2011 and 2012, the Taxpayers self-prepared and filed their joint Federal income tax returns. For the tax years 2011 and 2012, the Johnson’s Federal income tax returns reflected ranching losses in the amount of $342,326 and $483,705 respectively.

In June of 2013 the Taxpayers’ 2011 and 2012 Federal income tax returns were selected by the IRS for examination. The Johnson’s were not represented during the IRS examination which resulted in the IRS disallowing 100% of the Schedule F (Farming) business expenses and the ranching losses sustained during the years in question. In addition, the IRS assessed the I.R.C. § 6662(a) 20% accuracy related penalty. The predicate for the IRS assessment was based upon the principle that a taxpayer may not deduct expenses and losses associated therewith, where a legitimate business purpose and profit motive is absent. The IRS assessed $102,697 and $145,112 in additional income tax for the respective tax years 2011 and 2012. In addition, the IRS assessed the 20% accuracy related penalty in the amount of $23,963.00 and $29,022.00 for the two years in question.

The IRS auditor provided the Johnson’s with Form 4549 (Income Tax Examination Changes) outlining the proposed changes. Thereafter, the Taxpayers contacted and retained the services of Kathryn J. Earnhardt, a local certified public accountant, for purposes of filing a written request for reconsideration to the Income Tax Examination Changes with the IRS. Ms. Earnhardt’s filed the request for reconsideration, but the IRS determined that it would not alter Form 4549. The IRS response consisted of Letter 692 (Request for Consideration of Additional Findings) and Form 886-A (Explanation of Items).

Mr. and Mrs. Johnson* thereafter contacted me and retained my services to represent the Taxpayers in connection with filing an Appeal with respect to the IRS assessments for 2011 and 2012. The issues presented for Appeal included the disallowance of the Schedule F business expenses, the disallowance of the losses from the Taxpayers’ ranching operations for the years 2011 and 2012 and the assessment of the I.R.C. § 6662(a) 20% accuracy related penalty.

In January 2014, my office prepared and filed a Protest Letter and Form 12203 (Request for Appeals Review) on behalf of the Johnson’s with the IRS Appeals office in Dallas, Texas. A conference was subsequently scheduled with the Appeals office in Dallas for March of 2014.I attended the conference together with the Johnson’s. We met with Mr. Robert Warfield, an attorney with IRS Appeals. During the conference, we discussed the issues presented and the Johnson’s provided credible testimony concerning profit motive in their ranching operations, as well as the circumstances related to the draught. At the conclusion of the conference Mr. Warfield informed the Taxpayers that they were entitled to 100% of the business expenses and ranching losses reflected on Schedule F for the tax years 2011 and 2012 and that those adjustments would be made to the Taxpayers’ account. In addition, Mr. Warfield also informed the Taxpayers that the 20% accuracy related penalty would be abated.

The experience gained from this case is as follows: If you started a business within the last five years and have continued to sustain losses, there is a risk that your returns will be selected for examination and subject to the IRS disallowing the both the business expenses as well as any losses. A self-employed Taxpayer needs to be able to establish that the business is viable as a going concern, and that a clear profit motive exists. Since no two cases are alike, it is important to have credible evidence regarding income patterns in your industry and that your expenses are in line based upon your income. If you have been contacted by the IRS concerning your business expenses and the losses reflected on your Federal income tax returns, you should contact a competent tax attorney to discuss the specific facts of your case, industry profit and loss statistics and the options available to you.

* The clients’ names have been changed for purposes of preserving the privacy of attorney client privilege. The facts of the tax law case are the same.

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Tax Evasion: No One Is Immune From Prosecution

The U.S Department of Justice, Tax Division:
Federal Tax Prosecutions Continue Unabated

tax evasion lawyer to help with criminal tax prosecutions by the IRSMany taxpayers are skeptical of the IRS and feel that the system is “rigged” against the small guy. These taxpayers may also feel that those with substantial means or political connections can get away with cheating the U.S. government out of its fair share of taxes.  Contrary to public perception, when it comes to criminal prosecution of tax cheats, the U.S. Department of Justice, Tax Division is an affirmative action prosecutor.

The following examples illustrate that, even those working within the U.S. tax system are subject to prosecution.  It makes no difference whether you are a politician, tax attorney, judge or IRS agent.

Be aware that in the eyes of the U.S. government, a tax cheat is a tax cheat.

Florida State Representative Pleads Guilty To Wire Fraud And Failure To File Federal Income Tax Returns

On September 30, 2016,Reginald Fullwood, a member of the Florida House of Representatives was convicted of one count of wire fraud and one count of failure to file federal income tax returns. According to the documents filed with the court, during his first election bid as well as his campaign for reelection, Fullwood made a number of wire transfers from the “Reggie Fullwood Campaign” bank account to a bank account in the name of Rhino Harbor, LLC, a nominee entity wholly owned by Fullwood.  Fullwood created the nominee entity to conceal his diversion and use of approximately $65,000 in campaign contributions which he used to pay for personal expenses including restaurants, groceries, retail shopping, jewelry purchases, flowers, fuel and liquor.

Former IRS Revenue Officer And Owner Of Tax Consulting Business Pleads Guilty To Tax Evasion

 On October 4, 2016 a former Internal Revenue Service (IRS) revenue officer pleaded guilty to one count of tax evasion and one count of corruptly endeavoring to impede the due administration of the Internal Revenue laws. The plea was taken in the United States District Court, for the Middle District of North Carolina.

According to plea agreement filed with the court, Henti Lucian Baird (“Baird”), a North Carolinian, filed tax returns each year but did not paythe income taxes reflected on his returns,dating back to 1998.  Prior to starting HL Baird’s Tax Consultants in 1989, Baird was a revenue agent with the IRS for 12 years. Baird advertised himself to clients as specializing in “IRS problems, delinquent returns, offer-in-compromise, tax problems, delinquent employee taxes and release of liens and levies.”

Baird evaded paying his federal income taxes  from 1998 to 2013by:(i)creating over 10 nominee bank accounts in the names of his children to hide hundreds of thousands of dollars; (ii) submitting false Form 433-A to an investigating revenue officer that did not reveal all of his nominee bank accounts; (iii) filing a bad faith, Chapter 13 bankruptcy petition wherein Baird submitted a cash offer in compromise, made a request for discharge and an application for subordination of his federal tax lien; and (iv)transferring funds out of nominee accounts to avoid impending IRS levies. During this time period, Baird continued to pay the mortgage on his 4,300 square-foot home, annual fees for a timeshare he owned in Florida and car payments on a BMW.  In an admission to the revenue officer, Baird stated that he did not keep money in bank accounts because he feared a levy or garnishment.

The documents filed with the Court further reveal that Baird used his stepson’s identity, without his knowledge, to apply for a Preparer Tax Identification Number (“PTIN”). ThereafterBaird used his stepson’s PTIN in order to file over 900 income tax returns for clients, as well as his own income tax returns.  Furthermore, despite having his authorization to represent taxpayers revoked by the IRS, Baird submitted, under penalties of perjury, at least 120 Forms 2848, Power of Attorney and Declaration of Representative, on behalf of clients that falsely stated he was an enrolled agent.

As of September 20, 2016 the total amount due in tax, penalties and interest for the tax years 1998-2013 was approximately $477,028.80. It seems that Mr. Baird failed to fully read 26 U.S. Code §7201, the tax evasion statute, which includes willful attempts at evading or defeating the payment of any tax in the definition of tax evasion.

Former United States Tax Court Judge Pleads Guilty To Conspiring To Defraud The IRS Of $450,000 In Taxes

On October 21, 2016 Diane L. Kroupa, a former U.S. Tax Court Judge, pleaded guilty to conspiring to defraud the United States. According to the plea agreement and Kroupa’s testimony, Kroupa was appointed to the United States Tax Court on June 13, 2003 for a term of 15 years. Kroupa was married to Robert E. Fackler, a lobbyist and political consultant who was also named in the indictment. Fackler was the owner/operator of a business known as Grassroots Consulting. For tax purposes, Grassroots Consulting was treated as a sole proprietorship.

From 2004 to 2013, the defendants maintained their principal residence in Plymouth, Minnesota. The defendants also leased a second residence in Easton, Maryland from 2007-2013. The home was leased in order to provide Kroupa with a place to live, while serving as a Judge on the U.S. Tax Court in Washington DC.

The court documents and Kroupa’s testimony further substantiate that between 2002 and 2012, Kroupa and Fackler would annually compile numerous personal expenses that would be included on Schedule C for Grassroots Consulting under the pretext that the expenses constituted ordinary and necessary “business expenses.” The Schedule Cexpenses included: rent and utilities for the Maryland home; utilities, upkeep and renovation expenses of the Minnesota home; Pilates classes; spa and massage fees; jewelry and personal clothing; wine club fees; Chinese language tutoring; music lessons; personal computers; and expenses for vacations to Alaska, Australia, the Bahamas, China, England, Greece, Hawaii, Mexico and Thailand.

In addition, Kroupa would sometimes prepare and provide Fackler with summaries of personal expenses falsely describing the expenses according to business expense category. Kroupa on occasion would also compile and provide fraudulent personal expenses to their tax preparer.The ongoing scheme to defraud the IRS resulted in the defendants deducting $500,000 of personal expenses as ordinary and necessary business expenses on Schedule C.

In addition to the bogus deductions claimed by Kroupa and Fackler,Kroupa made a series of other false claims on the defendants’ tax returns, including failing to report approximately $44,520 that she received from a 2010 land sale in South Dakota and falsely claiming financial insolvency to avoid paying tax on $33,031 on cancellation of indebtedness income that she and her husband received.

In furtherance of their nefarious scheme, Kroupa and Fackler also concealed documents from their tax preparer and an IRS Tax Compliance Officer during an audit of their 2004 and 2005 tax returns.

According to the plea agreement and Kroupa’s testimony at the plea hearing, Kroupa and Fackler delivered false and misleading documents to an IRS employee, during a second audit in 2012,to bolster their claim that certain personal expenses were actually business expenses of Grassroots Consulting. After the IRS requested documents pertaining to their tax returns, Kroupa and Fackler removed certain items from their personal tax files before giving them to their tax preparer because the documents contained potential evidence that Kroupa and Fackler illegally deducted numerous personal expenses.

During the audit, Kroupa also falsely denied receiving money from the 2010 land sale. Later, when they learned the 2012 audit might progress into a criminal investigation, Kroupa instructed Fackler to lie to the IRS about her involvement in preparing the portion of their tax returns related to Grassroots Consulting.

Kroupa and Fackler’s scheme to defraud the IRS resulted in the deliberate understating of their taxable income for the tax years 2004-2010 by approximately $1,000,000, resulting in approximately $450,000 in federal income taxes evaded.

Shea Jones, Special Agent in Charge of the St. Paul Field Office put it in perspective by stating:

“Those charged with upholding the laws are not above the law. While serving as a United States Tax Court Judge, Diane Kroupa conspired to break the law by evading the taxes she owed. Her actions were not only unlawful and dishonest, but they were a theft from the American public. No matter what your position, it is unacceptable to cheat the system that provides the government services and protections that we all enjoy. IRS Special Agents will continue to pursue tax cheats at all levels of society, regardless of position or status.”

Former IRS Criminal Investigation Special Agent Charged

On October 26, 2016 a federal grand jury in Sacramento, California charged a former Internal Revenue Service–Criminal Investigation (IRS-CI) special agent with six counts of filing false income tax returns, one count of corruptly endeavoring to obstruct the Internal Revenue laws, one count of theft of government money and one count of destroying records during a federal investigation.

According to the allegations in the amended indictment, Alena Aleykina (“Aleykina”), a certified public accountant and former IRS-CI special agent, filed false individual income tax returns for the years 2009, 2010 and 2011 by claiming false filing statutes, dependents, deductions and losses and tax returns on behalf of two trusts.

The indictment also alleges that, between 2008 and 2013, Aleykina attempted to obstruct the IRS by preparing false tax returns for herself, family members, trusts and partnerships and by making false statements to representatives of the Department of the Treasury.  In addition, Aleykina attempted to obstruct a federal investigation by destroying evidence on a government computer.  Finally, Aleykina was charged with fraudulently causing the IRS to issue IRS Tuition Assistance Reimbursement payments to her.

Tax Attorney And CPA Indicted For Tax Evasion And Diversion Of Tax Shelter Fees From Major Manhattan Law Firm

On October 26, 2016 Harold Levine (“Levine”), a Manhattan tax attorney, and Ronald Katz (“Katz”), a Florida certified public account, were charged in the U.S. District Court in New York with an eight-count indictment related to a multi-year tax evasion scheme. According to the indictment, the defendants diverted millions of dollars of fees from Levine’s Manhattan law firm and failed to report millions of dollars in fee income to the Internal Revenue Service.

The allegations in the indictment assert that Levine, the former head of the tax department at a major New York City Law Firm schemed with Katz, to divert from the Law Firm over $3 million in fee income from tax shelter and related transactions that Levine worked on while serving as a partner of the New York Law Firm.  The indictment further alleges that Levine failed to report that fee income to the IRS on his personal tax returns during the period 2005-2011.  Not to be excluded, the indictment also charged Katz with receiving and failing to report over $1.2 million in fee income to the IRS.

In order to carry out the nefarious scheme, Levine caused tax shelter fees paid by Law Firm clients to be routed to a partnership entity he co-owned with Katz, rather than being paid directly to the Law Firm. Thereafter, it is alleged that Levine used approximately $500,000 of those fees to purchase a home in Levittown, New York.  In an attempt to conceal the diversion, Levine purchased the Levittown home in the name of a Law Firm Employee with whom Levine had a personal relationship with.

For a period of five years Levine allowed the Law Firm Employee to reside in the Levittown house without paying rent. Even though the Law Firm Employee lived at the residence rent free, Levine and Katz prepared tax returns for the partnership through which the home was purchased and treated the home as a rental property thereby falsely claiming deductions related to the property.

When Levine was questioned by IRS agents concerning his involvement in the tax shelter transactions and the fees received for those transactions, Levine falsely represented that the Law Firm Employee paid him $1,000 per month in rent while living in the Levittown home.  In addition, after the Law Firm Employee was contacted by the IRS and summoned to appear for testimony, Levinecoached the employee to represent falsely to the IRS that she had paid $1,000 per month in rent to Levine.

IRS-CI Special Agent in Charge Shantelle P. Kitchen said:

“Tax and accounting professionals who conceal their incomes, evade income taxes, and otherwise obstruct the Internal Revenue Service simply have no excuse for violating the very laws their professions are centered on.  IRS-Criminal Investigation works hard to ensure that everyone pays their fair sure and we take particular interest in allegations involving professionals who should simply know better.”

Former Business Professor Pays $100 Million Penalty in Tax Fraud Case

On November 4, 2016, Dan Horsky (“Horsky”), age 71, pleaded guilty to his role in a financial fraud conspiracy involving a foreign bank account totaling more than $200M and further agreed to pay a civil penalty in the amount of $100M.

According to the statement of facts filed with the plea agreement, Horsky is a citizen of the United States, the United Kingdom and Israel. He was employed for more than 30 years as a professor of business administration at a university located in New York.  On or about 1995, Horsky started making investments in a number of start-up companies. The investments were made using financial accounts, which Horsky set up, at various offshore banks, including one bank in Zurich, Switzerland.  Horsky created “Horsky Holdings,” a nominee entity, to hold some of the investments. He used the Horsky Holdings account, and later, other accounts at the Zurich-based bank, to conceal his financial transactions and financial accounts from the IRS and the U.S. Treasury Department.

Horsky made various investments in Company A through the Horsky Holdings account. The funds used to make the investments represented Horsky’s own money, money provided by his father and sister, and margin loans from the Zurich-based bank.  Company A was purchased by Company B for $1.8 billion in an all cash transaction. At this time, Horsky held a 4% interest in Company A.  Horsky received approximately $80 million in net proceeds from the sale of Company A’s stock, but he only disclosed approximately $7 million of his gain from that sale to the IRS. As a result, Horsky paid taxes on just that fraction of his share of the proceeds.  In 2008, and in subsequent years, Horsky invested in Company B’s stock using funds from his accounts at the Zurich-based bank and by 2013, his investments in Company B, combined with other unreported offshore assets, reached approximately $200 million.

To further conceal his ownership in the foreign financial accounts, in 2011, Horsky caused another individual to have signature authority over his Zurich-based bank accounts, and this individual assumed the responsibility of providing instructions as to the management of the accounts at Horsky’s direction.  This arrangement was intended to conceal Horsky’s interest in and control over these accounts from the IRS as well as to conceal the income generated from these accounts.

CONCLUSION

The average taxpayer can find comfort in knowing that in the world of U.S. tax compliance, no one gets a pass.  The U.S. tax system is based upon voluntary compliance and the principle that each U.S. taxpayer has an obligation to report his income honestly and further is expected to pay his fair share of federal income tax.  The preceding examples are just a sampling of recent prosecutions and are not intended as an exhaustive list.

“No matter what your position, it is unacceptable to cheat the system that provides the government services and protections that we all enjoy. IRS Special Agents will continue to pursue tax cheats at all levels of society, regardless of position or status.”

Shea Jones, Special Agent in Charge of the St. Paul Field Office commenting on the Kroupa conviction.

©2016 ANTHONY N. VERNI, ATTORNEY AT LAW, CPA

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Making Appeals to the IRS: What You Need to Know

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

irs appeals are made at their headquarters. The Internal Revenue Service in washington d.c.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:

  1. File a protest, resulting in a non-docketed Appeals case;
  2. Pay the proposed deficiency, file a claim for refund and, if that claim is denied, file a protest at that time;
  3. Request early referral under Rev. Proc. 99-28;
  4. File a Tax Court petition in response to a statutory Notice of Deficiency (90 day letter) and go to Appeals in docketed status; or
  5. 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.

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Tax Controversy: What to Do When You Get An Audit Letter

tax controversy | auditThe phrase “tax controversy” is used in the legal profession to define tax disputes that originate between the IRS or a state tax agency and a Taxpayer, usually, but not always, originating from an audit.

Legal services offered as part of a typical tax controversy matter can include assistance with audits, appeals, and Tax Court litigation as well as negotiated settlements.

While the odds of getting audited are lower than 1%, there is still a chance that the IRS will serve you with an audit letter, particularly where tax issues are flagged on the Taxpayer’s return. So what do you do when you receive an audit letter and are facing a tax controversy?

  1. Ask “Why me?”

The IRS may know exactly why you’ve been targeted, but just because you receive a tax audit letter does not automatically mean you are guilty of tax evasion or some other tax related crime.

Many times people are audited because the IRS doesn’t have enough information about them and is merely seeking clarification. In other case, a Taxpayer maybe selected randomly. With most Taxpayers, the IRS has access to all their information, like their total wages and how much mortgage interest they paid. However, returns filed by self-employed people and the wealthy tend to have a lot more self-reported items that the IRS may question.

Review your return to ensure it is accurate and only provide the information the IRS specifically asks for to avoid broadening the scope of the audit to other years.

  1. Get Your Ducks in a Row

Once you have reviewed your return and determined, with the help of a tax controversy specialist, the necessary information the IRS is seeking, begin compiling that information.

The IRS can audit you for taxes up to three years, so it is important to save documentation of your business or personal expenses as they relate to your taxes. For example, if you are being audited because you wrote off 100% of your car usage as a business expense, get your mileage log and other evidence that the car was used only for business purposes all in one place.

  1. Be Efficient in Your Response

The most surefire way to avoid the negative ramifications of a full blow audit is compliance. This doesn’t mean you roll over and give in to the IRS. Instead it means that you seek a qualified tax attorney to assist you in preparing the documents and information the IRS is seeking and conduct due diligence to ensure that you are complying with their requests. Once you have done your due diligence, respond to the IRS promptly and courteously

As the adage goes, ignorance is bliss, but in the case of an IRS audit, ignoring the letter will only make things worse. The IRS will give you a certain deadline to respond, make sure to meet this deadline in order to avoid larger consequences like civil penalties or possibly criminal action.

If you have a tax controversy, either related to your personal or business, please see the help of a qualified tax attorney to guide you through the process of dealing with the IRS.
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Publication 519: What You Need to Know

What You Need to Know About IRS Publication 519

publication-519-tax-status-irs U.S. Tax guide for AliensPublication 519 is provided by the Internal Revenue Service (IRS) to assist in tax preparation for both resident and non-resident aliens. Among other things Publication 519 helps you to determine whether you are a resident, non-resident alien or if you fall under both classifications; what income may be subject to tax; how income of aliens is taxed; and where, when and how you should file your income tax forms.

Your first step, for tax purposes, should be to determine if you are a resident or non-resident alien. If you qualify as both resident and non-resident in the same year, you have what is referred to as dual status. If you are married, you may also have a choice of treating your non-resident spouse as a resident alien. Your status is determined by either the “Green Card” test or the “Substantial Presence” test. However, even if you do not meet the requirements of either test you may be able to choose to be treated as a United States resident for part of the year.

After you have determined your residency status, your next step is to determine what income is subject to taxes. As a Resident alien, income is generally subject to tax treatment in the same manner as a U.S. citizen. Non-resident aliens are generally subject to U.S. taxes only on income earned from U.S. sources. However, not all income from U.S. sources is subject to income tax.

How Your Income is Taxed

Tax Resolution Firms and tax preparers should also seek counsel with a qualified tax lawyer.Resident and non-resident aliens are taxed in different ways. Resident aliens are generally taxed in much the same way as U.S. citizens.

What this means is that the residents alien’s worldwide income is subject to U.S. tax and must be reported on his/her tax return. The same graduated tax rates that apply to U.S. citizens will apply to a resident alien.

Income for a non-resident alien will be divided into two categories:

  1. Income that is effectively connected to a United States trade or business; and
  2. income that is not effectively connected to a United States trade or business.

The difference between the two categories will be the rate in which the income is taxed. The effectively connected income is subject to the same graduated rates discussed above. The non-effectively connected income is taxed at a flat 30% rate.

As you can see, Publication 519 is a complicated document that also refers to several other IRS publications. When it comes to figuring out which tax status is right for you and which, if any, income is subject to U.S. taxes it is best to consult an experienced tax lawyer.

An experienced tax lawyer can help you to minimize your taxes and reduce the risk of costly audits. They will also help you wade through the complexities of the U.S. tax code.

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Doubling Down: How an International Tax Lawyer Can Save You From Double Taxation

How Tax Lawyers Can Help Prevent Double Taxation Confusions

international tax lawyer can help you avoid double taxation with the IRSThe notion of an international tax attorney conjures up images of Grand Cayman and John Grisham’s “The Firm,” but the need for a tax lawyer who specializes is international tax issues is for more than just high rollers and fictional characters.

The problem facing most business owners or individuals in the international tax realm is the burden of double taxation. From small business owners to retirees, international tax implications require that you have a top-notch professional on your team, ready to protect you from the IRS and to prevent you from being taxed twice.

The global markets have made it easy to work, invest and sell goods across borders. For small business owners, the opportunity to reach new markets has never been easier. With that ease of access, however, comes a bevy of new and different tax laws. The Department of the Treasury has issued several rulings which allow businesses to protect their assets and save on taxes.

International tax planning for privately owned businesses is unique. It is different than the foreign tax planning used by publicly traded companies.  Offshore tax planning for a large company like Google does not necessarily apply to the small American business selling internationally. Think of sites like Etsy, Amazon and Kindle, where Americans can sell goods in foreign countries. The country where the business originates may want to claim a sales tax, while the country where the transaction occurred may claim a transaction tax. This results in a major problem for small businesses.

The “problem” for small business is double taxation.  When income is earned in a foreign country, income tax is paid to the foreign country.  Next, taxes are paid to the U.S.

For business owners, the solution is simple. The IRS has approved “dual resident corporation” which eliminates double taxation.  It also allows for a simple tax return, allows for tax savings for foreign operating losses, and waives the requirement to file the complex Form 5471. A seasoned international tax attorney can walk you through the process of setting up a dual resident corporation and apply for a tax ruling with the IRS. Business owners who plan to sell internationally would be wise to seek this option.

While it may be common for business owners to encounter international tax issues, the issues of taxation are becoming increasingly common for the growing number of U.S. citizens living and retiring abroad.

Retiring abroad has many advantages, however, lowering your tax bill typically isn’t one of them. If you earn income in your adopted country, you may be able to exclude up to $97,600 from U.S. in 2015 by claiming the Foreign Earned Income Exclusion. This law enables you to avoid paying taxes to two countries on the same income. Be sure to let your tax lawyer know the details of your new home abroad. Some countries base their tax systems on residency, not citizenship. Without the help of an international tax lawyer you may be subject to double taxation.  The U.S. has tax treaties with many foreign countries to prevent double taxation, but you may still have to file a tax return, in both your country of residence and the United States.

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