Verni Tax Law

EMPLOYMENT TAX AUDITS ON THE RISE SECTION 6672 PENALTY AND CRIMINAL PROSECUTION

By: Anthony N. Verni, Attorney at Law, CPA

August 13, 2024

®2024

EMPLOYMENT TAX AUDITS ON THE RISE

SECTION 6672 PENALTY AND CRIMINAL PROSECUTION

Employment tax audits are on the rise and so too is the exposure to those individuals deemed “responsible,” who are charged with the responsibility of properly reporting employee wages and collecting and paying over to the IRS employee withholding taxes as well as the employer’s share of Social Security and Medicare taxes. The heightened IRS scrutiny will, in all likelihood, result in certain officers, directors and other employees being subject to the 26 U.S.C. § 6672 Trust Fund Recovery Penalty (“”TFRP”).

A responsible party may also be subject to the TFRP in situations where he or she either deliberately or mistakenly classified employees as independent contractors, or where the party charged with reporting provides false information to the IRS.

A responsible person within the meaning of Section 6672 includes an officer or employee of a corporation who is under a duty to collect, account for, or pay over the withheld tax. Mazo v. United States, 591 F.2d 1151, 1153 (5th Cir.), cert. denied, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979) Responsibility is a “matter of status, duty and authority, not knowledge.” Id. at 1156. Indicia of responsibility include the holding of corporate office, control over financial affairs, and the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees. More than one person may be a responsible officer of the corporation under § 6672. Roth v. United States, 779 F.2d 1567, 1571 (11th Cir. 1986).

In cases where indicia of employment tax fraud are uncovered, individuals also risk being criminally charged.

Prosecutions for employment tax fraud can result in severe consequences including fines, penalties, and even imprisonment. The Internal Revenue Service (IRS) as well as state tax authorities have investigative units dedicated to detecting and prosecuting employment tax fraud.

In General, employment tax fraud is uncovered during employment tax audit. As part of the audit process, IRS agents gather evidence surrounding the activities and financial condition of the business. The audit process usually includes reviewing financial records, interviewing employees as well as the principals of the business.

In particular, agents will look to see if a business is engaged in the commingling of business and personal funds. Agents will also seek to identify preferential payments to creditors and insiders, payments of personal expenses, large luxury purchases as well as other expenditures not considered to be ordinary and necessary business expenses.

It’s important for individuals and businesses to comply with employment tax laws and regulations to avoid being subject to the TFRP and a potential employment tax fraud prosecution.

Seeking guidance from tax professionals or legal advisors can help ensure compliance and minimize the risk of being subject to the Section 6672 penalty and potential criminal prosecution.

Understanding the IRS audit procedures is essential if you hope to avoid becoming personal liability or subject to criminal charges. Most TFRP assessments and criminal prosecutions contain common fact patterns.

The following is a sampling of recent employment tax fraud cases.

West Virginia Business Owner Charged with Employment Tax Offenses. On July 23, 2024 a federal grand jury in Charleston, West Virginia, returned an indictment charging a West Virginia man with not paying employment taxes. Between the third quarter of 2018 to 2023, the taxpayer did not pay to the IRS the Social Security, Medicare and federal income taxes that were withheld from employees. He also failed to file quarterly tax returns. Instead of paying his share of employment taxes, the taxpayer used his business bank account to pay his personal expenses and diverted funds to his wife, who was not an employee.

Former CEO of Startup Software Company Pleads Guilty to Payroll Tax Fraud Scheme. On July 22, 2024 a New Hampshire man pled guilty to not paying more than $14 million in employment tax. The defendant, Andrew Park, was the co-founder of a startup technology company and considered the responsible person for all financial matters related to the company including filing quarterly employment tax returns and collecting and paying over Social Security, Medicare and income taxes withheld from employees’ wages to the IRS as well as the employer’s shares of Social Security and Medicare taxes. From 2014 until the third quarter of 2021, the defendant withheld federal, state and local taxes from his employees, but did not pay them over to the tax authorities. As a result of the defendant’s actions, the U.S. Government sustained a tax loss in excess of $14, million.

Virginia Woman Sentenced for employment tax fraud. On June 27, 2024 a Virginia business woman was sentenced to one year and three months in prison and payment of $950K in restitution for not paying employment taxes to the IRS. According to documents and testimony taken in court, the defendant was the owner of parcel delivery service from 2013-2018. The defendant withheld employment taxes from her employees, but failed to pay them to the IRS. To frustrate IRC collection efforts, the defendant opened new bank accounts using other individual’s social security numbers, new employer ID numbers and a variation of business names. Instead of paying the business employment taxes, the defendant withdrew $450,000 with the total tax loss to the IRS approximating $950,000.

Michigan Shipping Magnate Charged with Filing False Tax Returns and Employment Tax Crimes. On June 12, a Michigan man was charged 15 counts of employment tax fraud in addition to filing false tax returns. The charging document alleges that defendant operated a transport business and was responsible for withholding Social Security, Medicare and federal income taxes.

Defendant Thwarted IRS Collection Efforts by Hiding Assets from the IRS. On May 7, 2024 a Virginia business man was sentenced to 78 months in prison for evading the payment of employment taxes, filing false returns and obstructing the IRS. According to the evidence presented at sentencing, the defendant owned and operated an ambulance business from 2008 to 2009. During this time defendant was responsible for paying approximately $200k in payroll taxes. After the business failed to pay the employment taxes, the IRS assessed the 100% trust fund penalty. To avoid paying the employment taxes, the defendant claimed that he did not have the assets to satisfy the trust fund penalty. In fact, the defendant owned several beach front condominiums, multiple interests in foreign financial accounts as well as a muscle car collection. In efforts to avoid detection and frustrate IRS collection efforts, the defendant filed false income tax returns for the tax years 2013-2018 wherein rental income from the taxpayer’s Caribbean properties was omitted and false deductions claimed.

West Virginia Ambulance Services Business Owner Convicted of Tax Crimes. On May 3, 2024, a federal jury convicted a West Virginia man for failing to pay taxes withheld from Stat EMS, LLC, an ambulance service business located in Pineville, West Virginia. EMS, a nominee entity, was created after the defendant accrued millions of dollars in employment tax liabilities from the operation of a prior ambulance business.

Often time’s unsuspecting business owners and others considered to be responsible parties choose to deal with the IRS without representation resulting in the assessment of the Section 6672 penalty. This usually occurs after the individual participates in the audit and interview processes. Business owners or other responsible parties are usually unaware that statements made to an IRS Agent during the employment tax audit or interview serves as the basis for the assessment of the TFRP. In more severe cases, these statements have been used for criminal prosecution.

Thus, the importance of having a knowledgeable and experienced Tax representation cannot be overstated. The assessment of the TFRP or a criminal prosecution can be a life altering experience, often times resulting in financial ruin or the break up of your family.

An IRS employment tax investigation generally includes interviewing potentially responsible persons, before making an assessment. The period in which the IRS may assess the TFRP against a responsible person is the same period during which the IRS may assess against the employer for the underlying employment tax liability.

Before the IRS can assess the penalty, it must send Letter 1153 (DO) 10-Day Notification Letter, 100% Penalty Proposed against Filer for Corporation, to the taxpayer informing him or her of the Proposed assessment. In Letter 1153, the IRS encloses Form 2751, (Proposed Assessment of Trust Fund Recovery Penalty), setting forth the periods and amounts of the proposed TFRP assessment, and Offering the taxpayer an opportunity to appeal the proposed assessment to the Office of Appeals. The Taxpayer has 60 days from the date of the letter to submit a written request for appeal.

After Letter 1153 and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, have been properly delivered, (IRM 5.7.4.7), Notification of Proposed Assessment, the responsible person has 60 days (75 if the letter was addressed outside of the United States) from the date of the mailing of the notice or the date of personal delivery to respond.

The IRS must provide each person being interviewed with Notice 784, (“Could You is personally Liable for Certain Unpaid Federal Taxes?”) They must also provide sufficient copies of Notice 784 to allow distribution to all other persons associated with the business who, based on the interview and other preliminary investigation, may be liable.

Form 4180 (Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes) is the form to be used for conducting TFRP interviews. It is intended to be used as a record of a personal interview with a potentially responsible person IRM 5.7.4.2.4; IRM 5.7.4.2.7. During the initial contact the agent will attempt to personally secure Form 4180 from all potentially responsible persons to the extent possible. If Form 4180 cannot be secured, the agent will document the case history with the reasons why it was not secured.

The purpose of the personal interview and completion of Form 4180 is to secure direct, detailed information regarding the individual’s or other person’s involvement in the business in order to determine if they meet the criteria for responsibility (IRM 5.7.3.4.1, Establishing Responsibility) and willfulness (IRM 5.7.3.4.2, Establishing Willfulness). The questions on the form are intended as a guide and are not all inclusive; supplemental questions may be asked.

Generally, if the agent is attempting to secure Form 4180, you should state during any interview that you wish to consult with an authorized representative, at which time the agent is required to suspend the interview to permit such consultation IRM 5.1.10.7.1.

Employment tax compliance is considered a priority to the IRS. Consequently, if you are contacted by the IRS concerning employment taxes you should be concerned. It is important to be proactive. Do not let fear control you into paralysis. Engaging an experienced attorney is the best place to start. If you are represented the IRS will not try to put words in your mouth and is less likely to accuse you of lying to an agent.

August 15, 2024/by Anthony N Verni, Attorney at Law, CPA

Tax Audit, Tax Preparer Prosecutions, Tax Returns

LARGE TAX REFUNDS AND THE GHOST PREPARER

Earlier this year a Charlotte man was charged with tax fraud in a 20 count criminal indictment, charging him with aiding and assisting in the preparation and filing of false returns over a five year period.

According to the allegations, between 2014 and 2021 the Defendant, Tijan Mboob (“Mboob” or the “Defendant”) prepared hundreds of fraudulent returns. The indictment further alleges that the Defendant was a “Ghost Preparer,” who failed to identify himself as a paid tax preparer on the tax returns he submitted to the IRS on behalf of his clients, despite the fact he was compensated for his services.

The IRS requires paid return preparers to provide information, including name, address and phone number for the preparer, Federal Tax Identification or Social Security Number and PTIN number as well as other information.

The indictment specifically alleges that Mboob prepared tax returns on behalf of his clients which contained fabricated and fraudulent items. Some of the items included false filing status, false American Opportunity and education credits, false itemized deductions and false reforestation credits. The hundreds of fraudulent returns prepared by the Defendant resulted in the overall reduction in tax liability on behalf of his clients and their receipt of large refunds totaling $4.7 million dollars.

Finally, the indictment indicates that the Defendant failed to report any of the preparation fees he eared as income for 2017 and 2019, and in addition, failed to file returns for 2019 and 2019.

Each Year the IRS warns the public about return preparer scams. However, there is no shortage of victims, who fall prey to these predators each year.

While the Ghost Preparer is also a paid preparer, he differs from the fraudulent return preparer who provides identifying information on the tax returns he or she prepares. The Ghost Preparer will submit a fraudulent tax return and designate the tax return as “Self-Prepared.” In doing so, he or she will deliberately omit any paid return preparer information at the bottom of the tax return. Clients are delighted to learn that they are getting a $10,000 refund, only to later discover that it was too good to be true. How is this possible?

Its possible thanks to the illegal business practices some return preparers engage in. Most are unlicensed and not subject to Circular 230. In addition, many conduct business using a nominee as the face of the tax preparation business. These charlatans are generally are able to grow their practices based solely on their ability to generate large taxpayer refunds for their clients and by word of mouth.

The return preparer, who engages in these illegal acts, will have a federal identification number, as well as PTIN and ERO numbers. These preparers are monitored by the IRS, who, through AI and analytics is able to identify patterns in certain types of deductions, business losses, credits and withholding. Many of these preparers have been identified and either civilly enjoined from preparing tax returns or criminally prosecuted. The ones who escape prosecution simply set up shop down the road, making use of new nominee.

A Client who receives a large tax refund to which he or she is not entitled may be thrilled and think he or she hit the jackpot. That joy quickly gives way to fear and anxiety when the Taxpayer receives a notice from the IRS. In certain cases, it can involve multiple years.

The morale of the story is choose your return preparer wisely and asks lots of questions. It is always best when selecting a return preparer to select an attorney, certified accountant or enrolled agent, all of whom are subject to Circular 230, which governs the conduct of return preparers. Further, if a friend or relative recommends a return preparer based on the fact that they systematically receive large refunds, I would be suspicious.

If you have been receiving large refunds, it would be wise to have a tax attorney, certified public account or enrolled agent review your tax return.

September 26, 2023/by Anthony N Verni, Attorney at Law, CPA

News, Tax Audit

AUDIT RISK TO INCREASE FOR LOW TO MIDDLE INCOME TAXPAYERS UNDER THE INFLATION REDUCTION ACT

The IRS estimates that individual taxpayers underreported their income tax on average by $245 billion each year for tax years 2011 to 2013 (See IRS Publication 1415). This underreporting is the largest component of the tax gap—the difference between the amount of taxes owed and taxes paid timely and voluntarily.

There has been a great deal of debate concerning the impact the Inflation Reduction Act (“IRA”) will have on low to middle income taxpayers, including wage earners and small business owners. According to the Biden Administration and the media pundits, we are expected to believe that spending $80 Billion on hiring 87,000 new agents and beefing up compliance and enforcement initiatives will only affect those whose incomes exceed $400,000. Better think again.

Questionable tax legislation is not limited to Democrats. Let us not forget Bush Senior’s famous words: “Read my lips, no new taxes.” Irrespective of political affiliation, history tells us, that changes in the Internal Revenue Code and tax policy have done little, if anything, to protect low and middle income wages earners and small business owners from IRS scrutiny. The additional funding for the IRS will particularly affect self-employed taxpayers, who will be the first on the IRS hit list.

The Biden Administration’s claims that the new and improved IRS will focus their attention on Taxpayers earning more than $400,000 is debunked by a number of reliable sources as well as historical audit data.

The Congressional Budget Office (“CBO”) in a Report entitled: “The Effects of Increased Funding for the IRS,” concluded that IRS funding under the IRA will lead to more audits and enforcement measures, and higher taxes for families making less than $400,000. The CBO’s findings directly contradict President Biden’s claim that taxes for those making less than $400,000 will not increase a “penny.” According to the CBO, the IRS funding would result in at least $20 billion of the total projected revenue being collected from lower and middle-income earners and small businesses.

The Biden Administration’s claim that the new funding will only affect taxpayers earning over $400,000 is a deliberate attempt to deceive the public and is further belied by the fact that 50 Senate Democrats voted against an Amendment offered by Mike Crapo (R-ID). The Crapo Amendment would have protected lower and middle income American taxpayers against new audits by the IRS. If the new legislation is indeed limited in scope to taxpayers with incomes in excess of $400,000, why did the Democrats unanimously reject the Amendment?

Further, in its Report, the CBO comments related to the consequences associated with the Democrat’s rejection of the Crapo Amendment strongly suggest that the IRS will target low and middle income taxpayers. The CBO concluded that if the Republican Amendment passed, the projected total revenue contained in the IRA would be reduced by at least $20 Billion. As such, $20 Billion of the total projected revenue in the amount of $124 Billion would come from an increase in the number of audits of low and middle income taxpayers.

The CBO also concluded that if audit levels return to the historical levels in 2010, lower and middle income earners could face an increase of as many as 710,00 additional audits.

These revelations should come as no surprise given Biden’s penchant for lying to Americans.

The Biden Administration’s true intentions are further evidenced by House Budget Committee Republican Leader Jason Smith’s (MO-07) comments. Smith maintains that Americans earning less than $200,000 are 80 percent more likely to be targeted by the IRS based upon Secretary Yellen’s historic audit levels.

In addition to the CBO Report, a recent analysis conducted by Joint Committee on Taxation, an independent Congressional body is further evidence that low to middle income taxpayers will be targeted by the IRS. In its analysis, the Committee concluded that 78 to 90 Percent of the money raised from under-reported income would likely come from those making less than $200,000 a year. The non-partisan Committee further maintains that nearly half of the audits would affect taxpayers making $75,000 or less and that only 4 to 9% would come from those making more than $500,000.

In addition, to the CBO and the Joint Committee’s findings, there is evidence that the IRS has historically focused their audit efforts on low and middle income taxpayers.

In a recent Report by the Government Accountability Office (“GAO”) entitled: “Trends of IRS Audit Rates and Results For Individual Taxpayers By Income,” the GAO found that for the years 2010-2021, the majority of additional taxes IRS recommended from audits came from taxpayers with incomes below $200,000. According to the GAO, the higher audit rates for lower income taxpayers is attributable to the fact that the average number hours spent per audit for the period studied was stable for those earning less than $200,000, but the number of hours almost doubled for those earning over $200,000.

The explanation offered by the IRS is that higher income audits are generally more complex, resulting in additional time spent per audit. However, the IRS explanation does not tell the whole story. Taxpayers with incomes exceeding $200,000 are more likely to be represented by a tax attorney, CPA or enrolled agent. Taxpayers who are represented invariably increase the number of audit hours, particularly in cases where a genuine tax controversy exists.

Moreover, contested cases involving taxpayers earning more than $200,000 do not necessarily result in the assessment and collection of additional tax revenue. Hence, low and middle income taxpayers will be expected to make up the shortfall.

Historically, audits of the lowest income taxpayers, in particularly those claiming the Earned Income Tax Credit (“EITC”) have resulted in high amounts of recommended additional tax per audit hour. This is due to the fact that EITC audits are pre refund audits, which are conducted through correspondence and generally require less time.

According to the Treasury Inspector General for Tax Administration (“TIGTA”) in a Report entitled “Trends in Compliance Activities through Fiscal Year 2019, “ audit rates declined 44% between 2015 and 2019, due to attrition and increase in the number of cases transferred. Nevertheless, TIGTA noted that, despite IRS budget, there was only a 33% drop in audits for low income taxpayer claiming the EITC compared to 75% for individuals with incomes of $ 1 million or more.

In its report, the GAO stated that because the no change rate has generally decreased because of fewer audits, the IRS tends to select returns for audits that have the highest results in changes. ( i.e. low hanging fruit). The GAO also points out that since 2010; the average number of audit hours has more than doubled for returns with incomes of $200,000 and above.

The projected revenue by the current Administration is based upon hiring 87,000 new agents, IT improvements and additional compliance and enforcement initiatives. However, the projections fail to take into consideration the fact that new auditors require training and further fail to consider the learning curve. In its report, the GAO noted that new IRS agents must spend additional hours conducting research in connection with tax law changes. Further, the projected revenue does not take into consideration the effect retirement of existing IRS personnel will have on bringing the new crop of agents up to speed. Consequently, many, if not most, new hires will be assigned to simple cases involving low to middle income taxpayers.

The current Administration’s claim that only taxpayers who earn in excess of $400,000 will be the subject of IRS scrutiny is, at best, disingenuous, and more probably a deliberate attempt to deceive U.S. taxpayers. The CBO, Joint Committee on Taxation, GAO and TIGTA Reports as well as historical data make clear that low and middle income taxpayers will not escape IRS scrutiny.

November 2, 2022/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Tax Audit, Tax Returns

Trust Fund Recovery Penalty; Consequences of Fraudulent Conveyances

Fraudulent Conveyances in Employment Taxes

Employers who willfully fail to remit an employee’s withholding to the IRS are liable to the IRS for the “trust fund recovery penalty” (TFRP). Generally, the IRS will assess the Penalty against any responsible person who fails to collect and pay these taxes to the IRS. A responsible person can include a business owner, a corporate officer, director or office manager and a trustee or executor as well other individuals and entities.

Those who are subject to the TFRP may attempt to impede IRS collection efforts by conveying their personal or corporate assets to relatives or to nominee entities, without fully considering the civil and criminal tax consequences associated with making such transfers. A fraudulent conveyance can be as simple as transferring an asset to a spouse or child, or may involve multiple entities and other devices. While there may be legitimate reasons for transferring an asset to a third party, making a fraudulent conveyance is not one of them.

IRS Lawsuit on a Fraudulent Transfer Scheme

An excellent illustration of an elaborate fraudulent transfer scheme is United States v. William Planes,et al (8:18-cv-02726) where William Planes (“William”) and his wife, Regina Planes (“Regina”), failed to pay employment taxes exceeding $9 million on behalf of at least ten entities over a 12 year period. The following is a partial summary of what happened. I would, however, recommend reading the case in its entirety.

The IRS filed a lawsuit in the U.S. District Court, for the Middle District of Florida against William. In its complaint, the Government alleged that while employment taxes continued to accrue, but prior to the lawsuit being filed, the defendant, William Planes (William), fraudulently transferred almost $600,000 to his wife Regina (Regina) Planes.

In furtherance of the scheme, Regina lied to the IRS by maintaining that she was not a financially responsible person of South Capital Construction, Inc. The Court subsequently entered a judgment against Regina finding that William made the transfer to Regina in order to prevent the IRS from collecting the penalty from him.

On November 5th 2018, the Government filed a second lawsuit seeking to:

Reduce a separate trust fund penalty of $529,000 assessed against William Planes in 2003 to a judgment.
Disregard the corporate entities that the defendants were using to impede IRS collections.
Apply the entities’ assets to the judgment.

A day after the IRS assessed $529,000 penalty against William, the defendant created the William Planes 2003 Irrevocable Trust and the Regina Planes 2003 Irrevocable Trust. These two trusts, in turn, owned six limited liability companies which William and Regina either owned or controlled.

The Government also requested and secured a temporary restraining order (TRO) on November 6th 2018, enjoining the defendants or anyone acting on their behalf or in concert with from transferring any entity asset.

On November 7, 2018 Regina was served with the TRO. Less than two hours later William transferred the sum of $160,000 from three of the entities bound by the TRO to Coast to Coast, an entity in which William is a director. A contempt hearing followed. The Court subsequently found the defendants in contempt and converted the TRO to a preliminary injunction.

While this case has yet to be referred to the IRS Criminal Investigation Division, I suspect it will be given the dollar amount.

Trust Fund Recovery Penalty and Prosecution

The amount of the TFRP is for the most part irrelevant in the Government’s decision to prosecute an individual. Taxpayers have been prosecuted where the TFRP was far less. The following cases illustrate the dollar range in TFRP cases that have resulted in criminal prosecution:

On August 27, 2019, a North Carolina woman was sentenced to 14 months in prison for employment tax fraud for withholding and failing to pay over $78,937 in employment taxes deducted from the employees of a Pediatrician where she worked as an office manager, as well as the failure to pay over $35,472 representing the employer’s share of taxes. Instead, the defendant used the money to pay her credit card bills, go on personal vacations and fund a business venture. She also helped herself to $1.4 million from the Pediatrician’s bank account.
In June of 2019 a Long Island business man pleaded guilty to failure to pay over employment taxes to the IRS. According to the documents filed by the DOJ, the defendant owned and operated several steel erection businesses on Long Island. Over a four year period the defendant owed almost $500k in employment taxes. In May of 2011, the defendant changed the name of his business to BR Teck Enterprises Inc. and transferred ownership of the corporation to another individual. Despite transferring ownership of the business to a third party, the defendant continued to operate the business ad continued to pay over employment taxes. From January 2012 through June 2017, the defendant racked up an additional $950K in unpaid employment tax liability.

An Individual who owns or controls a business or is considered a responsible person who has a fiduciary obligation to accurately collect, account for and pay over to the Internal Revenue Service, all federal employment taxes withheld from its employees as well as the employer’s portion of any payroll taxes. Failure to remit such payments will invariably lead to assessment of the TFRP against an individual or entity that is considered responsible.

The above examples make clear that the transfer of corporate or individual assets to another person or an entity as a strategy to defeat or impede IRS collection efforts will seldom, if ever, work. This strategy is viewed by the Government as a deliberative process and has served as strong evidence in criminal prosecutions of intent to defraud the U.S. Government.

Alternatives other than the fraudulent transfer of assets are available when dealing with payroll tax issues. These issues can sometimes be mitigated, when an experienced tax attorney becomes involved at an early stage in the process. Conducting a Google search and handling the problem yourself is no strategy at all. Perhaps, it is time to stop digging.

September 23, 2019/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

Law Office News, Tax Audit, Tax Returns

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

Back 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.

February 2, 2017/by Anthony N Verni, Attorney at Law, CPA

FBAR, Law Office News, Tax Audit

New Jersey Couple Avoids FBAR Penalty and Instead Receives Warning Letter

The following is an actual FBAR case handled by the Law Office of Anthony N. Verni. My Princeton New Jersey office was successful in securing a waiver of the proposed FBAR penalties for these two taxpayers.

Mr.and Mrs. Beránek (a.k.a. the “taxpayers”) are Czechoslovakia nationals.* The taxpayer as well as his spouse are retired and in their early seventies. The Beránek’s came to the United States in 1997 as Permanent Legal Residents and became naturalized citizens in 2004. Since their immigration to the U.S., Mr. and Mrs. Beránek have lived in Freehold, New Jersey.

The taxpayers maintained an account with UBS in Switzerland (the “UBS Account”), which was established in 1962. The taxpayers would routinely deposit their earnings from their employment as electrical engineers into the UBS Account. In addition to the UBS Account,Mrs. Beránek opened and maintained a joint account with her non-resident alien sister, Catalina in Zvolen Slovakia at Credit Suisse (the “Credit Suisse Account”).

In 1996 the Beránek’s sold their personal residence in Prague and liquidated a number of investments totaling $1,350,000. The proceeds were used to open a Brokerage Account with Raymond James in Newark, New Jersey. The taxpayers also owned a commercial rental property located in Prague until October of 2005, when the property was sold for $700,000. The proceeds from the sale were deposited into the UBS Account and remain there to date.

The taxpayers’ federal income tax returns were prepared by a local CPA near Howell, New Jersey, by the name of Sam Patel.** Each year the taxpayers would meet with Mr. Patel’s assistance and would provide her with copies of the Composite Form 1099 they received from Raymond James.

The CPA was unfamiliar with the FBAR filing requirements, and further, did not understand the concept that U.S. Taxpayers are taxed on their worldwide income. Consequently, Mr. Patel failed to prepare and file FBAR reports, failed to report the interest income earned on those accounts and failed to report the income and expenses from the rental property on the taxpayers’ income tax returns. In addition, Mr. Patel also failed to report the sale of the property in 2005 on the taxpayers 2005 tax returns.

In 2010 the taxpayers were notified that their 2005-2007 federal income tax returns were selected by the IRS for examination. The taxpayers retained an Upper Montclair, New Jersey CPA, who was competent in the area of IRS examinations, but he too was unfamiliar with the reporting requirements for foreign financial accounts.

As part of the examination process the IRS auditor asked the taxpayers about the existence of any foreign financial accounts and whether the taxpayers had any foreign source income.

In response to the IRS agent’s questions, the taxpayers disclosed that they had two foreign financial accounts and that interest income was earned on these two accounts. In addition, the taxpayers told the IRS that they received rental income from the commercial rental property in Prague, but sold the property in 2005. As a result of the taxpayers’ disclosures, the scope of the examination was expanded to include the tax years 2008 and 2009.

At the conclusion of the examination, the IRS advised the taxpayers that an additional income tax in the amount of $2,822 for the years 2005-2009 would be proposed. The agent also told the taxpayers that he was recommending a negligence FBAR penalty in the amount of $100,000, representing a $10,000 penalty for each account for each of the five years.

The taxpayers then retained my office in Princeton NJ for purposes of bringing them into compliance with the IRS and pursuing an abatement of the proposed negligence FBAR penalties.

During my initial meeting with the Beránek’s, I was not able to discern that the taxpayers were unaware of the FBAR reporting requirements nor were they aware of their obligation to report their worldwide income for Federal income tax purposes.

The taxpayers also informed me that neither Mr. Patel nor his assistance ever asked the Beránek’s whether they had any interest in any foreign financial account or whether the taxpayers received any income from foreign sources. Based upon the foregoing, I determined that reasonable cause existed and that an abatement of the proposed FBAR penalties should be pursued.

I contacted Mr. Patel and secured the taxpayers’ complete file. I was also able to secure an affidavit from the Mr. Patel wherein he acknowledged being unfamiliar with the FBAR filing requirements and also admitted that he was not aware that U.S. Taxpayers must report their worldwide income for federal income tax purposes.

I contacted the IRS agent’s supervisor and explained the situation. We agreed that the taxpayers would submit amended income tax returns for 2005-2009 and also prepare and file delinquent FBARS for the same years. We further agreed that we would revisit the FBAR penalties proposed by the agent once the taxpayers brought their filings current.

We amended the taxpayers’2005-2009 Federal Income Tax Returns. We also prepared and filed FBAR reports for 2005-2009.

The amended returns, together with the taxpayers’ remittance in the amount of $2,822 were delivered the IRA agent. We also provided the agent with, copies of the filed FBARS, a letter brief, outlining the relevant facts supporting our abatement request and Mr. Patel’s affidavit.

Following his review of the documents submitted and supervisor review, the examining agent advised me that he would be withdrawing his recommendation for the imposition of the FBAR penalties and would instead recommend that a warning letter be issued to the taxpayers. Several weeks later the taxpayers received a warning letter (Letter 3800) from the IRS and the case was closed.

Anthony N. Verni is an attorney and certified public accountant with over 20 years of experience.His practice is focused on representing expatriates and other U.S. Taxpayers, who have failed to report their worldwide income and/or failed to meet the FBAR reporting and other U.S. financial reporting requirements. Mr. Verni services clients in the Tri-tate area, South Florida, as well as client residing outside of the United States. In addition, Mr. Verni represents clients in domestic tax matters including examinations, appeals as well as taxpayers with un-filed income tax returns.

*The clients’ names have been changed for purposes of preserving the attorney client privilege. The facts of the case, however, are the facts from the actual case.

**The CPA name and location is fictitious, based upon a confidentiality agreement.

January 26, 2017/by Anthony N Verni, Attorney at Law, CPA

Criminal Tax Prosecutions, Expat Taxes, Tax Audit

Taxation of Professional Athletes & Entertainers – Are You At Risk?

The Risks of Professional Athlete and Entertainer Taxation

Global sports and entertainment have created many new opportunities as well as challenges for those individuals, who are multi-jurisdictional earners. The IRS has taken a keen interest in cross border sports and entertainment in the context of U.S. tax enforcement. This scrutiny has been expanded to include directors, producers, technicians, managers, promoters as well as others.

Recognizing that professional athletes and entertainers are globally mobile and have unlimited earning capacity, the IRS formed a task force charged with the responsibility of improving federal tax compliance among high income athletes and entertainers, through taxpayer awareness and increased enhanced enforcement efforts.

Other countries are likewise interested in professional athletes and entertainers, who earn income while performing services in venues outside of the U.S. Recent global tax enforcement initiatives signal that athletes and entertainers who evade taxes within and without the United States will be vigorously pursued. Specifically, the standards contained in FATCA and the Common Reporting Standards will facilitate the mutual exchange of information, transparency and the detection of those who are determined to evade paying their fair share of income taxes to the United States and its global partners.

In determining whether a professional athlete or entertainer is subject to U.S. income tax, the IRS will always key in on whether the athlete or entertainer is a resident for federal income tax purposes. The IRS will also look at how the income is characterized, whether the athlete or entertainer made use of a shell company or other device to avoid paying U.S. tax and whether the individual unreasonably relied upon a tax treaty or income allocation.

A U.S. tax resident is subject to U.S. income tax on his or her worldwide income.

As such, whether an athlete or entertainer is a resident for U.S. income tax purposes is the critical starting point. Generally, U.S. citizens and permanent resident aliens are considered U.S. tax residents and subject to federal income tax on their worldwide income.

In certain circumstances even a non-resident can be considered a U.S. tax resident if the individual spends the requisite number of days in the United States. A non-resident who is physically present in the United State for 183 days or more during a calendar year is considered a U.S. tax resident. A non-resident can also meet the physical presence test under a formula. If an individual is present in the United States for less than 183 days during a single tax year he or she may nevertheless be considered a U.S. tax resident in that year if the individual spends at least 31 days in the United States in the current year and, by application of a certain carryover formula, where the number of days in the United States in the current year plus the number of days from the prior two years equals 183 days or more.

Finally, a non-resident, who files and signs a joint tax return with a U.S. citizen or legal permanent resident, may also, be subject to federal income tax based upon his or her worldwide income.

Residency for federal tax purposes is significant to the IRS for the following reasons:

Athletes and entertainers, who are considered tax residents of the United States, are subject to U.S. income tax on their worldwide income. As such, the IRS is particularly interested in determining whether the athlete or entertainer received income from foreign sources, and if so, whether that income was properly reflected on the individual’s U.S. tax return.
Foreign athletes and entertainers, who are considered non-residents for U.S. tax purposes, are only subject to U.S. income taxon compensation received for services rendered in the United States, as well as royalties, rents from investments in U.S. real property, dividends, interest, and income derived from U.S. business operations. The IRS will focus on these individuals to determine if the foreign athlete or entertainer is reporting his or her U.S. source income. The IRS will also scrutinize the number of days a foreign athlete or entertainer spends in the United States for purposes of determining whether the individual meets the physical presence test.The unintended consequences of a non-resident athlete or entertainer, who is present for 183 days or otherwise meets the physical presence test under the formula, can be financially devastating.

Many professional athletes and entertainers may not be aware of their U.S. filing and reporting obligations if they are represented by a tax professional that is unfamiliar with cross border tax reporting. Too often, athletes and entertainers rely upon professional agents and management companies for direction in selecting legal, accounting and tax professionals to assist them with their financial affairs. Relying upon a professional agent or management company in the selection of a tax professional is inherently suspect and should be avoided at all costs. The simple reason for this is lack of independence. Moreover, while a recommended tax professional may have a general understanding of U.S. taxation, the individual may not be familiar with the mechanics of taxation in a multi-jurisdictional context.

Similarly, athletes and entertainers who rely upon friends or family in vetting and selecting a tax professional may eventually find themselves at odds with the Internal Revenue Service. An athlete or entertainer may also continue to use his or her existing tax professional out of loyalty, due to a personal relationship or based upon the assumption that the tax professional has the requisite experience, skill and knowledge related to cross border earners. However well intended, these methods for selecting a tax professional can result in adverse tax consequences.

A an athlete or entertainer, who fails to comply with his or her U.S. Tax and filing obligations can be subject to civil and criminal penalties. In cases where the athlete or entertainer has engaged in a systematic pattern of non-compliance, the individual may be subject to criminal prosecution, imprisonment and heavy fines. The IRS is particularly interested in the prosecution of famous athletes and entertainers, since the IRS considers high profile prosecutions a strong deterrent to potential tax cheats.

Running afoul of the U.S. tax laws may also result in loss of work visas and deportation of green card holders and individuals in the United States on visas. In addition, where the IRS has assessed income tax, an athlete or entertainer may not be permitted to leave the United States until federal tax liability is satisfied.

If you are a professional athlete or entertainer, you should speak with a tax attorney. Even athletes or entertainers who are currently in high school or college and anticipate signing a lucrative contract, it would be wise to speak with a tax attorney for purposes of evaluating the tax implications.

A final word of caution unrelated to the topic of taxation. Never permit an agent, accountant, attorney or financial manager to manage your financial affairs or have access to your assets. The investment, reporting and custody functions should always remain segregated as a safeguard against potential misappropriation of assets or making ill-advised investments. Any appearance of a conflict of interest should be a red flag. If a financial advisor, attorney or accountant suggests an investment, you should always get an independent attorney opinion prior to parting with your hard earned money. Just ask Hall of Famer, Scotty Pippen or superstar singer Rihanna.

November 12, 2016

November 12, 2016/by Anthony N Verni, Attorney at Law, CPA