Posted tagged ‘IRS’

« Tax Blawg home page
« Older Entries

How Does the IRS Treat Federal Agencies Who Owe Employment Taxes?

October 3, 2012

By George W. Connelly

Previous Blawg articles have cautioned my readers about the problems they can face if they do not take care of their Federal employment taxes, ranging from collection action against their business, to the trust fund recovery penalty being asserted against individuals determined to be “responsible officers.”  Since Federal agencies are also required to pay employment taxes for their employees, it is only fair to wonder if the IRS is dealing as harshly with them.  The answer warrants a letter to your Congressman.

On September 5, 2012, the Treasury Inspector General For Tax Administration (TIGTA) issued a report to follow up one prepared in August 2007, when TIGTA found that there were serious weaknesses in the Federal Agency Delinquency Program’s efforts to identify and address the causes for delinquencies in filings and payments.  TIGTA found that the corrective action the IRS took in response to that prior report did not fully address the previously identified weaknesses, and particularly those involving delinquent tax accounts. TIGTA  analyzed 132 aged Federal agency delinquent tax accounts from December 2008, and found that as of December 31, 2011, 40—totaling approximately $2.6 million—were still open after three years, and that collection action had been suspended for 34 of those 40 accounts, totaling $2.4 million.

TIGTA noted that the IRS does not have the same set of tools available when the taxpayer is another Federal agency.  For instance, Federal agencies are not authorized to pay interest and penalties for late filed returns or underpaid employment taxes.  Also, various IRS policies—policies!—do not allow enforcement actions to be taken against Federal agencies with delinquent tax accounts.  These apparently prevent filing of a Notice of Tax Lien, sending a Final Notice of Intent to Levy, or assessing the trust fund penalty against responsible officers, let alone seizure of property.  Of the 132 aged delinquent tax accounts for 68 Federal agencies in December 2008, TIGTA found that 36% had their collection statutes expire—the collection statute is ten years from the time of assessment!—and thus prevented the IRS from ever collecting those amounts.  40 accounts were open and unresolved after three years and in 85% of those, collection action had been suspended by the IRS.

There’s an old saying:  “What’s good for the goose is sauce for the gander.”  There is simply no reason why our hard-earned tax dollars should go to paying interest and penalties incurred by Federal agencies which should be setting a standard for compliance with employment taxes.  However, if the trust fund recovery penalty could be asserted against the persons in those agencies who are not performing their jobs, we would see a different response from them.  Moreover, we would not have to worry about the IRS wasting resources on chasing the few dollars it does collect from them.

Categories: Uncategorized
Tags: , , , ,

Comments: Be the first to comment

What Will The IRS Do If You Don’t Prepare An Income Tax Return?

September 28, 2012

By George W. Connelly

Well for starters, it won’t be very happy!  Beyond that, the IRS has several avenues it can pursue.

In extreme situations, such as where a taxpayer owes a considerable sum of money and has not filed for several years, the IRS may consider pursuing criminal liability under I.R.C. § 7203, which makes it a misdemeanor to “willfully” fail to file a Federal Income Tax Return.  This is rarely applied unless a pattern of three consecutive non-filing years are present, but potentially any single willful failure to file could result in this prosecution.  There is a six year statue of limitations, which begins to run on the day each tax return is due, so that the IRS has plenty of time to conduct an investigation.

Above and beyond the criminal liabilities, there can be civil liability for taxes, interest and penalties.  The presence of a criminal investigation is not a prerequisite to such a civil proceeding, nor is it barred in the event a criminal prosecution is pursued.  In fact, most non-filer situations are pursued civily.

The IRS is authorized by I.R.C. § 6020(b) to prepare a return for a taxpayer in the event one is not filed.  The information used could be the subject of information returns—Forms 1099 and W-2; formal examination of the taxpayer’s records; and in some cases even situations where the IRS relies upon information from prior years’ tax returns.

The taxpayer should be aware that the IRS seldom does this in isolation.  It is normal for the IRS to send a letter to the taxpayer stating that its records show that no tax return has been filed, and asking the taxpayer to send a copy if one was in fact filed, but alternatively to file one as soon as possible.  When the taxpayer does not respond, the IRSeither conducts an examiantion or simply handles it by correspondence.  In the absence of a formal agreement by the taxpayer to what the liability and its components are, the IRS cannot simply “assess” the liability.  It will issue a Notice of Deficiency outlining the details of its adjustments and computations.

One serious handicap in cases where taxpayers do not participate in either the correspondence or personal audits is that the IRS is undoubtedly not going to allow any deductions, since none are proven, and will treat any receipts reflected on a Form 1099 or 1099 substitute as ordinary income.  In many cases, such items from brokerage houses include gross receipts from the disposition of securities or other assets, but do not reflect the taxpayer’s basis, holding period, or other information which might affect the amount taxable, and the proper tax treatment.

On top of the foregoing, there are penalties based upon late filing in and of itself.  I.R.C. § 6651(a)(1) provides for a penalty running at the rate of 5% for each month or part of a month that a return is delinquent, maxing out at 25% of the underpayment of tax.  However, if the IRS concludes that the failure to file the return was fraudulent, I.R.C. § 6651(h) provides for an enhanced penalty of 75% of the underpayment.

As busy as we all are, it is important to take whatever steps are possible to get your tax returns filed on time, and to understand that if you fail to do so, it is only a matter of time before the IRS arrives and proceeds as we have described.

Categories: Uncategorized
Tags: , ,

Comments: Be the first to comment

What Can The IRS Do If You Go Out Of Business?

September 20, 2012

By George W. Connelly

Obviously, there will be “nothing” to do unless the business owes taxes or has not filed all its tax returns.  These comments are prompted by the fact is that the IRS has just issued a Manual Administration Supplement No. 855 to instruct its employees about how to proceed in the case of insolvency proceedings.

If the company files bankruptcy, the IRS will file a Proof of Claim and, depending upon the nature of its claim—is a Federal Tax Lien filed?are the taxes assessed?—it will proceed to pursue its rights based on its priority relative to other creditors.  If the proceeding is instead a receivership, assignment for the benefit of creditors, corporate disolution, or insolvent decedents estate, the IRS will likewise file a Proof of Claim, but note that each has a “fiduciary” that acquires the property of the debtor or decedent which then becomes the property of the insolvent estate, and the fiduciary has the responsibility of administering and distributing the property, including payments to creditors.  If the company does not initiate a proceeding, the IRS will try to contact the owner.

In these situations, if other creditors are paid ahead of the Internal Revenue Service, there is a Federal Priority Statute, 31 U.S.C. § 3713, which provides that a fiduciary could become personally liable if it pays other claimants ahead of the IRS.  In addition, the IRS may assert “transferee liability” against persons who receive property from insolvent estatesor companies if federal taxes are not paid.

If the business is a sole proprietorship, the IRS will doubtless pursue any assets of the owner.  Likewise, if it is a partnership, the IRS will pursue the assets of the partnership, as well as consider potential exposure of the general and limited partners.  If the business is a corporation, liability generally extends only to the extent of corporate assets, except for situations where transfers have been made voluntarily to the shareholders without adequate consideration.

In all these situations, there is the specter of further personal liability for those involved in the business.  If the unpaid liabilities include employment taxes, the IRS can pursue “responsible officers” pursuant to I.R.C. § 6672.  Under I.R.C. § 7501, above and beyond employment taxes, a person required to collect or withhold any Internal Revenue tax from any other person and pay it over to the Internal Revenue Service will similarly be treated as the holder of a “trust fund” in favor of the United States, which can be assessed and collected in the same manner as the underlying taxes themselves.

The important lesson is simply that the end of a business does not mean the end of liability to the IRS or the IRS’ interest in that business.  It is important to consult with a knowledgeable tax advisor if it appears your business is going under to make sure you are aware of all possible ramifications, and your own exposure to personal liability in these situations.

Categories: Uncategorized
Tags: , , ,

Comments: Be the first to comment

Under Water on Your Home Mortgage? Talk to Your Tax Advisor Before You Take Action!

April 10, 2012

By George W. Connelly

Recently, the IRS issued “Tax Tip 2012-39″ regarding important issues concerning mortgage debt forgiveness.  While anyone capable of reading this Blawg is capable of pulling that up from the IRS website and reading it, no action should be undertaken without making sure your tax professional has covered the positives and negatives of doing so.

Right now, a lot of people are “under water” on their home mortgage, and faced with possible foreclosure, short sale, or other transactions in which their mortgage debt is partly or entirely “forgiven” during this tax year.  There are several things to be wary of.  For starters, any time a debt is forgiven, it is presumed to result in taxable income.  However, there is a statute known as the Mortgage Forgiveness Debt Relief Act of 2007 that may permit the exclusion of up to $2,000,000 of debt forgiven on a personal residence.  (For a married person filing separately, the limit is $1,000,000).  This can take place through a mortgage restructuring as well as a debt forgiven in a foreclosure or short sale.  The only “qualified debt” involves monies used to buy, build or substantially improve the principal residence and be secured by that residence.  This includes refinancing for the purpose of substantially improving the principal residence.  A taxpayer seeking to qualify for this relief must fill out and file a Form 982 with the Federal Income Tax Return for the year in question.

Second, not all debt qualifies.  Proceeds of financing used for other purposes, such as paying off credit card debt, will not qualify.  Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for this relief provision.  However, some other tax relief provision – such as being insolvent both before and after the debt forgiveness – may be applicable, and these circumstances are covered on Form 982.

Next, if a debt is reduced or eliminated, a taxpayer is supposed to receive a year end statement, Form 1099-C, Cancellation of Debt, from the lender.  This form is supposed to show the amount of debt forgiven and the fair market value of the property foreclosed.  If you receive this form, examine it closely, because it is filed with the Internal Revenue Service and that agency will assume its contents are correct.  If it containsany incorrect information, notify the lender in writing immediately – pay especially close attention to the amount of debt forgiven in Box 2, as well as the value listed for the property in Box 7.  That notification should be in writing and this writer recommends that you send it certified mail with return receipt requested.

Finally, do not “attempt all this in your own home.”  Better to have a tax professional guide you through the process than to take the chance of a costly mistake.

Categories: Uncategorized
Tags: , , ,

Comments: Be the first to comment

Don’t Be A Victim Of One Of The IRS “Dirty Dozen Tax Scams” For 2012

March 22, 2012

By George W. Connelly

In February, the IRS published its annual “Dirty Dozen” listing of tax scams to caution taxpayers about problems they may face in this filing season.  They range from self-inflicted—too good to be true—to situations where third parties prey upon the unsuspecting.

Several are fairly common and familiar, ranging from reporting income that was not earned in order to maximize refundable credit, claiming excessive fuel tax credits, or simply claiming deductions one did not incur.  So are the time-worn tax protester arguments that have been thrown out by the courts.  There are, however, several that are new and equally dangerous.

The first involves identity theft – where someone files a return with your name and social security number in order to obtain a fraudulent refund.  This writer can tell you from the experience of his clients that these things are happening at an alarming rate and, quite frankly, that the IRS has not made a really firm respose to the cases he has seen, notwithstanding its claims to have a “robust screening process” in place.  This problem has been the subject of many newspaper articles, and anyone who believes personal information has been stolen – such as where you receive a letter from the IRS that your return was previously processed – needs to visit the IRS Special Identity Theft page at www.irs.gov/identitytheft.

Second, there are an increasing number of “PHISHING” scams – unsolicited emails or fake websites that pose as IRS sites in order to lure victims to provide personal and financial information.  Any unsolicited email claiming to be from the IRS or an organization linked to the IRS should be reported to phishing@irs.gov.  The IRS does not initiate contacts with taxpayer by email or request personal or financial information in this fashion.

A third problem involves tax return preparer fraud.  There are some “bad apples” out there, and it is important to make sure that your tax return preparer operates on the up-and-up.  For 2012, every paid preparer needs to have a Preparer Tax Identification Number (“PTIN”), and enter it on the return being prepared.  If your preparer does not enter one on the return, or does not also sign it, beware!

A fourth problem area involves attempts to hide income offshore, which have received a great deal of publicity due to the IRS Offshore Voluntary Disclosure Programs.  This can include foreign accounts, nominee entities, credit cards issued by foreign banks, and a multitude of other approaches.  While there may be legitimate reasons for maintaining financial accounts abroad, taxpayers have to be mindful of the many reporting requirements that need to be fulfilled, because the penalties for failing to do so – even in legitimate situations – are severe.  The IRS is working on information exchange programs with virtually every foreign country, so that these accounts are being “discovered” every day.  If you have or need to open any sort of foreign financial account, talk to your tax advisor abour your reporting obligations.

Finally, there are situations where corporations are created to obscure the true ownership of a business,and trusts are promoted to disguise asset transfers.  There are legitimate uses of both, but promises that income can be reduced, deductions of personal expenses can be permitted, or estate and gift taxes can be reduced, must be viewed with great suspicion.  Again, have any such plan reviewed by an experienced tax professional before you proceed.

As long as we have a federal income tax, there are going to be scams to deal with.  Don’t be a victim in 2012!

Categories: Uncategorized
Tags: , , , , , , ,

Comments: Be the first to comment

Can Foreign Governments Obtain Taxpayer Information From State and Local Revenue Agencies?

February 28, 2012

By Jonathan Prokup

During a course that I taught about tax treaties at last week’s TEI Houston Tax School, one audience member asked whether the exchange-of-information provisions of U.S. tax treaties apply not only to the federal government but also to state and local governments.   I had to confess that I did not know the answer of the top of my head.  However, I took a quick look at the question later in the week.

By way of background, in each income tax treaty with foreign jurisdictions, the United States negotiates an “exchange of information and administrative assistance” provision.  This provision generally obligates the governments to share information with one another “as may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State….”  United States Model Income Tax Convention (“Model Treaty”), art. 26, ¶ 1 (Nov. 15, 2006). (more…)

Categories: Administrative, International
Tags: , , , ,

Comments: Be the first to comment

If The Job Offer Includes A Loan From The Employer, Talk To Your Tax Adviser Before Accepting!

February 27, 2012

By George W. Connelly

It is not uncommon for sought-after job seekers to receive what appears to be an offer that is too good to be true:  in addition to a good compensation and benefits package, the employer proposes to make a loan to the applicant, and to forgive the entire amount if the person stays employed for a particular term—such as five years.  Sometimes the game plan is not in writing, and is left to “wink wink, nudge nudge” in terms of the likelihood that the loan will be forgiven if the person stays employed that length of time.

These arrangements are not in any way “illegal,” but as Robert and Elizabeth Brooks learned in the United States Tax Court this year, in TC Memo 2012-25, there are some significant tax problems that could arise from this arrangement.

At the outset, there is a question about whether the arrangement is really a “loan” when there is an intent to forgive in the first place.  A loan is a transaction where one person borrows money from the other, with the agreement that it will be repaid, and the lender expects repayment.  They are easily reduced to writing, bear interest, and are treated as loans by both parties.  Those facts alone, however, will not necessarily make the transaction a loan.

As Judge Mark Holmes pointed out in the Brooks case, such advances have in various contexts been treated as income at the outset because the Court concluded that the intent of the transaction was not a loan, but rather an attempt to induce the person to provide personal services, and the obligation to repay was conditional—only if the applicant quits or was fired for cause within five years.  In that situation, the “loan” could be treated as income in the year it is advanced.

In the case of Mr. and Mrs. Brooks, the Court was confronted with the tax year in which the loan was actually forgiven, and Judge Holmes noted that the Internal Revenue Code normally treats forgiveness of debt as income, since the borrower who does not have to pay it back has received an economic benefit.  This discharge of indebtedness income includes both the forgiven loan principal and the accrued interest.

In these situations, the old adage that “If it looks too good to be true, it probably is,” isn’t necessarily the point.  Rather, before one enters into a transaction like this, it is critical that the prospective employee pin down as closely as possible what the real intentions are, and then review them with a tax adviser.  A lot of trouble can be avoided if these steps are taken at the outset, rather than after the IRS comes in and questions the transaction.

Categories: Tax Procedure
Tags: , , , , , ,

Comments: Be the first to comment

Settlement Program for Worker-Classification Issues: Putting the Latest Employment Tax Offer into Perspective

February 23, 2012

By Hale Sheppard

The difference between what taxpayers should pay and what they actually pay the IRS is called the “tax gap.”  A significant portion of the tax gap is attributable to non-compliance with employment tax laws, including worker misclassification.  The IRS is currently conducting a three-year research project, which entails an additional 6,000 random employment tax audits.  This research will inevitably lead to the conclusion that worker misclassification is rampant and depriving the federal government of billions of dollars in tax revenues each year.  Therefore, the IRS likely will deem it necessary to dedicate significantly more resources to enforcement of employment tax laws in the future.

Against this backdrop, the IRS announced in September 2011 a new voluntary classification settlement program (“VCSP”), which is designed to entice companies into reclassifying their workers from independent contractors to employees.  The VCSP may seem appealing at first blush, but further analysis reveals that participation in this pseudo-amnesty program may not be the best decision for many companies.  Of course, the challenge is that many companies grappling with this critical issue lack a complete picture of the options and their true implications.   These companies and/or their advisors have, as they say, just enough information to be dangerous.  The attached article, called “IRS Introduces New Settlement Program for Worker-Classification Issues:  Putting the Latest Employment Tax Offer into Perspective,” analyzes the major choices available to companies that could be facing worker-classification disputes with the IRS in the near future.  The article was published in the most recent issue of Taxes – The Tax Magazine.

Categories: Employment Tax
Tags: , ,

Comments: Be the first to comment

Always Say Never: Does Financial Distress Create Reasonable Cause Sufficient To Abate Tax Penalties?

February 6, 2012

By Hale Sheppard

Nearly all taxpayers will face penalties by the IRS at some point, regardless of their sophistication level and size.  Accordingly, tax practitioners, even those who claim not to get involved in traditional “collection” activities, must understand key aspects of abatement and collection procedures in order to effectively advise their clients.  This is particularly true given that the IRS persists in taking extreme positions in the Tax Court, such as the always-say-never approach, that are contrary to the majority of existing legal authorities.  A recent example is Custom Stairs & Trim, Ltd., Inc. v. Commissioner, T.C. Memo 2011-155, a case in which the IRS unsuccessfully argued that financial distress caused by events beyond the taxpayer’s control can “never” constitute reasonable cause for abating late payment and federal tax deposit penalties.  The attached article, called “Always Say Never:  Tax Court Rejects IRS’s Extreme Litigation Position in Penalty Cases,” analyzes Custom Stairs and the valuable lessons that it contains for taxpayers and their advisors.  The article was published in the most recent issue of Journal of Tax Practice & Procedure.

Categories: Administrative, Litigation
Tags: , , ,

Comments: Be the first to comment

Fox Business Interview: OVDI, FBARs, And The Economic Benefits Of A Repatriation Holiday

January 17, 2012

By Jonathan Prokup

Fox Business invited me to appear yesterday on “After The Bell” with Liz Claman and David Asman to discuss (i) the IRS reopening the disclosure initiative for offshore bank accounts and (ii) the ongoing debate about whether Congress should implement a corporate repatriation holiday.  A link to the video is below the fold. (more…)

Categories: Administrative, International
Tags: , , , , , , ,

Comments: 1 Comment

« Older Entries
Follow

Get every new post delivered to your Inbox.

Join 79 other followers

%d bloggers like this: