November 21, 2014

United States Signs Intergovernmental Agreement with the Bahamas to Implement the Foreign Account Tax Compliance Act

The tax attorneys at Nardone Law Group in Columbus, Ohio, continuously monitor the Internal Revenue Service’s efforts to incentivize taxpayers to disclose foreign financial accounts, assets or entities. IRS programs, such as the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures, allow taxpayers with undisclosed offshore accounts to come into compliance. Recent expansions to the streamlined filing procedures made them available to a broader population of U.S. taxpayers. U.S. taxpayers living outside the United States are able to take advantage of the Streamlined Foreign Offshore Procedures, while U.S. taxpayers residing within the United States may now utilize the Streamlined Domestic Offshore Procedures. Each program involves certain criteria that taxpayers must satisfy to obtain the program’s benefits. It is important that taxpayers review the relevant criteria to help decide which program is best suited for their needs, because waiting to come into compliance is no longer a viable option.

The IRS and U.S. Department of Justice have also reached agreements with an increasing number of countries, working to uncover taxpayers with undisclosed foreign financial accounts, assets or entities. Most recently, the U.S. and the Bahamas signed an intergovernmental agreement to implement the Foreign Account Tax Compliance Act. The full text of the agreement can be found here: Agreement between U.S. and the Bahamas. This agreement is part of an ongoing effort to uncover delinquent U.S. taxpayers with undisclosed foreign accounts and bring them into compliance.

U.S. and the Bahamas Reach Agreement to Implement FATCA

On November 3, 2014, the United States and the Commonwealth of the Bahamas signed an intergovernmental agreement to implement the Foreign Account Tax Compliance Act (FATCA). Enacted in 2010, FATCA targets non-compliant U.S. taxpayers with foreign accounts. FATCA focuses on reporting, either by the U.S. taxpayers themselves, or by foreign financial institutions in which U.S. taxpayers hold an account or a substantial ownership interest in an account held by a non-U.S. entity. The agreement between the U.S. and the Bahamas is designed to promote cooperation between the two countries in regards to FATCA.

Under the agreement, the Bahamas “shall obtain the information specified…with respect to all U.S. Reportable Accounts and shall annually exchange this information with the United States on an automatic basis.” The information to be obtained and exchanged, with respect to each U.S. Reportable Account includes:

i.  The name, address, and U.S. Taxpayer Identification Number (TIN) of each specified U.S. taxpayer that holds an account, or of each U.S. taxpayer who owns a substantial ownership interest in a non-U.S. entity’s account;

ii.  The account number (or functional equivalent in the absence of an account number);

iii. The name and identifying number of the Reporting Bahamas Financial Institution; and

iv. The account balance or value as of the end of the relevant calendar year or reporting period.

As you can see, the agreement gives the Bahamas significant authority to report U.S. taxpayers’ financial interests in Bahamas Financial Institutions. Taxpayers who fail to come into compliance can be subjected to substantial penalties, including civil and criminal fines. As the IRS and Justice Department increase their efforts to uncover undisclosed foreign financial accounts, now is the time to come into compliance and significantly reduce the risk of further negative impacts. Taxpayers with an undisclosed foreign account should consult with a tax attorney to figure out which method of offshore account disclosure is best suited for their needs and circumstances.

How Nardone Law Group Can Help

Nardone Law Group routinely represents individuals and businesses in federal and state tax issues, including the IRS Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures. If you have an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorneys today. There are many factors for taxpayers to consider when determining what method of offshore account disclosure will produce the optimal results. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

November 18, 2014

Ohio Society of CPAs 2014 Dayton Fall CPE Conference

Vince Nardone is set to speak on Wednesday, November 19, 2014 at the Ohio Society of CPAs 2014 Dayton Fall CPE Conference taking place in Dayton, Ohio. Vince will cover IRS Audit Representation, where he plans to address key issues that the Internal Revenue Service is targeting, including how to prepare for and handle the audit with a consistent message. He will also share his expertise regarding how to maintain control of the situation by knowing what information to share with the IRS and how to anticipate future disputes. Again, we thank the Ohio Society of CPAs for this opportunity!

November 17, 2014

Installment Agreements Provide Taxpayers a Viable Collection Alternative When Facing Federal Tax Liabilities

The tax attorneys at Nardone Law Group in Columbus, Ohio, frequently advise individual taxpayers and businesses on how to utilize the Internal Revenue Service’s collection alternatives to manage their federal tax liabilities. In many instances, taxpayers are contacted by IRS revenue officers, whose sole purpose is to collect the tax from that taxpayer as quickly as possible. Aside from simply paying the tax liability in full, there are various collection alternatives available to taxpayers that can help reduce or eliminate tax liabilities arising from an IRS audit or examination, including, but not limited to: (i) installment agreements, (ii) offers-in-compromise, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liabilities.

This article is the first of a series that will focus on installment agreements as IRS collection alternatives. This article provides a general description of installment agreements and some of the various types that exist. Future articles in the series will provide a more in-depth discussion of each type of installment agreement, outlining the requirements and benefits involved. First, it is helpful to understand what an installment agreement is and how it can help a taxpayer manage their federal tax liabilities.

Installment Agreements as a Collection Alternative

According to the Internal Revenue Manual, installment agreements are “arrangements by which the Internal Revenue Service allows taxpayers to pay liabilities over time.” The IRS’ goal is for delinquent taxpayers to achieve full payment, but in some cases, Partial Payment Installment Agreements may be granted. Taxpayers are encouraged to pay their liabilities in full to avoid the costs of an installment agreement, which include a user fee, the accrual of penalties and interest, and the possible filing of a Notice of Federal Tax Lien.

There are a variety of installment agreements that businesses and individuals may qualify for, depending on the specific circumstances of the particular case. Some of the pertinent criteria to be considered are the amount of debt and the type of tax involved. Below are some of the possible installment agreements, available to businesses and taxpayers as an IRS collection alternative.

Types of Installment Agreements

1. Guaranteed – provide qualified taxpayers who have a one-time account delinquency the right to any agreement, if their taxes are $10,000 or less, and certain other conditions are met.

2. Streamlined – has two tiers – $25,000 or less, and $25,001 to $50,000 – and can be used on income tax liabilities, and out of business modules.

3. In-Business Trust Fund Express – can be utilized without securing financial information on BMF accounts, up to $25,000.

4. Routine – accounts are considered ‘routine installment agreements’ when the type of debt does not meet the criteria for any other type of installment agreement (Guaranteed, Streamlined, or IBTF-Express).

5. Partial Payment – if full payment cannot be achieved by the Collection Statute Expiration Date, and taxpayers have some ability to pay, the IRS can enter into Partial Payment Installment Agreements.

NLG Comment: Our series on installment agreements as a collection alternative will continue, with articles featuring each of the foregoing types of agreements, providing a detailed look at the requirements and benefits of each possible agreement. If you have questions about installment agreements, or IRS collection alternatives in general, contact one of our experienced tax attorneys today.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in federal tax matters, including collection alternatives, such as installment agreements. If you or your business have been contacted by an IRS revenue officer, or are struggling with tax liabilities, you should contact one of our tax attorneys today. Nardone Law Group’s tax attorneys have vast experience representing clients before the IRS. We will thoroughly review your case to determine what options and alternatives are available, including an installment agreement.

Contact us today for a consultation to discuss your case.

November 14, 2014

Ohio Society of CPAs Columbus Accounting Show

November 14, 2014 — Vince Nardone, managing member of Nardone Law Group, LLC, spoke at the Columbus Accounting Show held by the Ohio Society of CPAs. Vince addressed the attendees regarding the representation of financially distressed businesses and individuals in front of the Internal Revenue Service, a topic that heavily impacts our clients. Thank you to the OSCPA for extending this opportunity!

November 13, 2014

Updated 'Streamlined Domestic Offshore Procedures' Target U.S. Residents with Undisclosed Offshore Accounts, Assets

The tax attorneys at Nardone Law Group in Columbus, Ohio, continuously monitor the latest developments in the Internal Revenue Service’s efforts to encourage taxpayers to disclose foreign accounts, assets, or entities. The recently expanded Streamlined Filing Compliance Procedures are available to a wider population of U.S. taxpayers living outside the country (via the ‘Streamlined Foreign Offshore Procedures’) and to certain U.S. taxpayers residing in the United States (via the ‘Streamlined Domestic Offshore Procedures’).

Our previous article, on the Streamlined Foreign Offshore Procedures, laid out the criteria and benefits of that program, as it relates to non-U.S. residents. This article provides a brief overview of the important requirements and effects of the Streamlined Domestic Offshore Procedures. Since the program’s expansion to U.S. residents is a fairly recent development, taxpayers may have questions about whether the Streamlined Domestic Offshore Procedures apply to them and, if so, what benefits the procedures provide. To answer these questions, we will start by reviewing the applicable criteria.

‘Streamlined Domestic Offshore Procedures’ Criteria

In addition to the general streamlined filing requirements, the Streamlined Domestic Offshore Procedures have specific criteria for U.S. residents. Taxpayers seeking to utilize the Streamlined Domestic Offshore Procedures must:

1. Fail to meet the applicable non-residency requirement (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement);

2. Have previously filed a U.S. tax return (if required) for each of the most recent three years for which the U.S. tax return due date has passed;

3. Have failed to report gross income from a foreign financial asset and pay tax as required by U.S. Law, and may have failed to file an FBAR and/or international information returns with respect to the foreign financial asset; and

4. Show that such failures resulted from non-willful conduct.

NLG Comment: For a review of the “applicable non-residency requirements,” as well as the “non-willful conduct” requirement, please see our previous article regarding ‘Streamlined Foreign Offshore Procedures.’

Compliance with the Streamlined Domestic Offshore Procedures

Once a taxpayer qualifies for participation under the Streamlined Domestic Offshore Procedures criteria, there are several important instructions the taxpayer must follow. Eligible taxpayers, seeking to utilize the streamlined domestic procedures, must:

1. Submit a complete and accurate amended tax return for the period(s) in question, together with any required information returns (Delinquent income tax returns may not be filed using these procedures);

2. Write “Streamlined Domestic Offshore” in red, at the top of the first page of each amended tax return, to indicate that the returns are being submitted under these procedures;

3. Complete and sign a statement of Certification by U.S. Person Residing in the U.S.;

4. Submit payment of all tax due, as reflected on the tax returns, and all applicable interest with respect to each of the late payment amounts;

5. Submit payment of the five percent miscellaneous offshore penalty, discussed below; and

6. File delinquent FBARs, and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.

Effect of Streamlined Foreign Offshore Procedures

At this point, you may be wondering, “Why would I want to use these procedures? What is the benefit?” Eligible taxpayers who utilize the Streamlined Domestic Offshore Procedures and comply with all of the applicable instructions will be subject only to a five percent miscellaneous offshore penalty. The five percent miscellaneous offshore penalty is based on the highest aggregate balance of the taxpayer’s foreign financial assets causing the tax compliance issue over the relevant period. All other penalties associated with the non-U.S. source income will be waived. The streamlined procedures do not, however, limit the civil penalties otherwise associated with the reporting of U.S. source income and do not provide protection from a possible criminal prosecution referral from the IRS.

Therefore, the Streamlined Foreign Offshore Procedures can be a very helpful tool for certain taxpayers seeking to become compliant with U.S. tax reporting and payment obligations related to their foreign accounts, assets, or entities.

Contact Nardone Law Group

This article is intended to highlight some important points of the Streamlined Domestic Offshore Procedures. If you have an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorneys today. Nardone Law Group routinely represents individuals and businesses in federal and state tax issues, including the Streamlined Domestic Offshore Procedures. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

November 11, 2014

'Streamlined Foreign Offshore Procedures' Allow U.S. Taxpayers Residing Outside the U.S. to Disclose Offshore Accounts, Assets

Nardone Law Group’s experienced tax attorneys, located in Columbus, Ohio, routinely advise taxpayers about their U.S. tax reporting obligations regarding foreign financial accounts and the importance of reporting previously undisclosed foreign accounts. In our previous article, we provided an overview of the IRS’ Streamlined Filing Compliance Procedures. In 2014, the IRS expanded the streamlined procedures, making them available to a wider population of U.S. taxpayers living outside the United States (via the ‘Streamlined Foreign Offshore Procedures’) and, for the first time, to certain U.S. taxpayers residing in the United States (via the ‘Streamlined Domestic Offshore Procedures’).

This article highlights some important information regarding the Streamlined Foreign Offshore Procedures, which offers non-U.S. residents the opportunity to report previously undisclosed foreign financial accounts, assets or entities. Our next article will discuss the Streamlined Domestic Offshore Procedures, which provides U.S. residents the same opportunity. There are important, and sometimes subtle, differences between the two procedures, and taxpayers might have some questions about which category they qualify for and what benefits are associated with those categories. We will try to answer some of those questions now, starting with “Who qualifies as a non-U.S. resident?”

Non-Residency Requirements

The first question that should arise is: how does the Internal Revenue Service define a non-resident? A common misconception is that one must permanently live outside of the United States to be a “non-resident.” But, U.S. Citizens or Lawful Permanent Residents (i.e., ‘Green Card Holders’) satisfy the “applicable non-residency requirement” if the individual did not have a U.S. abode and was physically outside of the United States for at least 330 full days, in one or more of the most recent three years for which the U.S. tax return due date has passed.

NLG Comment: It is important to note that neither temporary presence of the individual in the U.S. nor maintenance of a dwelling in the U.S. by an individual necessarily mean that the individual’s abode is in the U.S. For joint return filers, both spouses must meet the applicable non-residency requirement.

Individuals, who are not U.S. Citizens or Lawful Permanent Residents, however, may meet the applicable non-residency requirement if the individual fails to meet the ‘substantial presence test,’ in one or more of the last three years for which the U.S. tax return due date has passed. The ultimate determination as to whether one satisfies the non-residency requirement, requires a detailed review of the facts and circumstances of each particular taxpayer’s case. Once it has been determined that a taxpayer qualifies as a “non-resident,” the next step is to consider the additional criteria.

‘Streamlined Foreign Offshore Procedures’ Criteria

In addition to the general streamlined filing requirements, covered in our previous article, the Streamlined Foreign Offshore Procedures have specific criteria for non-U.S. residents. Taxpayers seeking to utilize the Streamlined Foreign Offshore Procedures must:

1. Have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR with respect to a foreign financial account; and

2. Show that such failures resulted from non-willful conduct (i.e., conduct that is due to negligence, inadvertence or mistake, or conduct that is the result of a good-faith misunderstanding of the requirements of the laws.

NLG Comment: The certification of “non-willful” conduct is an essential component for taxpayers to understand when deciding whether they qualify for the Streamlined Foreign Offshore Procedures. The taxpayer must certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. If the IRS determines that the taxpayer intentionally falsified the certification, the taxpayer may be subject to prosecution. Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct, and therefore seek assurances that they will not be subject to substantial monetary penalties and/or criminal liability, should consider participating in the Offshore Voluntary Disclosure Program.

Effect of Streamlined Foreign Offshore Procedures

Once a taxpayer meets the applicable non-residency requirement and is eligible for the Streamlined Foreign Offshore Procedures, the taxpayer must file the delinquent or amended tax returns, along with any required information returns and any delinquent FBARs. The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.

The major benefit of qualifying as a non-U.S. resident is that all penalties related to the disclosure will be waived. However, the streamlined procedures do not limit the civil penalties associated with the reporting of U.S. source income or provide protection from a possible criminal prosecution referral from the IRS. An experienced tax attorney can help taxpayers determine if they can take advantage of this program and the beneficial penalty waivers it provides. 

Contact Nardone Law Group

As this article illustrates, there are many factors for taxpayers to consider when determining what method of offshore account disclosure will produce the optimal results. It is important to have an experienced tax attorney evaluate your case to decide whether the Streamlined Foreign Offshore Procedures, the Offshore Voluntary Disclosure Program, or opting out and undergoing a regular civil examination is best for you. Nardone Law Group frequently represents individuals and businesses in federal and state tax issues, including the Streamlined Foreign Offshore Procedures. If you have an undisclosed foreign account, asset, or entity, contact an experienced Nardone Law Group tax attorney today. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case

November 06, 2014

Taxpayer's Criminal Conviction for Assisting in False Tax Return Filings Upheld by U.S. Court of Appeals

The tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated regarding the Internal Revenue Service’s efforts to eliminate tax fraud, through civil and criminal investigations. In our prior article on IRS Audits and Examinations, we discussed the IRS’ ability to conduct civil investigations of taxpayers’ federal income tax returns and to impose accuracy-related penalties, resulting from any deficiencies. It is important to know that the IRS also has the ability to conduct criminal investigations, which may result in fines, as well as sentences of incarceration. Taxpayers who commit tax crimes, such as filing false returns, making fraudulent claims, or assisting others in similar acts, can face severe punishments if convicted. A recent decision by the U.S. Court of Appeals highlighted the government’s authority to criminally punish fraudulent taxpayers.  

Tax Fraud Results in 97 Month Jail Sentence

In the case of United States v. Bell, the U.S. Court of Appeals for the Ninth Circuit affirmed the conviction of a taxpayer who made false, fictitious, and fraudulent claims to the U.S. Treasury, and assisted in the filing of false tax returns. The case concerned a tax scheme, involving false Form 1099-OIDs, in which a taxpayer would file the form, which falsely stated that an amount of income tax had been withheld. The taxpayer would then rely on that false withholding figure to submit a fraudulent refund claim.

Bell filed five false income tax returns using this scheme. In addition to these false submissions and fraudulent refund claims on his own returns, Bell also promoted the tax scheme to other people, including his son. From October 2008 to October 2009, Bell assisted six taxpayers in filing fifteen tax returns using the Form 1099-OID scheme, collectively requesting $2.7 million in unwarranted refunds, and causing the IRS to mistakenly make refund payments exceeding $670,000.

At trial, Bell proceeded pro se (representing himself) and, according to the court, consistently refused to recognize the authority of the court or to participate in the proceedings.  At the end of trial, the district court delivered jury instructions, the government gave its closing argument, and Bell remained silent, effectively waiving his right to make a closing argument. The jury subsequently convicted Bell as charged. The district court calculated Bell’s sentencing guideline range to be 97 to 121 months, and accordingly sentenced him to 97 months of incarceration, followed by three years of supervised release. Ultimately, the U.S. Court of Appeals affirmed Bell’s conviction.

NLG Comment: This case is a prime example of the severe punishments taxpayers can incur when attempting to defraud the federal government. Not only can the IRS impose hefty civil fines and penalties, but it can also conduct criminal investigations, which can result in lengthy jail sentences. Furthermore, this case illustrates the importance of consulting with an experienced tax attorney to help navigate the intricacies of IRS investigations and any subsequent litigation that might arise.

Contact Nardone Law Group

Nardone Law Group routinely represents businesses and individuals who are undergoing an IRS audit or examination, including criminal investigations. If you have been contacted by an IRS revenue officer, or if you are currently facing a civil or criminal tax investigation, contact one of our experienced tax attorneys today. Nardone Law Group’s tax lawyers and professional staff have vast experience representing taxpayers before the IRS. We will thoroughly review your case and determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 31, 2014

Taxpayer's Failure to Substantiate Gambling Loss Deductions Results in Accuracy-Related Penalties

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise clients on tax law issues involved with gambling. One issue that taxpayers frequently encounter is the need to substantiate gambling losses before the IRS. Whether the taxpayer is a professional or recreational gambler, gambling losses can only be deducted to the extent of gambling winnings. Professional gamblers have the additional benefit of being able to deduct ordinary and necessary business expenses related to their gambling, such as travel, food, and lodging expenses. Amateur, recreational gamblers cannot deduct these expenses because they are considered personal in nature when the activity is not engaged for profit. Professional gamblers report their gambling winnings and losses on Schedule C, while recreational gamblers report their losses as itemized deductions.

Gambling is often a form of entertainment for most people and, as a result, they do not maintain detailed records of their gains and losses, like someone would for a business or other for-profit activity. Gambling losses usually exceed gambling winnings, so taxpayers often have issues substantiating their gambling losses. Adequate and thorough documentation is required to claim gambling losses, and can often help taxpayers substantiate and defend their claims to the IRS, should any discrepancies arise in an audit or examination. A recent decision by the U.S. Tax Court highlights the importance of adequate gambling records, as well as the IRS’ ability to assess accuracy-related penalties as a result of deficiencies.

Unsubstantiated Gambling Loss Deductions

In Jacqueline F. Burrell v. Commissioner, a recreational gambler was denied deductions for gambling losses beyond amounts conceded by the IRS for the years 2007 to 2009. The IRS’ determination found deficiencies of approximately $115,000 for the relevant period and, as a result, assessed accuracy-related penalties of nearly $23,000. The court found that the petitioner failed to properly substantiate additional losses, even though she submitted documents entitled “Cash Recycled” and “Cash Ledger.” The documents helped the court establish the amount of cash the taxpayer brought to the casinos each day, however, they did not show how much she left with at the end of the day.

Taxpayers are required to maintain permanent books of account or records, sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown on their federal income tax return. If taxpayers establish that an expense is deductible but are unable to substantiate a precise amount, the court may estimate the amount, bearing heavily against the taxpayer. In the case of gambling winnings and losses, taxpayers can substantiate their income and deductions by maintaining a detailed log.

The petitioner did not track her winnings and losses. However, based on casino letters and other documents, the IRS conceded that the petitioner was entitled to deduct approximately 70% of the total reported gambling losses for the three years involved. Since the petitioner had no records of her winnings and losses, the court held that the evidence was insufficient to entitle the petitioner to greater deductions for gambling losses than those conceded by the IRS. Consequently, the court found the petitioner liable for the accuracy-related penalty of $23,183.20.

NLG Comment: This case exemplifies the importance of keeping detailed records, for both professional and recreational gamblers. Adequate documentation of financial gains and losses can help taxpayers substantiate claims on their federal income tax returns, as well as defend against potential liabilities in the event of an IRS audit or examination.

Contact Nardone Law Group

Nardone Law Group frequently represents individuals who are undergoing an IRS audit or examination, including professional and amateur gamblers. If you have been contacted by an IRS revenue officer, or if you have questions regarding deductions for gambling losses, contact one of our tax attorneys today. Our tax lawyers and professional staff have vast experience representing and advising professional and non-professional gamblers regarding substantiating gambling losses. Adequate documentation is vital to ensuring compliance with all relevant tax reporting requirements. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 27, 2014

What Taxpayers Need to Know About IRS Audits and Examinations, And the Possibility of Penalties

Nardone Law Group’s experienced tax attorneys, in Columbus, Ohio, routinely assist individuals and businesses that become subject to an Internal Revenue Service audit or examination. An IRS audit or examination occurs when the IRS selects a tax return and reviews the taxpayer’s records from which the reported information on the tax return is derived. One of the most important things taxpayers can do to avoid a potential audit or examination is to maintain adequate personal and business records. While many tax practitioners advise clients to maintain tax records for seven years, Nardone Law Group recommends that tax records be retained indefinitely.

When taxpayers are subjected to an audit or examination, properly retained and organized records will help to effectively defend against the possibility of an assessment of additional taxes, as well as accuracy-related penalties. Proper documentation allows taxpayers to substantiate all business or personal expenses deducted on a tax return and will help to resolve any discrepancies that may arise. A recent U.S. Tax Court decision, which upheld an accuracy-related negligence penalty against a military service member, exemplified the IRS’ ability to assess penalties against negligent taxpayers.

Tax Court Upholds IRS Determination Regarding Charitable Deductions

In Thad D. Smith v. Commissioner, the U.S. Tax Court addressed the issue of tax deductions for charitable donations and the IRS’ ability to assess accuracy-related penalties for negligently unsubstantiated deductions. The petitioner, a pro se military service member, timely filed a federal income tax return for 2009, on which he claimed itemized deductions of $52,810. Upon audit, the IRS determined that $35,238 of these deductions should be disallowed due to a lack of substantiation. While the case was being considered by the IRS Appeals Office, the petitioner submitted an amended 2009 return, increasing his claimed deduction for noncash charitable contributions from $490 to $27,767. He based this new amount on clothing and other household items that he allegedly donated to the American Veterans National Service Foundation (AMVETS) in 2009.

IRS determinations in a notice of deficiency are generally presumed correct, so taxpayers bear the burden of proving that determinations are erroneous. Taxpayers must demonstrate their entitlement to deductions and are required to substantiate their claims. For noncash charitable contributions, the substantiation requirements become increasingly more stringent as the gifts increase in value. The most basic requirement provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with a “contemporaneous written acknowledgement of contribution by the donee organization.” This acknowledgment must include a description of any property other than cash.

The petitioner did not maintain written records establishing when or how the items were acquired, or what their cost bases were. Furthermore, he obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. The court held that the petitioner failed to satisfy the “contemporaneous written acknowledgement” requirement, and subsequently disallowed any portion of the additional deduction claimed on his amended 2009 return.

Accuracy-Related Negligence Penalty

IRC section 6662 imposes a 20% penalty upon the portion of any underpayment attributable to negligence or the disregard of rules or regulations by a taxpayer. “Negligence” includes any failure to make a reasonable attempt to comply with the tax laws, and “disregard” includes any careless, reckless, or intentional disregard. With respect to an individual taxpayer’s liability for a penalty, the IRS bears the burden of proving that the penalty is appropriate. Once the Commissioner meets this burden of production, the taxpayer must prove that the determination is incorrect.

As a result of the petitioner’s unsubstantiated deductions, the IRS’ notice of deficiency assessed an accuracy-related penalty of $1,881. The petitioner acknowledged at trial that he had no basis for claiming most of the deductions, effectively discharging his burden of production. Therefore, the court upheld the IRS’ imposition of the accuracy-related penalty.

NLG Comment: This case is an excellent example of why taxpayers need to carefully organize and retain their personal and business records. Detailed records and files will help taxpayers defend against the assessment of additional taxes or penalties.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in a multitude of federal tax matters, including taxpayers who are subjected to an IRS audit or examination. If you are facing an IRS tax audit or examination, or if you wish to learn more about how to adequately maintain your records, contact one of our experienced tax attorneys today. Nardone Law Group’s tax lawyers and professions have vast experience representing clients undergoing IRS audits and examinations. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 24, 2014

Recent 'Innocent Spouse Relief' Case Displays Requirement Threshold

The experienced tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated on the Internal Revenue Service’s efforts to collect federal tax liabilities, including advising taxpayers on the various collection alternatives that may be available. These collection alternatives include: (i) offer-in-compromise, (ii) installment agreements, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liability. When taxpayers are contacted by an IRS revenue officer, we recommend that taxpayers thoroughly scrutinize the liabilities to ensure accuracy.

In our prior article on Innocent Spouse Relief, we discussed how one may potentially avoid such tax liabilities if they fulfill the requirements to be considered an “innocent spouse.” Under the pertinent federal law, IRC section 6015, a spouse may seek relief from joint and several liability if they satisfy five conditions. This article will provide a brief overview of these five conditions and will summarize a recent case that provided an analysis of each requirement. To know if you qualify, it is important to carefully review each of the five requirements.

Innocent Spouse Relief Requirements

Under section 6015(b), a qualifying spouse may seek relief from joint and several liability. Taxpayers bear the burden of proving whether they are entitled to relief and are required to satisfy five conditions:

  1. A joint return was filed for the taxable year;
  2. There is an understatement of tax attributable to erroneous items of the taxpayer’s spouse;
  3. The taxpayer establishes that in signing the return, he or she did not know, and had no reason to know, that there was an understatement;
  4. Taking into account all facts and circumstances, it would be inequitable to hold the taxpayer liable for the relevant deficiency; and
  5. The taxpayer timely files for relief under section 6015(b).

In determining whether a taxpayer is entitled to relief, the court will thoroughly review the case and relevant facts in their entirety. If the court determines that the spouse has failed to satisfy one or more of the conditions, then the spouse is not entitled to relief from joint and several liability under section 6015(b). These cases can often be complex, however, and the taxpayer is not necessarily liable if they fail to meet the five requirements. The spouse may be able to seek equitable relief under section 6015(f), but this, too, involves a stringent requirement threshold. To better understand the requirement threshold for innocent spouse relief, it is often helpful to review cases that discuss the subject in greater detail. The following recent case, Irene K. Wang, et vir. v. Commissioner, provides an excellent example of a taxpayer who failed to meet the strict innocent spouse relief requirements.

Wife/Former Chemical Engineer/Homemaker Denied Relief

Recently, a Tax Court decision denied a woman innocent spouse relief from joint liabilities for years she and her husband claimed law firm business deductions for personal expenses. The petitioner wife, a homemaker and former chemical engineer, and her husband, a subsequently disbarred attorney, filed joint federal income tax returns for 2007 and 2008, and have continued to file jointly since. The IRS commenced audits of the couple’s 2007 and 2008 returns, and eventually issued notices of deficiency. The IRS determined deficiencies in tax and accuracy-related penalties of nearly $44,000 for the relevant period. The petitioner wife claimed that she met all five of the relevant requirements and should, therefore, be afforded relief as an innocent spouse.

The Tax Court denied her relief, however, concluding that she participated extensively in the firm’s business during the years at issue. Therefore, the court held that she failed to prove that she did not know, or had no reason to know, of the understatement, due to her heavy involvement in the business. Further, the fact that she had a high level of education and chose not to question the husband, regarding the tax filings, weighed heavily against her. Although she claimed that her husband was deceptive and intentionally withheld information from her, the court found no credibility in her testimony, which was constantly contradictory.

The court’s full opinion can be found here: Irene K. Wang, et vir. v. Commissioner

NLG Comment: As you can see, spouses bear a high burden of proof when seeking relief from joint liabilities. It is important to consult with an experienced tax attorney to find out whether you qualify and what options are available.

Contact Nardone Law Group

Nardone Law Group routinely represents individuals and businesses in federal tax issues, including spouses seeking innocent spouse relief. If you have been contacted by an IRS revenue officer and believe you might have a claim for innocent spouse relief, contact one of our tax attorneys today. The tax attorneys at Nardone Law group have vast experience representing clients before the IRS. We will thoroughly review your case and determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

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