Vince Nardone: Tax and Controversy

Most Important Strategy to Defend Against an IRS Audit and Examination: Maintaining Adequate Records of Business Expenses

By Matt Porter

    The tax attorneys at Nardone Law Group in Columbus, Ohio routinely assist individuals and businesses that become subject to an IRS audit or examination. Keeping adequate records is one of the most important things a taxpayer can do to avoid a potential IRS audit or examination, and ensure that an IRS audit or examination does not result in an assessment of additional tax, penalties, and interest. An IRS audit or examination occurs when the IRS selects a tax return to review the taxpayer’s records from which the information that is reported on the tax returned is derived.  IRS revenue agents are typically the employees within the IRS who audit and examine tax returns.  Below is a United States Tax Court case example of a taxpayer that did not keep proper records and documents of his car and truck expenses and, therefore, could not successfully defend against the IRS audit and examination.

Sharriff M. Dyer v. Commissioner: Mortgage Broker Failed to Substantiate Business Use of Automobile During IRS Audit and Examination

    In Sharriff M. Dyer v. Commissioner (full case opinion linked), the United State Tax Court denied a mortgage broker and real estate management company owner’s deductions above the amounts that the IRS determined during the audit and examination for expenses relating to automobiles he used for both business and personal purposes.  The taxpayer did not sufficiently substantiate the car and truck expenses pursuant to I.R.C. § 274 (d). The Taxpayer failed to keep a contemporaneous mileage log or other adequate records and instead relied on vague testimony and general daily planners.  The taxpayer’s records, or lack thereof, did not contain adequate business purposes or geographic information from which total number of miles driven could be determined. Because of § 274(d)'s strict rules, the Tax Court held that the taxpayer could not estimate the car and truck expenses and denied the additional car and truck expenses claimed over the amount the IRS allowed during the audit and examination of the taxpayer’s income tax returns.

    The lesson to be learned from Sharriff M. Dyer v. Commissioner is that a taxpayer must keep adequate books and records to substantiate income, deductions, losses, and credits reported on his tax return.  If not, the IRS will reconstruct these items during the audit and examination using a variety of methods.  When the IRS questions expenses relating to business use of automobiles during an audit or examination, a taxpayer must substantiate with adequate records: (1) the amount of each separate expense; (2) the mileage for each business use of the automobile and the total mileage for all purposes during the taxable period; (3) the date of the business use; and (4) the business purpose of the use. In the absence of adequate records, such as an account book, a diary, a log, a statement of expenses, trip sheets, or a similar record, a taxpayer may substantiate expenses for mileage with sufficiently detailed written or oral statements and other collateral evidence establishing that the expense was incurred.  The taxpayer in Dyer failed to keep a contemporaneous driving log or any other document which established the amount of miles driven, the mileage for each purported business use of his vehicles, the date of the trips, or a specific business purpose.

    A taxpayer bears the ultimate burden to prove that an IRS revenue agent’s methods during the audit and examination are unfair or inaccurate.  When a taxpayer fails to maintain adequate records to support items of income, deductions, losses, and credits, as the taxpayer failed to do in Dyer, the IRS’s conclusions made during the audit and examination are much more likely to stand in Tax Court.

Contact Nardone Law Group for IRS Audit or Examination Representation

    Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS audit or examination. If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return to avoid an IRS audit or examination, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS audits and examinations. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available during or after the IRS audit or examination, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

More Incentive to Enter the IRS Offshore Voluntary Disclosure Program: IRS Use of John Doe Summonses to Expose Caribbean Bank Accounts Intended to Avoid U.S. Tax Laws

By Nick Eusanio

    The IRS has recently noticed a significant trend in taxpayers using Caribbean bank accounts to avoid federal tax reporting and payment obligations related to foreign income, rather than taking advantage of the IRS’ Offshore Voluntary Disclosure Program to become compliant. The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program and the importance of coming forward to report previously unreported foreign income, accounts, and assets to the IRS. Nonetheless, many taxpayers do not seek advice from a tax lawyer about the Offshore Voluntary Disclosure Program, and instead ignore their federal tax reporting and payment responsibilities or make a “quiet disclosure” of unreported income. For more information on “quiet disclosures” and the associated pitfalls, see our prior article about the IRS chasing Down Quiet Disclosures. But, ignoring the Offshore Voluntary Disclosure Program or making a quiet disclosure can expose a taxpayer to audit, increased penalties and interest, and even criminal investigation and prosecution. 

    The tax attorneys at Nardone Law Group want to help inform taxpayers about the IRS’ current plans to expose and pursue those taxpayers using Caribbean bank accounts to evade their federal tax reporting and payment obligations. The IRS is now using John Doe summonses to discover noncompliant Caribbean account holders and pursue them for payment of tax, penalties and interest, and possibly even criminal investigation and prosecution under U.S. tax laws. The IRS’ pursuit of Caribbean bank account holders underscores the importance of consulting an experienced tax attorney about entering the Offshore Voluntary Disclosure Program to limit exposure to significant penalties and the risk of criminal investigation and prosecution related to undisclosed foreign accounts, assets, or income. 

IRS Exposing Noncompliant Caribbean Accounts Using John Doe Summonses
 
    The IRS recently noticed that many taxpayers continue to use Caribbean bank accounts to conceal foreign income or assets and avoid U.S. taxes. As a response, the IRS is now obtaining John Doe summonses—court orders for records relating to presently unknown individuals—to force foreign banks and financial institutions to turn over information and records identifying their U.S. account holders. Specifically, a federal court in San Francisco recently granted the IRS a John Doe summons demanding information about U.S. account holders from the Canadian Imperial Bank of Commerce First Caribbean International Bank (“First Caribbean International Bank”). See In re Tax Liabilities of John Does, N.D. Cal., No. 13-CV-01938, order 4/29/13. Based on the IRS’ recent efforts to expose potential tax evasion and other noncompliance, taxpayers with foreign bank accounts—and especially those with Caribbean bank accounts— should strongly consider the Offshore Voluntary Disclosure Program.

    The Offshore Voluntary Disclosure Program provides a potential life-line to taxpayers that want to come into compliance with U.S. tax laws and regulations, and limit exposure to onerous penalties and the risk of criminal prosecution.  Nardone Law Group plans to continue following the IRS’ use of John Doe summonses to expose tax noncompliance, and providing relevant updates to taxpayers with foreign accounts, assets, or income.  Now, more than ever, taxpayers with undisclosed foreign accounts, assets, or income should consider entering the Offshore Voluntary Disclosure Program to limit their exposure to IRS penalties and criminal prosecution.

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program.  If you have an undisclosed foreign account or entity, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS.  Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.

NLG Attorney Presents at Ohio Society of CPAs Event

    The tax lawyers at Nardone Law Group, LLC routinely speak and give presentations at both accounting and real estate Continuing Professional Education events throughout Ohio and the United States.  Attorney Vince Nardone recently gave two presentations at the Ohio Society of CPA's 2013 Columbus Spring CPE Conference on Wednesday, May 8, 2013.  His presentation topics included IRS Audit Representation, which detailed Internal Revenue Service examinations, and Discharge of Indebtedness Income, which explained the insolvency provisions regarding the discharge of indebtedness income.  

Contact Nardone Law Group, LLC

    Nardone Law Group represents individuals and businesses with federal tax issues, including those who have become subject to an IRS tax audit or examination. If you are facing an IRS tax audit or examination, you should contact an experienced tax attorney today. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

IRS Chasing Down Quiet Disclosures Intended to Avoid Offshore Voluntary Disclosure Program

By Nick Eusanio

    The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program.  Whether or not the Offshore Voluntary Disclosure Program is beneficial to a particular taxpayer depends upon that particular taxpayer’s facts and circumstances.  For example, there are instances in which Nardone Law Group may advise a taxpayer not to pursue the Offshore Voluntary Disclosure Program.  Nonetheless, many taxpayers decide not to seek advice from a tax lawyer about the Offshore Voluntary Disclosure Program, and instead simply file amended tax returns for earlier years or file current tax returns to include all previously undisclosed foreign income—in other words, they make a “quiet disclosure.”  But, making quiet disclosure rather than making a voluntary disclosure to the IRS can expose a taxpayer to audit, increased penalties and interest, and even criminal investigation and prosecution.  The tax attorneys at Nardone Law Group want to help inform taxpayers about the IRS’ current plans to expose and pursue those taxpayers making a quiet disclosure.  The IRS’ plan to chase down quiet disclosures highlights the importance of consulting an experienced tax attorney to determine whether entering the Offshore Voluntary Disclosure Program is best, or whether alternative action would be best. 

What is the Offshore Voluntary Disclosure Program and What is the Penalty Structure?

    The IRS’ 2012 Offshore Voluntary Disclosure Program provides taxpayers with undisclosed foreign accounts or foreign entities the opportunity to become compliant with United States tax laws while limiting exposure to civil penalties and criminal prosecution for nondisclosure.  Generally, taxpayers who have undisclosed foreign accounts or entities should make a voluntary disclosure because it allows them to become compliant with federal tax law, eliminate significant civil penalties, and generally avoid the risk of criminal prosecution.  Additionally, making a voluntary disclosure enables taxpayers to calculate the total cost of resolving their offshore tax matters with a reasonable degree of confidence.  Taxpayers who do not enter the Offshore Voluntary Disclosure Program risk discovery by the IRS, assessment of significant penalties—including penalties for failure to file foreign information returns and fraud—and potential criminal prosecution.

    Generally, taxpayers who participate in the 2012 Offshore Voluntary Disclosure Program must pay a penalty equal to 27.5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets during the period covered by the voluntary disclosure.  In certain circumstances though, some taxpayers may qualify for a reduced penalty of 12.5% or even 5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets, as opposed to the general 27.5% penalty.  Moreover, under the Offshore Voluntary Disclosure Program, taxpayers must pay a 20% accuracy-related penalty on the full amount of underpayments of tax, as well as failure to file and failure to pay penalties, if applicable.  But, because the 27.5% offshore penalty takes the place of various penalties otherwise imposed outside the Offshore Voluntary Disclosure Program, there may be cases where a taxpayer making a voluntary disclosure would owe less without entering the Offshore Voluntary Disclosure Program.  For more detail, please see our prior article discussing one scenario in which opting out of the Offshore Voluntary Disclosure Program may make sense.

IRS Exposing Quiet Disclosures
 
    Rather than entering the Offshore Voluntary Disclosure Program, many taxpayers have decided to make a quiet disclosure by simply amending prior tax returns or including previously unreported foreign income on current tax returns to avoid taxes, interest, and penalties imposed under the Offshore Voluntary Disclosure Program.  The Government Accountability Office (GAO)—an independent congressional agency that investigates government spending and recommends measures to increase efficiency and effectiveness in governmental programs—recently investigated the prevalence of quiet disclosures and issued a report of its findings and recommendations with regard to quiet disclosures.  The GAO’s investigation revealed many more likely quiet disclosures than the IRS had previously discovered.  The GAO cautioned that the large number of likely quiet disclosures it uncovered undermines the effectiveness of the Offshore Voluntary Disclosure Program, and significantly reduces the IRS’ identification of unreported foreign income and recovery of unpaid tax, interest and penalties related to that foreign income.  Accordingly, the GAO recommended that the IRS research and institute options and procedures to detect and pursue potential quiet disclosures.

    The IRS has agreed with the GAO’s report and recommendations, and is now reviewing the method the GAO used to identify quiet disclosures.  The IRS will likely soon implement a procedure for more efficiently and effectively reviewing taxpayer filings and uncovering quiet disclosures.  Thus, many more IRS audits and examinations and criminal investigations related to offshore accounts will likely follow.  Due to the IRS’ increased scrutiny, taxpayers that make a quiet disclosure may well expose themselves to increased interest and penalties, and even criminal investigation and prosecution.  The IRS’ new-found resolve to track down and pursue taxpayers making a quiet disclosure is a strong reminder that taxpayers with undisclosed foreign accounts or assets and unreported foreign income should consult an experienced tax attorney to discuss the Offshore Voluntary Disclosure Program and other available options for coming into compliance with the IRS. 

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program.  If you have an undisclosed foreign account or entity, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS.  Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.

The Draft Form 1042-S Designed for Foreign Account Tax Compliance Act (“FATCA”) Compliance

By Matt Porter

    The tax lawyers at Nardone Law Group, LLC routinely advise Ohio taxpayers on gambling issues for non-resident aliens and the impact of the Foreign Account Tax Compliance Act (“FATCA”) on a taxpayer’s investments.  The IRS recently released the highly anticipated draft version of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for the 2014 tax year.  A copy of the new draft Form 1042-S can be found on the IRS’s website here.  The new draft Form 1042-S is very similar to the Form 1042-S for 2013, but contains changes to reflect the new requirements imposed by FATCA.  This article addresses some of the main changes to the draft Form 1042-S and outlines the form’s impact on those non-resident aliens who have gambling winnings in the United States.

What is the Foreign Account Tax Compliance Act (“FATCA”)

    FATCA was originally enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act (Pub. L. No. 111-147).  Beginning in January 2013, FATCA requires U.S. and foreign financial institutions to annually identify and report their U.S. account holders.  The legislative intent of FATCA is to ensure that the United States government is able to determine the ownership of U.S. assets in foreign accounts. It is a revenue raising provision.  The new draft Form 1042-S contains several changes to ensure that withholding agents have all the necessary information to comply with new requirements under FATCA.

Changes on New Draft Form 1042-S Designed to Accommodate FATCA

    The many changes in the new draft Form 1042-S are designed to accommodate reporting of information relating to both Internal Revenue Code (“I.R.C.”) Chapter 3 withholding at source on payments to non-U.S. individuals and entities, and the new I.R.C. Chapter 4 FATCA information and withholding.  The changes include new boxes, new data to be tracked and reported as well as changes in the codes used on the form. While the instructions for the new draft Form 1042-S have not yet been issued, the tax lawyers at Nardone Law Group except them to be issued soon. 

U.S. Gambling and Form 1042-S

    Non-resident aliens who gamble in the United States will receive a Form 1042-S from the casino at which you gambled, above certain threshold amounts on certain games. Casino winnings for non-resident aliens are generally subjected to a 30% tax.  The 30% tax is indicated on the Form 1042-S that you receive and will be instantly deducting from your gross gambling winnings.  This is true even the non-resident alien has lost more gambling than they won.  The 30% withholding cannot be refunded unless the non-resident alien is from Canada or one of the other treaty countries listed under Gambling Winnings (Income Code 28) in IRS Publication 515.  For more information on this topic, please refer to the recent article entitled “Withholding of Tax on U.S. Gambling Winnings for Nonresident Aliens,” by the tax attorneys at Nardone Law Group, which can be found here.

Contact Nardone Law Group, LLC

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including gambling issues for non-resident aliens and the Internal Revenue Service's Offshore Voluntary Disclosure Program. If you believe you are entitled to a refund of your U.S. gambling winnings or have questions on FATCA compliance and the new draft Form 1042-S, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including obtaining a refund of the 30% tax withholding reported on Form 1042-S. Contact us today for a consultation to discuss your case.

Rental Losses in IRS Examinations and Audits

By Whitney Braunlin

    As tax attorneys in Columbus, Ohio, Nardone Law Group assists many individuals and businesses that become subject to an IRS audit or examination.  Keeping adequate records is one of the most important things you can do to avoid a potential IRS audit or examination.  Further, maintaining those records will minimize the impact of an IRS audit or examination by reducing or eliminating a potential assessment of additional tax, penalties, or interest based on lack of substantiation.  Below is an example from the United States Tax Court where a taxpayer failed to keep adequate records to support his position that he was a real estate professional for federal income tax purposes.  In this instance, the taxpayer's failure to keep adequate records prevented him or his tax professionals from successfully defending against the IRS examination.  The tax lawyers at Nardone Law Group help Ohio taxpayers understand IRS record-keeping requirements and can provide helpful tips on what types of documents to keep to successfully defend against an IRS audit or examination.

Hassanipour v. Commissioner

    In Hassanipour v. Commissioner, the Tax Court disallowed the taxpayer’s rental activity losses claimed on his federal income tax return. The taxpayer had a full-time job as a research associate and also owned 28 rental units. He performed various duties for the rental properties, including repairs, administrative tasks, communicating with tenants, researching landlord-tenant law, preparing tax returns, and other management activities. The taxpayer claimed a deduction for losses associated with his rental properties on his federal income tax return. The IRS determined the taxpayer could not take these deductions because he was not a real estate professional as required by the Tax Code.

Taxpayer’s Records and Testimony Were Not Credible

    At trial, the issue before the Tax Court was whether the taxpayer could be considered a real estate professional for federal income tax purposes. The IRS generally allows a deduction for ordinary and necessary business expenses. Code Section 469, however, disallows any passive activity loss. Rental activity is a passive activity unless the taxpayer is a real estate professional. A taxpayer may qualify as a real estate professional if (1) more than half of the taxpayer’s work is in the real property trade or business and (2) the taxpayer works more than 750 hours during the year in the real property trade or business. The Tax Court found the taxpayer’s testimony unreliable, as he changed the number of hours he claimed to work as a research associate and claimed that a calendar with a 2009 copyright was created contemporaneously with the real estate activities he commenced in 2007. Because the taxpayer bears the burden of proof on deductions claimed, the Tax Court found in favor of the IRS and did not allow the taxpayer to take deductions for his rental activity losses.

    NLG Comment: With the real estate market still struggling to recover, the Real Estate Professional classification for taxpayers is very beneficial.  It allows taxpayers to offset losses from real estate against ordinary income from other sources.  This can be a big win for taxpayers.  But, the Real Estate Professional classification is very document based and fact specific.  Taxpayers must maintain adequate records to avail themselves of this classification. 

Contact Nardone Law Group

    Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS tax audit or examination.  If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS tax audits and examinations.  Contact us today for an initial consultation.

IRS Increasingly Accepting Offers-in-Compromise

By Matt Porter

    The tax lawyers at Nardone Law Group, LLC (“NLG”) routinely advise and assist taxpayers in Ohio and throughout the United States with making arrangements to reduce or eliminate their federal tax liabilities owed to the Internal Revenue Service (the “IRS”).  One area of particular interest to taxpayers is the IRS’s offer-in-compromise program.  If you have unpaid federal tax liabilities, you may have received a notice from an IRS revenue officer.  Revenue officers are employees within the IRS who focus on collecting unpaid federal tax liabilities.  The primary function of an IRS revenue officer is to collect federal taxes that have been reported or assessed but not paid, and to secure returns that have not been filed.  An offer-in-compromise is one of several collection alternatives that are available to taxpayers to resolve their delinquent federal tax liabilities.  The IRS is now offering more flexible terms with its offer-in-compromise program.  As a result, more and more offers are being accepted.

    This article briefly outlines the structure of the IRS offer-in-compromise program and provides the latest statistics on the IRS’s collection activities regarding the offer-in-compromise program.

The Offer-in-Compromise Program at a Glance

    An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed. An offer-in-compromise is generally accepted only if the IRS believes—after assessing the taxpayer's financial situation—that the tax debt cannot be paid in full as a lump sum or through a payment agreement.  Detailed information on the offer-in-compromise program can be found on NLG’s FAQ webpage here. 

Statistics on Acceptance of Offers-in-Compromise in the Prior IRS Fiscal Year

    During the IRS fiscal year 2012, the IRS received 64,000 offers-in-compromise from taxpayers with unpaid federal tax liabilities.  The amount of offers received has increased 8%, from 59,000 in fiscal year 2011 to 64,000 in fiscal year 2012.  The number of offers accepted, however, increased by 20% from 20,000 in fiscal year 2011 to 24,000 in fiscal year 2012.  The percentage of offers-in-compromise accepted in fiscal year 2011 was 33.9%.  The percentage of offers-in-compromise accepted in fiscal year 2012 rose to 37.5%.  The dollar amounts of offers accepted increased from $154,092,000 in fiscal year 2011 to $195,652,000 in fiscal year 2012.  This data confirms that the IRS has been more flexible in accepting offers-in-compromise.  This is good news for taxpayers, but it does not mean that your case will be accepted.  The following is a brief analysis of the role played by the IRS Appeals Office when a taxpayer and the IRS fail to agree on the terms of the offer-in-compromise.

IRS Appeals Review of an Offer-in-Compromise

    The IRS Appeals Office considers cases that involve, among other things, collection issues.  If you disagree with the IRS’s determination on your offer-in-compromise application, you may request an IRS Appeals hearing.  Your local IRS Appeals Office is separate and independent from the IRS office that proposed the collection action on your offer-in-compromise application.  During fiscal year 2012, the IRS Appeals Office received 135,061 new cases and closed 144,453 cases, including those received in a prior fiscal year.  The IRS Appeals Office received 9,496 offer-in-compromise cases in fiscal year 2012.  The IRS Appeals Office closed 10,164 cases and 4,411 cases were pending as of September 31, 2012.

Contact Nardone Law Group, LLC

    Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their federal income tax liabilities. The tax lawyers at NLG have vast experience in representing taxpayers who are in collections with IRS revenue officers.  The current data indicates that the offers-in-compromise program is becoming an increasingly viable collection alternative.  If you have unpaid federal income tax liabilities and are interested in working with the IRS on an offer-in-compromise, you should contact an experienced tax attorney today. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.

IRS Notice of Federal Tax Liens: Fresh Start Benefits for Taxpayers

By Nick Eusanio

    The IRS has authority to file a Notice of Federal Tax Lien against a taxpayer’s assets to secure payment or satisfaction of unpaid tax debt.  If you have unpaid tax debt, an IRS revenue officer may take collection action against you, like filing a Notice of Federal Tax Lien, to protect the IRS’ interest in the unpaid taxes.  But, the IRS’ Fresh Start Program provides some new benefits for taxpayers related to the Notice of Federal Tax Lien filing and withdrawal process.  The tax attorneys at Nardone Law Group want to summarize the Fresh Start benefits available to taxpayers related to preventing and withdrawing a Notice of Federal Tax Lien.

Fresh Start Taxpayer Benefits

    The IRS Fresh Start Program allows 3 main benefits to taxpayers related to a Notice of Federal Tax Lien:

1. Increased Threshold Amount for Filing a Notice of Federal Tax Lien

     Under the Fresh Start Program, the IRS no longer requires a revenue officer to file a Notice of Federal Tax Lien against a taxpayer for debts under $10,000.  Previously, IRS guidelines directed a revenue officer to file a Notice of Federal Tax Lien against a taxpayer with a debt of only $5,000.  So, the IRS has increased the Notice of Federal Tax Lien filing threshold guideline from $5,000 to $10,000.  But, it is important to note that under certain circumstances an IRS revenue officer may still file a Notice of Federal Tax Lien against a taxpayer with outstanding tax debt less than $10,000.

2. Request to Withdraw a Notice of Federal Tax Lien after Lien Release

     As part of the IRS Fresh Start Program, a revenue officer may now issue a withdrawal of a Notice of Federal Tax Lien once that lien has been released.  Release of a federal tax lien is an important goal for a taxpayer because a filed lien release provides notice that a taxpayer’s federal tax lien has been paid in full.  So, once a federal tax lien is released, credit reporting agencies will update the taxpayer’s credit history to reflect the release.  But, withdrawal of a released Notice of Federal Tax Lien is even better for a taxpayer.  Withdrawal of a Notice of Federal Tax Lien causes credit reporting agencies to remove any reference to a federal tax lien from a taxpayer’s credit history.  Thus, the ability to obtain withdrawal of a Notice of Federal Tax Lien from an IRS revenue officer is a major benefit for taxpayers who meet the specific eligibility requirements.

3. Request to Withdraw a Notice of Federal Tax Lien after Entering Direct Debit Installment Agreement.

    Thanks to the Fresh Start Program, a taxpayer that meets specific eligibility requirements may also now file an application to withdraw a Notice of Federal Tax Lien after entering into a Direct Debit Installment Agreement with the IRS.  A Direct Debit Installment Agreement is an agreement between a taxpayer and the IRS to repay tax debt in monthly installments by direct debit from the taxpayer’s designated financial account.  So, after working with an IRS revenue officer to enter a Direct Debit Installment Agreement to repay tax debt, a taxpayer may now also request that the revenue officer withdraw any Notice of Federal Tax Lien related to that debt.

    Nardone Law Group represents businesses and individuals in federal and state tax controversies.  If an IRS revenue officer has contacted you about your tax debt or even filed a Notice of Federal Tax Lien against you, you should contact an experienced tax lawyer today.  The tax attorneys at Nardone Law Group routinely assist Ohio taxpayers in negotiating with revenue officers to prevent filing of a Notice of Federal Tax Lien, and in releasing and withdrawing a Notice of Federal Tax Lien that a revenue officer has already filed.  Nardone Law Group’s tax lawyers and professionals have vast experience representing taxpayers before the IRS.  Our experienced tax attorneys will thoroughly review your case to determine what options and alternatives are available, including the Fresh Start Program and preventing or withdrawing a Notice of Federal Tax Lien.  Contact us today for a consultation to discuss your case.

Taxpayer Victory Against IRS on Trust Fund Recovery Penalty Claim

By Matt Porter

    If you or your business have been the subject of a trust fund recovery penalty investigation initiated by a revenue officer with the Internal Revenue Service (“IRS”), you understand that the IRS revenue officer is seeking to establish who within the business is a responsible person. The IRS can personally assess the trust fund recovery penalty against those who it determines are liable for the trust fund recovery penalty, and it collects the liability from their personal income and assets.  Consequently, the IRS revenue officers have a tendency to cast their nets wide when they target and characterize potentially responsible persons for trust fund recovery penalties. Due to the potentially devastating impact that a trust fund recovery penalty assessment can have on your personal financial situation, it is extremely important to know how and when an IRS revenue officer determines your liability.  Accordingly, the tax lawyers at Nardone Law Group, LLC wanted to bring to your attention a district court case where a taxpayer prevailed on a claim against the IRS regarding the trust fund recovery penalty.

Background of the Trust Fund Recovery Penalty (the “100% Penalty”)

    The Internal Revenue Code (“I.R.C.”) requires employers to withhold from employees' wages, federal income taxes, and social security contributions.  The employer holds these funds “in trust” for the United States.  When a corporate employer fails to pay over the trust funds, I.R.C. § 6672(a) imposes a penalty equal to the entire amount of the unpaid taxes on any person required to collect, account for, or pay over the withheld taxes, who “willfully” fails to do so. Because the penalty is equal to the entire amount of unpaid trust fund taxes, it is often referred to as the 100% Penalty.  Liability for the penalty is established if a person is (i) a responsible person; (ii) who willfully failed to pay over the withheld taxes.

    The policy behind the trust fund recovery penalty is to facilitate the collection of tax and to enhance voluntary compliance.  Congress enacted I.R.C. § 6672 to encourage companies to promptly pay the trust fund portion of employment taxes and to ensure that taxes can be collected from a secondary source—i.e., a responsible person who willful failed to pay over the trust fund taxes.  Most of the litigation in this area involves the question of whether the taxpayer assessed with the trust fund recovery penalty is a responsible person.  The Comeaux case described below is a good example of the relevant factors courts look to when a taxpayer has been assessed with the trust fund recovery penalty by the IRS. The full

Taxpayer Not a Responsible Party in the District Court Case Comeaux v. U.S.

    In a refund suit filed in the U.S. District Court for the Western District of Louisiana, the taxpayer, Mark Comeaux (“Comeaux”) alleged that he was not a responsible person for collecting, accounting for, and paying the withholding tax liabilities.  Comeaux alleged that Gary Cain (“Mr. Cain”), the designated tax matters partner, was the responsible person.  The IRS assessed Comeaux as a responsible person for the tax periods ending March 31, 2006 through June 30, 2007.  In all, the IRS assessed Comeaux for almost $1 million in unpaid trust fund taxes.  During his tenure with Continuum Health Care Management, LLC and several rehabilitation and psychiatric hospitals (the “Companies”), Mr. Comeaux worked as a salaried controller, CFO, and accountant.  His primary duties were to bill Medicare, Medicaid, and private insurance.  The main issue in the case was whether Comeaux was a responsible person under I.R.C. § 6672.  The district court characterized the issue as whether Comeaux had the “effective power” to pay the Companies’ taxes—regardless of whether he in fact exercised any such power—and concluded that he did not.

Factors Establishing that Comeaux was Not a Responsible Person

The district court relied upon several factors in concluding that Comeaux was not a responsible person. The court found that Comeaux had no entrepreneurial interest in the Companies and had no authority to make decisions regarding purchases, contracts, or loans.  Comeaux was not authorized to sell the Companies' assets.  Further, he did not have the authority to determine which bills to pay and he was not authorized to make federal tax deposits to the IRS through the Electronic Federal Tax Payment System.  Comeaux did not sign or issue tax forms on behalf of any of the Companies, and he was not responsible for preparing or filing federal tax returns.   Comeaux also had no authority or control over employees.  Finally, he had no authority or ability to pay the payroll taxes relating to the Companies’ employees. After weighing these factors, the court found that IRS's arguments that Comeaux was a responsible person, and in fact its overall case against Comeaux, were unsupported.

As a result, the district court held that Comeaux was not a responsible person.  The court instead focused on explaining why Mr. Cain was a responsible person.  Mr. Cain oversaw and controlled the day-to-day operations and financial affairs of the Companies. Mr. Cain signed checks on behalf of the Companies and made decisions for paying creditors and vendors.  In addition, Mr. Cain was responsible for collecting and paying the Companies' withholding tax liabilities.  Although Comeaux occasionally signed payroll checks on behalf of the Companies, the court found that he did so on an infrequent basis and only in emergency situations upon express directive from Mr. Cain, after such checks were printed in amounts and to designees determined by Mr. Cain. Overall, the Court found that the facts of the case supported Comeaux's assertion that he lacked the power to be considered a responsible person.

Contact Nardone Law Group, LLC

Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their trust fund taxes and who are being assessed with the trust fund recovery penalty by IRS revenue officers. The tax lawyers at NLG have vast experience in representing individuals and businesses with the trust fund recovery penalty. If you are struggling with tax liabilities and are currently involved with a trust fund recovery penalty investigation with an IRS revenue officer, you should contact an experienced tax attorney today. Our experienced tax lawyers will work with you through the trust fund recovery penalty investigation to analyze whether or not you are a responsible party. Contact us today for a consultation to discuss your case.

The IRS Offshore Voluntary Disclosure Program: The Process for Opting Out

By Nick Eusanio

    The tax attorneys at Nardone Law Group regularly guide Ohio taxpayers through the Internal Revenue Service’s Offshore Voluntary Disclosure Program.  Whether or not the Offshore Voluntary Disclosure Program is beneficial to a particular taxpayer depends upon that particular taxpayer’s facts and circumstances.  For example, there are instances in which Nardone Law Group may advise a taxpayer to opt out of the Offshore Voluntary Disclosure Program.  This article briefly notes the reasons a taxpayer may decide to opt out of the Offshore Voluntary Disclosure Program, and discusses the procedure for opting out of the Offshore Voluntary Disclosure Program.

Why Opt Out of the Offshore Voluntary Disclosure Program?

    In one of our prior articles we explained the 2012 IRS Offshore Voluntary Disclosure Program and its penalty structure.  Most importantly, as part of the IRS’ 2012 Offshore Voluntary Disclosure Program taxpayers usually must pay a penalty equal to 27.5% of the highest aggregate balance in their foreign bank accounts, or the value of their foreign assets or entities during the period covered by the voluntary disclosure.  Because the 27.5% offshore penalty takes the place of various penalties otherwise imposed outside the Offshore Voluntary Disclosure Program, there may be cases where a taxpayer making a voluntary disclosure would owe less by opting out of the Offshore Voluntary Disclosure Program.  Please see our previous article providing an example of such a scenario. 

The Process for Opting Out of the IRS Voluntary Disclosure Program

    When a taxpayer has made contact with the IRS to initiate a voluntary disclosure, but thereafter notifies the IRS that the taxpayer is considering opting out of the IRS Offshore Voluntary Disclosure Program, the IRS examiner handling the case will take the following steps:

    1. Status Report: The IRS examiner will send a letter to the taxpayer summarizing the status of the voluntary disclosure, identifying any documents the taxpayer must still provide to the IRS and, if the IRS has enough information at the time, the amount of tax, interest, and penalties likely to be due under the Offshore Voluntary Disclosure Program.

    2. Caution Letter: If the taxpayer does not respond to the Status Report letter within 30 days, the IRS examiner will issue a letter to the taxpayer explaining that the decision to opt out of the Offshore Voluntary Disclosure Program must be in writing, and cautioning that the decision to opt out is irrevocable.  The taxpayer must provide a written response within 20 days of receiving the Caution Letter from the IRS.

    3. Taxpayer Opt Out Statement: The taxpayer then provides a written response to the IRS examiner, outlining the facts of the case, a recommendation of the penalties that should apply, and the reasoning for the penalty recommendations.

    4. IRS Case Summary: After the taxpayer provides a written opt out statement, the IRS examiner will prepare a case summary outlining the facts and disputed facts of the case, the examiner’s recommendation as to applicable penalties and position as to the taxpayer’s recommendations on applicable penalties, and the degree and scope of audit the examiner recommends for the taxpayer.

    5. IRS Centralized Committee Review: The examiner will then forward the taxpayer’s opt out statement and the IRS Case Summary to the IRS centralized review committee, which will evaluate those documents and determine how the examination will proceed.

    Taxpayers should understand, however, that opting out opens the case up for examination of all relevant years and issues.  Consequently, if issues that were not disclosed by the taxpayer are discovered under a full scope examination, those issues may be subject to review by IRS Criminal Investigation.  Thus, it is important to have an experienced tax attorney evaluate your case to decide whether the Offshore Voluntary Disclosure Program is best for you, or whether opting out of the Offshore Voluntary Disclosure Program makes more sense. 

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program.  If you have an undisclosed foreign account or entity, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS.  Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.

Most Important Strategy to Defend Against an IRS Audit and Examination: Maintaining Adequate Records of Business Expenses

By Matt Porter

    The tax attorneys at Nardone Law Group in Columbus, Ohio routinely assist individuals and businesses that become subject to an IRS audit or examination. Keeping adequate records is one of the most important things a taxpayer can do to avoid a potential IRS audit or examination, and ensure that an IRS audit or examination does not result in an assessment of additional tax, penalties, and interest. An IRS audit or examination occurs when the IRS selects a tax return to review the taxpayer’s records from which the information that is reported on the tax returned is derived.  IRS revenue agents are typically the employees within the IRS who audit and examine tax returns.  Below is a United States Tax Court case example of a taxpayer that did not keep proper records and documents of his car and truck expenses and, therefore, could not successfully defend against the IRS audit and examination.

Sharriff M. Dyer v. Commissioner: Mortgage Broker Failed to Substantiate Business Use of Automobile During IRS Audit and Examination

    In Sharriff M. Dyer v. Commissioner (full case opinion linked), the United State Tax Court denied a mortgage broker and real estate management company owner’s deductions above the amounts that the IRS determined during the audit and examination for expenses relating to automobiles he used for both business and personal purposes.  The taxpayer did not sufficiently substantiate the car and truck expenses pursuant to I.R.C. § 274 (d). The Taxpayer failed to keep a contemporaneous mileage log or other adequate records and instead relied on vague testimony and general daily planners.  The taxpayer’s records, or lack thereof, did not contain adequate business purposes or geographic information from which total number of miles driven could be determined. Because of § 274(d)'s strict rules, the Tax Court held that the taxpayer could not estimate the car and truck expenses and denied the additional car and truck expenses claimed over the amount the IRS allowed during the audit and examination of the taxpayer’s income tax returns.

    The lesson to be learned from Sharriff M. Dyer v. Commissioner is that a taxpayer must keep adequate books and records to substantiate income, deductions, losses, and credits reported on his tax return.  If not, the IRS will reconstruct these items during the audit and examination using a variety of methods.  When the IRS questions expenses relating to business use of automobiles during an audit or examination, a taxpayer must substantiate with adequate records: (1) the amount of each separate expense; (2) the mileage for each business use of the automobile and the total mileage for all purposes during the taxable period; (3) the date of the business use; and (4) the business purpose of the use. In the absence of adequate records, such as an account book, a diary, a log, a statement of expenses, trip sheets, or a similar record, a taxpayer may substantiate expenses for mileage with sufficiently detailed written or oral statements and other collateral evidence establishing that the expense was incurred.  The taxpayer in Dyer failed to keep a contemporaneous driving log or any other document which established the amount of miles driven, the mileage for each purported business use of his vehicles, the date of the trips, or a specific business purpose.

    A taxpayer bears the ultimate burden to prove that an IRS revenue agent’s methods during the audit and examination are unfair or inaccurate.  When a taxpayer fails to maintain adequate records to support items of income, deductions, losses, and credits, as the taxpayer failed to do in Dyer, the IRS’s conclusions made during the audit and examination are much more likely to stand in Tax Court.

Contact Nardone Law Group for IRS Audit or Examination Representation

    Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS audit or examination. If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return to avoid an IRS audit or examination, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS audits and examinations. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available during or after the IRS audit or examination, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

More Incentive to Enter the IRS Offshore Voluntary Disclosure Program: IRS Use of John Doe Summonses to Expose Caribbean Bank Accounts Intended to Avoid U.S. Tax Laws

By Nick Eusanio

    The IRS has recently noticed a significant trend in taxpayers using Caribbean bank accounts to avoid federal tax reporting and payment obligations related to foreign income, rather than taking advantage of the IRS’ Offshore Voluntary Disclosure Program to become compliant. The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program and the importance of coming forward to report previously unreported foreign income, accounts, and assets to the IRS. Nonetheless, many taxpayers do not seek advice from a tax lawyer about the Offshore Voluntary Disclosure Program, and instead ignore their federal tax reporting and payment responsibilities or make a “quiet disclosure” of unreported income. For more information on “quiet disclosures” and the associated pitfalls, see our prior article about the IRS chasing Down Quiet Disclosures. But, ignoring the Offshore Voluntary Disclosure Program or making a quiet disclosure can expose a taxpayer to audit, increased penalties and interest, and even criminal investigation and prosecution. 

    The tax attorneys at Nardone Law Group want to help inform taxpayers about the IRS’ current plans to expose and pursue those taxpayers using Caribbean bank accounts to evade their federal tax reporting and payment obligations. The IRS is now using John Doe summonses to discover noncompliant Caribbean account holders and pursue them for payment of tax, penalties and interest, and possibly even criminal investigation and prosecution under U.S. tax laws. The IRS’ pursuit of Caribbean bank account holders underscores the importance of consulting an experienced tax attorney about entering the Offshore Voluntary Disclosure Program to limit exposure to significant penalties and the risk of criminal investigation and prosecution related to undisclosed foreign accounts, assets, or income. 

IRS Exposing Noncompliant Caribbean Accounts Using John Doe Summonses
 
    The IRS recently noticed that many taxpayers continue to use Caribbean bank accounts to conceal foreign income or assets and avoid U.S. taxes. As a response, the IRS is now obtaining John Doe summonses—court orders for records relating to presently unknown individuals—to force foreign banks and financial institutions to turn over information and records identifying their U.S. account holders. Specifically, a federal court in San Francisco recently granted the IRS a John Doe summons demanding information about U.S. account holders from the Canadian Imperial Bank of Commerce First Caribbean International Bank (“First Caribbean International Bank”). See In re Tax Liabilities of John Does, N.D. Cal., No. 13-CV-01938, order 4/29/13. Based on the IRS’ recent efforts to expose potential tax evasion and other noncompliance, taxpayers with foreign bank accounts—and especially those with Caribbean bank accounts— should strongly consider the Offshore Voluntary Disclosure Program.

    The Offshore Voluntary Disclosure Program provides a potential life-line to taxpayers that want to come into compliance with U.S. tax laws and regulations, and limit exposure to onerous penalties and the risk of criminal prosecution.  Nardone Law Group plans to continue following the IRS’ use of John Doe summonses to expose tax noncompliance, and providing relevant updates to taxpayers with foreign accounts, assets, or income.  Now, more than ever, taxpayers with undisclosed foreign accounts, assets, or income should consider entering the Offshore Voluntary Disclosure Program to limit their exposure to IRS penalties and criminal prosecution.

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program.  If you have an undisclosed foreign account or entity, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS.  Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.

NLG Attorney Presents at Ohio Society of CPAs Event

    The tax lawyers at Nardone Law Group, LLC routinely speak and give presentations at both accounting and real estate Continuing Professional Education events throughout Ohio and the United States.  Attorney Vince Nardone recently gave two presentations at the Ohio Society of CPA's 2013 Columbus Spring CPE Conference on Wednesday, May 8, 2013.  His presentation topics included IRS Audit Representation, which detailed Internal Revenue Service examinations, and Discharge of Indebtedness Income, which explained the insolvency provisions regarding the discharge of indebtedness income.  

Contact Nardone Law Group, LLC

    Nardone Law Group represents individuals and businesses with federal tax issues, including those who have become subject to an IRS tax audit or examination. If you are facing an IRS tax audit or examination, you should contact an experienced tax attorney today. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

IRS Chasing Down Quiet Disclosures Intended to Avoid Offshore Voluntary Disclosure Program

By Nick Eusanio

    The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program.  Whether or not the Offshore Voluntary Disclosure Program is beneficial to a particular taxpayer depends upon that particular taxpayer’s facts and circumstances.  For example, there are instances in which Nardone Law Group may advise a taxpayer not to pursue the Offshore Voluntary Disclosure Program.  Nonetheless, many taxpayers decide not to seek advice from a tax lawyer about the Offshore Voluntary Disclosure Program, and instead simply file amended tax returns for earlier years or file current tax returns to include all previously undisclosed foreign income—in other words, they make a “quiet disclosure.”  But, making quiet disclosure rather than making a voluntary disclosure to the IRS can expose a taxpayer to audit, increased penalties and interest, and even criminal investigation and prosecution.  The tax attorneys at Nardone Law Group want to help inform taxpayers about the IRS’ current plans to expose and pursue those taxpayers making a quiet disclosure.  The IRS’ plan to chase down quiet disclosures highlights the importance of consulting an experienced tax attorney to determine whether entering the Offshore Voluntary Disclosure Program is best, or whether alternative action would be best. 

What is the Offshore Voluntary Disclosure Program and What is the Penalty Structure?

    The IRS’ 2012 Offshore Voluntary Disclosure Program provides taxpayers with undisclosed foreign accounts or foreign entities the opportunity to become compliant with United States tax laws while limiting exposure to civil penalties and criminal prosecution for nondisclosure.  Generally, taxpayers who have undisclosed foreign accounts or entities should make a voluntary disclosure because it allows them to become compliant with federal tax law, eliminate significant civil penalties, and generally avoid the risk of criminal prosecution.  Additionally, making a voluntary disclosure enables taxpayers to calculate the total cost of resolving their offshore tax matters with a reasonable degree of confidence.  Taxpayers who do not enter the Offshore Voluntary Disclosure Program risk discovery by the IRS, assessment of significant penalties—including penalties for failure to file foreign information returns and fraud—and potential criminal prosecution.

    Generally, taxpayers who participate in the 2012 Offshore Voluntary Disclosure Program must pay a penalty equal to 27.5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets during the period covered by the voluntary disclosure.  In certain circumstances though, some taxpayers may qualify for a reduced penalty of 12.5% or even 5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets, as opposed to the general 27.5% penalty.  Moreover, under the Offshore Voluntary Disclosure Program, taxpayers must pay a 20% accuracy-related penalty on the full amount of underpayments of tax, as well as failure to file and failure to pay penalties, if applicable.  But, because the 27.5% offshore penalty takes the place of various penalties otherwise imposed outside the Offshore Voluntary Disclosure Program, there may be cases where a taxpayer making a voluntary disclosure would owe less without entering the Offshore Voluntary Disclosure Program.  For more detail, please see our prior article discussing one scenario in which opting out of the Offshore Voluntary Disclosure Program may make sense.

IRS Exposing Quiet Disclosures
 
    Rather than entering the Offshore Voluntary Disclosure Program, many taxpayers have decided to make a quiet disclosure by simply amending prior tax returns or including previously unreported foreign income on current tax returns to avoid taxes, interest, and penalties imposed under the Offshore Voluntary Disclosure Program.  The Government Accountability Office (GAO)—an independent congressional agency that investigates government spending and recommends measures to increase efficiency and effectiveness in governmental programs—recently investigated the prevalence of quiet disclosures and issued a report of its findings and recommendations with regard to quiet disclosures.  The GAO’s investigation revealed many more likely quiet disclosures than the IRS had previously discovered.  The GAO cautioned that the large number of likely quiet disclosures it uncovered undermines the effectiveness of the Offshore Voluntary Disclosure Program, and significantly reduces the IRS’ identification of unreported foreign income and recovery of unpaid tax, interest and penalties related to that foreign income.  Accordingly, the GAO recommended that the IRS research and institute options and procedures to detect and pursue potential quiet disclosures.

    The IRS has agreed with the GAO’s report and recommendations, and is now reviewing the method the GAO used to identify quiet disclosures.  The IRS will likely soon implement a procedure for more efficiently and effectively reviewing taxpayer filings and uncovering quiet disclosures.  Thus, many more IRS audits and examinations and criminal investigations related to offshore accounts will likely follow.  Due to the IRS’ increased scrutiny, taxpayers that make a quiet disclosure may well expose themselves to increased interest and penalties, and even criminal investigation and prosecution.  The IRS’ new-found resolve to track down and pursue taxpayers making a quiet disclosure is a strong reminder that taxpayers with undisclosed foreign accounts or assets and unreported foreign income should consult an experienced tax attorney to discuss the Offshore Voluntary Disclosure Program and other available options for coming into compliance with the IRS. 

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program.  If you have an undisclosed foreign account or entity, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS.  Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.

The Draft Form 1042-S Designed for Foreign Account Tax Compliance Act (“FATCA”) Compliance

By Matt Porter

    The tax lawyers at Nardone Law Group, LLC routinely advise Ohio taxpayers on gambling issues for non-resident aliens and the impact of the Foreign Account Tax Compliance Act (“FATCA”) on a taxpayer’s investments.  The IRS recently released the highly anticipated draft version of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for the 2014 tax year.  A copy of the new draft Form 1042-S can be found on the IRS’s website here.  The new draft Form 1042-S is very similar to the Form 1042-S for 2013, but contains changes to reflect the new requirements imposed by FATCA.  This article addresses some of the main changes to the draft Form 1042-S and outlines the form’s impact on those non-resident aliens who have gambling winnings in the United States.

What is the Foreign Account Tax Compliance Act (“FATCA”)

    FATCA was originally enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act (Pub. L. No. 111-147).  Beginning in January 2013, FATCA requires U.S. and foreign financial institutions to annually identify and report their U.S. account holders.  The legislative intent of FATCA is to ensure that the United States government is able to determine the ownership of U.S. assets in foreign accounts. It is a revenue raising provision.  The new draft Form 1042-S contains several changes to ensure that withholding agents have all the necessary information to comply with new requirements under FATCA.

Changes on New Draft Form 1042-S Designed to Accommodate FATCA

    The many changes in the new draft Form 1042-S are designed to accommodate reporting of information relating to both Internal Revenue Code (“I.R.C.”) Chapter 3 withholding at source on payments to non-U.S. individuals and entities, and the new I.R.C. Chapter 4 FATCA information and withholding.  The changes include new boxes, new data to be tracked and reported as well as changes in the codes used on the form. While the instructions for the new draft Form 1042-S have not yet been issued, the tax lawyers at Nardone Law Group except them to be issued soon. 

U.S. Gambling and Form 1042-S

    Non-resident aliens who gamble in the United States will receive a Form 1042-S from the casino at which you gambled, above certain threshold amounts on certain games. Casino winnings for non-resident aliens are generally subjected to a 30% tax.  The 30% tax is indicated on the Form 1042-S that you receive and will be instantly deducting from your gross gambling winnings.  This is true even the non-resident alien has lost more gambling than they won.  The 30% withholding cannot be refunded unless the non-resident alien is from Canada or one of the other treaty countries listed under Gambling Winnings (Income Code 28) in IRS Publication 515.  For more information on this topic, please refer to the recent article entitled “Withholding of Tax on U.S. Gambling Winnings for Nonresident Aliens,” by the tax attorneys at Nardone Law Group, which can be found here.

Contact Nardone Law Group, LLC

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including gambling issues for non-resident aliens and the Internal Revenue Service's Offshore Voluntary Disclosure Program. If you believe you are entitled to a refund of your U.S. gambling winnings or have questions on FATCA compliance and the new draft Form 1042-S, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including obtaining a refund of the 30% tax withholding reported on Form 1042-S. Contact us today for a consultation to discuss your case.

Rental Losses in IRS Examinations and Audits

By Whitney Braunlin

    As tax attorneys in Columbus, Ohio, Nardone Law Group assists many individuals and businesses that become subject to an IRS audit or examination.  Keeping adequate records is one of the most important things you can do to avoid a potential IRS audit or examination.  Further, maintaining those records will minimize the impact of an IRS audit or examination by reducing or eliminating a potential assessment of additional tax, penalties, or interest based on lack of substantiation.  Below is an example from the United States Tax Court where a taxpayer failed to keep adequate records to support his position that he was a real estate professional for federal income tax purposes.  In this instance, the taxpayer's failure to keep adequate records prevented him or his tax professionals from successfully defending against the IRS examination.  The tax lawyers at Nardone Law Group help Ohio taxpayers understand IRS record-keeping requirements and can provide helpful tips on what types of documents to keep to successfully defend against an IRS audit or examination.

Hassanipour v. Commissioner

    In Hassanipour v. Commissioner, the Tax Court disallowed the taxpayer’s rental activity losses claimed on his federal income tax return. The taxpayer had a full-time job as a research associate and also owned 28 rental units. He performed various duties for the rental properties, including repairs, administrative tasks, communicating with tenants, researching landlord-tenant law, preparing tax returns, and other management activities. The taxpayer claimed a deduction for losses associated with his rental properties on his federal income tax return. The IRS determined the taxpayer could not take these deductions because he was not a real estate professional as required by the Tax Code.

Taxpayer’s Records and Testimony Were Not Credible

    At trial, the issue before the Tax Court was whether the taxpayer could be considered a real estate professional for federal income tax purposes. The IRS generally allows a deduction for ordinary and necessary business expenses. Code Section 469, however, disallows any passive activity loss. Rental activity is a passive activity unless the taxpayer is a real estate professional. A taxpayer may qualify as a real estate professional if (1) more than half of the taxpayer’s work is in the real property trade or business and (2) the taxpayer works more than 750 hours during the year in the real property trade or business. The Tax Court found the taxpayer’s testimony unreliable, as he changed the number of hours he claimed to work as a research associate and claimed that a calendar with a 2009 copyright was created contemporaneously with the real estate activities he commenced in 2007. Because the taxpayer bears the burden of proof on deductions claimed, the Tax Court found in favor of the IRS and did not allow the taxpayer to take deductions for his rental activity losses.

    NLG Comment: With the real estate market still struggling to recover, the Real Estate Professional classification for taxpayers is very beneficial.  It allows taxpayers to offset losses from real estate against ordinary income from other sources.  This can be a big win for taxpayers.  But, the Real Estate Professional classification is very document based and fact specific.  Taxpayers must maintain adequate records to avail themselves of this classification. 

Contact Nardone Law Group

    Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS tax audit or examination.  If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS tax audits and examinations.  Contact us today for an initial consultation.

IRS Increasingly Accepting Offers-in-Compromise

By Matt Porter

    The tax lawyers at Nardone Law Group, LLC (“NLG”) routinely advise and assist taxpayers in Ohio and throughout the United States with making arrangements to reduce or eliminate their federal tax liabilities owed to the Internal Revenue Service (the “IRS”).  One area of particular interest to taxpayers is the IRS’s offer-in-compromise program.  If you have unpaid federal tax liabilities, you may have received a notice from an IRS revenue officer.  Revenue officers are employees within the IRS who focus on collecting unpaid federal tax liabilities.  The primary function of an IRS revenue officer is to collect federal taxes that have been reported or assessed but not paid, and to secure returns that have not been filed.  An offer-in-compromise is one of several collection alternatives that are available to taxpayers to resolve their delinquent federal tax liabilities.  The IRS is now offering more flexible terms with its offer-in-compromise program.  As a result, more and more offers are being accepted.

    This article briefly outlines the structure of the IRS offer-in-compromise program and provides the latest statistics on the IRS’s collection activities regarding the offer-in-compromise program.

The Offer-in-Compromise Program at a Glance

    An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed. An offer-in-compromise is generally accepted only if the IRS believes—after assessing the taxpayer's financial situation—that the tax debt cannot be paid in full as a lump sum or through a payment agreement.  Detailed information on the offer-in-compromise program can be found on NLG’s FAQ webpage here. 

Statistics on Acceptance of Offers-in-Compromise in the Prior IRS Fiscal Year

    During the IRS fiscal year 2012, the IRS received 64,000 offers-in-compromise from taxpayers with unpaid federal tax liabilities.  The amount of offers received has increased 8%, from 59,000 in fiscal year 2011 to 64,000 in fiscal year 2012.  The number of offers accepted, however, increased by 20% from 20,000 in fiscal year 2011 to 24,000 in fiscal year 2012.  The percentage of offers-in-compromise accepted in fiscal year 2011 was 33.9%.  The percentage of offers-in-compromise accepted in fiscal year 2012 rose to 37.5%.  The dollar amounts of offers accepted increased from $154,092,000 in fiscal year 2011 to $195,652,000 in fiscal year 2012.  This data confirms that the IRS has been more flexible in accepting offers-in-compromise.  This is good news for taxpayers, but it does not mean that your case will be accepted.  The following is a brief analysis of the role played by the IRS Appeals Office when a taxpayer and the IRS fail to agree on the terms of the offer-in-compromise.

IRS Appeals Review of an Offer-in-Compromise

    The IRS Appeals Office considers cases that involve, among other things, collection issues.  If you disagree with the IRS’s determination on your offer-in-compromise application, you may request an IRS Appeals hearing.  Your local IRS Appeals Office is separate and independent from the IRS office that proposed the collection action on your offer-in-compromise application.  During fiscal year 2012, the IRS Appeals Office received 135,061 new cases and closed 144,453 cases, including those received in a prior fiscal year.  The IRS Appeals Office received 9,496 offer-in-compromise cases in fiscal year 2012.  The IRS Appeals Office closed 10,164 cases and 4,411 cases were pending as of September 31, 2012.

Contact Nardone Law Group, LLC

    Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their federal income tax liabilities. The tax lawyers at NLG have vast experience in representing taxpayers who are in collections with IRS revenue officers.  The current data indicates that the offers-in-compromise program is becoming an increasingly viable collection alternative.  If you have unpaid federal income tax liabilities and are interested in working with the IRS on an offer-in-compromise, you should contact an experienced tax attorney today. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.

IRS Notice of Federal Tax Liens: Fresh Start Benefits for Taxpayers

By Nick Eusanio

    The IRS has authority to file a Notice of Federal Tax Lien against a taxpayer’s assets to secure payment or satisfaction of unpaid tax debt.  If you have unpaid tax debt, an IRS revenue officer may take collection action against you, like filing a Notice of Federal Tax Lien, to protect the IRS’ interest in the unpaid taxes.  But, the IRS’ Fresh Start Program provides some new benefits for taxpayers related to the Notice of Federal Tax Lien filing and withdrawal process.  The tax attorneys at Nardone Law Group want to summarize the Fresh Start benefits available to taxpayers related to preventing and withdrawing a Notice of Federal Tax Lien.

Fresh Start Taxpayer Benefits

    The IRS Fresh Start Program allows 3 main benefits to taxpayers related to a Notice of Federal Tax Lien:

1. Increased Threshold Amount for Filing a Notice of Federal Tax Lien

     Under the Fresh Start Program, the IRS no longer requires a revenue officer to file a Notice of Federal Tax Lien against a taxpayer for debts under $10,000.  Previously, IRS guidelines directed a revenue officer to file a Notice of Federal Tax Lien against a taxpayer with a debt of only $5,000.  So, the IRS has increased the Notice of Federal Tax Lien filing threshold guideline from $5,000 to $10,000.  But, it is important to note that under certain circumstances an IRS revenue officer may still file a Notice of Federal Tax Lien against a taxpayer with outstanding tax debt less than $10,000.

2. Request to Withdraw a Notice of Federal Tax Lien after Lien Release

     As part of the IRS Fresh Start Program, a revenue officer may now issue a withdrawal of a Notice of Federal Tax Lien once that lien has been released.  Release of a federal tax lien is an important goal for a taxpayer because a filed lien release provides notice that a taxpayer’s federal tax lien has been paid in full.  So, once a federal tax lien is released, credit reporting agencies will update the taxpayer’s credit history to reflect the release.  But, withdrawal of a released Notice of Federal Tax Lien is even better for a taxpayer.  Withdrawal of a Notice of Federal Tax Lien causes credit reporting agencies to remove any reference to a federal tax lien from a taxpayer’s credit history.  Thus, the ability to obtain withdrawal of a Notice of Federal Tax Lien from an IRS revenue officer is a major benefit for taxpayers who meet the specific eligibility requirements.

3. Request to Withdraw a Notice of Federal Tax Lien after Entering Direct Debit Installment Agreement.

    Thanks to the Fresh Start Program, a taxpayer that meets specific eligibility requirements may also now file an application to withdraw a Notice of Federal Tax Lien after entering into a Direct Debit Installment Agreement with the IRS.  A Direct Debit Installment Agreement is an agreement between a taxpayer and the IRS to repay tax debt in monthly installments by direct debit from the taxpayer’s designated financial account.  So, after working with an IRS revenue officer to enter a Direct Debit Installment Agreement to repay tax debt, a taxpayer may now also request that the revenue officer withdraw any Notice of Federal Tax Lien related to that debt.

    Nardone Law Group represents businesses and individuals in federal and state tax controversies.  If an IRS revenue officer has contacted you about your tax debt or even filed a Notice of Federal Tax Lien against you, you should contact an experienced tax lawyer today.  The tax attorneys at Nardone Law Group routinely assist Ohio taxpayers in negotiating with revenue officers to prevent filing of a Notice of Federal Tax Lien, and in releasing and withdrawing a Notice of Federal Tax Lien that a revenue officer has already filed.  Nardone Law Group’s tax lawyers and professionals have vast experience representing taxpayers before the IRS.  Our experienced tax attorneys will thoroughly review your case to determine what options and alternatives are available, including the Fresh Start Program and preventing or withdrawing a Notice of Federal Tax Lien.  Contact us today for a consultation to discuss your case.

Taxpayer Victory Against IRS on Trust Fund Recovery Penalty Claim

By Matt Porter

    If you or your business have been the subject of a trust fund recovery penalty investigation initiated by a revenue officer with the Internal Revenue Service (“IRS”), you understand that the IRS revenue officer is seeking to establish who within the business is a responsible person. The IRS can personally assess the trust fund recovery penalty against those who it determines are liable for the trust fund recovery penalty, and it collects the liability from their personal income and assets.  Consequently, the IRS revenue officers have a tendency to cast their nets wide when they target and characterize potentially responsible persons for trust fund recovery penalties. Due to the potentially devastating impact that a trust fund recovery penalty assessment can have on your personal financial situation, it is extremely important to know how and when an IRS revenue officer determines your liability.  Accordingly, the tax lawyers at Nardone Law Group, LLC wanted to bring to your attention a district court case where a taxpayer prevailed on a claim against the IRS regarding the trust fund recovery penalty.

Background of the Trust Fund Recovery Penalty (the “100% Penalty”)

    The Internal Revenue Code (“I.R.C.”) requires employers to withhold from employees' wages, federal income taxes, and social security contributions.  The employer holds these funds “in trust” for the United States.  When a corporate employer fails to pay over the trust funds, I.R.C. § 6672(a) imposes a penalty equal to the entire amount of the unpaid taxes on any person required to collect, account for, or pay over the withheld taxes, who “willfully” fails to do so. Because the penalty is equal to the entire amount of unpaid trust fund taxes, it is often referred to as the 100% Penalty.  Liability for the penalty is established if a person is (i) a responsible person; (ii) who willfully failed to pay over the withheld taxes.

    The policy behind the trust fund recovery penalty is to facilitate the collection of tax and to enhance voluntary compliance.  Congress enacted I.R.C. § 6672 to encourage companies to promptly pay the trust fund portion of employment taxes and to ensure that taxes can be collected from a secondary source—i.e., a responsible person who willful failed to pay over the trust fund taxes.  Most of the litigation in this area involves the question of whether the taxpayer assessed with the trust fund recovery penalty is a responsible person.  The Comeaux case described below is a good example of the relevant factors courts look to when a taxpayer has been assessed with the trust fund recovery penalty by the IRS. The full

Taxpayer Not a Responsible Party in the District Court Case Comeaux v. U.S.

    In a refund suit filed in the U.S. District Court for the Western District of Louisiana, the taxpayer, Mark Comeaux (“Comeaux”) alleged that he was not a responsible person for collecting, accounting for, and paying the withholding tax liabilities.  Comeaux alleged that Gary Cain (“Mr. Cain”), the designated tax matters partner, was the responsible person.  The IRS assessed Comeaux as a responsible person for the tax periods ending March 31, 2006 through June 30, 2007.  In all, the IRS assessed Comeaux for almost $1 million in unpaid trust fund taxes.  During his tenure with Continuum Health Care Management, LLC and several rehabilitation and psychiatric hospitals (the “Companies”), Mr. Comeaux worked as a salaried controller, CFO, and accountant.  His primary duties were to bill Medicare, Medicaid, and private insurance.  The main issue in the case was whether Comeaux was a responsible person under I.R.C. § 6672.  The district court characterized the issue as whether Comeaux had the “effective power” to pay the Companies’ taxes—regardless of whether he in fact exercised any such power—and concluded that he did not.

Factors Establishing that Comeaux was Not a Responsible Person

The district court relied upon several factors in concluding that Comeaux was not a responsible person. The court found that Comeaux had no entrepreneurial interest in the Companies and had no authority to make decisions regarding purchases, contracts, or loans.  Comeaux was not authorized to sell the Companies' assets.  Further, he did not have the authority to determine which bills to pay and he was not authorized to make federal tax deposits to the IRS through the Electronic Federal Tax Payment System.  Comeaux did not sign or issue tax forms on behalf of any of the Companies, and he was not responsible for preparing or filing federal tax returns.   Comeaux also had no authority or control over employees.  Finally, he had no authority or ability to pay the payroll taxes relating to the Companies’ employees. After weighing these factors, the court found that IRS's arguments that Comeaux was a responsible person, and in fact its overall case against Comeaux, were unsupported.

As a result, the district court held that Comeaux was not a responsible person.  The court instead focused on explaining why Mr. Cain was a responsible person.  Mr. Cain oversaw and controlled the day-to-day operations and financial affairs of the Companies. Mr. Cain signed checks on behalf of the Companies and made decisions for paying creditors and vendors.  In addition, Mr. Cain was responsible for collecting and paying the Companies' withholding tax liabilities.  Although Comeaux occasionally signed payroll checks on behalf of the Companies, the court found that he did so on an infrequent basis and only in emergency situations upon express directive from Mr. Cain, after such checks were printed in amounts and to designees determined by Mr. Cain. Overall, the Court found that the facts of the case supported Comeaux's assertion that he lacked the power to be considered a responsible person.

Contact Nardone Law Group, LLC

Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their trust fund taxes and who are being assessed with the trust fund recovery penalty by IRS revenue officers. The tax lawyers at NLG have vast experience in representing individuals and businesses with the trust fund recovery penalty. If you are struggling with tax liabilities and are currently involved with a trust fund recovery penalty investigation with an IRS revenue officer, you should contact an experienced tax attorney today. Our experienced tax lawyers will work with you through the trust fund recovery penalty investigation to analyze whether or not you are a responsible party. Contact us today for a consultation to discuss your case.

The IRS Offshore Voluntary Disclosure Program: The Process for Opting Out

By Nick Eusanio

    The tax attorneys at Nardone Law Group regularly guide Ohio taxpayers through the Internal Revenue Service’s Offshore Voluntary Disclosure Program.  Whether or not the Offshore Voluntary Disclosure Program is beneficial to a particular taxpayer depends upon that particular taxpayer’s facts and circumstances.  For example, there are instances in which Nardone Law Group may advise a taxpayer to opt out of the Offshore Voluntary Disclosure Program.  This article briefly notes the reasons a taxpayer may decide to opt out of the Offshore Voluntary Disclosure Program, and discusses the procedure for opting out of the Offshore Voluntary Disclosure Program.

Why Opt Out of the Offshore Voluntary Disclosure Program?

    In one of our prior articles we explained the 2012 IRS Offshore Voluntary Disclosure Program and its penalty structure.  Most importantly, as part of the IRS’ 2012 Offshore Voluntary Disclosure Program taxpayers usually must pay a penalty equal to 27.5% of the highest aggregate balance in their foreign bank accounts, or the value of their foreign assets or entities during the period covered by the voluntary disclosure.  Because the 27.5% offshore penalty takes the place of various penalties otherwise imposed outside the Offshore Voluntary Disclosure Program, there may be cases where a taxpayer making a voluntary disclosure would owe less by opting out of the Offshore Voluntary Disclosure Program.  Please see our previous article providing an example of such a scenario. 

The Process for Opting Out of the IRS Voluntary Disclosure Program

    When a taxpayer has made contact with the IRS to initiate a voluntary disclosure, but thereafter notifies the IRS that the taxpayer is considering opting out of the IRS Offshore Voluntary Disclosure Program, the IRS examiner handling the case will take the following steps:

    1. Status Report: The IRS examiner will send a letter to the taxpayer summarizing the status of the voluntary disclosure, identifying any documents the taxpayer must still provide to the IRS and, if the IRS has enough information at the time, the amount of tax, interest, and penalties likely to be due under the Offshore Voluntary Disclosure Program.

    2. Caution Letter: If the taxpayer does not respond to the Status Report letter within 30 days, the IRS examiner will issue a letter to the taxpayer explaining that the decision to opt out of the Offshore Voluntary Disclosure Program must be in writing, and cautioning that the decision to opt out is irrevocable.  The taxpayer must provide a written response within 20 days of receiving the Caution Letter from the IRS.

    3. Taxpayer Opt Out Statement: The taxpayer then provides a written response to the IRS examiner, outlining the facts of the case, a recommendation of the penalties that should apply, and the reasoning for the penalty recommendations.

    4. IRS Case Summary: After the taxpayer provides a written opt out statement, the IRS examiner will prepare a case summary outlining the facts and disputed facts of the case, the examiner’s recommendation as to applicable penalties and position as to the taxpayer’s recommendations on applicable penalties, and the degree and scope of audit the examiner recommends for the taxpayer.

    5. IRS Centralized Committee Review: The examiner will then forward the taxpayer’s opt out statement and the IRS Case Summary to the IRS centralized review committee, which will evaluate those documents and determine how the examination will proceed.

    Taxpayers should understand, however, that opting out opens the case up for examination of all relevant years and issues.  Consequently, if issues that were not disclosed by the taxpayer are discovered under a full scope examination, those issues may be subject to review by IRS Criminal Investigation.  Thus, it is important to have an experienced tax attorney evaluate your case to decide whether the Offshore Voluntary Disclosure Program is best for you, or whether opting out of the Offshore Voluntary Disclosure Program makes more sense. 

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program.  If you have an undisclosed foreign account or entity, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS.  Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.