Vince Nardone: Tax and Controversy

Tax Deductions for Professional Gamblers in Ohio

Guest Author: Matthew R. Porter, Esq., Columbus, Ohio

This article addresses the question of what tax deductions are available to professional gamblers.  On November 3, 2009, the citizens of Ohio passed the casino initiative authorizing legal gambling in four of Ohio's largest cities.  The passage of the Ohio Issue 3, also known as the "Four Casinos Initiative," amends the Constitution of Ohio and authorizes gambling casinos in Cincinnati, Cleveland, Columbus, and Toledo.  These new casinos mean that more and more gamblers here in Columbus, Ohio will need to understand what tax deductions are available to professional gamblers.  The State of Ohio expects to create over 20,000 jobs and increase revenues for state and local governments.The tax lawyers at the Nardone Law Group, LLC expect more disputes between taxpayers claiming to be professional gamblers and the Internal Revenue Service (the " IRS " or the " Service ") on the amount that may be claimed as deductible gambling losses.

Professional versus Recreational Gamblers

The tax deductions available to professional gamblers for their gambling activities are vastly different from the tax deductions available to recreational gamblers.  In general, gambling income is fully taxable and gambling losses may not exceed gambling winnings—unless the taxpayer is engaged in the trade or business of gambling. This means that if you are a professional gambler, you may be able to deduct all your losses, as well as incidental business expenses that are ordinary and necessary expenses in the pursuit of your gambling activities.  Therefore, the most important question for gamblers is to determine at what point a gambling activity raises to the level of a trade or business such that you would be considered a professional gambler. When you become a professional gambler, your gambling losses may be deductible in determining your adjusted gross income, as opposed to being taken as itemized deductions subject to limitations.  Deducting your losses from adjusted gross income can result in huge tax savings, so understanding what it takes to become a professional gambler is of principal importance.

What is a Professional Gambler?

The IRS and reviewing courts will find that a gambling activity constitutes a trade or business only after examining all relevant facts and circumstances.  Whether you play poker, slot machines, or are involved in horse racing, the facts and circumstances must show that your gambling activity is pursued full time, in good faith, and with regularity.  In addition, yourgambling activity must also be your intended source of livelihood and cannot be recreational or a mere hobby.  If you have a job outside of gambling, you must show that you not only pursued your gambling activity full-time, but that your gambling activity was your main source of earning a livelihood.  It may notbe immediately clear whether your gambling activity will qualify you as a professional gambler.  Thus, the tax lawyers at the Nardone Law Group, LLC recommend taking the following steps to ensure the greatest chance of success.

Recommendation for Professional Gamblers

If you consider yourself to be a professional gambler, you can increase your chances of being determined as such by the IRS by operating your gambling activities in a business-like manner.  This involves setting up a separate bank account designated solely for your gambling activities.  You should also have a detailed business plan outlining your strategy and indicating how you intend to make a profit from gambling.  The motive to make a profit is the key ingredient.  Therefore, your business plan should clearly provide your plan to make money and should reference any and all research you have done to increase your chances of making your gambling activities profitable.  Further, you should keep a log of the time you spent gambling also keeping track ofthe money you bring with you gambling, tracking your winnings and your losses.  Never rely on a casino's player's card or a Form W-2G to track your winnings.  You must maintain your own records.  You should also limit the recreational aspects of gambling.  If you are a professional gambler, you should treat gambling like any other job.  If you gamble with friends for casino perks, then it will be much more difficult to prove to the IRS you are truly a professional gambler. Finally, you must be able to document your expertise in your gambling activity.  You must be able to show what research you have done to show that you believed you could make a profit gambling, even if you have not done so.  Your research should be referenced in your business plan and the books you have read and experts you have consulted with should be cited to and referenced accordingly.

Contact Nardone Law Group, LLC

If you consider yourself a professional gambler, and you have significant gambling losses that are greater than your gambling winnings, you should contact an experienced tax lawyer today. The tax lawyers at Nardone Law Group, LLC have vast experience representing clients before the IRS to obtain tax deductions for professional gamblers. Our experienced tax lawyers will thoroughly review your case to determine whether you are a professional gambler such that you can deduct your gambling losses above your gambling winnings.  Contact us today for a consultation to discuss your case.

What is the Likelihood that I will be Audited by the Internal Revenue Service?

Clients and taxpayers, in general, are surprised as to the amount of information available on the Internal Revenue Service’s website regarding examination statistics.  As an example, the Internal Revenue Service recently issued statistics regarding tax returns examined in Fiscal Year 2010.  Overall there were 187,124,450 returns filed and 1,735,083 returns examined, which represents 0.9% percent of returns covered by examination.  That is less than one percent folks.  But, as always, the devil is in the details.  For example, the Internal Revenue Service examined 4.7% of returns filed where individuals reported gross receipts between $100,000 and $200,000 and filed a schedule C.  On the other hand, the Internal Revenue Service examined 98 percent of certain large corporate taxpayers.  So, it all depends.

The below chart provides a summary of the most common returns and taxpayers:

Type of Taxpayer	Returns Filed	Returns Examined	Amount of Additional Tax (thousands of dollars)
Schedule C Filer - $100,000 to $200,000 in gross receipts	893,707	42,403	$923,734
Schedule C Filer - $200,00 or more in gross receipts	705,877	23,569	$528,770
Partnership Returns	3,423,583	12,406	N/A
S Corporation Returns	4,414,662	16,327	N/A
Employment Tax Returns	30,158,258	63,937	$1,245,789
Estate Tax Returns	42,366	4,288	$1,405,415

The question you very well may be asking yourself is, so, how does the IRS select tax returns for audit?  This is a question that we get asked quite a bit at Nardone Law Group.  To answer the question of how returns are selected for an audit, follow this link. 

IRS Whistleblower Program Alive and Well

Did you know that you could turn in your former boss, colleague, business partner, or former spouse to the IRS, and benefit monetarily?  Some say that this could be a blessing, while others simply want to get revenge.  Either way, it is true.  As a tax attorney specializing in representing individuals and businesses in matters with the IRS, I can tell you that it is true and a very realistic opportunity for the right person in the right place with the right information.  So, what is the Whistleblower Program?

In 2006, Congress reformed the IRS Whistleblower Program in the Tax Relief and Health Care Act (" Tax Relief Act").  The Tax Relief Act created a new framework for rewarding whistleblowers for reporting those involved in tax evasion.  Under Internal Revenue Code §7623(b), where taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected to the whistleblower.   If the tax evasion case deals with an individual, his or her annual gross income must be more than $200,000.  A reduced award amount of up to 10 percent may be available in cases based principally on disclosure of specific allegations resulting from judicial or administrative hearings, a governmental report, hearing, audit or investigation, or the news media.   

See Nardone Law Group's discussion on the IRS Whistleblower Program by visiting our Frequently Asked Questions page.

 

What is the likelihood that I will be audited by the Internal Revenue Service?

As a tax attorney in Columbus, Ohio, I am often asked by clients and others, how likely am I to be audited by the Internal Revenue Service. My answer consistently is: well, as a tax attorney, I am not comfortable answering that question based on your specific tax position and your specific tax return. But, I can direct you to the Internal Revenue Service website, where they keep statistics on a yearly basis regarding examination of returns.

Clients and taxpayers, in general, are surprised as to the amount of information available on the Internal Revenue Service website regarding examination statistics. As an example, the Internal Revenue Service recently issued its statistics regarding tax returns examined in Fiscal Year 2010.

Overall there were 187,124,450 returns filed and 1,735,083 returns examined, which represents .9 percent of returns covered by examination. That is less than one percent folks. But, as always, the devil is in the details. For example, the Internal Revenue Service examined 4.7 percent of returns filed where individuals reported gross receipts between $100,000 and $200,000 and filed a schedule C. On the other hand, the Internal Revenue Service examined 98 percent of certain large corporate taxpayers. So, it all depends.

For more detail regarding the audit statistics please see Nardone Law Group's frequently asked questions How are Returns Selected for Audit and Tax and Controvery Services. Also, for the actual statistics themselves please see the below link.Download Examination Statistics (00046381)

IRS Extends Time for 2011 Offshore Voluntary Disclosure Initiative Requests

Guest Author: Tawnya Underwood, Columbus, Ohio

Good news for taxpayers who missed the August 31, 2011 deadline for submitting an offshore voluntary disclosure initiative request. The Internal Revenue Service extended the deadline for OVDI requests to September 9, 2011. A taxpayer has until September 9, 2011 to submit the Offshore Voluntary Disclosure Letter with all identifying information (name, address, date of birth, and social security number) and as much other information as possible to the Offshore Voluntary Disclosure Coordinator.

The Internal Revenue Service will also offer a 90-day extension to taxpayers for submission of all documents required for the complete OVDI package. The taxpayer must send a request for this 90-day extension by the September 9, 2011 deadline to the Austin campus. This will give the taxpayer an additional 90-day period to submit all required forms and documents as listed on the Internal Revenue Service’s web site, 2011 Offshore Voluntary Disclosure Initiative Documents and Forms.

For additional details regarding the September 9, 2011 OVDI request deadline, please see link below.

http://www.irs.gov/newsroom/article/0,,id=234900,00.html

FBAR and Offshore Voluntary Disclosure Initiative of the Internal Revenue Service

Tax Attorney Vince Nardone discusses filing requirements regarding foreign investments.

Hello everyone.  The Internal Revenue Service's Offshore Voluntary Disclosure Initiative deadline is quickly approaching.  Many are preparing their amended returns and ready to file the final disclosures with the Internal Revenue Service.  But, I question whether the tax accountants or taxpayers preparing the returns are also aware of the various informational returns that are required to be filed in addition to the Form 1040.  I have attached a list of those additional information returns in pdf format.  The reason I am doing that is that I have found many professionals (both attorneys and accountants) are simply not aware of them.  And, the Internal Revenue Service has done a poor job in promoting the requirements of these additional returns.  If you own foreign assets, investments, or business interests it is important that you review the instructions for each of the attached documents to determine what, if any, additional filing requirements you may have.

Please see the attached.

Download FBAR forms (00032167)

Offshore Voluntary Disclosure Initiative and FBAR

Hello all.  As many of you know, the Internal Revenue Service continues to promote its Offshore Voluntary Disclosure Initiative as a good option for taxpayers coming in from the cold.  Although we do not agree that the civil monetary penalties are fair under many circumstances, what we do agree on is that it is better than the alterntaive (i.e., federal prison).  One of the questions we frequently receive relates to the timing after you make a voluntary disclosure.  Here is a summary of that process, again, after disclosure.

After the complete disclosure is submitted, the case is assigned to a civil examiner for certification of completeness, accuracy, and correctness of the tax returns/voluntary disclosure.  This certification process is less formal than an examination, in that the examiner will not send taxpayer notices, taxpayer has no appeal rights related to the Service’s determination. But, the Service reserves the right to conduct an examination if needed.

The taxpayer generally will not hear from the assigned revenue agent/civil examiner until (i) the examiner has questions or needs clarification on the submission; and/or (ii) the examiner has a proposed closing agreement to submit.  A taxpayer should not expect contact from the Service simply indicating that the submission has been received and/or assigned.  The examiner may contact the taxpayer/representative, however, with questions, request additional documents, or make 3^rd party contacts, to certify the accuracy of the amended returns.

As to the timing of review, the Service does not provide an estimate of time for the certification process, but states that there is “no way to predict”.  The best option is to simply submit the information as soon as possible to get the process moving and completed before August 31, 2011.  Ultimately, the taxpayer will finalize the process with the Service.  There will be a finite resolution through (i) closing agreement; (ii) no change letter; or the voluntary disclosure will be ‘bounced out’ of the program – and the taxpayer would receive a letter regarding same. 

All and all, the process works very smoothly and the Service is working with the taxpayers to come up with what the Service believes is a good result for both the government and the taxpayer. 

Taxpayers Must Use The 2011 Offshore Voluntary Disclosure Initiative To Make Voluntary Disclosures Of Unreported Foreign Bank Accounts or Risk Criminal Prosecution

Guest Author: Pilar Puerto, Esq., Columbus, Ohio

    Recently the Department of Justice prosecuted a taxpayer that had made a “quiet disclosure” of his offshore bank account instead of using the IRS’s 2009 Offshore Voluntary Disclosure Initiative (OVDI), demonstrating how serious the IRS is about taxpayers utilizing the OVDI process.

    As background, in spring of 2009, the IRS announced a settlement offer to taxpayers who had unreported offshore income for the 2003 through 2008 tax years. The terms of the settlement offer allowed these taxpayers to avoid facing criminal prosecution if they voluntarily came forward, reported their offshore bank accounts, and paid the back taxes, interest, and delinquency penalties for the past six years. The deadline for this voluntary disclosure was October 15, 2009.

    Some taxpayers choose not to use the OVDI process and they instead do what is called a “quiet disclosure.” A quiet disclosure is when a taxpayer files FBARS and amended returns for those undeclared foreign accounts and pays the related tax and interest for the previously unreported offshore income. The IRS warned, however, that if taxpayers made quiet disclosures instead of using the OVDI process, they risked being criminally prosecuted for the unreported years. This recent prosecution is a good illustration of how serious the IRS is about taxpayers utilizing this process.     

    In this case, the taxpayer had invested in an American medical device company. He arranged to have his income from this investment placed into a bank account in Switzerland that was then wired to his bank account in Bermuda thereby hiding his income and avoiding the payment of taxes. When the taxpayer learned that the Switzerland bank that he and his business partner used to funnel the taxpayer’s investment income had been making some disclosures to the IRS of undeclared accounts held by US taxpayers, the taxpayer decided to make a quiet and only partial disclosure of his foreign bank accounts and income. The taxpayer filed FBARS and amended tax returns for tax years 2003 through 2008. In his amended return for one tax year, 2006, he only reported part of the income. He then filed a second amended return to fully disclose all of the income. This, of course, came after a special agent from the IRS attempted to interview the taxpayer at his home. The taxpayer has now entered into a plea agreement for the charge of failing to report his foreign bank account and income to the Department of the Treasury.

    The IRS has now recently announced a second OVDI offer for taxpayers to disclose unreported income from hidden offshore accounts for tax years 2003 through 2010. The terms of the offer are similar to those in the settlement offer provided in 2009 by the IRS. The only change is the penalty structure. The general rule is that the penalty is 25% based on the amounts in the foreign bank accounts, but it can be as low as 5% for some taxpayers. It is important that taxpayers know how to take advantage of this program so that they do not have to be in a situation where they could face criminal charges, which can include prison time.

For details regarding how to file the voluntary disclosure follow the link below.

http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html

When Does Six Years Mean Six Years?

Guest Author: Daniel Waters, Esq., Columbus, Ohio

    The Defendant in U.S. v. Richards, 107 AFTR 2d 2011-1742 was indicted on one charge of attempting to evade and defeat federal income tax under Internal Revenue Code ("IRC") § 7201. The indictment covered the tax years 1994-2003. The Defendant timely filed a motion to dismiss the indictment citing that some or all of the tax returns in question were barred from prosecution by IRC § 6531(2)'s six year statute of limitations. The Government opposed the motion, and the District Court ultimately granted the motion to dismiss. The decision is important because it gives good insight into how the Government failed to draft a proper indictment, and how one may still be liable for tax evasion for tax years falling outside the six year window.

    The Court first addresses the elements of § 7201, which are: (i) the existence of a tax deficiency, (ii) willfulness, and (iii) an affirmative act of evasion or affirmative attempt to evade. It also states the there are two crimes included in § 7201: (i) the willful attempt to evade the assessment of a tax and (ii) the willful attempt to evade or defeat the payment of a tax. The difference in the two crimes arises in that the "evasion of assessment" involves acts surrounding the filing/non-filing of the return and the reporting of income. Whereas, "evasion of payment" is concerned with conduct that is designed to place assets beyond the government's reach after the tax has been assessed. The Court further explains that while § 6531(2) imposes a six year statute of limitations on the tax evasion crimes, the statute runs from the occurrence of the last act necessary to complete the offense. As the Court goes on to state, the final occurrence is not the filing of the return, but the last date a defendant engaged in an affirmative act to evade payment of their liability.

    The Government ultimately lost this case because they were ineffective in the drafting of the indictment to connect actions by the Defendant in 2005, 2006, and 2008 with his failure to pay the taxes for the years under the indictment. While the result was optimal for this defendant, the analysis done by the Court should not be ignored by tax practitioners and taxpayers alike. For tax practitioners handling such cases, we need to be diligent in our review of the indictment.  And, ensure that the government has met their burden at each stage of litigation. Having dealt with numerous taxpayers, it appears that many assume the six year statute of limitations is a definite window of time from the filing date. As tax practitioners, we need to be able to explain how six years is not always six years.

The Tax Consequences of Life Insurance Can Be Complex

Guest Author: Jacqueline Ferris MacLaren, Esq., Columbus, Ohio

    Any amount that is received under a life insurance policy that is paid as a result of death of the insured is excludable from the income of the recipient. But an amount received under a life insurance policy before the death of an insured is taxable income to the extent it exceeds the investment in the policy.

    The Tax Court has recently found that married taxpayers realized a taxable gain on the termination of a life insurance policy even though the entire cash value of the policy was used to pay the policy debt.  In 2005 Mr. Brown held a life insurance policy that was terminated by the insurance company.  The insurance company used the entire cash value of the policy to pay the policy debt.  The Browns did not report any gain or loss on their 2005 federal income tax return from the termination of the life insurance policy.

    The IRS determined that the Browns recognized a taxable gain on termination of the life insurance policy and that the Browns were liable for the deficiency and a penalty.  The Tax Court agreed and held that the IRS correctly determined and calculated the Browns taxable gain on the termination of the life insurance contract and that the Browns were liable for the accuracy-related penalty under Code Sec. 6662.

    The Browns recognized taxable gain in an amount of the gross distribution that the insurance company reported to the IRS on Form 1099-R less the “net cost”/total premiums paid less the total dividends received.  When the policy was terminated, the insurance company applied the cash value to pay policy debt.  Mr. Brown had incurred the policy debt to pay the policy premiums. The Tax Court found that the Browns constructively received gross distribution upon termination and the fact that the cash value was used to pay policy debt was irrelevant so long as the policy debt was genuine.

    The accuracy-related substantial understatement penalty was upheld against the Browns for failing to report the gain or loss on their return. The IRS met its burden of production on penalties' applicability with proof that the Browns understated their tax liabilities by more than $5,000 and 10% of tax required to be shown on return.  The Browns mistaken belief that the insurance company’s information return was incorrectly based on a discharge-of-debt theory was not reasonable cause for their underpayment where they didn't research proper tax treatment of the transaction or ask the insurance company why it reported income when there was no discharge of debt.

To view the entire opinion, please see the attached:

http://ustaxcourt.gov/InOpHistoric/5Brown.TCM.WPD.pdf

The ABC's of the June 30th FBAR Filing Deadline

Guest Author: Daniel B. Waters, Esq., Columbus, Ohio

    Part III Foreign Accounts and Trusts on Schedule B Interest and Ordinary Dividends for Form 1040 U.S. Individual Income Tax Return asks what appears to be a simple question, "[D]id you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?"  This simple question though can carry significant penalties if left unanswered or worse, if answered incorrectly.  This blog entry will not cover the intricacies involved in reducing those penalties, but it will address the question who Section III applies to.  And, what obligations that person has after checking the yes box.

    The first requirement for filing the Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (the "FBAR") is that one must be a United States person.  This element has two distinct features: (i) what constitutes the United States, and (ii) who/what is a person?  The United States, for purposes of FBAR filing, encompasses all States, the District of Columbia, all territories, and Indian lands under the Indian Gaming Regulatory Act.  The definition of a person is very broad and includes all citizens, residents, and all corporations, partnerships, limited liability companies, trusts, estates, or other entities organized under the laws of the United States.  This definition mandates that even entities disregarded for purposes of federal tax laws are still included in the definition of person, and thus should file an FBAR.

    The second requirement for filing the FBAR is presence of a foreign financial account.  This element is also broadly defined to include brokerage, savings, checking, demand, deposit, time deposit, or the all-encompassing other accounts.  These accounts can be held at a financial institution or by a person acting in the same manner as a financial institution.  The account must also be located outside of the United States.

    The third and final requirement for the filing of the FBAR is the person must have an interest or signature authority in the foreign account.  Signature authority is pretty straight-forward.  An individual must have the authority to, whether by themselves or shared, to affect the disposition of the assets held in the foreign account.  A person has a financial interest in an account if they are either the owner of record or hold legal title.  An owner or holder of legal title is one who acts as agent, nominee, attorney, or a corporation, partnership, trust, or other entity that a United States person controls more than 50%.

    If you fit into all of these requirements then you must answer yes in Part III of Schedule B, and you must file the FBAR.  The FBAR must be received by June 30 of the year following the calendar year for which it applies.  Thus, if you had a financial interest in a foreign account in 2010, the FBAR must be received by June 30, 2011.  No extension of time to file can be granted, and the FBAR is not filed with the Form 1040.   The address to send the FBAR is:

Department of the Treasury

Post Office Box 32621

Detroit, MI 48232-0621

If you find it is June 29 and you have failed to mail the FBAR, express delivery must be made to this address:

IRS Enterprise Computing Center

ATTN: CTR Operations Mailroom, 4th Floor

985 Michigan Avenue

Detroit, MI 48226

    If you realize that you should have marked yes on Part III of Schedule B and filed an FBAR for prior years, please see our entry of February 18, 2011 where we discuss the latest Voluntary Disclosure Program the IRS is offering for non-filers.  Schedule B, the FBAR, and the corresponding instructions can be found by copying and pasting the following:

Schedule B and instructions - www.irs.gov/pub/irs-pdf/f1040sb.pdf  

FBAR and instructions - www.irs.gov/pub/irs-pdf/f90221.pdf

Tax Deductions for Professional Gamblers in Ohio

Guest Author: Matthew R. Porter, Esq., Columbus, Ohio

This article addresses the question of what tax deductions are available to professional gamblers.  On November 3, 2009, the citizens of Ohio passed the casino initiative authorizing legal gambling in four of Ohio's largest cities.  The passage of the Ohio Issue 3, also known as the "Four Casinos Initiative," amends the Constitution of Ohio and authorizes gambling casinos in Cincinnati, Cleveland, Columbus, and Toledo.  These new casinos mean that more and more gamblers here in Columbus, Ohio will need to understand what tax deductions are available to professional gamblers.  The State of Ohio expects to create over 20,000 jobs and increase revenues for state and local governments.The tax lawyers at the Nardone Law Group, LLC expect more disputes between taxpayers claiming to be professional gamblers and the Internal Revenue Service (the " IRS " or the " Service ") on the amount that may be claimed as deductible gambling losses.

Professional versus Recreational Gamblers

The tax deductions available to professional gamblers for their gambling activities are vastly different from the tax deductions available to recreational gamblers.  In general, gambling income is fully taxable and gambling losses may not exceed gambling winnings—unless the taxpayer is engaged in the trade or business of gambling. This means that if you are a professional gambler, you may be able to deduct all your losses, as well as incidental business expenses that are ordinary and necessary expenses in the pursuit of your gambling activities.  Therefore, the most important question for gamblers is to determine at what point a gambling activity raises to the level of a trade or business such that you would be considered a professional gambler. When you become a professional gambler, your gambling losses may be deductible in determining your adjusted gross income, as opposed to being taken as itemized deductions subject to limitations.  Deducting your losses from adjusted gross income can result in huge tax savings, so understanding what it takes to become a professional gambler is of principal importance.

What is a Professional Gambler?

The IRS and reviewing courts will find that a gambling activity constitutes a trade or business only after examining all relevant facts and circumstances.  Whether you play poker, slot machines, or are involved in horse racing, the facts and circumstances must show that your gambling activity is pursued full time, in good faith, and with regularity.  In addition, yourgambling activity must also be your intended source of livelihood and cannot be recreational or a mere hobby.  If you have a job outside of gambling, you must show that you not only pursued your gambling activity full-time, but that your gambling activity was your main source of earning a livelihood.  It may notbe immediately clear whether your gambling activity will qualify you as a professional gambler.  Thus, the tax lawyers at the Nardone Law Group, LLC recommend taking the following steps to ensure the greatest chance of success.

Recommendation for Professional Gamblers

If you consider yourself to be a professional gambler, you can increase your chances of being determined as such by the IRS by operating your gambling activities in a business-like manner.  This involves setting up a separate bank account designated solely for your gambling activities.  You should also have a detailed business plan outlining your strategy and indicating how you intend to make a profit from gambling.  The motive to make a profit is the key ingredient.  Therefore, your business plan should clearly provide your plan to make money and should reference any and all research you have done to increase your chances of making your gambling activities profitable.  Further, you should keep a log of the time you spent gambling also keeping track ofthe money you bring with you gambling, tracking your winnings and your losses.  Never rely on a casino's player's card or a Form W-2G to track your winnings.  You must maintain your own records.  You should also limit the recreational aspects of gambling.  If you are a professional gambler, you should treat gambling like any other job.  If you gamble with friends for casino perks, then it will be much more difficult to prove to the IRS you are truly a professional gambler. Finally, you must be able to document your expertise in your gambling activity.  You must be able to show what research you have done to show that you believed you could make a profit gambling, even if you have not done so.  Your research should be referenced in your business plan and the books you have read and experts you have consulted with should be cited to and referenced accordingly.

Contact Nardone Law Group, LLC

If you consider yourself a professional gambler, and you have significant gambling losses that are greater than your gambling winnings, you should contact an experienced tax lawyer today. The tax lawyers at Nardone Law Group, LLC have vast experience representing clients before the IRS to obtain tax deductions for professional gamblers. Our experienced tax lawyers will thoroughly review your case to determine whether you are a professional gambler such that you can deduct your gambling losses above your gambling winnings.  Contact us today for a consultation to discuss your case.

What is the Likelihood that I will be Audited by the Internal Revenue Service?

Clients and taxpayers, in general, are surprised as to the amount of information available on the Internal Revenue Service’s website regarding examination statistics.  As an example, the Internal Revenue Service recently issued statistics regarding tax returns examined in Fiscal Year 2010.  Overall there were 187,124,450 returns filed and 1,735,083 returns examined, which represents 0.9% percent of returns covered by examination.  That is less than one percent folks.  But, as always, the devil is in the details.  For example, the Internal Revenue Service examined 4.7% of returns filed where individuals reported gross receipts between $100,000 and $200,000 and filed a schedule C.  On the other hand, the Internal Revenue Service examined 98 percent of certain large corporate taxpayers.  So, it all depends.

The below chart provides a summary of the most common returns and taxpayers:

Type of Taxpayer	Returns Filed	Returns Examined	Amount of Additional Tax (thousands of dollars)
Schedule C Filer - $100,000 to $200,000 in gross receipts	893,707	42,403	$923,734
Schedule C Filer - $200,00 or more in gross receipts	705,877	23,569	$528,770
Partnership Returns	3,423,583	12,406	N/A
S Corporation Returns	4,414,662	16,327	N/A
Employment Tax Returns	30,158,258	63,937	$1,245,789
Estate Tax Returns	42,366	4,288	$1,405,415

The question you very well may be asking yourself is, so, how does the IRS select tax returns for audit?  This is a question that we get asked quite a bit at Nardone Law Group.  To answer the question of how returns are selected for an audit, follow this link. 

IRS Whistleblower Program Alive and Well

Did you know that you could turn in your former boss, colleague, business partner, or former spouse to the IRS, and benefit monetarily?  Some say that this could be a blessing, while others simply want to get revenge.  Either way, it is true.  As a tax attorney specializing in representing individuals and businesses in matters with the IRS, I can tell you that it is true and a very realistic opportunity for the right person in the right place with the right information.  So, what is the Whistleblower Program?

In 2006, Congress reformed the IRS Whistleblower Program in the Tax Relief and Health Care Act (" Tax Relief Act").  The Tax Relief Act created a new framework for rewarding whistleblowers for reporting those involved in tax evasion.  Under Internal Revenue Code §7623(b), where taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected to the whistleblower.   If the tax evasion case deals with an individual, his or her annual gross income must be more than $200,000.  A reduced award amount of up to 10 percent may be available in cases based principally on disclosure of specific allegations resulting from judicial or administrative hearings, a governmental report, hearing, audit or investigation, or the news media.   

See Nardone Law Group's discussion on the IRS Whistleblower Program by visiting our Frequently Asked Questions page.

 

What is the likelihood that I will be audited by the Internal Revenue Service?

As a tax attorney in Columbus, Ohio, I am often asked by clients and others, how likely am I to be audited by the Internal Revenue Service. My answer consistently is: well, as a tax attorney, I am not comfortable answering that question based on your specific tax position and your specific tax return. But, I can direct you to the Internal Revenue Service website, where they keep statistics on a yearly basis regarding examination of returns.

Clients and taxpayers, in general, are surprised as to the amount of information available on the Internal Revenue Service website regarding examination statistics. As an example, the Internal Revenue Service recently issued its statistics regarding tax returns examined in Fiscal Year 2010.

Overall there were 187,124,450 returns filed and 1,735,083 returns examined, which represents .9 percent of returns covered by examination. That is less than one percent folks. But, as always, the devil is in the details. For example, the Internal Revenue Service examined 4.7 percent of returns filed where individuals reported gross receipts between $100,000 and $200,000 and filed a schedule C. On the other hand, the Internal Revenue Service examined 98 percent of certain large corporate taxpayers. So, it all depends.

For more detail regarding the audit statistics please see Nardone Law Group's frequently asked questions How are Returns Selected for Audit and Tax and Controvery Services. Also, for the actual statistics themselves please see the below link.Download Examination Statistics (00046381)

IRS Extends Time for 2011 Offshore Voluntary Disclosure Initiative Requests

Guest Author: Tawnya Underwood, Columbus, Ohio

Good news for taxpayers who missed the August 31, 2011 deadline for submitting an offshore voluntary disclosure initiative request. The Internal Revenue Service extended the deadline for OVDI requests to September 9, 2011. A taxpayer has until September 9, 2011 to submit the Offshore Voluntary Disclosure Letter with all identifying information (name, address, date of birth, and social security number) and as much other information as possible to the Offshore Voluntary Disclosure Coordinator.

The Internal Revenue Service will also offer a 90-day extension to taxpayers for submission of all documents required for the complete OVDI package. The taxpayer must send a request for this 90-day extension by the September 9, 2011 deadline to the Austin campus. This will give the taxpayer an additional 90-day period to submit all required forms and documents as listed on the Internal Revenue Service’s web site, 2011 Offshore Voluntary Disclosure Initiative Documents and Forms.

For additional details regarding the September 9, 2011 OVDI request deadline, please see link below.

http://www.irs.gov/newsroom/article/0,,id=234900,00.html

FBAR and Offshore Voluntary Disclosure Initiative of the Internal Revenue Service

Tax Attorney Vince Nardone discusses filing requirements regarding foreign investments.

Hello everyone.  The Internal Revenue Service's Offshore Voluntary Disclosure Initiative deadline is quickly approaching.  Many are preparing their amended returns and ready to file the final disclosures with the Internal Revenue Service.  But, I question whether the tax accountants or taxpayers preparing the returns are also aware of the various informational returns that are required to be filed in addition to the Form 1040.  I have attached a list of those additional information returns in pdf format.  The reason I am doing that is that I have found many professionals (both attorneys and accountants) are simply not aware of them.  And, the Internal Revenue Service has done a poor job in promoting the requirements of these additional returns.  If you own foreign assets, investments, or business interests it is important that you review the instructions for each of the attached documents to determine what, if any, additional filing requirements you may have.

Please see the attached.

Download FBAR forms (00032167)

Offshore Voluntary Disclosure Initiative and FBAR

Hello all.  As many of you know, the Internal Revenue Service continues to promote its Offshore Voluntary Disclosure Initiative as a good option for taxpayers coming in from the cold.  Although we do not agree that the civil monetary penalties are fair under many circumstances, what we do agree on is that it is better than the alterntaive (i.e., federal prison).  One of the questions we frequently receive relates to the timing after you make a voluntary disclosure.  Here is a summary of that process, again, after disclosure.

After the complete disclosure is submitted, the case is assigned to a civil examiner for certification of completeness, accuracy, and correctness of the tax returns/voluntary disclosure.  This certification process is less formal than an examination, in that the examiner will not send taxpayer notices, taxpayer has no appeal rights related to the Service’s determination. But, the Service reserves the right to conduct an examination if needed.

The taxpayer generally will not hear from the assigned revenue agent/civil examiner until (i) the examiner has questions or needs clarification on the submission; and/or (ii) the examiner has a proposed closing agreement to submit.  A taxpayer should not expect contact from the Service simply indicating that the submission has been received and/or assigned.  The examiner may contact the taxpayer/representative, however, with questions, request additional documents, or make 3^rd party contacts, to certify the accuracy of the amended returns.

As to the timing of review, the Service does not provide an estimate of time for the certification process, but states that there is “no way to predict”.  The best option is to simply submit the information as soon as possible to get the process moving and completed before August 31, 2011.  Ultimately, the taxpayer will finalize the process with the Service.  There will be a finite resolution through (i) closing agreement; (ii) no change letter; or the voluntary disclosure will be ‘bounced out’ of the program – and the taxpayer would receive a letter regarding same. 

All and all, the process works very smoothly and the Service is working with the taxpayers to come up with what the Service believes is a good result for both the government and the taxpayer. 

Taxpayers Must Use The 2011 Offshore Voluntary Disclosure Initiative To Make Voluntary Disclosures Of Unreported Foreign Bank Accounts or Risk Criminal Prosecution

Guest Author: Pilar Puerto, Esq., Columbus, Ohio

    Recently the Department of Justice prosecuted a taxpayer that had made a “quiet disclosure” of his offshore bank account instead of using the IRS’s 2009 Offshore Voluntary Disclosure Initiative (OVDI), demonstrating how serious the IRS is about taxpayers utilizing the OVDI process.

    As background, in spring of 2009, the IRS announced a settlement offer to taxpayers who had unreported offshore income for the 2003 through 2008 tax years. The terms of the settlement offer allowed these taxpayers to avoid facing criminal prosecution if they voluntarily came forward, reported their offshore bank accounts, and paid the back taxes, interest, and delinquency penalties for the past six years. The deadline for this voluntary disclosure was October 15, 2009.

    Some taxpayers choose not to use the OVDI process and they instead do what is called a “quiet disclosure.” A quiet disclosure is when a taxpayer files FBARS and amended returns for those undeclared foreign accounts and pays the related tax and interest for the previously unreported offshore income. The IRS warned, however, that if taxpayers made quiet disclosures instead of using the OVDI process, they risked being criminally prosecuted for the unreported years. This recent prosecution is a good illustration of how serious the IRS is about taxpayers utilizing this process.     

    In this case, the taxpayer had invested in an American medical device company. He arranged to have his income from this investment placed into a bank account in Switzerland that was then wired to his bank account in Bermuda thereby hiding his income and avoiding the payment of taxes. When the taxpayer learned that the Switzerland bank that he and his business partner used to funnel the taxpayer’s investment income had been making some disclosures to the IRS of undeclared accounts held by US taxpayers, the taxpayer decided to make a quiet and only partial disclosure of his foreign bank accounts and income. The taxpayer filed FBARS and amended tax returns for tax years 2003 through 2008. In his amended return for one tax year, 2006, he only reported part of the income. He then filed a second amended return to fully disclose all of the income. This, of course, came after a special agent from the IRS attempted to interview the taxpayer at his home. The taxpayer has now entered into a plea agreement for the charge of failing to report his foreign bank account and income to the Department of the Treasury.

    The IRS has now recently announced a second OVDI offer for taxpayers to disclose unreported income from hidden offshore accounts for tax years 2003 through 2010. The terms of the offer are similar to those in the settlement offer provided in 2009 by the IRS. The only change is the penalty structure. The general rule is that the penalty is 25% based on the amounts in the foreign bank accounts, but it can be as low as 5% for some taxpayers. It is important that taxpayers know how to take advantage of this program so that they do not have to be in a situation where they could face criminal charges, which can include prison time.

For details regarding how to file the voluntary disclosure follow the link below.

http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html

When Does Six Years Mean Six Years?

Guest Author: Daniel Waters, Esq., Columbus, Ohio

    The Defendant in U.S. v. Richards, 107 AFTR 2d 2011-1742 was indicted on one charge of attempting to evade and defeat federal income tax under Internal Revenue Code ("IRC") § 7201. The indictment covered the tax years 1994-2003. The Defendant timely filed a motion to dismiss the indictment citing that some or all of the tax returns in question were barred from prosecution by IRC § 6531(2)'s six year statute of limitations. The Government opposed the motion, and the District Court ultimately granted the motion to dismiss. The decision is important because it gives good insight into how the Government failed to draft a proper indictment, and how one may still be liable for tax evasion for tax years falling outside the six year window.

    The Court first addresses the elements of § 7201, which are: (i) the existence of a tax deficiency, (ii) willfulness, and (iii) an affirmative act of evasion or affirmative attempt to evade. It also states the there are two crimes included in § 7201: (i) the willful attempt to evade the assessment of a tax and (ii) the willful attempt to evade or defeat the payment of a tax. The difference in the two crimes arises in that the "evasion of assessment" involves acts surrounding the filing/non-filing of the return and the reporting of income. Whereas, "evasion of payment" is concerned with conduct that is designed to place assets beyond the government's reach after the tax has been assessed. The Court further explains that while § 6531(2) imposes a six year statute of limitations on the tax evasion crimes, the statute runs from the occurrence of the last act necessary to complete the offense. As the Court goes on to state, the final occurrence is not the filing of the return, but the last date a defendant engaged in an affirmative act to evade payment of their liability.

    The Government ultimately lost this case because they were ineffective in the drafting of the indictment to connect actions by the Defendant in 2005, 2006, and 2008 with his failure to pay the taxes for the years under the indictment. While the result was optimal for this defendant, the analysis done by the Court should not be ignored by tax practitioners and taxpayers alike. For tax practitioners handling such cases, we need to be diligent in our review of the indictment.  And, ensure that the government has met their burden at each stage of litigation. Having dealt with numerous taxpayers, it appears that many assume the six year statute of limitations is a definite window of time from the filing date. As tax practitioners, we need to be able to explain how six years is not always six years.

The Tax Consequences of Life Insurance Can Be Complex

Guest Author: Jacqueline Ferris MacLaren, Esq., Columbus, Ohio

    Any amount that is received under a life insurance policy that is paid as a result of death of the insured is excludable from the income of the recipient. But an amount received under a life insurance policy before the death of an insured is taxable income to the extent it exceeds the investment in the policy.

    The Tax Court has recently found that married taxpayers realized a taxable gain on the termination of a life insurance policy even though the entire cash value of the policy was used to pay the policy debt.  In 2005 Mr. Brown held a life insurance policy that was terminated by the insurance company.  The insurance company used the entire cash value of the policy to pay the policy debt.  The Browns did not report any gain or loss on their 2005 federal income tax return from the termination of the life insurance policy.

    The IRS determined that the Browns recognized a taxable gain on termination of the life insurance policy and that the Browns were liable for the deficiency and a penalty.  The Tax Court agreed and held that the IRS correctly determined and calculated the Browns taxable gain on the termination of the life insurance contract and that the Browns were liable for the accuracy-related penalty under Code Sec. 6662.

    The Browns recognized taxable gain in an amount of the gross distribution that the insurance company reported to the IRS on Form 1099-R less the “net cost”/total premiums paid less the total dividends received.  When the policy was terminated, the insurance company applied the cash value to pay policy debt.  Mr. Brown had incurred the policy debt to pay the policy premiums. The Tax Court found that the Browns constructively received gross distribution upon termination and the fact that the cash value was used to pay policy debt was irrelevant so long as the policy debt was genuine.

    The accuracy-related substantial understatement penalty was upheld against the Browns for failing to report the gain or loss on their return. The IRS met its burden of production on penalties' applicability with proof that the Browns understated their tax liabilities by more than $5,000 and 10% of tax required to be shown on return.  The Browns mistaken belief that the insurance company’s information return was incorrectly based on a discharge-of-debt theory was not reasonable cause for their underpayment where they didn't research proper tax treatment of the transaction or ask the insurance company why it reported income when there was no discharge of debt.

To view the entire opinion, please see the attached:

http://ustaxcourt.gov/InOpHistoric/5Brown.TCM.WPD.pdf

The ABC's of the June 30th FBAR Filing Deadline

Guest Author: Daniel B. Waters, Esq., Columbus, Ohio

    Part III Foreign Accounts and Trusts on Schedule B Interest and Ordinary Dividends for Form 1040 U.S. Individual Income Tax Return asks what appears to be a simple question, "[D]id you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?"  This simple question though can carry significant penalties if left unanswered or worse, if answered incorrectly.  This blog entry will not cover the intricacies involved in reducing those penalties, but it will address the question who Section III applies to.  And, what obligations that person has after checking the yes box.

    The first requirement for filing the Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (the "FBAR") is that one must be a United States person.  This element has two distinct features: (i) what constitutes the United States, and (ii) who/what is a person?  The United States, for purposes of FBAR filing, encompasses all States, the District of Columbia, all territories, and Indian lands under the Indian Gaming Regulatory Act.  The definition of a person is very broad and includes all citizens, residents, and all corporations, partnerships, limited liability companies, trusts, estates, or other entities organized under the laws of the United States.  This definition mandates that even entities disregarded for purposes of federal tax laws are still included in the definition of person, and thus should file an FBAR.

    The second requirement for filing the FBAR is presence of a foreign financial account.  This element is also broadly defined to include brokerage, savings, checking, demand, deposit, time deposit, or the all-encompassing other accounts.  These accounts can be held at a financial institution or by a person acting in the same manner as a financial institution.  The account must also be located outside of the United States.

    The third and final requirement for the filing of the FBAR is the person must have an interest or signature authority in the foreign account.  Signature authority is pretty straight-forward.  An individual must have the authority to, whether by themselves or shared, to affect the disposition of the assets held in the foreign account.  A person has a financial interest in an account if they are either the owner of record or hold legal title.  An owner or holder of legal title is one who acts as agent, nominee, attorney, or a corporation, partnership, trust, or other entity that a United States person controls more than 50%.

    If you fit into all of these requirements then you must answer yes in Part III of Schedule B, and you must file the FBAR.  The FBAR must be received by June 30 of the year following the calendar year for which it applies.  Thus, if you had a financial interest in a foreign account in 2010, the FBAR must be received by June 30, 2011.  No extension of time to file can be granted, and the FBAR is not filed with the Form 1040.   The address to send the FBAR is:

Department of the Treasury

Post Office Box 32621

Detroit, MI 48232-0621

If you find it is June 29 and you have failed to mail the FBAR, express delivery must be made to this address:

IRS Enterprise Computing Center

ATTN: CTR Operations Mailroom, 4th Floor

985 Michigan Avenue

Detroit, MI 48226

    If you realize that you should have marked yes on Part III of Schedule B and filed an FBAR for prior years, please see our entry of February 18, 2011 where we discuss the latest Voluntary Disclosure Program the IRS is offering for non-filers.  Schedule B, the FBAR, and the corresponding instructions can be found by copying and pasting the following:

Schedule B and instructions - www.irs.gov/pub/irs-pdf/f1040sb.pdf  

FBAR and instructions - www.irs.gov/pub/irs-pdf/f90221.pdf