April 29, 2015

IRS-CI Fiscal Year 2014 Annual Business Report Demonstrates the IRS' Broad Authority and Investigative Successes

The tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated regarding the Internal Revenue Service’s efforts to eliminate tax fraud, through civil and criminal investigations. Depending on the circumstances surrounding the case, these investigations can result in fines and penalties, as well as sentences of incarceration. In our prior article on the Criminal Consequences of Tax Evasion, we discussed a recent case in which the IRS sentenced a delinquent taxpayer to 18 months in prison and ordered him to pay more than $1.6 million in restitution to the U.S. government. That case, and many others like it, provided a warning to taxpayers: if you commit tax crimes, such as filing false returns, making fraudulent claims, or assisting others in similar acts, you can and will face severe punishments if convicted.

Recently, IRS Criminal Investigation (IRS-CI) released its Annual Business Report for Fiscal Year 2014 (view here). The main function of IRS-CI is to investigate potential criminal violations of the Internal Revenue Code and related financial crimes. The Report outlined IRS-CI’s successes and challenges from the previous year, providing statistics and summaries of the progress made towards eliminating tax crimes. This article provides a brief overview of the Report, as well as some of the cases of note from Fiscal Year 2014.

IRS-CI Annual Business Report

The IRS-CI Annual Business Report for Fiscal Year 2014 provides a broad overview of IRS-CI’s efforts to enforce U.S. tax laws and combat tax fraud. The Report includes cases summaries, which illustrate the diversity and complexity of IRS-CI investigations. In his introductory message, Chief Richard Weber declared IRS-CI to be the “best financial investigators in the world,” and further noted that “[o]ur special agents and professional staff continue to be the model by which other law enforcement agencies should be judged.” Chief Weber further discussed how IRS-CI was able to reach unprecedented agreements and make great strides in enforcement during FY 2014.

The IRS-CI Report focuses largely on the agency’s “investigative priorities.” The investigative priorities are areas of concern, in which IRS-CI concentrates much of its resources and energy. Some of the investigative priorities involve long-standing challenges faced by the IRS, while others represent emerging trends in the financial and technological industries. The Fiscal Year 2014 investigative priorities included:

  1. Identity Theft Fraud;
  2. Return Preparer Fraud & Questionable Refund Fraud;
  3. International Tax Fraud;
  4. Political/Public Corruption;
  5. Bank Secrecy Act;
  6. Asset Forfeiture;
  7. Voluntary Disclosure Program; and
  8. Counterterrorism and Sovereign Citizens.

Each of these areas provides unique and ongoing challenges for IRS-CI. As the Report’s case summaries demonstrate, however, IRS-CI has had significant success in investigating, prosecuting, and preventing tax crimes within these priority areas.

Examples of IRS-CI Success

Among other important information, the IRS-CI Annual Business Report provides case summaries of various investigations adjudicated during FY 2014. The cases involve a variety of tax crimes, such as tax-related identity theft, money laundering, public corruption, and terrorist financing. Some cases resulted in hefty penalties and fines, others imposed lengthy sentences of incarceration, while many involved a combination of the two. Regardless of the outcome, the cases demonstrate the IRS-CI’s broad authority to investigate and punish criminal taxpayers.

One of IRS-CI’s main priorities is to combat fraud and ensure compliance with relevant tax laws. In the largest criminal tax case ever filed, Credit Suisse pleaded guilty to conspiracy to aid and assist U.S. taxpayers in the filing of false income tax returns. Credit Suisse ultimately agreed to pay a total of $2.6 billion. In the wake of the Credit Suisse investigation, IRS-CI brought a case against Bank Leumi Group, a major international Israeli bank. Bank Leumi Group admitted that it conspired to aid and assist U.S. taxpayers to prepare and present false tax returns. As part of their agreement with the IRS, Bank Leumi Group will pay $270 million and cease to provide banking and investment services for any accounts held, or beneficially owned, by U.S. taxpayers. The successful investigations of these two major foreign financial institutions are a prime example of IRS-CI’s objective to stop fraud, while also displaying its global reach.

Coinciding with its efforts to combat fraud, IRS-CI works hard to protect the integrity of the financial system. For example, Liberty Reserve, a leading digital currency company, and seven of its principals were indicted for an alleged $6 billion money laundering scheme. Similarly, Ross William Ulbricht, the creator of “Silk Road,” was indicted on charges of engaging in a continuing criminal enterprise, money laundering, and other federal offenses. Silk Road was a website, which allowed over 100,000 users to buy and sell illegal drugs and other unlawful goods and services. While IRS-CI was able to use its unique and creative investigative skills to put a stop to these illegal practices, the work is far from over.

What Does This Mean for Taxpayers?

IRS-CI has made significant headway in the fight against tax crime, and the Annual Business Report certainly reflects that. Looking to Fiscal Year 2015, Chief Weber recognized the challenges ahead, stating, “[w]e will not lose sight of taking care of our people and will continue to push initiatives…investing in technology, and improving communication and transparency.” With this in mind, it now seems more important than ever for taxpayers to be aware of their U.S. tax obligations. With the IRS’s broad investigative authority, and the risk of significant fines, penalties, and prison sentences, taxpayers cannot afford to be non-compliant. If you or your business have been contacted by an IRS revenue officer, or are currently undergoing an investigation, it is important to consult with an experienced tax attorney to find out what solutions are available.

Contact Nardone Law Group

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

Contact us today for a consultation to discuss your case.

April 27, 2015

Recent Court Decision Analyzed the Proper Standard of Review for FBAR Penalty Issues

The tax attorneys at Nardone Law Group in Columbus, Ohio are committed to keeping taxpayers updated and informed about the various programs the Internal Revenue Service offers that allow taxpayers to disclose offshore accounts and resolve any tax and penalty obligations. In our prior article on the Delinquent FBAR Submission Procedures, we provided an overview of the Report of Foreign Bank and Financial Accounts (FBAR), and described how eligible taxpayers can come into compliance with U.S. tax reporting requirements by filing delinquent FBARs.

Frequently, taxpayers will address their failure to file the required FBAR form as part of the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. In certain circumstances, however, taxpayers with undisclosed foreign financial interests will not need to use the Streamlined Filing Compliance Procedures or the Offshore Voluntary Disclosure Program. In such cases, the taxpayer may simply need to file the FBAR, by following the Delinquent FBAR Submission Procedures. Regardless of which reporting method taxpayers utilize to come into compliance, it is important to know that the IRS has a broad scope to assess penalties for failure to disclose foreign financial accounts. A recent district court decision highlighted the IRS’ assessment abilities and provided helpful insight into how the court examines FBAR penalty issues.

FBAR Penalty Issues in Moore v. U.S.

Recently, a district court dismissed a taxpayer’s challenges to his penalty for failing to file FBARs with respect to his foreign account. In reaching its decision, the court was required to address a number of FBAR-related issues, including the appropriate standard of review. The court ultimately determined that the IRS-imposed penalties were not excessive, since the taxpayer had no reasonable cause for his violations of the FBAR filing requirements.

The Bank Secrecy Act (BSA) gives the IRS broad authority to collect information from U.S. citizens who have foreign financial accounts. U.S. taxpayers who have a financial interest in, or signature authority over, a foreign financial account must file the FBAR if the aggregate value of the account exceeds $10,000 at any time during the calendar year. For non-willful violations of the BSA, the IRS can impose a civil penalty of up to $10,000 on a taxpayer who fails to file FBARs (31 CFR 5321(5)(b)(i)). But, “no penalty shall be imposed” if, among other requirements, the “violation was due to reasonable cause.”

In Moore v. U.S., the taxpayer maintained a foreign account for nearly two decades. At all relevant times, the account contained a balance between $300,000 and $550,000, subjecting the account to FBAR requirements. The taxpayer, however, filed no FBARs until 2009, when he became aware of, and decided to take advantage of, the IRS’s Offshore Voluntary Disclosure Program. The taxpayer amended six years of tax returns (2003 to 2008) and filed late FBARs to report the income for each of those years from his foreign account.

In October 2011, an IRS revenue agent interviewed the taxpayer and ultimately recommended that the IRS impose a $10,000 penalty for each year from 2005 to 2008. In December 2011, the IRS sent the taxpayer a letter proposing the $40,000 fine, but the letter provided little to no information about the basis for the penalty. The letter demanded that he accept the penalty or request an appeal, otherwise the penalty would be assessed and collection procedures would be instigated.

In reviewing the case, the court determined, as a matter of law, that the taxpayer’s BSA violations were non-willful­ and therefore would subject him to civil penalties. The only remaining issue was whether the taxpayer could avoid liability by establishing that he acted with “reasonable cause.” The court examined the taxpayer’s explanation in support of reasonable cause, but it found that he had no objective basis for a belief that he was not required to report his foreign account. The court pointed to two tax questionnaires where the taxpayer had indicated to his return preparer that he had no interest in a foreign account, and there was no evidence that he otherwise disclosed the account to his preparer.

Finally, the court examined the IRS’s assessment of the FBAR penalties, to decide if the action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” The court observed that there are no codified procedures for the IRS to use in assessing FBAR penalties, which essentially allows the IRS broad discretion in how it chooses to assess those penalties. Accordingly, the court determined that the IRS’s penalty procedures “served all of the purposes of due process” and that the assessment of the maximum penalty of $40,000 did not violate the excessive fines clause.

NLG Comment: There are many critical considerations that taxpayers must weigh when deciding how to come into compliance with U.S. tax reporting obligations. If you have a previously undisclosed foreign financial account, there are multiple methods for coming into compliance, but it is crucial to choose the correct one. The IRS has a broad scope to assess penalties when the failure to disclose a foreign financial account is deemed willful. To avoid possible civil and criminal penalties, taxpayers should consult with an experienced tax attorney to determine what disclosure program or procedure is best suited to their needs.

Contact Nardone Law Group

The tax attorneys at Nardone Law Group routinely represent businesses and individuals with federal and state tax issues, including identifying any reporting and payment obligations related to foreign financial accounts. If you have unreported foreign income, or an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorney’s today. Nardone Law Group has vast experience representing clients before the IRS. Our tax attorneys will thoroughly review your case to determine what options and alternatives are available. 

Contact us today for a consultation to discuss your case.

April 21, 2015

'Delinquent FBAR Submission Procedures' Provide Taxpayers an Alternative Method of Foreign Account Disclosure

The tax attorneys at Nardone Law Group in Columbus, Ohio, continuously monitor the latest developments in the Internal Revenue Service’s efforts to encourage taxpayers to disclose foreign accounts, assets, or entities. In our prior articles on the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures, we provided an overview of the recent expansions of those programs, as well as the qualification requirements and benefits of each. To qualify for participation and to take advantage of the various benefits that each program provides, it is important that taxpayers are aware of and fully understand these requirements. 

As part of the Offshore Voluntary Disclosure Program, taxpayers are required to address their failure to file the required Report of Foreign Bank and Financial Accounts, commonly referred to as the FBAR form. In certain circumstances, however, taxpayers with undisclosed foreign financial interests will not need to use the Streamlined Filing Compliance Procedures or the Offshore Voluntary Disclosure Program. In such cases, the taxpayer may simply need to file the FBAR, by following the Delinquent FBAR Submission Procedures. This article outlines the necessary steps involved, as well as the pertinent qualification requirements.

Background on the FBAR Form

Federal tax law requires taxpayers with an interest in a foreign financial account to report that foreign financial account interest to the IRS by filing an FBAR form (FinCEN Form 114, formerly Form TD F 90-22.1). To fulfill their U.S. tax reporting obligations, as relating to foreign financial accounts, taxpayers must disclose the account on their income tax returns and properly file the FBAR form. Failure to comply with the FBAR filing requirements can result in civil and criminal penalties (see FBAR Penalties). Therefore, regardless of whether the taxpayer needs to utilize the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures, it is essential that they are aware of the FBAR requirements and the ability to file a delinquent FBAR form.

FBAR Filing Requirements

U.S. taxpayers who have a financial interest in, or signature authority over, a foreign financial account must file the FBAR if the aggregate value of the account exceeds $10,000 at any time during the calendar year. The FBAR for any particular calendar year is to be filed on or before June 30 of the following year. Additionally, the taxpayer must also disclose the foreign financial account on Schedule B of the taxpayer’s individual income tax return.

A “financial account” includes any securities, brokerage, savings, demand, checking, deposit, or other account maintained within a financial institution. A financial account also includes a commodity futures or options account, an insurance policy with a cash value, an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. A “foreign financial account” is a financial account located outside the United States, including correspondent accounts.

Delinquent FBAR Submission Procedures

Taxpayers who do not need to use either the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures to file a delinquent or amended tax return, may still need to file a delinquent FBAR form. To utilize the Delinquent FBAR Submission Procedures, the taxpayer must meet the following criteria:

1. Taxpayer has not filed a required FBAR (FinCEN Form 114, previously Form TD F 90-22.1);

2. Taxpayer is not currently under a civil examination or a criminal investigation by the IRS; and

3. Taxpayer has not already been contacted by the IRS about the delinquent FBARs.

To resolve the delinquent FBARs, the taxpayer should follow the IRS’ FBAR instructions and include a statement explaining why the FBARs are being filed late. All FBARs are to be filed electronically at FinCEN. Taxpayers who are unable to file electronically should contact FinCEN’s help line directly to determine a possible alternative.

The IRS will not impose a penalty for failure to file the delinquent FBARs, so long as the taxpayer properly reported, and paid all tax on, the foreign financial accounts being reported on the delinquent FBARs. The taxpayer also must not have been previously contacted by the IRS regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

There are many critical considerations that taxpayers must weigh in deciding how to come into compliance with U.S. tax reporting obligations. If you have a previously undisclosed foreign financial account, there are multiple methods for coming into compliance, but it is crucial to choose the right one. The IRS has a broad scope to assess penalties when the failure to disclose a foreign financial account is deemed willful. To avoid possible civil and criminal penalties, taxpayers should consult with an experienced tax attorney to determine what disclosure program or procedure is best suited to their needs.

How Nardone Law Group Can Help

The tax attorneys at Nardone Law Group routinely represent businesses and individuals with federal and state tax issues, including identifying any reporting and payment obligations related to foreign financial accounts. The Offshore Voluntary Disclosure Program and FBAR are a prime example of how taxpayers can come into compliance relating to previously undisclosed foreign accounts. If you have unreported foreign income, or an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorney’s today. One day can mean the difference between the benefits of voluntary disclosure and the severe penalties one can incur from a willful violation. Nardone Law Group has vast experience representing clients before the IRS. Our tax attorneys will thoroughly review your case to determine what options and alternatives are available. 

Contact us today for a consultation to discuss your case.

April 17, 2015

As Part of an IRS Audit or Examination, Taxpayers Must Be Aware of IRS' Assertion of Economic Substance and Related Penalties

Nardone Law Group’s experienced tax attorneys routinely assist individuals and businesses in, Columbus, Ohio and nationwide, that become subject to an Internal Revenue Service audit or examination. An IRS audit or examination occurs when the IRS selects a tax return and reviews the taxpayer’s records from which the reported information on the tax return is derived. As part of that examination, the IRS will review the taxpayer’s transactions for the relevant years to ensure those transactions have economic substance. If the transactions are void of economic substance, the IRS may assert penalties against the taxpayer.

Background

 The economic substance doctrine is one of the longstanding  judicial doctrines that must be considered as part of any tax planning and will be considered by the IRS as part of any IRS audit or examination.  In general, and without getting in to the technicalities, this simply means that a transaction may be disregarded if the transaction does not change the taxpayer’s economic position independent of its federal income tax consequences.   For the longest time, the courts have acknowledged and authorized a taxpayer’s lawful effort to avoid the payment of tax.  In fact, one of the most famous quotes from Judge Learned Hand states:

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.  Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.  Commissioner v. Newman, 159 F.2d 848, 850-851 (2d Cir. 1947).

But, taxpayers, in some instances, cross the line from tax avoidance to tax evasion when the transactions that they are entering into lack or are void of any economic substance.  That is, there was no business purpose for the transaction. In those instances, the IRS will challenge the taxpayer’s position and may pursue both civil and criminal penalties.  It is important to note that the economic substance doctrine was ultimately codified under Internal Revenue Code § 7701(o).

What Does All of This Mean?

In layman’s terms, if an individual or business is planning to enter into a transaction that is motivated by tax planning, the transaction must have independent significance from both a business purpose perspective and true economic impact on the taxpayer, separate from the tax consequences.  That is, there must be a legitimate intent and reasonable expectation of profit.  We cannot simply create tax planning transactions with no legitimate business purpose.  Over the last decade or two, many so-called smart tax attorneys, and tax accountants at large law firms and accounting firms, have found themselves in harm’s way because they aided and abetted taxpayers in pursuing transactions void of economic substance. Tax professionals and taxpayers themselves must be careful to ensure that they do not participate in these tax evasion type activities versus those legitimate tax avoidance planning opportunities that exist in most legitimate business transactions that a taxpayer may enter into.

NLG Comment: Avoid the too-good-to-be-true type of planning that certain tax professionals may attempt to sell you.  Question their guidance, their reliance on certain laws and their analysis of the tax code.  Simply because something may sound complicated and may sound sophisticated, does not mean that what they are proposing will work or is even within the law.  In fact, in many instances, tax professionals or tax promoters intentionally complicate facts in an attempt to disguise the true motivation of the transaction: tax evasion.

Contact Nardone Law Group

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

Contact us today for a consultation to discuss your case.

April 10, 2015

Recent Guidance Affects the IRS' Ability to Issue a Notice of Federal Tax Lien on an Unrecorded Property Conveyance

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise taxpayers who have been contacted by a revenue officer with the Internal Revenue Service. If a taxpayer neglects to make payment of a federal tax liability, the IRS has broad authority and tools available to collect delinquent taxes, which includes the filing of a Notice of Federal Tax Lien. A Notice of Federal Tax Lien can cause a taxpayer significant financial harm, so it is crucial that taxpayers are aware of the various ways to obtain relief when issued a Notice of Federal Tax Lien. See our previous article, Discharging Property from a Notice of Federal Tax Lien, where we focused on the option of discharging property as one of the solutions available to help taxpayers resolve a Notice of Federal Tax Lien.

Recently, the IRS issued interim guidance regarding the government’s ability (or possible inability) to issue a Notice of Federal Tax Lien on an unrecorded property conveyance, frequently arising in divorce cases. This article provides a brief overview of the IRS guidance, as well as some potential issues and questions that may arise as a result.

What Does the Guidance Say?

In September 2014, the IRS issued interim guidance (found here) regarding “policies and procedures for prioritizing the federal tax lien relative to a change in the Service’s position on unrecorded conveyances.” The new procedures are to be incorporated into Internal Revenue Manual 5.17.2.7.1, with the new subsection title of Unrecorded Conveyances.

The IRS guidance provided, in pertinent part:

"A recent court decision has led to a change in the Service’s position relative to unrecorded conveyances. The new position is that a federal tax lien does not attach to property once a conveyance divests a taxpayer of their interest in that property, regardless of what state law provides regarding the rights of creditors in unrecorded conveyance situations."

Essentially, once a property interest has been conveyed from one party to another, the IRS can no longer issue a Notice of Federal Tax Lien on that property interest, against the party that transferred the property, regardless of whether the conveyance was properly recorded. Furthermore, this policy is to take precedence over any contrary state laws.

What Does the Guidance Mean?

This issue of prioritizing a Notice of Federal Tax Lien on an unrecorded conveyance frequently arises in divorce cases, where one of the spouses receives full title to the house. The IRS guidance provided an illustrative example:

A husband and wife divorced in December 2005. The court awarded the residence to the wife with a contingency that, if the wife sells the residence within three years of the divorce, the wife will split the proceeds with the husband.

The husband failed to pay his 2005 taxes, and the IRS filed a Notice of Federal Tax Lien in September 2008. The husband’s contingent property right expired in December 2008, and the wife never recorded the property conveyance in the county deed records. 

Even though the real property conveyance was unrecorded when the Notice of Federal Tax Lien was filed, the lien could only have attached to the husband’s contingent personal property interest in the monetary proceeds, until that right expired. Therefore, since the contingent right expired in December 2008, the Notice of Federal Tax Lien could not attach to a real property interest in the residence.

How will the Guidance Affect Existing Practice?

This guidance has created a fair amount of confusion in the states. Traditionally, state laws played the important role of defining property rights, and state recording statutes are directly relevant to determining priority rights. The IRS guidance, however, expressly disregards state laws in relation to the rights of creditors in unrecorded conveyance situations.

This guidance seems to suggest that the IRS is seeking to protect the innocent spouse, or transferee, from having their rightfully acquired property interest improperly seized by the government. Since it is still unclear how this guidance will affect the IRS’ practices and procedures going forward, it is important for taxpayers to stay updated and informed on the changes as they occur.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in federal tax issues, including resolving a Notice of Federal Tax Lien. If you have been contacted by an IRS revenue officer, or have been subjected to a Notice of Federal Tax Lien, contact one of our experienced tax lawyers today. Nardone Law Group’s tax attorneys and professional staff have vast experience representing clients before the IRS. If you are subject to a Federal Tax Lien, we will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

April 06, 2015

'Former Credit Suisse Bankers' Sentenced, all related to IRS Crackdown on Taxpayer's Failure to Disclose Offshore Accounts

Nardone Law Group’s experienced tax attorneys, located in Columbus, Ohio, routinely advise taxpayers on their U.S. tax reporting obligations regarding foreign financial accounts and the importance of reporting previously undisclosed foreign accounts. See our prior articles discussing the IRS’ Offshore Voluntary Disclosure Program and the IRS’ Streamlined Filing Compliance Procedures program.

This article discusses the IRS’ continued enforcement and scrutiny of taxpayers related to Offshore Accounts, including the taxpayers’ tax and investment professionals.  In many instances, the IRS is more interested, or as interested, in going after the tax attorneys, tax accountants, investment advisors, or bankers that help the taxpayers facilitate their tax evasion activities. The IRS’ interest in the professional themselves is highlighted in the recent prosecution and sentencing of two former Credit Suisse AG bankers.  The idea is that some taxpayers would not be willing to, or able to, participate in tax evasion activities without the aiding and abetting of their professional advisors.  Thus, if we deter the professional from participating in certain activities, we then deter the taxpayer. 

Indictment and Sentencing

In this particular case, the bankers assisted taxpayers with undisclosed foreign accounts from reporting earnings on those accounts.  The bankers’ assistance included the use of secret accounts and shell companies used to conceal the underlying activity and the ownership of the accounts.  In some instances, taxpayers did not even receive monthly or yearly statements as to the amounts in their accounts at any particular time.  That is, all parties involved wanted to avoid any sort of paper trail.  The taxpayers would likely not have been able to achieve the concealment without the aiding and abetting of the bankers.  The bankers ultimately plead guilty and were recently sentenced.  In the recent sentencing, a federal judge sentenced both bankers to five years of unsupervised probation for their roles in helping numerous taxpayers hide earnings from taxing authorities.  Both bankers were also fined for their involvement.  The light sentence for both bankers took into account many facets of the case, including the bankers’ cooperation with the government and their family and personal circumstances. See the statement of facts from Andreas Bachmann’s indictment and those from Josef Dorig’s indictment for additional and specific detail.

Contact Nardone Law Group

Nardone Law Group frequently represents individuals and businesses in federal and state tax issues, including defending individuals and businesses being investigated and prosecuted for tax evasion activities, as well as participating in the IRS’ Offshore Voluntary Disclosure Programs and the Streamlined Filing Compliance Procedures. If you have been contacted by the IRS, or have an undisclosed foreign account, asset, or entity, contact an experienced Nardone Law Group tax attorney today. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

April 01, 2015

Civil Forfeiture in Structuring Cases: How Far Can the IRS Reach?

The tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated regarding the Internal Revenue Service’s efforts to eliminate tax fraud, through civil and criminal investigations. In our prior article on Criminal Tax Convictions, we discussed the IRS’ ability to prosecute taxpayers for tax evasion, such as failing to remit withheld employment taxes. Taxpayers who commit tax crimes, such as filing false returns, failing to remit withheld taxes, or assisting others in similar acts, can face severe punishments if convicted. These punishments usually involve considerable fines, penalties, and, in some instances, incarceration.

In certain cases, the IRS has the ability to seize a taxpayer’s assets (i.e., property or cash) that it suspects have been somehow used in criminal activity. This seizure and forfeiture of taxpayer assets often arises in the context of structuring cases, which involve manipulating cash transactions to avoid reporting requirements. Recently, IRS Commissioner John Koskinen testified before the House Subcommittee on Oversight on Financial Transaction Structuring to discuss the IRS’ new policy regarding civil forfeiture in structuring cases (the full testimony can be viewed here). This article is intended to provide a brief overview of structuring cases and the IRS’ new position on civil forfeiture actions.

What is “Structuring”?

Under the Bank Secrecy Act (BSA), financial institutions are required to report any deposit, withdrawal, exchange of currency, or other payment or transfer exceeding $10,000. Multiple transactions are to be treated as a single transaction if the transactions are made by, or on behalf of, any one person and total more than $10,000 during one business day. Structuring involves the willful manipulation of cash transactions to fall below the $10,000 reporting threshold. While legitimate business reasons may exist for keeping deposit levels under $10,000, more often than not, the intention for doing so is to defraud and evade the BSA reporting requirements. Taxpayers that willfully violate the anti-structuring provision may be subject to a fine of no more than $250,000, imprisonment for a maximum of five years, or both. This is why the IRS vigorously pursues structuring cases.

The Difference between Civil and Criminal Forfeiture

A “seizure” is the process by which the government initially comes into possession of property. “Forfeiture” proceedings are how the government is able to acquire legal title and full rights over the property. Generally, civil forfeiture is a process by which the government can seize property that is suspects has been involved or used in criminal activity. Criminal forfeiture typically follows a criminal conviction. The key difference is that with a civil forfeiture, the property owner need not be convicted or even charged with a crime. In his testimony, Commissioner Koskinen stressed that there are significant due process protections in place to protect the rights of innocent parties. Furthermore, there are numerous safeguards that ensure the reasonableness of any seizure and allow interested parties to have a full and fair opportunity to be heard.

“Legal Source” vs. “Illegal Source” Structuring Cases

Following some negative press, the IRS stated that it would no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases, absent exceptional circumstances. Legal source structuring cases involve funds that come from legal activities and are not derived from, or associated with, any other illegal activity. One example of why legal source structuring cases were receiving criticism involved a restaurant owner who, for 38 years, had deposited all of the earnings from her cash-only business at a local bank. The IRS seized the owner’s checking account, even though she had not been charged with any crime, because of a pattern of less-than-$10,000 deposits. Apparently the pattern was a sufficient basis to obtain a seizure warrant, despite the fact that it isn’t illegal to deposit less than $10,000, so long as you are not intending to evade the BSA reporting requirements. These types of instances are what prompted Commissioner Koskinen’s testimony and the IRS’ updated policy regarding civil forfeiture actions in legal source cases.

Recognizing that businesses and individuals may make deposits under $10,000 without any intent to evade reporting requirements, the IRS concluded that it should begin focusing its resources on cases where evidence indicates that the funds used in the structuring scheme are from illegal sources. Commissioner Koskinen emphasized, however, that structuring deposits or withdrawals to evade reporting requirements is a felony, regardless of whether the funds come from a legal or illegal source. The new policy simply means that the IRS will not be seizing assets in structuring cases unless there is evidence that the funds are somehow connected to illegal activity.

The IRS’ new policy on civil forfeiture in structuring cases should help eliminate instances of law-abiding taxpayers having their assets seized because of a transaction “pattern.” This will also allow the IRS to focus its attention on “illegal source” structuring cases, ensuring consistency in how structuring investigations and seizures are conducted. Seizures and forfeitures are powerful tools, so it is important for taxpayers to be aware of the BSA reporting requirements and the IRS’ broad investigative power.

Contact Nardone Law Group

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

Contact us today for a consultation to discuss your case.

March 17, 2015

Transitional Treatment under the IRS Offshore Voluntary Disclosure Program

Nardone Law Group’s experienced tax attorneys, located in Columbus, Ohio, routinely advise taxpayers about U.S. tax reporting obligations regarding foreign financial accounts and the importance of reporting previously undisclosed foreign accounts. The Internal Revenue Service offers various programs that allow taxpayers to disclose foreign accounts, assets, or entities, and resolve any tax and penalty obligations. Two of these programs are the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures. Each program has certain requirements that taxpayers must meet in order to qualify for participation.

In 2014, the IRS expanded the streamlined procedures, making them available to a wider population of U.S. taxpayers. As part of those expansions, certain taxpayers participating in the Offshore Voluntary Disclosure Program will be allowed to take advantage of the favorable penalty structure of the expanded streamlined procedures, while remaining in the offshore disclosure program. This is commonly referred to as transitional treatment. As we always advise our clients, whether the Offshore Voluntary Disclosure Program will be beneficial to a particular taxpayer depends on that taxpayer’s facts and circumstances. Therefore, it is important to know the relevant requirements, and resulting benefits, for transitional treatment under the Offshore Voluntary Disclosure Program.

What is Transitional Treatment?

Transitional treatment under the Offshore Voluntary Disclosure Program allows taxpayers currently participating in the program an opportunity to take advantage of the favorable penalty structure of the expanded Streamlined Filing Compliance Procedures. For example, certain taxpayers who qualify for transitional treatment will not be required to pay the Title 26 miscellaneous offshore penalty, prescribed under the Offshore Voluntary Disclosure Program.

To receive transitional treatment, taxpayers must meet the general eligibility requirements for the expanded Streamlined Filing Compliance Procedures (discussed here). The streamlined procedures are available to individual U.S. resident and non-resident taxpayers who have a valid taxpayer identification number. Furthermore, the taxpayer must be able to certify that their failure to report all income, pay all tax, and submit all required information returns, was due to non-willful conduct.

How Does Transitional Treatment Work?

A taxpayer is considered eligible for transitional treatment under the streamlined procedures if they submitted a voluntary disclosure letter under the Offshore Voluntary Disclosure Program prior to July 1, 2014, but do not yet have a fully executed closing agreement.  If eligible, the taxpayer may request treatment under the applicable penalty terms available under the Streamlined Filing Compliance Procedures.

If a taxpayer makes a submission under the Streamlined Filing Compliance Procedures, the taxpayer may not participate in the Offshore Voluntary Disclosure Program. Similarly, a taxpayer who submits an Offshore Voluntary Disclosure Program voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined process.

To receive transitional treatment, the taxpayer does not need to opt out of the Offshore Voluntary Disclosure Program, but will be required to certify, as discussed below, that the failure to report was due to non-willful conduct. The IRS will review the facts and circumstances of the taxpayer’s case and determine whether to incorporate the streamlined penalty terms in the Offshore Voluntary Disclosure Program closing agreement. 

NLG Comment: It is important to understand that this certification must be carefully reviewed and thoroughly understood before making such certification. Intentionally falsifying this certification or negligently failing to conduct the necessary due diligence to determine whether a particular taxpayer qualifies, may place that particular taxpayer in significant harm. If the Internal Revenue Service determines that the taxpayer intentionally falsified the certification, the taxpayer may be prosecuted.

Contact Nardone Law Group

Nardone Law Group routinely represents clients before the Internal Revenue Service. As you can see, there are many factors to consider when deciding whether to participate in the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. If you have an undisclosed foreign account, asset, or entity, you should contact one of our experienced tax attorneys today. Nardone Law Group’s tax attorneys will thoroughly review your case to determine which options and alternatives are available, including transitional treatment under the Offshore Voluntary Disclosure Program.

Contact us today for a consultation to discuss your case.

March 13, 2015

Certification of Non-Willful Conduct an Important Aspect of Offshore Account Disclosure

The tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated and informed about the various programs the Internal Revenue Service offers that allow taxpayers to disclose foreign accounts, assets, or entities, and resolve any tax and penalty obligations. In our prior articles on the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures, we provided an overview of the recent expansions of those programs, as well as the qualification requirements and benefits of each. To qualify for participation and to take advantage of the various benefits that each program provides, it is important that taxpayers are aware of and fully understand these requirements. 

Under the Streamlined Filing Compliance Procedures, taxpayers are required to certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. The certification requirement also applies to taxpayers who are receiving transitional treatment under the Offshore Voluntary Disclosure Program. While this article provides a brief overview of the certification requirement, we strongly advise taxpayers to consult with an experienced tax attorney before making this certification to the IRS.

When is Conduct “Non-Willful”?

When utilizing the streamlined filing procedures, the taxpayer must certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. The IRS defines “non-willful conduct” as conduct that is due to negligence, inadvertence, or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.

The “non-willful conduct” certification requires taxpayers to provide specific reasons for their failure to comply with the relevant reporting obligations. This is often more difficult than it sounds. Taxpayers may believe that their conduct was “non-willful,” however, the IRS must agree. Additionally, this applies if a taxpayer was “willfully blind” regarding a duty to report. The taxpayer cannot actively choose to ignore a duty, when they are aware that such a duty exists. For example, if a taxpayer is aware of an FBAR reporting requirement and consciously chooses not to file the FBAR, that is sufficient to constitute a “willful” violation.  

Why is this so important? When a taxpayer certifies that their conduct was non-willful, they do so under penalty of perjury. Intentionally falsifying this certification or negligently failing to conduct the necessary due diligence to determine whether a particular taxpayer qualifies, may place the taxpayer in significant harm. For example, if the taxpayer ultimately does not qualify for the Streamlined Filing Compliance Program, the taxpayer will not be eligible for the Offshore Voluntary Disclosure Program. Furthermore, if the IRS determines that the taxpayer intentionally falsified the certification, the taxpayer might be subject to criminal prosecution.

Contact Nardone Law Group

Nardone Law Group routinely represents clients before the Internal Revenue Service. As you can see, it is crucial that the certification of non-willful conduct be reviewed and thoroughly understood before making such certification. If you have an undisclosed foreign account, asset, or entity, you should contact one of our experienced tax attorneys today. Nardone Law Group’s tax attorneys will thoroughly review your case to determine which options and alternatives are available, including transitional treatment under the Streamlined Filing Compliance Procedures.

Contact us today for a consultation to discuss your case.

March 05, 2015

Ohio Department of Taxation Sales Tax Audits: Contesting the Use of Purchase Markup Analysis When Primary Sales Records Maintained by Vendor

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise individuals and businesses on state and federal tax issues, including those involving the Ohio Department of Taxation. When faced with a sales tax audit, appeal, or other litigation, many owners of restaurants and bars find themselves in unfamiliar territory and often end up owing additional sales tax, interest and penalties as a result of the audit, despite having adequate records of their sales.  In many cases, the additional assessment could have been avoided with proper counsel from a tax attorney.

Vendor Tax Requirements via the Ohio Revised Code and the Ohio Administrative Code

Section 5739.11 of the Ohio Revised Code requires Ohio vendors to “keep complete and accurate records of sales, together with a record of the tax collected on the sales” and to “keep all invoices, bills of lading, and other such pertinent documents.” Additionally, Chapter 5703-9-02(A) of the Ohio Administrative Code elaborates on this requirement by requiring Ohio businesses subject to the Ohio sales tax to maintain complete and accurate records, which include:

1. Primary records such as purchase invoices, bills of lading, sales invoices, guest checks, exemption certificates, tax payment receipts, and cash register tapes; and

2. Secondary records such as bank deposit receipts and daybooks, journals, or any other records in which accumulated data is recorded.  Secondary records must be supported by complete detailed primary records from which the secondary records were created.

Alternate Audit Methods, Including Purchase Mark-Up Analysis

If a vendor fails to maintain primary sales records, the Ohio Department of Taxation is permitted to use certain alternative methods to determine the correct amount of taxable sales. One of these methods is a purchase mark-up analysis, employed on a test or sample basis, whereby the auditor will use the vendor’s purchase invoices from a sample period to estimate the vendor’s sales figures at an attributed mark-up cost for the entire audit period. This method almost always leads to significantly increased sales tax liability because it does not account for reduced mark-ups or loss through spoilage, breakage or theft.

If a vendor has maintained primary records of its sales as required by the Ohio Administrative Code, then the vendor’s sales tax liability should be readily ascertainable without the use of alternate audit methods, and it should dispute any attempt by the Ohio Department of Taxation to use the mark-up or “test-check” method of estimating taxable sales.  The Supreme Court of Ohio has held that the purpose of the record-keeping requirements, under O.R.C. 5739.11 and O.A.C. 5703-9-02, is to permit the Tax Commissioner to ascertain with clarity whether sales tax has been properly collected and remitted.  McDonald’s v. Kosydar (1975), 43 Ohio St.2d 5. 

Accordingly, “adequate records” are those that allow the Tax Commissioner to determine whether sales tax has been properly collected and remitted.”  National Delicatessens v. Collins (1976), 46 Ohio St.2d 333. In order to protect itself, “the taxpayer need only keep complete and accurate records of his taxable sales, which he is under a duty to do by virtue of Section 5739.11, Revised Code.”  S. S. Kresge Co. v. Bower (1960), 170 Ohio St. 405.  If complete and accurate records of taxable sales are kept, then no speculation should be involved in a determination of the vendor’s sales tax liability.  See, S.S. Kresge Co., at 409.  Accordingly, a bar or restaurant can avoid an assessment of additional sales tax, that would almost certainly result from a mark-up analysis, simply by maintaining primary records of sales and having proper legal guidance during a sales tax audit.

Contact Nardone Law Group

If you are the owner of a bar, restaurant, drive-thru or convenience store and you are facing a sales tax audit by the Ohio Department of Taxation, or have been contacted by an Ohio Department of Taxation auditor, you should contact one of our experienced tax attorneys today. Nardone Law Group has vast experience representing bars and restaurants in sales tax audits, examinations, and litigation with the Ohio Department of Taxation.  Our experienced tax lawyers will thoroughly review your case to determine what options are available to you. 

Contact us today for a consultation to discuss your case.

April 29, 2015

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