November 13, 2015

Sales Tax Audits of Bars: Sufficient Documentation to Avoid Inaccurate Mark-Ups

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 (the “Department”). When faced with a sales tax audit, appeal, or other litigation, many owners of bars and restaurants find themselves in unfamiliar territory. Throughout this article, we will discuss why it is important for bar and restaurant owners to understand the methods used by the Department to perform sales tax audits, and why we would encourage them to take proactive steps to avoid an assessment, or overassessment, of sales tax due.

Direct Audit Method

During a direct sales tax audit, the Department will seek to obtain the taxpayer’s primary sales records directly from the taxpayer, including the taxpayer’s sales receipts and reports generated by its point of sale (POS) system, and the taxpayer’s invoices reflecting all inventory purchased by the taxpayer during the audit period.  If the taxpayer is able to produce its primary sales records, then the Department will typically perform a “test-check” of the records by comparing the taxpayer’s purchase invoices to its sales receipts for a sample portion of the audit period.  The Department will perform the “test-check” to verify whether the inventory purchased by the Taxpayer during the sample period coincides with the taxpayer’s sales during that same period. This analysis assumes that the taxpayer sold all inventory purchased during the sample period.  If the purchases and sales match-up during the test-check period, then the Department will typically determine that all taxable sales are accounted for.

The Department will then compare the taxpayer’s actual taxable sales (as determined from the taxpayer’s primary sales records) to its sales tax reports filed with the Department, to ensure that all taxable sales were reported, and that all sales tax was collected and remitted.  If there are no discrepancies, then the Department will generally complete the audit with no determination of liability. Many times, however, bars and restaurants fail to properly maintain their primary sales records, or there is a large discrepancy between the taxpayer’s purchase invoices and its sales records for the sample period. In order to avoid the Department using an indirect approach to estimate sales tax liability, it is important for bars and restaurants in particular to keep detailed reports due to the cash basis on which many liquor establishments operate. If the taxpayer’s primary sales records are inaccurate or incomplete, then the Department will use an indirect audit method to estimate the taxpayer’s taxable sales and sales tax liability.

Indirect Audit Method

If the Department concludes, after the test-check, that the taxpayer’s sales records do not match-up with its purchase records, then the Department will use an indirect method to estimate the taxpayer’s taxable sales. In the event the taxpayer has not maintained all of its purchase invoices during the audit period, this indirect method will often involve the Department gathering such information, typically in summary form, directly from beverage distributors. The Department will use this information to compute a mark-up, taxable sales, and related sales tax, rather than calculating sales tax based on actual sales records. The Department uses this approach to estimate the sales tax owed by the taxpayer during the audit period, and then compares that number to the sales tax that was reported and remitted to the Department by the taxpayer, in order to determine the taxpayer’s assessed liability.

In the bar and restaurant industry, the Department will typically use a unit-volume method in order to calculate the “mark-up” of purchased inventory. In addition to obtaining the purchase records directly from the distributors, the Department will also obtain a drink list, pricing information, and other relevant information from the taxpayer. In the absence of supportable information provided by the taxpayer, it will then make assumptions regarding things like the number of drinks that can be poured from a bottle, and standard drink size (e.g., 1.5 ounces for a mixed drink, 6.3 ounces for a glass of wine, etc.).  The Department will use this information to compute a weighted average mark-up, and then multiply the mark-up by purchased inventory to arrive at an estimated taxable sales figure for the audit period.

Problems for the bar owners arise when they are unable to provide the auditor with accurate information regarding drink size, pricing, and drink specials or promotions. Again, in the absence of this information, the auditor may make numerous assumptions regarding the number of drinks that can be poured from a bottle, drink sizes, spillage, and breakage. The most important factors in the unit volume method are the unit price and drink size. Inaccurate assumptions by the auditor or information from the taxpayer can significantly impact the audit results. However, the mark-up method may only be used when there is support that the taxpayer’s records are inadequate. Further, there are proactive steps a bar owner can take in order to avoid the mark-up method and achieve the most accurate reflection of their taxable sales.    

How to Keep Adequate and Complete Records to Avoid Inaccurate Mark-Ups

An honest and conscientious taxpayer who maintains required records has a right to expect that those records will be used in a complete audit.  For this reason it is important for bar or restaurant owners to track and document things such as losses due to breakage, theft, or spillage, pricing, drink specials, and serving size, and to also employ ways to reduce inventory losses.

1. Track and Document Breakage. Losses of inventory in the bar and restaurant industry may include spillage (typically over-pouring), spoilage (i.e., bottles with a bad seal), pilferage (loss due to employee or customer theft), breakage (i.e., broken bottles), and loss due to complementary drinks from the bar tender. Accounting for these losses is necessary because Ohio law contains no required allowance for losses due to spillage, breakage, or pilferage. The presumption is that all alcoholic beverages purchased from a distributor will be resold to the customer. The taxpayer bears the burden of demonstrating what happened to its inventory. If the taxpayer is able to provide specific documentation, such as daily summaries documenting inventory lost to breakage or spillage, and detailing the size, brand, and type of lost inventory, then the auditor will be more inclined to accept this as documentation supporting the loss. In addition to tracking and documenting inventory losses, bar and restaurant owners can use various tactics, such as placing video cameras to identify, count and correct the effect of such acts.

 2. Document Prices. As previously stated, pricing is critical when using the unit volume method to calculate estimated mark-ups and estimated gross sales. During the audit, the taxpayer should ensure that pricing and estimated mark-ups are adjusted and calculated to reflect all distinct happy hour, seasonal, and promotional pricing in effect during each separate month, quarter or year.  The taxpayer should be able to provide evidence for the special pricing, as well as evidence as to the length of time over which the specials were offered. Otherwise, the auditor may use current regular sales pricing mark-ups against past periods for which much lower pricing was in place, resulting in an overstated assessment of additional sales tax due. 

 3. Document Serving Size. If the taxpayer does not provide accurate serving size information, the assumed mark-up will likely be overstated. To avoid this, the bar or restaurant owner should be able to provide the auditor with evidence of distinct serving sizes, and to the extent that the bar uses larger or distinct glass sizes, it should provide evidence of that as well. Absent credible evidence of serving size, the auditor may calculate the estimated mark-up on the assumption that all bars use 1.5 ounces of liquor in all mixed drinks, and that 12 ounces of beer and 5 ounces of wine is being poured per drink.

 4. Hire Independent Auditors. Bar owners should also consider hiring independent auditors to conduct unannounced audits of their sales.. If these audits are done prior to a state audit, the results of these detailed reports can be used as compelling evidence to contradict the assumptions made by the auditor with regard to breakage, pricing, or mark-ups.

 5. Invest in a Sophisticated Cash Register. Bar owners should invest in a relatively sophisticated cash register or point of sale system, and inventory tracking software, that is able to provide detailed sales reports and track items like complimentary sales and loss of inventory.

 6. Train Employees. Bar owners should properly train their employees on proper drink sizes to avoid the over-pouring of drinks, to implement procedures to avoid loss of inventory due to breakage and spillage, and to properly document such losses of inventory.  In some instances, it may be beneficial to hire a third-party consultant to provide a training session to bartenders or servers.  

7. Keep Records and Reports for at least Four Years. The statute of limitations in Ohio, for which the state can audit a taxpayer and assess for unpaid tax, is four years. For this reason, all primary sales reports and records, including sales receipts, purchase invoices, inventory records, and documentation of inventory losses should be maintained for at least four years.

Contact Nardone Law Group

If you are the owner of a bar or restaurant and you are facing a sales tax audit by the Ohio Department of Taxation, or you would like further advice on ways to keep adequate and complete records to avoid inaccurate mark-ups, you should contact Nardone Law Group. We have vast experience representing bars and restaurants in sales tax audits, examinations, and litigation with the Ohio Department of Taxation. Contact us today for a consultation.

October 26, 2015

IRS Commissioner Urges Taxpayers to Take Advantage of IRS Voluntary Disclosure Programs, Citing $8 Billion in Collections

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 offshore accounts and resolve any tax and penalty obligations. The Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedures (SFCP) offer taxpayers who have undisclosed foreign accounts a way to become compliant with the U.S. tax law. In a previous article, “IRS Authorized to Serve ‘John Doe’ Summonses to Target Offshore Accounts in Belize,” we discussed the IRS’ most recent effort to expose taxpayers with undisclosed foreign accounts by issuing “John Doe” summonses to foreign financial institutions to gain information on certain groups of taxpayers. The IRS remains committed to stopping offshore tax evasion and has recently encouraged taxpayers with undisclosed foreign accounts to strongly consider utilizing existing voluntary disclosure programs to come into full compliance. Please see below.

Automatic Third-Party Account Reporting Provides Assistance to Combat Offshore Tax Evasion 

On October 16, 2015, the IRS Commissioner, John Koskinen, urged taxpayers with undisclosed foreign accounts to consider available options, such as the voluntary disclosure programs, to come into compliance with the U.S. federal tax laws (IRS News Release). He further stated that the automatic reporting of foreign accounts has given the IRS a stronger hand in fighting tax evasion. Through the implementation of the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and partner jurisdictions, automatic third-party reporting has made it less likely that offshore accounts will go unnoticed by the IRS. FACTA is an important tool the IRS has utilized in its fight against offshore tax evasion.

Further, the Swiss Bank Program continues to reach non-prosecution agreements with Swiss financial institutions that facilitated past non-compliance work. As part of this program, banks provide information on potential non-compliant U.S. taxpayers. A taxpayer’s potential civil penalties significantly increase if U.S. taxpayers associated with participating banks wait to apply to OVDP. The IRS has indicated that many U.S. taxpayers have made use of the offshore compliance programs, generating over $8 billion from these disclosures. 

Success of the Voluntary Disclosure Programs

Both the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedures (SFCP) enable taxpayers to correct prior omissions and meet their federal tax obligations. The purpose of both programs is to encourage taxpayers to voluntarily disclose foreign accounts now rather than risk detection by the IRS later and face more severe penalties. The OVDP was created in 2009 and was specifically designed for taxpayers with exposure to potential criminal liability and substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.  The SFCP, initiated in 2012, was developed to provide relief for taxpayers who certify that their failure to report foreign financial assets and pay due taxes, did not result from willful conduct. The creation of these two programs has enabled the IRS to collect an abundant amount of unpaid tax from previously undisclosed foreign accounts.  

Since the creation of the OVDP, there have been 54,000 disclosures. From these disclosures the IRS has collected more than $8 billion. In addition, more than 30,000 taxpayers have used the streamlined procedures to come back into compliance with U.S. tax laws. Further, the IRS has conducted thousands of offshore-related audits, based on the information obtained from investigations and under the terms of settlements with foreign financial institutions. These audits have produced tens of millions of dollars for the IRS. The IRS had also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Contact Nardone Law Group

Nardone Law Group represents businesses and individuals with federal and state tax issues, including identifying any reporting and payment obligations related to foreign financial accounts. Through our tax controversy services, we assist taxpayers in utilizing the Offshore Voluntary Disclosure Program or Streamlined Filing Compliance Procedures to come into compliance relating to previously undisclosed foreign accounts. If you have unreported foreign income, or an undisclosed foreign account, asset or entity, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.

October 19, 2015

IRS Whistleblower Rewards Program

The tax attorneys at Nardone Law Group in Columbus, Ohio, continuously monitor the latest developments in the Internal Revenue Service’s efforts to identify taxpayers who are paying fewer taxes than they actually owe to the government. The IRS Whistleblower Program provides an incentive to people to come forward and identify other taxpayers, including individuals and businesses that have failed to pay the tax that they owe. If the IRS uses the information provided by the whistleblower, the IRS may award the whistleblower up to 30 percent of the additional tax, penalty, and other amounts the IRS collects. The recent change to the whistleblower statute gives whistleblowers a right to receive an award for the information they provide to the IRS if the case meets certain thresholds.

Changes to the Whistleblower Statutes

In December 2006, the Tax Relief and Health Care Act of 2006 made fundamental changes to the Whistleblower Program. The IRS Whistleblower Program pays money to people who blow the whistle on persons or businesses who fail to pay the tax that they owe. The key change in the law was the addition of I.R.C. § 7623(b), which makes certain whistleblower awards mandatory. The new law set award ranges based on percentages of the collected proceeds, and established a Whistleblower Office within the IRS to administer those awards. The Whistleblower Office analyzes the information submitted, and makes award determinations. The statute provides that the Whistleblower Office may investigate the claims itself or assign it to the appropriate IRS office for investigation. A whistleblower’s entitlement to an award turns on whether there was a collection of proceeds and whether that collection was in some way attributable to the information provided by the whistleblower. After the 2006 amendments, I.R.C § 7623 now provides for two types of awards a whistleblower may be entitled.

NLG Comment: In a later article, we will address the legal requirements for a whistleblower submission, as well as, the information the Whistleblower Office looks for when analyzing a submission. 

1. Discretionary Awards under I.R.C § 7623(a). The first type of award program, governed by I.R.C. § 7623(a), is for cases that do not meet the $2 million in dispute or $200,000 annual income threshold for an award under § 7623(b). The awards through this program are less than what is recoverable under § 7623(b), with a maximum award of 15 percent up to $10 million. The determination of award amount depends upon the extent to which the whistleblower substantially contributed to such action. In addition, the awards are discretionary and the whistleblower cannot dispute the outcome of the claim in Tax Court.

2. Mandatory Awards under I.R.C. § 7623(b). The second type of award program, governed by I.R.C. § 7623(b), is for cases where the taxes, penalties, interest and other amounts in dispute exceed $2 million. If the case is related to an individual, the individual’s annual gross income must exceed $200,000 for at least one of the tax years in question. In these cases, the IRS will pay the whistleblower between 15 and 30 percent of the collected proceeds.

The addition of § 7623(b) is significant because it does not put a cap on the dollar amount a whistleblower may receive as an award. Thus, a person who comes forward to identify a large underpayment of tax by another taxpayer could potentially collect millions of dollars. Further, the awards under this section are mandatory. This section also provides the whistleblower the option to appeal to the U.S. Tax Court, under I.R.C. § 7623(b)(1), (2), or (3), within 30 days of such determination, if the whistleblower disagrees with the amount of the claim. Although § 7623(b) has provided whistleblowers with the opportunity to receive a higher percentage of awards, the IRS has the discretion to reduce whistleblower awards in some circumstances.  

NLG Comment: In a separate article we will explain the factors the IRS considers when it determines an award percentage.

Contact Nardone Law Group

Nardone Law Group frequently represents individuals and businesses in federal and state tax issues, including both representation and defense against whistleblower claims.  If you have information on an individual or business that is paying fewer taxes than they owe to the government, or you are being investigated or prosecuted by the IRS, you should contact one of the experienced tax attorneys at Nardone Law Group to learn more about the Whistleblower Program. We will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

October 05, 2015

Effect of Substitute Returns on Discharge of Debt

The tax attorneys at Nardone Law Group, LLC in Columbus, Ohio, routinely advise individual taxpayers and businesses on how to utilize the Internal Revenue Service’s collection alternatives to manage their federal tax liabilities. The IRS has broad authority and tools available to collect delinquent taxes, including the ability to file a Notice of Federal Tax Lien or a Notice of Intent to Levy. Therefore, if taxpayers are contacted by an IRS revenue officer, it is important to understand the various collection alternatives available to resolve federal tax liabilities. Some collection alternatives include: (i) offer-in-compromise, (ii) installment agreements, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liability. When a taxpayer elects to discharge taxes in bankruptcy, and they have also failed to file tax returns on time, it is important to understand that there are two provisions in which the IRS can prepare a substitute return. These substitute return provisions may dictate the dischargeability of taxes in bankruptcy.  

Substitute Returns under § 6020(a) and § 6020(b)

In limited circumstances, the Secretary of Treasury has the power to prepare or execute tax returns for individual taxpayers. Substitute tax returns can be prepared by the IRS under one of two specific provisions: I.R.C. § 6020(a) and I.R.C. § 6020(b). Section 6020(a) returns are those in which a taxpayer, who has failed to file his or her returns on time, nonetheless discloses all information necessary for the IRS to prepare a substitute return that the taxpayer can then sign and submit. In contrast, a § 6020(b) return is one in which the taxpayer submits either no information or fraudulent information, and the IRS prepares a substitute return based on the best information it can collect independently.

The Bankruptcy Code requires that a return be filed before taxes can be discharged. A Section 6020(a) return satisfies the Code’s requirement, however, a § 6020(b) return does not. Further, returns that do not meet the filing requirements cannot be discharged, unless they fit within the narrow exception of § 6020(a). A recent United States district court decision discussed the necessary criteria for a § 6020(a) return.

NLG Comment: In a later article, we will discuss I.R.C § 6020(b) returns in greater detail.

 

Taxpayer Failed to Offer Evidence That Substitute Return Was Filed Under I.R.C. § 6020(a)

In Kemendo v. U.S., the United States District Court for the Southern District of Texas remanded the case back to the Bankruptcy Court, declaring that summary judgment in favor of the taxpayer was improper because the taxpayer failed to assert that the substitute returns used by the IRS were prepared under § 6020(a). The issue in this case was whether  the substitute tax returns prepared by the IRS in 1998 were done so pursuant to I.R.C § 6020(a), making the tax debts dischargeable, or done so under § 6020(b), making the debts non-dischargeable.

In this case, the taxpayer did not file federal income tax returns for 1995 and 1996 by their due dates, April 15, 1996 and October 15, 1997. In response, the IRS prepared a substitute tax return for both years.  The dispute is whether this substitute tax return was prepared under I.R.C. § 6020(a) or § 6020(b).

In 2005 and in 2006 the IRS filed a notice of tax lien for uncollected debts. In 2007, the taxpayer filed for Chapter 13 bankruptcy and received a discharge. In 2013, the IRS issued Notices of Intent to Levy to the taxpayer for unpaid federal income tax liabilities for tax years 1995 and 1996. In response, the taxpayer filed a motion to reopen the bankruptcy case for a determination of whether his 1995 and 1996 tax liabilities were included in the general Chapter 13 discharge.

The Bankruptcy Court granted the taxpayer’s motion for summary judgment and denied the IRS’s motion for summary judgment, after determining that no genuine issue of material fact existed.  The parties stipulated that the taxpayer filed late tax returns for 1995 and 1996 in August of 2003. However, the Bankruptcy Court determined that it was undisputed that the taxpayer himself had filed tax returns for 1995 and 1996 on June 19, 1998. The Bankruptcy Court then determined that that taxpayer’s filing of tax returns in June 1998 was evidence of cooperation by the taxpayer in preparation of a substitute return under § 6020(a).

However, the United States District Court determined that the taxpayer never actually asserted that the substitute tax returns used by the IRS were prepared under § 6020(a) or that he  filed income tax returns for 1995 and 1996 on June 19, 1998. Although the IRS has the burden of proof regarding non-dischargeabilty at trial, the taxpayer still has the initial burden of informing the Court of the basis for summary judgment.

This Court held that there is a genuine issue of material fact concerning whether the taxpayer filed his 1995 and 1996 tax returns in June 1998. Further, because the Bankruptcy Court’s Order rested on a fact that was genuinely in dispute, summary judgment in favor of the taxpayer was not proper. Therefore, the case was remanded back to the Bankruptcy Court for further proceeding.

Contact Nardone Law Group

Nardone Law Group frequently represents individuals and businesses in federal tax matters, including collection alternatives, such as discharging taxes in bankruptcy. As the case above illustrates, utilizing a collection alternative often involves stringent substantive and procedural requirements. If you or your business have been contacted by an IRS revenue officer, or are struggling with tax liabilities, you should contact one of our tax attorneys today. Nardone Law Group’s tax lawyers have vast experience representing clients before the IRS. We will thoroughly review your case to determine what options and alternatives are available to you.

Contact us today for a consultation to discuss your case.

October 02, 2015

Court Reminds the IRS that "Filing" is Essential for a Conviction

The tax attorneys at Nardone Law Group in Columbus, Ohio, continuously monitor the Internal Revenue Service’s efforts to eliminate tax fraud, through civil and criminal investigations. In one of our prior articles on Criminal Tax Convictions, we discussed a recent decision by the U.S. Court of Appeals highlighting the government’s authority to criminally punish certain taxpayers. It is important that taxpayers are aware that the IRS also has the ability to conduct both civil and criminal investigations, which may result in fines, as well as sentences of incarceration. Taxpayers who have committed tax crimes, such as making fraudulent or false statements on personal income tax returns, should contact an experienced criminal tax attorney to reduce their risk of severe punishment. The following case is recent example of the government’s ongoing efforts to criminally pursue tax evaders.

Three Felony Counts of Making False Statements Reversed

In the case of United States v. Boitano, the U.S. Court of Appeals for the Ninth Circuit reversed the defendant’s three felony counts of making false statements under the penalty of perjury. The issue was whether “filing” is an essential element for a conviction under 28 U.S.C. § 7206(1). This court held that filing is an essential element of 7206(1) and that no Supreme Court case holds otherwise.

From 1991 to 2007, the taxpayer failed to file tax returns. In 1992, 1993 and 2004, the IRS conducted examinations, yet the taxpayer still did not file any returns. In 2009 the taxpayer’s case was referred to the IRS’s Special Enforcement Program. One of their agents met with the taxpayer on three different occasions. On the third meeting the taxpayer handed the agent tax returns from 2001, 2002, and 2003. The returns were signed under penalty of perjury by the taxpayer and his wife.

The returns that the taxpayer gave to the agent reported “estimated tax payments” that had not been made. The agent noticed that there were discrepancies between the taxpayer’s figures and the figures that the government had calculated. The agent then contacted the taxpayer by mail requesting that he give an explanation as to why the amounts were different. The taxpayer never responded.

The taxpayer was indicted and charged with three counts of making false statements under 26 U.S.C. § 7206(1). The taxpayer was also charged with three misdemeanor counts of failure to file taxes under 26 U.S.C. § 7203, however, he plead guilty to those counts.

At trial, the taxpayer argued that filing is an essential element of § 7206(1) and that his act of handing the returns to the agent did not constitute filing. The government agreed that filing is an element of the charged offense, but contended that it was satisfied by the taxpayer handing the returns to the agent. The district court found for the IRS and the taxpayer appealed.

In the taxpayer’s appeal, the taxpayer held the same position as he did in the district court. The government, however, switched its prior position. The government argued that there is a single definition of filing that applied in both the civil and criminal context and that “the record does not support that the returns here were filed.” The government’s new argument was that filing is not an element of the charged offense because, by its own terms, § 7206(1) does not require the government to prove filing as defined by the IRS regulations to establish a violation of the statute. The government claimed that the taxpayer violated the statute by completing a return, signing it, and taking actions by which he gave up any right of self-correction.

The court cited U.S. v. Hanson as authority for its decision. Hanson explicitly identified “filing” as an element of a § 7206(1) offense. In Hanson, the defendant argued that his tax returns were not filed because the IRS never processed them. The question on appeal was whether there was sufficient evidence to sustain a conviction. The court held for the IRS, stating that a return is filed at the time it is delivered to the IRS. The government proved delivery by showing that the taxpayer personally mailed the forms to the IRS and the IRS received them.

In conclusion, the Court held that the government failed to prove an essential element of the crime beyond a reasonable doubt. Because precedent established that “filing” is an essential element of a conviction under § 7206(1), and the government conceded that the record does not support that the returns here were filed, the defendant’s convictions were reversed.

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.

September 30, 2015

IRS Authorized to Serve "John Doe" Summonses to Target Offshore Accounts in Belize

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 offshore accounts and resolve any tax and penalty obligations. The Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedure Program (SFCP) offer taxpayers who have undisclosed foreign accounts a way to become compliant with the U.S. tax laws. Due to recent IRS enforcement efforts in the offshore area, it is important for taxpayers with undisclosed foreign assets or accounts to consider voluntary disclosure in order to minimize their penalty amount, and reduce their chances of criminal prosecution.

Eligibility for Voluntary Disclosures

The Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedure Program (SFCP) are available to U.S. taxpayers who have undisclosed foreign accounts and assets and wish to become compliant with federal tax law. However, certain events make these programs unavailable to particular delinquent taxpayers. As an example, if the IRS has initiated a civil or criminal examination for any year, regardless of whether it relates to undisclosed foreign financial assets, the taxpayer will not be eligible to participate in the OVDP or any of the streamlined procedures. Further, once the IRS has served a “John Doe” summons, made a treaty request, or has taken similar action and has obtained information that provides evidence of a specific taxpayer’s noncompliance with the tax laws or reporting requirements, that particular taxpayer may become ineligible for one of the voluntary disclosure programs. For this reason, a taxpayer concerned that a party subject to a “John Doe” summons, treaty request, or similar action will provide information about him to the IRS should consult a tax attorney as soon as possible. Currently, the IRS is utilizing “John Doe” summonses to identify Americans with undisclosed foreign accounts in Belize.  

Use of “John Doe” Summonses to Investigate Undisclosed Accounts in Belize

On September 15, 2015, the U.S. Department of Justice filed a petition in federal court in Miami seeking permission to issue summonses to help the IRS identify Americans with undisclosed accounts at Belize Bank International Limited, Belize Bank Limited or Belize Corporate Services between 2006 and 2014. The U.S. District Court for the Southern District of Florida in Miami granted the IRS’ petition the next day authorizing the IRS to serve “John Doe” summonses on Bank of America and Citibank, seeking information about U.S. taxpayers with accounts at the listed financial institutions in Belize. The court order gives federal investigators authorization to seek records of so-called correspondent accounts the Belize banks maintain at Bank of America and Citibank. The IRS already knew about these entities from the Offshore Voluntary Disclosure Program, but the correspondent accounts will help the IRS sort out which depositors did not come forward.

With normal summons, the IRS seeks information about a specific taxpayer whose identity it knows. In contrast, a “John Doe” summons allows the IRS to obtain information about all taxpayers in a certain group, even if the agency does not know their identities. In order to gain the judge’s approval to serve the “John Doe” summons, the IRS cited evidence gathered from five taxpayers who maintained undisclosed accounts through Belizean entities who subsequently confessed to having accounts to the IRS.

The IRS uses the information obtained from the correspondent accounts, as well as information it collects from whistleblowers, cooperating witnesses, and the Offshore Voluntary Disclosure database to reveal taxpayers who are hiding money abroad. In particular, the correspondent accounts of Bank of American and Citibank leave a trail the IRS can follow. The IRS obtains records of money deposited, paid out through checks, and moved through the correspondent account through wire transfers. While it may take a significant amount of time for the IRS to collect all of this information, it warns taxpayers to come forward voluntarily before it is too late.

Contact Nardone Law Group

Nardone Law Group represents businesses and individuals with federal and state tax issues, including identifying U.S. tax reporting and payment obligations related to foreign financial accounts and utilizing the Offshore Voluntary Disclosure Program or Streamlined Filing Compliance Program to come into compliance related to previously undisclosed foreign accounts. If you have unreported foreign income, or an undisclosed foreign account, asset or entity, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.

September 23, 2015

IRS Collection: Early Interaction Initiative for Payroll Tax Deposits

The tax attorneys at Nardone Law Group in Columbus, Ohio routinely help individuals and businesses who have been contacted by a revenue officer with the Internal Revenue Service. Revenue officers with the IRC are responsible for collecting past due taxes. As an example, the IRS has significant power to collect delinquent tax debts from employers who fail to deposit employee payroll tax withholdings. Two ways in which the IRS can collect on delinquent tax debts is by filing a Notice of Federal Tax Lien or Notice of Intent to Levy. Taxpayers who find they are unable to pay their taxes and their associated penalties should know that the single worst course of action is inaction. To help alleviate their concerns, we typically talk to our clients about collection alternatives. However, these repayment options decrease as employment tax delinquencies begin to pyramid.   

Early Interaction Initiative

On August 7, 2015, the IRS Collection launched an Early Interaction Initiative aimed at helping employers understand and meet their payroll tax responsibilities. The goal of the initiative is to prevent missed payments from becoming delinquencies and delinquencies from pyramiding out of control. The initiative may help reduce employment delinquencies, along with interest and penalties, which may accrue as a result of an employer missing required payments. The purpose of the initiative is to help IRS Collection preclude delinquencies where it can and keep delinquencies at a minimum by speeding up the Federal Tax Deposit Alert process.

Federal Tax Deposit Alerts

Federal Tax Deposit (FTD) Alerts occur when IRS Collection records indicate that an employer’s payroll tax deposits have declined. Prior to the initiative these cases were sent to the Field Collection staff near the end of the quarter but before the quarterly payroll tax return was due. The goal, as is now, is to meet the employer, determine whether there was a missed payment or delinquency, and if so, help to get it paid and the employer to sustain payroll tax compliance.

Changes to the FTD Alert Process

The Early Interaction Initiative will accelerate and enhance the FTD Alert process to allow field officials to work more FTD Alerts more quickly. The IRS is adjusting its systems to issue FTD Alerts as soon as possible. Since the IRS does not have the resources to visit every employer whose payroll tax deposits have declined, the Field Collection staff will target cases with preexisting delinquencies first. If an employer offers an explanation for the decline in deposits (e.g., a cut in staff or a reorganization), the case will be closed.

 However, due to limited resources, many employers will receive a letter stating that because their payroll deposits have decreased, they must contact the IRS by letter or phone to explain the decrease in deposits. The letter will also inform the employer of their responsibilities and of the consequences of not complying with those responsibilities.  Where a delinquency exists, Field Collection will work with the employer to correct the delinquent condition going forward.

What Happens if an Employer Fails to Deposit Payroll Tax?

Employers withhold income and Federal Insurance Contribution Act (FICA) taxes from employees’ gross pay and hold it in trust until they are required to deposit it, along with their share of FICA taxes, with the Treasury. However, many employers feel pressured to use these funds as working capital when they are facing liquidity difficulties. When the FICA taxes are not deposited, the Social Security and Medicare trust funds suffer. When withheld income taxes are not deposited, the employee still gets credit for those withholding, but the rest of the taxpaying public makes up the difference and pays for their refunds and benefits.

When an employer misses payments because it is diverting funds, the result is employment tax delinquencies, along with interest and penalties. These delinquencies and penalties can accumulate or pyramid beyond what the employer is able to repay. The early FTD Alerts are aimed at detecting these missed deposits at an early stage in order to keep the employer’s options for repayment available.

The lesson here is to stay on top of your payroll taxes, because the IRS will start notifying businesses by mail when noticeable declines in deposit frequency occur. If you are behind on your payroll tax responsibilities, it is import to speak with an attorney to discuss collection alternatives before your options become limited.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their tax payments to the IRS. The tax attorneys at NLG have vast experience in representing individuals who owe money to the IRS. If you are struggling with tax liabilities or are interested in working with the IRS to review collection alternatives, you should contact an experienced attorney. Our experienced tax attorneys will thoroughly review you case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.

September 18, 2015

FBAR Penalties: New IRS Guidance Limits

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.  One option available to taxpayers who want to come forward and report a previously undisclosed foreign account is the IRS’ Offshore Voluntary Disclosure Program.  As part of the Offshore Voluntary Disclosure Program, taxpayers are required to address their failure to file the required Report of Foreign Bank Accounts, commonly referred to as the FBAR form.  Following is an update to our prior article, FBAR Penalties: The Significant Impact Taxpayers Can Face When Failing to Report Foreign Financial Accounts.

Background on 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 the FBAR (Fin CEN Form 114, formerly Form TD F 90-22.1).Taxpayers fulfill U.S. tax reporting obligations, relating to foreign financial accounts, by both disclosing the account on the taxpayer’s income tax return and by filing the FBAR. The failure to timely file the FBAR can result in civil penalties and possible criminal sanctions (i.e., imprisonment). First we will provide a brief overview of the FBAR filing requirements, followed by discussion on the recent IRS guidance limits on FBAR penalties.

FBAR Filing Requirements

U.S. persons having a financial interest in, or signature authority over, foreign financial accounts- including a bank account, brokerage account, mutual fund, trust or other type of foreign account- having an aggregate value exceeding $10,000 at any time during the calendar year, must file the FBAR.  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.  An extension of time to file federal income tax returns does not extend the due date for filing an FBAR. Meaning, the June 30 filing date may not be extended.

IRS Limits FBAR Penalties

On May 13, 2015, the IRS issued guidance which establishes limits to the potential penalties the IRS will assert for a taxpayers failure to file FBARs. The statutory FBAR penalty provisions only establish maximum penalty amounts. This gives the IRS discretion in determining the appropriate FBAR penalty amount below that threshold based on the facts and circumstances of each case. IRS examiners are instructed to take into account all available facts and circumstances and to use their best judgment when determining if an FBAR violation occurred, and if so, the appropriate penalty. 

New IRS Penalty Guidance

According to the new Interim Guidance for Report of Foreign Bank and Financial Account (FBAR) Penalties, a non-willful penalty will not be recommended if a taxpayer has reasonable cause for the reporting failure and subsequently filed complete and correct FBARs.  For cases in which a taxpayer has multiple non-willful violations, IRS examiners are now told to recommend one penalty for each open year, regardless of the number of unreported foreign financial accounts.  The penalty for each year will be limited to $10,000, and may be less depending on the aggregate balance of all the unreported accounts per year. In some cases involving multiple non-willful violations the examiner may decide, with the group manager’s approval, to assert a single penalty, not to exceed $10,000, for only one year. However, for other cases, the facts and circumstances may indicate that asserting a separate non-willful penalty for each unreported foreign financial account, and for each year, is warranted.  Regardless, the new IRS guidance provides that in no event will the total amount of the penalties for non-willful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.

For cases involving willful violations over multiple years, examiners will recommend a penalty for each year for which the FBAR violation was willful. The new IRS guidance states that the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The penalty will be allocated among multiple years based on account balances.  Although the guidance permits agents to recommend penalty amounts either higher or lower than 50 percent based on the applicable facts, in no event will the total willful penalty amount exceed 100 percent of the highest aggregate account balances. Meaning, a taxpayer will not be subject to a penalty that is more than his/her account was ever worth.

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 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, assets, 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.

August 26, 2015

Ohio Department of Taxation Sales Tax Audits: Steps to Take If the Agent Finds a Discrepancy Between Taxpayer's Purchase Invoices and Actual Sales Records

In recent years, the Ohio Department of Taxation has been targeting bars and restaurants for sales tax audits to ensure compliance with sales and use tax obligations. Given the potential sales tax revenue at stake in the liquor industry, and the fact that most establishments have a high percentage of cash transactions, it should come as no surprise that the Department is focusing its attention on bars and restaurants.

As discussed in our previous articled, Ohio Department of Taxation Sales Tax Audits: Preemptive Steps a Bar or Restaurant Can Take to Counter Inflated Liability Resulting From the Markup Analysis, during a sales tax audit, the Department will typically do a “test-check” of the taxpayer’s sales records (i.e., receipts and other records from the taxpayer’s POS system documenting all taxable and non-taxable sales); whereby the auditing agent will compare sales records from a specific period of time to the taxpayer’s purchase invoices for the same period.  This method of checking to see whether the taxpayer has reported all taxable sales assumes that everything the taxpayer purchased was ultimately sold. As any bar or restaurant owner knows, this is very rarely the case. In the article mentioned above, we listed various preemptive actions that a bar or restaurant can take to help explain a discrepancy between the total purchases reflected on the purchase invoices and the taxpayer’s actual sales.  But, in many instances, the taxpayer that is being audited has failed to take the appropriate preemptive measures, and instead finds itself with a large inexplicable discrepancy between the purchase invoices and its sales records.  This will result in the Department estimating taxable sales and liability by applying a mark-up percentage to the taxpayer’s purchase invoices. This will almost certainly be an inflated number.

After applying the “mark-up” analysis, the Department will issue a Form ST-807, Summary for Recommending Assessment, which reflects the preliminary results of the audit recommended by the auditing agent.  The taxpayer will have 30 days to review and respond to the preliminary proposed audit results by pointing out any errors, providing any new and pertinent information, and objecting to or agreeing with the proposing findings. If a taxpayer finds itself in a situation where sales records do not match its purchase invoices, there are a few steps the taxpayer can take in an attempt to explain the discrepancy and convince the agent to adjust its preliminary findings.

Non-Exhaustive List of Steps a Taxpayer Can Take To Explain

the Discrepancy Between Purchase Records and Sales Records

1. Scrutinize Purchase Invoices for Added Charges.  In calculating the mark-up of the taxpayer’s purchases, the auditing agent may simply rely on the total invoiced amount. But, oftentimes the purchase invoices will contain other charges from the vendors that are not amounts paid directly for the goods, and should not be included in the figures used by the Department in its “test-check.”  For example, sometimes invoices will contain “split-case” charges when the taxpayer orders only a partial case of wine or other alcoholic beverage.  These additional charges could add up quickly and help explain the difference between the purchase figures and the taxpayer’s sales figures.  Another added charge that is often seen on invoices is a delivery charge or gas charge.  Again, charges like these should be subtracted from the total purchase amount used by the agent.

2. Insist on Using Actual Invoices Instead of Purchase Summaries. In some cases, the Department has the ability to obtain a summary of the taxpayer’s purchases directly from the vendors.  In the event the agent uses the summary information for purposes of conducting its “test-check,” the taxpayer should insist on using the actual invoices, as the summaries may not provide the full picture.  For instance, the summaries may not reflect items that were returned by the taxpayer, or they may not categorize the additional charges discussed above.

3. Check Invoices Against Banking Information. The taxpayer should also check the purchase invoices against its check ledger and banking information to ensure the accuracy of the invoices that the agent is using for the “test-check.” If there is a discrepancy, the taxpayer should bring this to the agent’s attention and provide the supporting evidence that the invoice is inaccurate.

4. Provide Records of Theft and Other Loss to Inventory.  In our previous article, which can be viewed here, we stressed the importance of tracking inventory and filing police reports for any suspected thefts.  The reason for this is to ensure that the taxpayer can help explain a discrepancy between its purchases and its sales.  The Department will likely adjust its figures to account for theft if the taxpayer is able to provide police reports documenting the theft. While it is good practice for the bar or restaurant to keep track of losses to inventory on its own, the Department is unlikely to accept such records as proof of theft if no police report was filed. 

Being able to explain a discrepancy between the taxpayer’s purchases and its sales could mean the difference between the imposition of a significant sales tax assessment, versus a finding by the Department that the taxpayer has reported all taxable sales. If you are the owner of a bar or restaurant and you are facing a sales tax audit by the Ohio Department of Taxation, you should contact one of the experienced tax lawyers at Nardone Law Group, LLC. We have vast experience representing bars and restaurants in sales tax audits, examinations, and litigation with the Ohio Department of Taxation.  Contact us today for a consultation.

July 10, 2015

Health Insurance Premiums for Employees

Small employers who reimburse or pay a premium for an individual health insurance policy for an employee should be aware that they may be subject to a $100 per day ($36,500 per year), per employee excise tax. The Internal Revenue Service had previously provided transition relief regarding the health insurance premium excise tax, which ended on June 30, 2015.

NLG Comment: For purposes of this excise tax, the Government defines small employers as employers who are not applicable large employers (“ALEs”). An ALE generally is, with respect to a particular calendar year, and employer that employed an average of at least 50 full time employees. There are very specific exceptions to this general rule and therefore you should consult your attorney to determine whether you represent a small employer or an applicable large employer.

BACKGROUND

The Affordable Care Act (“ACA”) added ERISA § 715(a)(1) and I.R.C. § 9815(a)(1)to incorporate the provisions of part A of title XXVII of the Public Health Service Act (“PHSA”) into ERISA and the Internal Revenue Code, and make them applicable to group health plans and to health insurance issuers providing health insurance coverage in connection with group health plans. The incorporated PHSA sections are sections 2701 through 2728 (i.e., the market reforms). An excise tax is imposed on failures to meet these requirements under I.R.C. § 4980D.

RELIEF FOR SMALL EMPLOYERS

As noted in Notice 2013-54, 2013-40 IRB 287, small employers that offered their employees health coverage through arrangements that constitute an "employer payment plan" will owe a  I.R.C. § 4980D excise tax if they fail to comply with the market reforms provisions. Such an arrangement that fails to satisfy the market reforms may be subject to a $100 per day excise tax per applicable employee, which is $36,500 per year, per employee. Click here to view Notice 2013-54.

But, because the Small Business Health Options Program (“SHOP”) Marketplace was still transitioning, and the transition by eligible employers to SHOP Marketplace coverage or other alternatives would take time to implement, Notice 2015-17, 2015-10 IRB 845 provided that the  I.R.C. § 4980Dexcise tax would not be asserted for any failure to satisfy the market reforms by employer payment plans that pay, or reimburse employees for, individual health policy premiums or Medicare part B or Part D premiums (click here to view Notice 2015-17). This policy decision applies to small employers, again those that do not represent applicable large employers. After June 30, 2015, such employers are generally liable for the  I.R.C. § 4980Dexcise tax.

RECOMMENDATION GOING FORWARD

Many employers are asking whether the Government has provided any additional guidance regarding what happens after June 30, 2015. Unfortunately, there has been no additional guidance. As we have experienced in the past, there has been very poor communication from the Government as it relates to many aspects of the healthcare reform. That poor communication continues. Thus, until we receive additional guidance, employers should not be reimbursing their employees for health insurance premiums.

CONTACT NARDONE LAW GROUP

If you are an employer, whether large or small, and you would like further advice regarding health insurance premiums for your employees, you should contact one of the experienced tax attorneys at Nardone Law Group, LLC. Contact us today for a consultation.

November 13, 2015

October 26, 2015

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