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.

June 23, 2015

Ohio Department of Taxation Sales Tax Audits: Preemptive Steps a Bar or Restaurant Can Take to Counter Inflated Liability Resulting from the Markup Analysis

There is good chance that if you operate a bar or restaurant in the state of Ohio you will, at some point, be subjected to a sales tax audit by the Ohio Department of Taxation. 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 is not surprising that the Department has targeted bars and restaurants to ensure compliance with sales tax obligations.  Operating a bar or restaurant can be challenging enough without the added stress of a state sales tax audit.  The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise bars and restaurants on steps they can take to minimize the sales tax liability that could result from an audit.

In our previous article entitled Ohio Department of Taxation Sales Tax Audits: Contesting the Use of Purchase Markup Analysis When Primary Sales Records Maintained by Vendor, we discussed the Department’s ability to use an alternative method to calculate sales tax liability if the taxpayer’s primary sales records are inadequate. In particular, the Department will use the “mark-up” method or the “purchase analysis,” whereby the Department will typically obtain the taxpayer’s purchase invoices from third party distributors, and then apply a mark-up percentage to the different categories of purchased inventory to arrive at a taxable sales figure.  With regard to wine and mixed drinks, this analysis will involve the Department making assumptions regarding the drink size and the number of drinks that can be poured from a bottle. The mark-up method assumes that all inventory that was purchased by the taxpayer was sold by the taxpayer.  Anyone who has operated a bar or restaurant knows that this is a misguided assumption given things like theft, breakage, spillage and over-pours by bartenders.  Thus, the mark-up analysis almost always results in an inflated taxable sales figure.  The taxpayer is left trying to explain the discrepancy with their reported sales.  Below is a non-exhaustive list of preemptive actions a bar or restaurant can take to counter the potential negative consequences of this method of estimating taxable sales.

Preemptive Actions to Counter the Potentially

Negative Results of the Markup Analysis

1. Maintaining records of loss due to theft, breakage, etc. It is essential that a bar or restaurant maintain detailed records of losses of inventory from theft, breakage, spoilage, short deliveries, and spillage.  Although the Department may provide an allowance for such loss in computing taxable sales, the allowance does not usually reflect reality. Maintaining a daily log of losses, filing a monthly police report of all suspected thefts, and installing security cameras in strategic locations are just a few steps a bar or restaurant can take to properly document loss of inventory.  Installing cameras will provide the dual benefit of not only documenting theft and breakage, but also deterring employee theft.

2. Maintaining detailed inventory records.  Detailed inventory records can help explain a discrepancy between the total purchases reflected on the purchase invoices and the taxpayer’s actual sales.  For instance, if the taxpayer’s year-end inventory is substantially higher than the beginning inventory, this would help rebut the Department’s presumption that everything purchased during the audit period was sold. In order for the Department to accept inventory records as evidence to rebut this presumption, it will want to see more detail than just a bottom-line dollar amount of total inventory. Rather, the taxpayer should track taxable inventory versus non-taxable inventory by each product category. Additionally, bars and restaurants should consider investing in sophisticated inventory management and point-of-sale (POS) software to properly track inventory and sales.

3. Internal controls and training of employees.  Bars and restaurants should maintain internal controls to reduce loss of inventory. The proper training of bartenders can prevent over-pouring, which will not only lead to sales records that are more reflective of the purchase records, but will also lead to higher profit margins for the bar or restaurant. Hiring a third-party bartending consultant to train and monitor employees for a period of time will likely pay for itself in the long run. Along that same line, in conducting the mark-up analysis the sales tax auditor will make assumptions with regard to drink size and the number of drinks that can be poured from a bottle. The taxpayer should maintain detailed drink size information so that it can provide credible evidence to the auditor.  As an example, if a signature mixed drink served by the taxpayer contains more liquor that the auditor assumes the drink contains, there should be records supporting that.

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 if you would just like further advice on preemptive steps you can take to minimize potential liability from an audit, you should contact one of the experienced tax lawyers at 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.

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.

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