December 18, 2015

Personal Liability for Sales Tax: Penalties and Interest an Owner May Suffer

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise individuals and businesses on state and federal tax issues, including those involving the Ohio Department of Taxation. When faced with a sales tax audit, appeal, or other litigation, many owners of bars and restaurants find themselves in unfamiliar territory. It is not uncommon for these owners to end up owing additional sales tax, interest, and penalties as a result of the audit, despite doing their best to maintain adequate records of their sales. Ohio law permits the Department of Taxation to hold responsible parties/individuals personally liable for the underlying sales tax due, plus any additional penalties. In many cases, the additional sales tax and penalties could have been avoided by maintaining adequate records. In a prior article, we discussed preemptive actions bar and restaurant owners can take to counter inflated liability. If care is taken to keep adequate records, it could decrease the likelihood of the bar or restaurant owner’s personal liability.

Personal Liability

Sales tax is considered a trust-fund tax, meaning that it is collected from the customer by the vendor, and is held in trust until remitted to the state. For this reason, under Ohio law, a responsible party can be held personally liable for failure to collect or remit sales tax. Not only is the responsible party liable for the underlying sales tax obligation, they are also liable for the penalties and additional charges that come with the non-payment or late payment. A responsible party may include any of the business’ employees having control or supervision of or charged with the responsibility of filing returns and making payments, or any of its officers, members, managers or trustees who are responsible for the execution of the business trust’s financial responsibilities. R.C. § 5739.33.

Additional Penalties and Interest

In addition to the sale tax that is owed, the responsible party may have to pay additional charges and penalties associated with the non-payment or late payment. In the case of an assessment against a person who fails to collect and remit the required sales tax, up to 50 percent of the amount assessed may be owed as a penalty. R.C. § 5739.133(A)(1) and (2). An additional charge of fifty dollars or 10 percent of the tax required to be paid, whichever is greater, may be levied on every tax return not filed on time or when the tax liability is not paid in full. R.C. § 5751.06(A).  Interest will also start to accrue on the unpaid tax beginning from the day the tax was required to be paid until the tax is paid or until the day an assessment is issued, whichever occurs first. R.C. § 5739.132(A).

For example, if the taxpayer owes $100,000 in sales tax, the Ohio Department of Taxation could issue a penalty of $50,000, for the non-payment. Further, let’s say the taxpayer owes $5,000 for one return period, but failed to file the return on time. The Ohio Department of Taxation will issue an additional charge of fifty dollars or 10% of the tax to be paid, whichever is higher. Here, since 10% of $5,000 is greater than fifty dollars, the department will issue an additional charge of $500 to the taxpayer for the period in which the return was not filed on time. The department of taxation can issue this additional charge on all return periods for which the sales tax was not paid on time. If the bar or restaurant owner has consistently failed to file returns or has consistently filed late sales tax returns, they may be facing significant additional charges and penalties.

However, the taxpayer may appeal the additional charges and penalties. For this reason it is important to seek the help of an experienced tax attorney if you are a bar or restaurant owner facing a sales tax audit. If you have failed to file timely returns, or have failed to remit all sales tax that is due, and are worried that you may be personally liable for the underlying sales tax obligations of your business, you should contact the tax attorneys at Nardone Law Group. Our attorneys have vast experience representing bars and restaurants in sales tax audits, examinations, and litigation with the Ohio Department of Taxation. We will thoroughly review your case and advise you of preemptive steps to avoid the risk of being held personally liable for your business’ debts. Contact us today for a consultation.

December 08, 2015

IRS Collection Alternatives with the Ohio Society of CPAs

We would like to thank the Ohio Society of CPAs for giving us the opportunity to speak at the 2015 Mega Tax Conference on December 7, 2015. A great crowd joined Vince Nardone for a discussion regarding tax planning and IRS collection alternatives impacting our small businesses. This discussion included more information on the offer in compromise, bankruptcy as a collection alternative, various installment agreements, and more. From the assessment process to the collection process, it is important that all business owners understand the rules and regulations that the Internal Revenue Service will follow. We encourage all readers to become familiar with your collection alternatives in an attempt to minimize the Internal Revenue Service's impact on your business. We would like to thank those that attended the presentation and the Ohio Society of CPAs for hosting a wonderful event.

December 04, 2015

Failing to Submit or Submitting Fraudulent Information on Late Tax Returns May Preclude a Taxpayer from Discharging Debt

The tax attorneys at Nardone Law Group 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. If taxpayers are contacted by an IRS revenue officer, it is important to understand that there are 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. It is important to also be aware of circumstances where one of the collection alternatives may not be available. As an example, a taxpayer may lose the option to discharge taxes in bankruptcy if the IRS prepares a substitute return on the taxpayer’s behalf. In our prior article, “Effect of Substitute Returns on Discharge of Debt,” we discussed the criteria for a section 6020(a) substitute return and its effect on the taxpayer’s discharge of debt. The IRS files a 6020(a) return in cooperation with the taxpayer. But, when a taxpayer submits either no information or fraudulent information, the IRS prepares the substitute return under section 6020(b), without the cooperation of the taxpayer. Thus, taxpayer’s should be aware that substitute returns filed under section 6020(b) may negatively affect their ability to discharge debt in bankruptcy.

Substitute Returns Prepared by the IRS

The Bankruptcy Code requires that a return be filed before taxes can be discharged. But, if a taxpayer fails to make and file a return, the IRS may prepare a return for the taxpayer under the following situations:

  1. If the taxpayer discloses all information necessary for the preparation of the return the IRS will prepare a return under section 6020(a); or
  2. If the taxpayer has failed to make and file a return, or has filed a false or fraudulent return, the IRS can prepare a return on the basis of the knowledge and information it can obtain through testimony or other means under section 6020(b).

Section 6020(b) is a collection device that the IRS can use to assess and collect unpaid taxes. While Section 6020(b) returns are good for all legal purposes, the Bankruptcy Code specifically states that returns filed under 6020(b) are non-dischargeable regardless of whether the taxpayer later files a return; however, additional amounts reported on returns filed after an assessment on a substitute return are potentially subject to discharge. The following bankruptcy court decision uses 11 U.S.C. § 523, which states that a “return” does not include a return made pursuant to section 6020(b), in conjunction with the test established in Beard v. Commissioner to determine whether the taxpayer’s late filing qualified as a return for purposes of discharging debt.  

Taxpayer’s Overdue Filing Reporting Additional Liability was Dischargeable

In the case of In re: Biggers, the Sixth Circuit held that the taxpayer’s liabilities for 2001, 2003, and 2004 were non-dischargeable because: 1) the returns were filed after the IRS had already assessed the federal tax; 2) the returns revealed less tax than the amount assessed by the IRS; and 3) the returns served no tax purpose. The 2002 returns, however, revealed an amount due in excess of the tax assessed by the IRS. The court held that the 2002 return served a tax purpose to the extent that it reported an additional tax liability. The IRS conceded that the excess was dischargeable, although the remainder of the 2002 tax liability was not.

As previously stated, for taxes to be discharged a return must be filed. The court in Beard established a test to determine what qualifies as a return. The court held that for a Form 1040 to qualify as a return: 1) it must purport to be a return; 2) it must be executed under penalty of perjury; 3) it must contain sufficient data to allow calculation of tax; and 4) it must represent and honest and reasonable attempt to satisfy the requirements of the tax law.

In this case the IRS argued that the taxpayer’s late filings satisfied the first three elements of the Beard test, and the only issue was whether the late filing represented “an honest and reasonable attempt to satisfy the requirements of the tax law.” The court then cited United States v. Hindenlang, a Sixth Circuit case, which held that Form 1040 is not a return if it no longer serves any tax purpose or has any effect under the Internal Revenue Code. Further, a return filled too late to have any effect at all under the Internal Revenue Code cannot constitute “an honest and reasonable attempt to satisfy the requirements of the tax law.”

Here the taxpayer’s forms for 2001, 2003, and 2004 all reported a lower liability than the amount originally assessed by the IRS, and therefore served no purpose. However, the tax form from 2002 reported an additional $15,088 in tax liability. Thus, the 2002 tax form served a purpose under the Internal Revenue Code to the extent that it reported additional liability and was therefore subject to discharge.

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. 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.

November 30, 2015

Nardone Law Group's Tax Attorneys Agree with the Inspector General Regarding IRS Examination Procedures

The tax attorneys at Nardone Law Group in Columbus, Ohio routinely defend individual taxpayers and businesses in Internal Revenue Service’s audits and examinations. The IRS has broad authority and tools available to examine individual and business tax returns. In fact, the IRS has recently taken steps to implement its high-income and high-wealth strategy. This high-income and high-wealth strategy simply means that the IRS intends to audit and examine more high-income taxpayers than ever before.  Thus, not only did the top one-percenters already pay over 40% of the taxes in this great country, the IRS and the current defunct administration wants the high-income taxpayers to pay more. Yet, this same administration has failed to provide the IRS with the necessary resources to do so. And, in many instances, this administration has stripped the IRS from its ability to do so.  These issues were highlighted in the Treasury Inspector General for Tax Administration’s September 18, 2015 Report, titled Improvements are Needed in Resource Allocation and Management Controls for Audits of High-Income Taxpayers.

As detailed in the table below, although the IRS initially increased its audit coverage of high-income taxpayers, the percentage of high-income taxpayers audited dropped in most income levels from fiscal year 2010 to fiscal year 2014.  See the chart below. Thus, not surprising from this administration, one hand of the government announces broad and sweeping changes to its audit and exam functions of high-income taxpayers, while the other hand removes the IRS’ ability to follow through with the broad and sweeping changes, by un-funding the IRS and stripping it of its ability to audit and examine taxpayers effectively. See the report below:

Percentage of High-Income Tax Return Audits by Adjusted Gross Income During Fiscal Years 2010, 2013, and 2014

Chart 1

What is also not surprising is that the audit coverage of filed individual high-income tax returns completed in fiscal year 2014 reveals that the IRS provides increased audit coverage as the percentage of each total positive income range as the high-income taxpayer’s total positive income increases.  See the chart below:

Audit Coverage of Filed Individual High-Income Tax Returns Completed in Fiscal Years 2014 by TPI Level

Chart 2

Although at first glance, the chart and the IRS strategy seems to make sense.  You increase the percentage of audits based upon the amount of income earned.  The understanding there is that the returns become more complex as income earned increases, which justifies a higher percentage.  But, what the chart reveals is that the IRS conducted 66-percent more audits of taxpayers earning less than $600,000, in comparison to those taxpayers earning in excess of $600,000. Again, it really makes no sense.  If the IRS is going to audit or examine more high income earning taxpayers, with little resources to do so, then it should focus on those in excess of $600,000. As an example, the IRS only examined 6,309 taxpayers that made over $5,000,000. Yet, the IRS examined 62,159 returns of taxpayers making between $200,000 and less than $400,000. Where do you think more complexity exists, and where do you think more changes would potentially occur? Certainly, there would be more changes in those returns of taxpayers making more than $5,000,000. Yet, the IRS spends its limited resources on tax returns that likely have very little changes. See the Treasury Inspector General for Tax Administration’s September 18, 2015 Report.

Contact Nardone Law Group

If the IRS, Ohio Department of Taxation, or other taxing authority has contacted you or your business to be audited or examined, do not go at it alone. You should contact the tax attorneys at Nardone Law Group. We have vast experience representing individuals and businesses in IRS audits, exams, appeals, United States Tax Court, and other courts. Contact us today for a consultation.

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.

December 18, 2015

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