March 13, 2015

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

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

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

When is Conduct “Non-Willful”?

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

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

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

Contact Nardone Law Group

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

Contact us today for a consultation to discuss your case.

March 05, 2015

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

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

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

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

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

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

Alternate Audit Methods, Including Purchase Mark-Up Analysis

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

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

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

Contact Nardone Law Group

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

Contact us today for a consultation to discuss your case.

February 23, 2015

Failure to Remit Withheld Employment Taxes (i.e. Tax Evasion) Can Result in Severe Criminal Consequences

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 tax investigations. In our prior article on Criminal Tax Convictions, we discussed a recent decision by the U.S. Court of Appeals highlighting the government’s authority to criminally punish fraudulent 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 commit tax crimes, such as filing false returns, failing to remit withheld taxes, or assisting others in similar acts, can face severe punishments if convicted.

Employers are required by law to withhold employment taxes from all employees. Employment taxes include: (i) Federal Income tax withholding, and (ii) Social Security and Medicare taxes. Both employers and employees are responsible for the collection and remittance of employment taxes to the IRS. Usually, the employer will withhold these taxes on behalf of their employees, but in certain cases, such as when an individual is self-employed, it is the employee’s responsibility to pay the withheld employment taxes. The IRS frequently investigates employers, or individual taxpayers, who fail to remit federal employment taxes. Employers who fail to withhold employment taxes, or fail to remit them to the IRS, may be subject to criminal and civil sanctions.

Virginia Businessman Sentenced to Prison for Employment Tax Fraud

In June 2014, a Virginia businessman (the “Debtor”) plead guilty to failing to collect and remit more than $2.2 million in employment taxes, as well as the theft of over $186,000 from an employee pension plan. The Debtor served as executive chairman of a corporation and, from 2009 through 2011, was responsible for collecting, accounting, and paying the company’s payroll taxes to the IRS. Although appropriate payroll taxes were withheld from employee wages, the Debtor failed to pay both the employee withholdings and the employer’s matching portions to the IRS.

Furthermore, the employees were able to contribute portions of their paychecks to a qualified pension plan, which would be administered by an asset custodian. The Debtor, who was responsible for authorizing these payments, failed to send them to the asset custodian over the course of three years. This resulted in a loss of $186,263. Finally, the Debtor used company accounts to complete a variety of personal purchases. These purchases included $505,871 for the use of a Washington, D.C. football stadium executive suite and $40,000 for the sponsorship of a horse race in Virginia.

 In September 2014, the Debtor was sentenced to 18 months in prison, with three years of supervised release, and was ordered to pay more than $1.6 million in restitution to the IRS. This sentence is to be served consecutively to a 28-month prison that the Debtor was already serving, in relation to campaign finance violations the Debtor made in the 2008 presidential primary and a 2006 U.S. Senate campaign.

NLG Comment: Failure to remit employment taxes can result in severe consequences for both employers and employees. Employers may be subject to criminal and civil sanctions, while employees might not qualify for social security, Medicare, or unemployment benefits, due to the employer’s failure to pay employment taxes. 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.

February 16, 2015

What Taxpayers Should Know About Doubt as to Liability Offers-in-Compromise

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise 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. 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. Utilizing a collection alternative may help prevent, or significantly reduce the effect of, an IRS collection action.

In our previous article on Offers-in-Compromise, we provided a general overview of this particular collection alternative, including some of the factors that taxpayers should consider when deciding whether they are eligible to make an offer.  This article provides a more detailed look at one type of offer-in-compromise, known as a doubt as to liability offer-in-compromise (or “DATL-OIC”). As its name would suggest, this collection alternative involves offering a payment amount to the IRS, in an attempt to resolve a disputed federal tax liability. Taxpayers need to be aware, however, that the process is more intricate and involved than simply negotiating or settling on a reduced amount with the IRS. To better understand doubt as to liability offers-in-compromise, it is helpful to distinguish them from regular offers-in-compromise.

The Difference between ‘Doubt as to Collectability’ and ‘Doubt as to Liability’

An offer-in-compromise is an agreement between a delinquent taxpayer and the IRS to settle a federal tax liability for less than the full amount owed or assessed. An offer-in-compromise provides eligible taxpayers the opportunity to pay off their tax debt and to get a fresh start. It is important that taxpayers are aware of the important distinctions the IRS makes between when a taxpayer is simply unable to pay the liability in full and when the taxpayer wants to dispute the amount that has been assessed, either wholly or partially.

If a taxpayer agrees on the amount of liability assessed by the IRS, but is unable to make a full payment, the taxpayer can make a doubt as to collectability offer, regularly referred to as an offer-in-compromise. To be considered for a doubt as to collectability offer, taxpayers must make their offer based on what the IRS will consider their true ability to pay. Taxpayers can utilize this collection alternative by filing a Form 656, Offer-in-Compromise (OIC).

Taxpayers who have a legitimate doubt that they owe part or all of their tax liabilities can file a Form 656-L, Offer-in-Compromise (Doubt as to Liability). “Doubt” as to liability exists when there is a genuine dispute as to the amount, or even the existence of, a federal tax liability. Generally, taxpayers will utilize a doubt as to liability offer because they were unable to dispute the liability during the time allowed. Taxpayers who do not dispute the amount of tax debt should not file a Form 656-L. When deciding whether to file a form 656-L, Offer-in-
Compromise (Doubt as to Liability)
, taxpayers should consider the following:

1. A doubt as to liability offer is only accepted for the tax period(s) in question;

2. Submitting an offer application does not guarantee that the IRS will accept the offer – rather,  it begins a process of evaluation and verification;

3. The taxpayer’s offer must be more than zero ($0);

4. Taxpayers must include a written statement that explains why the tax debt, or a portion of the tax debt, is incorrect;

5. Taxpayers also must provide documentation or evidence that will help the IRS to identify the reason(s) for doubting the accuracy of the tax liability; and

6. Doubt as to liability does not exist if the tax debt has been established by a final court decision or judgment.

Taxpayers cannot submit a doubt as to liability offer (Form 656-L) and a doubt as to collectability offer (Form 656 or 656-B) at the same time. Essentially, this means that taxpayers cannot simultaneously dispute the assessment of tax liability, while claiming that they are unable to pay it. Taxpayers should resolve any disagreements about the validity of the tax liability before considering filing any offers based on a doubt as to collectability.

Calculating ‘Doubt as to Liability’ Offers

As we discussed in our prior article on offers-in-compromise, doubt as to liability requires an intimate understanding of the policies and procedures behind the IRS offer-in-compromise program. Taxpayers cannot simply offer an amount and hope that the IRS will accept that number, regardless of the taxpayer’s good faith belief in that number’s accuracy or validity. A doubt as to liability offer-in-compromise is quite different from a contract dispute that leads to a settlement or negotiation between two private parties. Rather, it requires a thorough understanding of the calculation used by the IRS to determine the amount owed. A taxpayer who simply offers some amount to the IRS, without any evidence or detail, is going to be rejected. This is a waste of both time and money for the taxpayer. Therefore, due to the many nuances and planning techniques involved with calculating a doubt as to liability offer, it is important to work with someone that routinely handles these offers-in-compromise.

A doubt as to liability offer-in-compromise can provide individual taxpayers and businesses an excellent opportunity to resolve their federal tax liabilities, especially if they dispute the amount assessed by the IRS. Taxpayers who have been contacted by an IRS revenue officer should consult with an experienced tax attorney to find out if they qualify for an offer-in-compromise or other collection alternatives. 

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in federal tax matters, including collection alternatives, such as offers-in-compromise. 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 attorneys 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.

February 11, 2015

Offer-In-Compromise as an IRS Collection Alternative for Federal Tax Liabilities

The tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated 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. Therefore, if individual taxpayers or businesses are contacted by an IRS revenue officer, it is important to be aware of and understand the various collection alternatives available to resolve federal tax liabilities. Aside from simply paying the tax liability in full, there are various collection alternatives available to taxpayers that can help reduce or eliminate tax liabilities arising from an IRS audit or examination, including, but not limited to: (i) offer-in-compromise, (ii) installment agreements, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liability. Utilizing a collection alternative may help prevent, or significantly reduce the effect of, an IRS collection action.

This article is the first of a series that will focus on the offer-in-compromise as an IRS collection alternative. This article provides a general description of the offer-in-compromise program, including how to determine whether you are eligible. Future articles in the series will provide a more in-depth discussion of the offer-in-compromise program, including Doubt as to Liability Offers. First, it is helpful to understand what an offer-in-compromise entails and how it can help a taxpayer manage their federal tax liabilities.

What is an Offer-in-Compromise?

The IRS, similar to any other business, encounters situations where outstanding debts cannot be collected in full or a dispute arises over the amount owed. It is generally acceptable business practice to resolve such collection and liability issues through a compromise. An offer-in-compromise is an agreement between a delinquent taxpayer and the IRS to settle a federal tax liability for less than the full amount owed or assessed. An offer-in-compromise provides eligible taxpayers the opportunity to pay off their tax debt and to get a fresh start.

To utilize this collection alternative, taxpayers can fill out either a Form 656, Offer-in-Compromise (OIC) or Form 656-L, Offer-in-Compromise (Doubt as to Liability), which allows the taxpayer to propose a settlement to the IRS. Submitting an application does not ensure that the IRS will accept the taxpayer’s offer. Instead, the application begins a process of evaluation and verification, during which the IRS considers any special circumstances that might affect the taxpayer’s ability to pay. The taxpayer’s settlement offer, upon filing and acceptance for processing, will be acted upon by recommendation for one of the following: (i) acceptance, (ii) rejection, (iii) termination, or (iv) it may be withdrawn by the taxpayer or the taxpayer’s agent. To qualify for acceptance, taxpayers should be aware of several eligibility requirements, as well as factors that the IRS considers when reviewing an application for an offer-in-compromise.

Eligibility for Offer-in-Compromise

For an individual taxpayer or business facing federal tax liabilities, an offer-in-compromise can be a saving grace. Before a taxpayer’s offer-in-compromise can be considered by the IRS, however, the taxpayer must:

1. File all tax returns the taxpayer is legally required to file;

2. Make all required estimated tax payments for the current year; and

3. Make all required federal deposits for the current quarter, if you are a business owner with employees.

The IRS has not established a minimum compliance requirement for the acceptance of an offer-in-compromise. Rather, the IRS is authorized to consider several factors, when analyzing whether to accept an offer-in-compromise, including: (i) economic hardship, (ii) public policy, and (iii) equity. Generally, if a taxpayer can pay their tax debt in full, whether through an installment agreement or a lump sum, the IRS will not accept an offer-in-compromise. Furthermore, if a taxpayer or business is currently undergoing bankruptcy proceedings, they will not be eligible to apply for an offer-in-compromise. If the IRS decides to accept a taxpayer’s offer, the compromise becomes a legally binding agreement between the IRS and the taxpayer, enforceable by either party.

NLG Comment: It is important to note that the Offer-in-Compromise (Doubt as to Liability) requires an intimate understanding of the policies and procedures behind the IRS offer-in-compromise program. You cannot simply offer some amount to the IRS and hope that they will accept that number. This is much different than a settlement and contract dispute between two private parties. Rather, it requires a  thorough understanding of the calculation used by the IRS to determine the amount owed. There are many nuances behind the calculation and planning techniques available to minimize the ultimate amount owed. It is important to work with someone that handles these offers-in-compromise on a daily basis. And remember, if you want to simply offer some amount to the IRS without any back up or detail, and without going through the necessary calculation, you would be better off to save your time, and your money, by not submitting an offer. It would simply be rejected. Rather, you need to do the necessary due diligence and complete it correctly.

An offer-in-compromise can provide individual taxpayers and businesses an excellent opportunity to resolve their federal tax liabilities, especially if they are unable to pay the full amount owed. Taxpayers who have been contacted by an IRS revenue officer should consult with an experienced tax attorney to find out if they qualify for an offer-in-compromise or other collection alternatives.

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses in federal tax matters, including collection alternatives, such as offers-in-compromise. 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 attorneys 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.

February 06, 2015

Bankruptcy as a Collection Alternative for Tax Liabilities

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. The IRS has broad authority and tools available to collect delinquent taxes, including the ability to file a Notice of Federal Tax Lien. 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. Utilizing a collection alternative may help prevent, or significantly reduce the effect of, an IRS collection action.

While collection alternatives can provide relief to taxpayers in certain situations, they are not simply a magic wand that makes debt disappear. For each collection alternative, there are certain criteria that must be satisfied and procedures that must be followed. When contacted by an IRS revenue officer, taxpayers should consult with an experienced tax attorney to find out what solutions and alternatives are available. Failure to properly utilize a collection alternative can lead to increased penalties, interest, and debt for the taxpayer. This was highlighted in a recent bankruptcy case, In Re Ollie-Barnes, where the court held that the debtor’s income tax liabilities were not dischargeable in bankruptcy.

Debtor’s Tax Liabilities Not Dischargeable in Bankruptcy

A U.S. Bankruptcy Court in North Carolina rejected a debtor’s claim that her federal tax liabilities were discharged in bankruptcy. The debtor had filed for bankruptcy twice before, with both cases getting dismissed, before commencing this third bankruptcy case in December 2009. The bankruptcy case was completed in July 2013, but was reopened at the request of the debtor, because she claimed she was receiving communications from the defendant creditor, as well as the IRS, concerning the collection of prepetition taxes. The debtor commenced an adversary proceeding, seeking declaratory relief, arguing that all of her debt owed during the pertinent years was fully discharged. The bankruptcy court considered two issues and ruled against the debtor with respect to both, concluding that her debts were not dischargeable.

For the first issue, the debtor argued that any claim omitted from a trustee’s report of filed claims is effectively disallowed, but did not cite any authority to support such an argument. The IRS filed three proofs of claims pertaining to the debtor’s tax liabilities for the pertinent years. The first proof of claim showed tax debts of approximately $34,000 and was not amended or withdrawn by the IRS, nor was any objection filed. The second and third proofs of claims were filed in error. The trustee listed the IRS allowed claim of $0.00 in its report of filed claims, but the court held that this neither resulted in disallowance or discharge of IRS’ first proof of claim in bankruptcy. The court’s decision was reinforced by the fact that the debtor had failed to object to the first claim entirely.

The second issue involved 11 USC 1328(a)(2), which excepts the discharge of certain debts. Specifically, the statute denies the discharge of taxes for which a late return or equivalent report was filed or given after two years before the before the date of filing the petition. Essentially, there is a two year look-back period to assess whether the debtor’s liabilities were dischargeable. The court used its equitable power to find that the two year look-back period was tolled during the debtor’s previous bankruptcy cases. In total, the debtor was only out of bankruptcy for a combined one year and eight months since she had filed her late return. Consequently the court found that the debtor’s tax liabilities, listed in the IRS’ first proof of claim, were excepted from the debtor’s 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. 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.

January 05, 2015

Subordinating a Federal Tax Lien to the Claims of Other Creditors: How Are Taxpayers Affected?

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise taxpayers who have been contacted by a revenue officer with the Internal Revenue Service. If a taxpayer neglects to make a payment on a federal tax liability, the IRS has substantial authority to file a Notice of Federal Tax Lien against the taxpayer’s assets, which can cause the taxpayer significant financial problems. In our previous article, Discharging Property from a Notice of Federal Tax Lien, we focused on the option of discharging property as one of the solutions available to help taxpayers resolve a Notice of Federal Tax Lien.

In this article, we focus on another option for obtaining relief from a Notice of Federal Tax Lien: Subordination. In some situations, the IRS will agree to subordinate a Federal Tax Lien to the rights of other creditors. Essentially, the IRS allows certain other creditors to move ahead in priority of its Federal Tax Lien interest in the taxpayer’s assets. This may enable a taxpayer to obtain a loan or mortgage that a lender would have otherwise refused to extend because of the Federal Tax Lien. Subordination is designed to facilitate the collection of delinquent tax liabilities by providing more flexible procedures for the taxpayer. It is important to understand, however, that subordination does not remove the Federal Tax Lien from the taxpayer’s property.

 A recent case dealt with the issue of Notices of Federal Tax Lien and whether those liens take priority over a bank security interest. The full court opinion can be found here: Susquehanna Bank v. U.S. This case demonstrates the IRS’ ability to issue tax liens and how the courts determine who has priority when there are competing interests in a taxpayer’s assets.

Which Has Priority: The IRS or a Bank?

In Susquehanna Bank v. U.S., the U.S. Court of Appeals for the Fourth Circuit held that a bank security interest created by a deed of trust, which was executed before the IRS filed its Notice of Federal Tax Lien, but was recorded thereafter, took priority over the IRS’ tax lien. The Court of Appeals affirmed the district court’s finding that the deed of trust gave the bank an equitable security interest on the date of execution, thereby taking priority over the lien.

The taxpayer, owner of an auto body shop, failed to pay employment taxes over several quarters, from 2002 to 2004. The IRS issued notice and demand for payment of $62,438.99 in taxes, interest, and penalties, which gave rise to a tax lien on all property owned by the taxpayer. On January 10, 2005, the IRS filed Notice of Federal Tax Lien for the relevant quarters of unpaid taxes.

On January 4, 2005, six days before the IRS filed Notice of Federal Tax Lien, the taxpayer borrowed $1 million from Susquehanna Bank, securing repayment of the loan by executing and delivering to the Bank a deed of trust with respect to two parcels of real property. The deed of trust was not recorded, however, until February 11, 2005, more than a month after the IRS filed the notice. When the taxpayer filed for Chapter 11 bankruptcy protection in April 2011, Susquehanna Bank commenced an adversary proceeding against the IRS, seeking a declaratory judgment, to decide which entity had priority over the secured interest: the Bank or the IRS.

The court ultimately held that, under the common law doctrine of equitable conversion, Susquehanna Bank received a protected equitable security interest in taxpayer’s property when the deed of trust was executed in exchange for the $1 million loan on January 4, regardless of recordation.

NLG Comment: As demonstrated in Susquehanna, disputes can arise regarding which entity has priority over an interest, when a taxpayer has existing tax liabilities with the IRS and other unresolved debts. This case presents a prime example of a dispute that could have been resolved through subordination; however, the IRS clearly believed that it was owed priority over the interest. The court’s ruling, in favor of the Bank, essentially forced the IRS to subordinate its Federal Tax Lien to the rights of the bank.

Contact Nardone Law Group

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

Contact us today for a consultation to discuss your case.

December 08, 2014

Discharging Property from a Notice of Federal Tax Lien Provides Taxpayers Relief

The tax attorneys at Nardone Law Group in Columbus, Ohio, frequently assist individuals and businesses that have been contacted by a revenue officer with the Internal Revenue Service, regarding federal tax liabilities. The IRS has substantial power to collect delinquent tax debts from taxpayers. If a taxpayer neglects to make payment of a federal tax liability, the IRS has broad authority and tools available to collect delinquent taxes, which includes the filing of a Notice of Federal Tax Lien. A Notice of Federal Tax Lien can cause a taxpayer significant financial harm, such as affecting one’s credit score or the potential of termination from employment. Therefore, it is crucial that taxpayers are aware of the various ways to obtain relief when issued a Notice of Federal Tax Lien.

In our prior article, Notice of Federal Tax Lien: Taxpayer Options and Alternatives, Nardone Law Group discussed several options that are generally available to assist taxpayers in minimizing the impact of a Notice of Federal Tax Lien. This article briefly highlights those options with a specific focus on the discharge of Notice of Federal Tax Lien process.   

How to Obtain Relief from a Federal Tax Lien

The law generally defines a lien as a charge or encumbrance that one person has on the property of another as a security for a debt or obligation. A Notice of Federal Tax Lien arises when a person (individuals, trusts, estates, partnerships, companies, etc.) fails to pay any federal tax after a demand by the government for payment.  When taxpayers are contacted by an IRS revenue officer with a Notice of Federal Tax Lien, it is important to know what options are available for relief.

There are four options that are generally available to a taxpayer to fully or partially resolve a Notice of Federal Tax Lien. They are: (i) Withdrawal, (ii) Release, (iii) Subordination, and (iv) Discharge, of a Notice of Federal Tax Lien. Each option has its own benefits and requirements that taxpayers must satisfy to obtain partial or full relief. Here, we will take a closer look at how taxpayers can discharge a Notice of Federal Tax Lien.

Discharging a Federal Tax Lien

When a taxpayer receives a Notice of Federal Tax Lien from an IRS revenue officer, the lien attaches to all of the taxpayer’s assets. The taxpayer can file an application, requesting that the IRS discharge certain property from the Notice of Federal Tax Lien. If the IRS approves the discharge, this option effectively allows the taxpayer to sell the discharged property free of any liens and encumbrances. Generally, the IRS will require the taxpayer to transfer the amount of sale proceeds that the IRS deems to be its monetary interest in the property to the IRS, as a payment towards the taxpayer’s tax debt.

NLG Comment: It is important to note that the Notice of Federal Tax Lien remains in effect and attached to all of the taxpayer’s other, undischarged assets until the taxpayer pays their tax liabilities in full. Only the specific property that was discharged is rendered free from the Notice of Federal Tax Lien.

The discharge of Notice of Federal Tax Lien process is a powerful tool for taxpayers. It allows taxpayers to utilize assets for various transactions, or to transfer those assets free and clear of any liens or encumbrances. The most common transactions that involve a discharge include:

  1. A sale of a personal residence.
  2. A sale of commercial real estate.
  3. The sale or purchase of a business, including the assets of that business.

Taxpayers who are subject to Notice of Federal Tax Lien restrictions, and need to initiate any of the above transactions, should ensure they seek out a well-qualified tax attorney, specializing in tax controversy matters, such as federal tax liabilities and disputes with the Internal Revenue Service.

Contact Nardone Law Group

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

Contact us today for a consultation to discuss your case.

December 05, 2014

How to Notify Credit Bureaus to Update Taxpayers' Credit Reports, Once a Notice of Federal Tax Lien is Withdrawn

The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise taxpayers who have unpaid federal tax liabilities and who may have been contacted by a revenue officer with the Internal Revenue Service. If a taxpayer neglects to make payment of a federal tax liability, the IRS has broad authority and tools available to collect delinquent taxes, which includes the filing of a Notice of Federal Tax Lien. A Notice of Federal Tax Lien can cause the taxpayer significant financial harm, so it is important for taxpayers to be aware of the various options and alternatives available to minimize the impact of a Notice of Federal Tax Lien. In our prior article on Notices of Federal Tax Lien, we discussed the various available options, as well as collection alternatives, that can provide taxpayers relief from a Notice of Federal Tax Lien. Particularly, the withdrawal of a Notice of Federal Tax Lien is very important because it can protect and restore a taxpayer’s credit history and credit score with the appropriate credit reporting agencies.

Withdrawal of Notice of Federal Tax Lien

Withdrawal of a Notice of Federal Tax Lien is primarily available where the IRS has made either a substantive or procedural mistake in filing the Notice of Federal Tax Lien against the taxpayer.  Withdrawal of a Notice of Federal Tax Lien is an excellent option for taxpayers, as it clears the tax lien from the public record, as well as from the taxpayer’s individual credit report. This effectively makes it as if the Notice of Federal Tax Lien never existed, giving the taxpayer a “fresh start.” (Click here for discussion of Withdrawal and the Fresh Start Program).  As a result, credit reporting agencies will update the taxpayer’s credit report to remove any reference to a Notice of Federal Tax Lien.

Notifying Credit Bureaus to Update Credit Report

It is important to note, that taxpayers must take certain steps to have their individual credit reports updated with the applicable credit bureaus. Once the IRS has withdrawn the Notice of Federal Tax Lien, including filing the appropriate documentation with the County Recorder’s Office, the taxpayer will need to dispute the Notice of Federal Tax Lien with each of the three credit bureaus to have it completely removed from the taxpayer’s credit report. As discussed below, each credit bureau has a different dispute process.

Equifax

1. The taxpayer will need to file a dispute directly with Equifax (along with documentation showing the lien has been withdrawn) either electronically through its online dispute process at the Credit Investigation Page, or by submitting a detailed letter (which Nardone Law Group can prepare) with copies of the supporting documentation to the following address:

    Equifax Information Services

    P.O. Box 740256

    Atlanta, GA 30374

2. Equifax will then investigate the dispute with the source of the information, typically the IRS.

3. Within a month of the request to dispute an inaccurate item on the taxpayer’s credit report, Equifax will notify the taxpayer of the results of is dispute investigation.

4. Based on the results of the investigation, Equifax will either update the current status of the disputed information or delete the item from the taxpayer’s file.

NLG Comment: After the Notice of Federal Tax Lien has been removed from the file, the other credit bureaus should eventually receive the corrected information. The best practice, however, is to contact each of the remaining two agencies and follow their dispute process. This will ensure that the taxpayer’s credit history is completely updated and will help to avoid any miscommunication throughout the dispute process.

Experian

1. The taxpayer will need to file a dispute with Experian, either electronically through its online dispute process here, or by mailing a detailed letter (which NLG can prepare) with copies of the supporting documentation to the following address:

    P.O. Box 4500

    Allen, TX 75013

2. The dispute request should include the following information: (i) full name, including middle initial; (ii) date of birth; (iii) social security number; (iv) all addresses where the taxpayer has lived during the past two years; (v) a copy of a government issued identification card (i.e., driver’s license); (vi) one copy of a utility bill, bank or insurance statement, etc.; and (vii) a list of the item(s) that are disputed.

3. Once Experian receives the taxpayer’s dispute request, it will contact the furnisher of the information or the entity that collected the information from a public record source (IRS or the court) to investigate.

4. The investigation may take up to 30 days, at which point it will send the client the results. The status of the dispute can be checked at the Experian status page.

TransUnion

1. The taxpayer will need to file a dispute with TransUnion, either electronically through its online dispute process at the TransUnion Credit Dispute Page, or by mailing a detailed letter (which NLG can prepare) with copies of the supporting documentation to the following address:

    TransUnion Consumer Solutions

    P.O. Box 2000

    Chester, PA 19022-2000

2. TransUnion will investigate by contacting the provider or furnisher of the information. The source of the information has either 30 or 45 days to investigate whether the information is accurate. If the source does not respond within the required time frame, TransUnion will remove the information from the report.

3. If the dispute is filed online, the client will be notified by e-mail with the results of the investigation.

As you can see, each credit bureau has its own specific procedure for disputing a Notice of Federal Tax Lien. It is important for taxpayers to be aware of these procedures, as the removal of a Notice of Federal Tax Lien from their credit history will greatly improve their credit score and help to eliminate future financial difficulties.

Contact Nardone Law Group

Nardone Law Group frequently assists individuals and businesses with federal tax matters, including the withdrawal of Notices of Federal Tax Lien. If you have been contacted by an IRS revenue officer and are subject to a Notice of Federal Tax Lien, or have questions on how to dispute the lien with credit bureaus, contact one of our experienced tax attorneys today. Nardone Law Group’s tax lawyers and professional staff have vast experience representing clients before the IRS. If you have been subjected to a Notice of Federal Tax Lien, we will thoroughly review your case to determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

November 21, 2014

United States Signs Intergovernmental Agreement with the Bahamas to Implement the Foreign Account Tax Compliance Act

The tax attorneys at Nardone Law Group in Columbus, Ohio, continuously monitor the Internal Revenue Service’s efforts to incentivize taxpayers to disclose foreign financial accounts, assets or entities. IRS programs, such as the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures, allow taxpayers with undisclosed offshore accounts to come into compliance. Recent expansions to the streamlined filing procedures made them available to a broader population of U.S. taxpayers. U.S. taxpayers living outside the United States are able to take advantage of the Streamlined Foreign Offshore Procedures, while U.S. taxpayers residing within the United States may now utilize the Streamlined Domestic Offshore Procedures. Each program involves certain criteria that taxpayers must satisfy to obtain the program’s benefits. It is important that taxpayers review the relevant criteria to help decide which program is best suited for their needs, because waiting to come into compliance is no longer a viable option.

The IRS and U.S. Department of Justice have also reached agreements with an increasing number of countries, working to uncover taxpayers with undisclosed foreign financial accounts, assets or entities. Most recently, the U.S. and the Bahamas signed an intergovernmental agreement to implement the Foreign Account Tax Compliance Act. The full text of the agreement can be found here: Agreement between U.S. and the Bahamas. This agreement is part of an ongoing effort to uncover delinquent U.S. taxpayers with undisclosed foreign accounts and bring them into compliance.

U.S. and the Bahamas Reach Agreement to Implement FATCA

On November 3, 2014, the United States and the Commonwealth of the Bahamas signed an intergovernmental agreement to implement the Foreign Account Tax Compliance Act (FATCA). Enacted in 2010, FATCA targets non-compliant U.S. taxpayers with foreign accounts. FATCA focuses on reporting, either by the U.S. taxpayers themselves, or by foreign financial institutions in which U.S. taxpayers hold an account or a substantial ownership interest in an account held by a non-U.S. entity. The agreement between the U.S. and the Bahamas is designed to promote cooperation between the two countries in regards to FATCA.

Under the agreement, the Bahamas “shall obtain the information specified…with respect to all U.S. Reportable Accounts and shall annually exchange this information with the United States on an automatic basis.” The information to be obtained and exchanged, with respect to each U.S. Reportable Account includes:

i.  The name, address, and U.S. Taxpayer Identification Number (TIN) of each specified U.S. taxpayer that holds an account, or of each U.S. taxpayer who owns a substantial ownership interest in a non-U.S. entity’s account;

ii.  The account number (or functional equivalent in the absence of an account number);

iii. The name and identifying number of the Reporting Bahamas Financial Institution; and

iv. The account balance or value as of the end of the relevant calendar year or reporting period.

As you can see, the agreement gives the Bahamas significant authority to report U.S. taxpayers’ financial interests in Bahamas Financial Institutions. Taxpayers who fail to come into compliance can be subjected to substantial penalties, including civil and criminal fines. As the IRS and Justice Department increase their efforts to uncover undisclosed foreign financial accounts, now is the time to come into compliance and significantly reduce the risk of further negative impacts. Taxpayers with an undisclosed foreign account should consult with a tax attorney to figure out which method of offshore account disclosure is best suited for their needs and circumstances.

How Nardone Law Group Can Help

Nardone Law Group routinely represents individuals and businesses in federal and state tax issues, including the IRS Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures. If you have an undisclosed foreign account, asset, or entity, contact one of our experienced tax attorneys today. There are many factors for taxpayers to consider when determining what method of offshore account disclosure will produce the optimal results. 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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