Vince Nardone: Tax and Controversy

Most Important Strategy to Defend Against an IRS Audit and Examination: Maintaining Adequate Records of Business Expenses

By Matt Porter

    The tax attorneys at Nardone Law Group in Columbus, Ohio routinely assist individuals and businesses that become subject to an IRS audit or examination. Keeping adequate records is one of the most important things a taxpayer can do to avoid a potential IRS audit or examination, and ensure that an IRS audit or examination does not result in an assessment of additional tax, penalties, and interest. An IRS audit or examination occurs when the IRS selects a tax return to review the taxpayer’s records from which the information that is reported on the tax returned is derived.  IRS revenue agents are typically the employees within the IRS who audit and examine tax returns.  Below is a United States Tax Court case example of a taxpayer that did not keep proper records and documents of his car and truck expenses and, therefore, could not successfully defend against the IRS audit and examination.

Sharriff M. Dyer v. Commissioner: Mortgage Broker Failed to Substantiate Business Use of Automobile During IRS Audit and Examination

    In Sharriff M. Dyer v. Commissioner (full case opinion linked), the United State Tax Court denied a mortgage broker and real estate management company owner’s deductions above the amounts that the IRS determined during the audit and examination for expenses relating to automobiles he used for both business and personal purposes.  The taxpayer did not sufficiently substantiate the car and truck expenses pursuant to I.R.C. § 274 (d). The Taxpayer failed to keep a contemporaneous mileage log or other adequate records and instead relied on vague testimony and general daily planners.  The taxpayer’s records, or lack thereof, did not contain adequate business purposes or geographic information from which total number of miles driven could be determined. Because of § 274(d)'s strict rules, the Tax Court held that the taxpayer could not estimate the car and truck expenses and denied the additional car and truck expenses claimed over the amount the IRS allowed during the audit and examination of the taxpayer’s income tax returns.

    The lesson to be learned from Sharriff M. Dyer v. Commissioner is that a taxpayer must keep adequate books and records to substantiate income, deductions, losses, and credits reported on his tax return.  If not, the IRS will reconstruct these items during the audit and examination using a variety of methods.  When the IRS questions expenses relating to business use of automobiles during an audit or examination, a taxpayer must substantiate with adequate records: (1) the amount of each separate expense; (2) the mileage for each business use of the automobile and the total mileage for all purposes during the taxable period; (3) the date of the business use; and (4) the business purpose of the use. In the absence of adequate records, such as an account book, a diary, a log, a statement of expenses, trip sheets, or a similar record, a taxpayer may substantiate expenses for mileage with sufficiently detailed written or oral statements and other collateral evidence establishing that the expense was incurred.  The taxpayer in Dyer failed to keep a contemporaneous driving log or any other document which established the amount of miles driven, the mileage for each purported business use of his vehicles, the date of the trips, or a specific business purpose.

    A taxpayer bears the ultimate burden to prove that an IRS revenue agent’s methods during the audit and examination are unfair or inaccurate.  When a taxpayer fails to maintain adequate records to support items of income, deductions, losses, and credits, as the taxpayer failed to do in Dyer, the IRS’s conclusions made during the audit and examination are much more likely to stand in Tax Court.

Contact Nardone Law Group for IRS Audit or Examination Representation

    Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS audit or examination. If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return to avoid an IRS audit or examination, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS audits and examinations. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available during or after the IRS audit or examination, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

Rental Losses in IRS Examinations and Audits

By Whitney Braunlin

    As tax attorneys in Columbus, Ohio, Nardone Law Group assists many individuals and businesses that become subject to an IRS audit or examination.  Keeping adequate records is one of the most important things you can do to avoid a potential IRS audit or examination.  Further, maintaining those records will minimize the impact of an IRS audit or examination by reducing or eliminating a potential assessment of additional tax, penalties, or interest based on lack of substantiation.  Below is an example from the United States Tax Court where a taxpayer failed to keep adequate records to support his position that he was a real estate professional for federal income tax purposes.  In this instance, the taxpayer's failure to keep adequate records prevented him or his tax professionals from successfully defending against the IRS examination.  The tax lawyers at Nardone Law Group help Ohio taxpayers understand IRS record-keeping requirements and can provide helpful tips on what types of documents to keep to successfully defend against an IRS audit or examination.

Hassanipour v. Commissioner

    In Hassanipour v. Commissioner, the Tax Court disallowed the taxpayer’s rental activity losses claimed on his federal income tax return. The taxpayer had a full-time job as a research associate and also owned 28 rental units. He performed various duties for the rental properties, including repairs, administrative tasks, communicating with tenants, researching landlord-tenant law, preparing tax returns, and other management activities. The taxpayer claimed a deduction for losses associated with his rental properties on his federal income tax return. The IRS determined the taxpayer could not take these deductions because he was not a real estate professional as required by the Tax Code.

Taxpayer’s Records and Testimony Were Not Credible

    At trial, the issue before the Tax Court was whether the taxpayer could be considered a real estate professional for federal income tax purposes. The IRS generally allows a deduction for ordinary and necessary business expenses. Code Section 469, however, disallows any passive activity loss. Rental activity is a passive activity unless the taxpayer is a real estate professional. A taxpayer may qualify as a real estate professional if (1) more than half of the taxpayer’s work is in the real property trade or business and (2) the taxpayer works more than 750 hours during the year in the real property trade or business. The Tax Court found the taxpayer’s testimony unreliable, as he changed the number of hours he claimed to work as a research associate and claimed that a calendar with a 2009 copyright was created contemporaneously with the real estate activities he commenced in 2007. Because the taxpayer bears the burden of proof on deductions claimed, the Tax Court found in favor of the IRS and did not allow the taxpayer to take deductions for his rental activity losses.

    NLG Comment: With the real estate market still struggling to recover, the Real Estate Professional classification for taxpayers is very beneficial.  It allows taxpayers to offset losses from real estate against ordinary income from other sources.  This can be a big win for taxpayers.  But, the Real Estate Professional classification is very document based and fact specific.  Taxpayers must maintain adequate records to avail themselves of this classification. 

Contact Nardone Law Group

    Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS tax audit or examination.  If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return, you should contact an experienced tax attorney today.  Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS tax audits and examinations.  Contact us today for an initial consultation.

Internal Revenue Service Offer-in-Compromise Program

 By Julie Biglin

    The tax attorneys at Nardone Law Group frequently advise our clients in Ohio and throughout the U.S. on various collection alternatives in dealing with the Internal Revenue Service.   Taxpayers who find they are unable to pay their taxes and their associated penalties should know that the single worst course of action is inaction.  To help alleviate their concerns, we typically talk to our clients about the following alternatives: (i) Offer-in-Compromise; (ii) Installment Agreement; (iii) currently not collectible status; and (iv) discharge of income taxes in bankruptcy, as well as a combination of several of those alternatives.

    As it relates to an Offer-in-Compromise, we have found that many taxpayers or their tax professionals fail to follow through with completing the entire process.  What we mean by that is: once the IRS accepts a taxpayer's offer, there are numerous tasks that remain to be completed.  One of those tasks involves dealing with the Notice of Federal Tax Lien and minimizing the impact that the Notice of Federal Tax Lien has against a taxpayer’s credit.  As an example, an unpaid tax lien can remain on your credit report for 10 years. Further, once the tax lien is paid and released, the lien does not immediately come off of your credit report. Rather, the record of the tax lien stays on your credit report for up to 7 years from the date of release.

    Thus, it is important to make sure that you obtain a Certificate of Release of Federal Tax Lien as soon as possible. Once the Offer-in-Compromise has been completed and approved by the IRS, a Form 668 (Z) Certificate of Release of Federal Tax Lien will be filed with the county recorder’s office. Once the Certificate of Release of Federal Tax Lien is filed with the recorder’s office, it is important to obtain a copy of the recorded release and send a copy to the three credit bureaus: (i) Equifax; (ii) Experian; and (iii) TransUnion. The release should be forwarded to each credit bureau requesting that they update their records to reflect that the tax liens have been removed.

    In sum, recognizing that the Notice of Federal Tax Lien remains on a taxpayer's credit report for 7 years, it is important to obtain the release of the Notice of Federal Tax Lien as soon as possible.

    Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their tax payments to the IRS. The tax lawyers at NLG have vast experience in representing individuals who owe money to the IRS. A recent article about IRS collection alternatives can be found here. If you are struggling with tax liabilities or are interested in working with the IRS to review collection alternatives, you should contact an experienced tax attorney today. 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.

IRS Offshore Voluntary Disclosure Program and Foreign Mutual Funds

    The tax attorneys at Nardone Law Group routinely represent Ohio taxpayers considering the Internal Revenue Service’s Offshore Voluntary Disclosure Program.  The Offshore Voluntary Disclosure Program may be beneficial to taxpayers with undisclosed foreign accounts and entities that should have been disclosed to the Internal Revenue Service (“IRS”).  In some circumstances a taxpayer may unknowingly have an obligation to report and pay taxes on a foreign account or investment to the IRS.  A taxpayer is many times surprised to learn that there may be federal tax reporting requirements with respect to their foreign mutual funds.  This article briefly explains that in certain instances taxpayers are required to disclose foreign mutual fund holdings to the IRS.

What is the Offshore Voluntary Disclosure Program?

The IRS’ 2012 Offshore Voluntary Disclosure Program provides taxpayers with undisclosed foreign accounts or foreign entities the opportunity to become compliant with United States tax laws while limiting exposure to civil penalties and criminal prosecution for nondisclosure.  The 2012 Offshore Voluntary Disclosure Program follows the IRS’ prior 2009 Offshore Voluntary Disclosure Program, and 2011 Offshore Voluntary Disclosure Initiative, which also provided valuable voluntary disclosure and compliance options for taxpayers with undisclosed foreign accounts or businesses.  The 2012 Offshore Voluntary Disclosure Program is available to taxpayers that meet certain requirements and provide certain information until further notice from the IRS.  But, the existence and terms of the Offshore Voluntary Disclosure Program could change at any time.  Thus, it is important for taxpayers with undisclosed foreign accounts or entities to consult with an experienced tax lawyer as soon as possible to discuss how the Offshore Voluntary Disclosure Program may benefit them.

Why Should a Taxpayer Enter the Offshore Voluntary Disclosure Program?

    Taxpayers who have undisclosed foreign accounts or entities should make a voluntary disclosure because it allows them to become compliant with federal tax law, eliminate significant civil penalties, and generally avoid the risk of criminal prosecution.  Additionally, making a voluntary disclosure enables taxpayers to calculate the total cost of resolving their offshore tax matters with a reasonable degree of confidence.  Taxpayers who do not enter the Offshore Voluntary Disclosure Program risk discovery by the IRS, assessment of significant penalties—including penalties for failure to file foreign information returns and fraud—and potential criminal prosecution.  Thus, it is important for taxpayers with undisclosed foreign accounts and entities to contact an experienced tax attorney to discuss the benefits of making a voluntary disclosure under the Offshore Voluntary Disclosure Program.

Foreign Mutual Funds as a “Passive Foreign Investment Company”

    United States tax law related to foreign trusts and investments is complex.  As a result, many taxpayers with foreign investments are likely unaware that they may have U.S. tax reporting and payment obligations related to their foreign trusts and investments.  The tax lawyers at Nardone Law Group have simplified this issue below to better inform Ohio taxpayers in this complex area.

    United States taxpayers who are beneficiaries of a foreign trust that holds shares of foreign mutual funds likely have an obligation to report that account or entity to the IRS, and pay taxes on distributions received from that account or entity.  This is because when a certain type of foreign trust with United States beneficiaries holds a foreign mutual fund, the foreign mutual fund is likely to be considered a Passive Foreign Investment Company (“PFIC”) of the U.S. beneficiary.  A foreign corporation is a PFIC if: (1) 75% or more of its gross income for the taxable year is passive income (the “income test”); or (2) 50% or more of the average yearly value of its assets produce, or are held for the production of, passive income (the “assets test”).  Passive income includes dividends, interest, and annuities.  Because mutual funds produce all passive income, a foreign mutual fund is likely to be considered a PFIC. 

    Moreover, stock in a PFIC that is owned directly or indirectly by a trust is considered to be owned by proportionately by its beneficiaries.  As a result, U.S. beneficiaries of certain foreign trusts can be treated as owning stock in a PFIC.  Consequently, taxpayers that are U.S. beneficiaries of a foreign trust holding shares of foreign mutual funds likely have an obligation to report that account or entity to the IRS.  Additionally, such taxpayers must pay taxes on dispositions of mutual fund stock made by the trust, or distributions received from that trust.  If you are a direct or indirect shareholder of foreign mutual funds, you must report that information to the IRS on Form 8621 Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and also on Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR).  If you have failed to report to the IRS as required, you should consider the Offshore Voluntary Disclosure Program.

    Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program.  If you have an undisclosed foreign account 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, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.

Federal Tax Record Keeping & Documentation for IRS Audits

Hectic economic times can present challenges for taxpayers under an IRS audit or examination. As tax attorneys in Columbus, Ohio, we assist many individuals and businesses that become subject to an IRS audit or examination. Keeping adequate records is one of the most important things you can do to avoid a potential IRS audit or examination, and ensure that an IRS audit or examination does not result in an assessment of additional tax, penalties, and interest. The tax lawyers at Nardone Law Group assist Ohio taxpayers on understanding their IRS’ record keeping requirements and provide some helpful tips on what types of documents to keep so that you may, or at least, successfully defend an IRS audit or examination.

IRS Tax Record Keeping Requirements

In slow economic times, it is certainly tempting to find and take as many tax credits or deductions as possible when filing your federal tax return. But, it is important to note that some of the most potentially helpful deductions also require some of the most specific proof. Internal Revenue Code Section 274(d) requires a taxpayer to substantiate expense credits and deductions for travel, entertainment, amusement, recreation, business gifts, automobiles, home computers, or cellular telephones. For travel, entertainment, amusement, recreation, and business gift credits and deductions, a taxpayer must provide adequate supporting records as to the following aspects of those credits and deductions:

1) the amount;

2) the time and place of travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift;

3) the business purpose of the item; and

4) the business relationship between the persons entertained, using the facility, or receiving the gift.

A taxpayer must substantiate credits and deductions for automobiles/other vehicles, computers and peripherals, and cellular phones by showing:

1) the amount, including purchase price, lease payments, and maintenance expenses for each expenditure;

2) the amount of the business or other profit-focused use of the property for the taxable year and the amount of total use for the same period (e.g., for automobiles, the number of miles traveled);

3) the date of each expenditure and use; and

4) the business purpose of each expenditure and use.

What Tax Records Should I Keep?

The IRS recently issued IRS Summertime Tax Tip 2012-16 on the topic of record keeping for tax purposes, which we summarized below.

Individuals

Generally, you should keep documents that confirm items on your tax return for at least three years after you file that tax return. The type of records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment and any other records to support deductions or credits claimed. You should generally keep records related to property at least three years after selling or otherwise transferring the property. You should note, and keep records for, the following types of transactions: a home improvement or purchase, transfer of stocks and other investments, Individual Retirement Account transactions, and property rental.

Small Businesses

Generally, you should keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Additionally, you should keep documents recording gross receipts, as well as evidence of purchases, expenses, and assets. As an example, you should keep Z-tapes or cash register tapes, bank deposit slips, credit card charges and sales slips, receipt logs, purchase and sales invoices, canceled checks, account statements, Forms 1099-MISC, real estate closing statements, and petty cash slips. It is also a good practice to keep electronic records, such as: e-mails, faxes, voicemails, databases, and other electronically saved files. Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS tax audit or examination. If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS tax audits and examinations. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

What is the Likelihood that I will be Audited by the Internal Revenue Service?

Clients and taxpayers, in general, are surprised as to the amount of information available on the Internal Revenue Service’s website regarding examination statistics.  As an example, the Internal Revenue Service recently issued statistics regarding tax returns examined in Fiscal Year 2010.  Overall there were 187,124,450 returns filed and 1,735,083 returns examined, which represents 0.9% percent of returns covered by examination.  That is less than one percent folks.  But, as always, the devil is in the details.  For example, the Internal Revenue Service examined 4.7% of returns filed where individuals reported gross receipts between $100,000 and $200,000 and filed a schedule C.  On the other hand, the Internal Revenue Service examined 98 percent of certain large corporate taxpayers.  So, it all depends.

The below chart provides a summary of the most common returns and taxpayers:

Type of Taxpayer	Returns Filed	Returns Examined	Amount of Additional Tax (thousands of dollars)
Schedule C Filer - $100,000 to $200,000 in gross receipts	893,707	42,403	$923,734
Schedule C Filer - $200,00 or more in gross receipts	705,877	23,569	$528,770
Partnership Returns	3,423,583	12,406	N/A
S Corporation Returns	4,414,662	16,327	N/A
Employment Tax Returns	30,158,258	63,937	$1,245,789
Estate Tax Returns	42,366	4,288	$1,405,415

The question you very well may be asking yourself is, so, how does the IRS select tax returns for audit?  This is a question that we get asked quite a bit at Nardone Law Group.  To answer the question of how returns are selected for an audit, follow this link. 

What is the likelihood that I will be audited by the Internal Revenue Service?

As a tax attorney in Columbus, Ohio, I am often asked by clients and others, how likely am I to be audited by the Internal Revenue Service. My answer consistently is: well, as a tax attorney, I am not comfortable answering that question based on your specific tax position and your specific tax return. But, I can direct you to the Internal Revenue Service website, where they keep statistics on a yearly basis regarding examination of returns.

Clients and taxpayers, in general, are surprised as to the amount of information available on the Internal Revenue Service website regarding examination statistics. As an example, the Internal Revenue Service recently issued its statistics regarding tax returns examined in Fiscal Year 2010.

Overall there were 187,124,450 returns filed and 1,735,083 returns examined, which represents .9 percent of returns covered by examination. That is less than one percent folks. But, as always, the devil is in the details. For example, the Internal Revenue Service examined 4.7 percent of returns filed where individuals reported gross receipts between $100,000 and $200,000 and filed a schedule C. On the other hand, the Internal Revenue Service examined 98 percent of certain large corporate taxpayers. So, it all depends.

For more detail regarding the audit statistics please see Nardone Law Group's frequently asked questions How are Returns Selected for Audit and Tax and Controvery Services. Also, for the actual statistics themselves please see the below link.Download Examination Statistics (00046381)

Ohio Use Tax Amnesty and Other Voluntary Disclosure Options

The Ohio Department of Taxation (“ODT”) has issued an Information Release providing guidance on the consumer's use tax amnesty program that runs from October 1, 2011 through May 1, 2013. The Tax Commissioner will waive all unassessed use tax liability due for any periods prior to January 1, 2009, and consumer's use tax paid under the amnesty is not subject to interest, or civil or criminal penalties. But, taxpayers who are registered for Ohio use tax as of June 1, 2011, are required to pay interest on any under-reported or unreported consumer's use tax.

Taxpayers should include consumer's use tax due on purchases made on or after January 1, 2009 on their amnesty applications. Taxpayers must make a nonrefundable payment of all consumer's use tax due on purchases made on or after January 1, 2009, through the last day of the month preceding the month in which amnesty is requested and will be required to register for consumer's use tax. A no-interest payment plan is available to businesses that were not registered for consumer's use tax as of June 1, 2011. The amount of consumer's use tax due under the amnesty must exceed $1,000, and the payment period cannot exceed seven years.

Taxpayers who have been issued an assessment for consumer's use tax due for any period are not eligible for amnesty, although they may still qualify for the Department's Voluntary Disclosure Program. See Ohio Tax Information Release No. ST 2011-01, 9/01/2011 attached below and also the proposed rule for making the payment under the Use Tax Amnesty.

Also, for a more detailed discussion of this and other amnesty programs, see below.

IRS Extends Time for 2011 Offshore Voluntary Disclosure Initiative Requests

Guest Author: Tawnya Underwood, Columbus, Ohio

Good news for taxpayers who missed the August 31, 2011 deadline for submitting an offshore voluntary disclosure initiative request. The Internal Revenue Service extended the deadline for OVDI requests to September 9, 2011. A taxpayer has until September 9, 2011 to submit the Offshore Voluntary Disclosure Letter with all identifying information (name, address, date of birth, and social security number) and as much other information as possible to the Offshore Voluntary Disclosure Coordinator.

The Internal Revenue Service will also offer a 90-day extension to taxpayers for submission of all documents required for the complete OVDI package. The taxpayer must send a request for this 90-day extension by the September 9, 2011 deadline to the Austin campus. This will give the taxpayer an additional 90-day period to submit all required forms and documents as listed on the Internal Revenue Service’s web site, 2011 Offshore Voluntary Disclosure Initiative Documents and Forms.

For additional details regarding the September 9, 2011 OVDI request deadline, please see link below.

http://www.irs.gov/newsroom/article/0,,id=234900,00.html

FBAR and Offshore Voluntary Disclosure Initiative of the Internal Revenue Service

Tax Attorney Vince Nardone discusses filing requirements regarding foreign investments.

Hello everyone.  The Internal Revenue Service's Offshore Voluntary Disclosure Initiative deadline is quickly approaching.  Many are preparing their amended returns and ready to file the final disclosures with the Internal Revenue Service.  But, I question whether the tax accountants or taxpayers preparing the returns are also aware of the various informational returns that are required to be filed in addition to the Form 1040.  I have attached a list of those additional information returns in pdf format.  The reason I am doing that is that I have found many professionals (both attorneys and accountants) are simply not aware of them.  And, the Internal Revenue Service has done a poor job in promoting the requirements of these additional returns.  If you own foreign assets, investments, or business interests it is important that you review the instructions for each of the attached documents to determine what, if any, additional filing requirements you may have.

Please see the attached.

Download FBAR forms (00032167)