Vince Nardone: Tax and Controversy

NLG Attorney Presents at Ohio Society of CPAs Event

    The tax lawyers at Nardone Law Group, LLC routinely speak and give presentations at both accounting and real estate Continuing Professional Education events throughout Ohio and the United States.  Attorney Vince Nardone recently gave two presentations at the Ohio Society of CPA's 2013 Columbus Spring CPE Conference on Wednesday, May 8, 2013.  His presentation topics included IRS Audit Representation, which detailed Internal Revenue Service examinations, and Discharge of Indebtedness Income, which explained the insolvency provisions regarding the discharge of indebtedness income.  

Contact Nardone Law Group, LLC

    Nardone Law Group represents individuals and businesses with 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, 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, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

Taxpayer Victory Against IRS on Trust Fund Recovery Penalty Claim

By Matt Porter

    If you or your business have been the subject of a trust fund recovery penalty investigation initiated by a revenue officer with the Internal Revenue Service (“IRS”), you understand that the IRS revenue officer is seeking to establish who within the business is a responsible person. The IRS can personally assess the trust fund recovery penalty against those who it determines are liable for the trust fund recovery penalty, and it collects the liability from their personal income and assets.  Consequently, the IRS revenue officers have a tendency to cast their nets wide when they target and characterize potentially responsible persons for trust fund recovery penalties. Due to the potentially devastating impact that a trust fund recovery penalty assessment can have on your personal financial situation, it is extremely important to know how and when an IRS revenue officer determines your liability.  Accordingly, the tax lawyers at Nardone Law Group, LLC wanted to bring to your attention a district court case where a taxpayer prevailed on a claim against the IRS regarding the trust fund recovery penalty.

Background of the Trust Fund Recovery Penalty (the “100% Penalty”)

    The Internal Revenue Code (“I.R.C.”) requires employers to withhold from employees' wages, federal income taxes, and social security contributions.  The employer holds these funds “in trust” for the United States.  When a corporate employer fails to pay over the trust funds, I.R.C. § 6672(a) imposes a penalty equal to the entire amount of the unpaid taxes on any person required to collect, account for, or pay over the withheld taxes, who “willfully” fails to do so. Because the penalty is equal to the entire amount of unpaid trust fund taxes, it is often referred to as the 100% Penalty.  Liability for the penalty is established if a person is (i) a responsible person; (ii) who willfully failed to pay over the withheld taxes.

    The policy behind the trust fund recovery penalty is to facilitate the collection of tax and to enhance voluntary compliance.  Congress enacted I.R.C. § 6672 to encourage companies to promptly pay the trust fund portion of employment taxes and to ensure that taxes can be collected from a secondary source—i.e., a responsible person who willful failed to pay over the trust fund taxes.  Most of the litigation in this area involves the question of whether the taxpayer assessed with the trust fund recovery penalty is a responsible person.  The Comeaux case described below is a good example of the relevant factors courts look to when a taxpayer has been assessed with the trust fund recovery penalty by the IRS. The full

Taxpayer Not a Responsible Party in the District Court Case Comeaux v. U.S.

    In a refund suit filed in the U.S. District Court for the Western District of Louisiana, the taxpayer, Mark Comeaux (“Comeaux”) alleged that he was not a responsible person for collecting, accounting for, and paying the withholding tax liabilities.  Comeaux alleged that Gary Cain (“Mr. Cain”), the designated tax matters partner, was the responsible person.  The IRS assessed Comeaux as a responsible person for the tax periods ending March 31, 2006 through June 30, 2007.  In all, the IRS assessed Comeaux for almost $1 million in unpaid trust fund taxes.  During his tenure with Continuum Health Care Management, LLC and several rehabilitation and psychiatric hospitals (the “Companies”), Mr. Comeaux worked as a salaried controller, CFO, and accountant.  His primary duties were to bill Medicare, Medicaid, and private insurance.  The main issue in the case was whether Comeaux was a responsible person under I.R.C. § 6672.  The district court characterized the issue as whether Comeaux had the “effective power” to pay the Companies’ taxes—regardless of whether he in fact exercised any such power—and concluded that he did not.

Factors Establishing that Comeaux was Not a Responsible Person

The district court relied upon several factors in concluding that Comeaux was not a responsible person. The court found that Comeaux had no entrepreneurial interest in the Companies and had no authority to make decisions regarding purchases, contracts, or loans.  Comeaux was not authorized to sell the Companies' assets.  Further, he did not have the authority to determine which bills to pay and he was not authorized to make federal tax deposits to the IRS through the Electronic Federal Tax Payment System.  Comeaux did not sign or issue tax forms on behalf of any of the Companies, and he was not responsible for preparing or filing federal tax returns.   Comeaux also had no authority or control over employees.  Finally, he had no authority or ability to pay the payroll taxes relating to the Companies’ employees. After weighing these factors, the court found that IRS's arguments that Comeaux was a responsible person, and in fact its overall case against Comeaux, were unsupported.

As a result, the district court held that Comeaux was not a responsible person.  The court instead focused on explaining why Mr. Cain was a responsible person.  Mr. Cain oversaw and controlled the day-to-day operations and financial affairs of the Companies. Mr. Cain signed checks on behalf of the Companies and made decisions for paying creditors and vendors.  In addition, Mr. Cain was responsible for collecting and paying the Companies' withholding tax liabilities.  Although Comeaux occasionally signed payroll checks on behalf of the Companies, the court found that he did so on an infrequent basis and only in emergency situations upon express directive from Mr. Cain, after such checks were printed in amounts and to designees determined by Mr. Cain. Overall, the Court found that the facts of the case supported Comeaux's assertion that he lacked the power to be considered a responsible person.

Contact Nardone Law Group, LLC

Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their trust fund taxes and who are being assessed with the trust fund recovery penalty by IRS revenue officers. The tax lawyers at NLG have vast experience in representing individuals and businesses with the trust fund recovery penalty. If you are struggling with tax liabilities and are currently involved with a trust fund recovery penalty investigation with an IRS revenue officer, you should contact an experienced tax attorney today. Our experienced tax lawyers will work with you through the trust fund recovery penalty investigation to analyze whether or not you are a responsible party. Contact us today for a consultation to discuss your case.

Internal Revenue Service Offer-in-Compromise Program

    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 client 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.

    Since March 12, 2012, when the IRS announced its fresh start initiative, the IRS has actually come through and remained committed to this initiative.  We have seen a serious uptick in offer-in-compromises being accepted.  Now, you still have to disregard the advertisements and false information being presented by firms regarding the likelihood of having an offer accepted for the amount that you propose.  But, Nardone Law Group has had significant success in the area of Offer-in-Comprises since the IRS announced its initiative in March, 2012.  We strongly encourage our clients to contact us if they are experiencing difficulty with the IRS and the payment of their taxes.  What everyone needs to know is that there are options.

    Also, see an excerpt from our frequently asked questions regarding Offer-in-Comprises below:

How does an Offer-in-Compromise work?

Answer:  The IRS prefers a partial payment to no payment at all. Thus, the IRS is sometimes willing to settle a tax liability for less than the full amount if (a) the taxpayer is unable to pay the full amount, (b) there is doubt as to how much the tax liability is, (c) collection of the liability would create economic hardship for the taxpayer (such as where the taxpayer is out of work due to health problems, or where sale of assets to pay the tax would leave the taxpayer without enough money to meet basic living expenses), or (d) compelling public policy or equity considerations exist, and due to the exceptional circumstances IRS's collection of the full liability would undermine public confidence that the tax laws are being fairly and equitably administered. Exceptional circumstances for this purpose might include situations where a taxpayer relies on erroneous advice from the IRS, or a medical condition prevents a taxpayer from managing his financial affairs

The taxpayer starts the settlement process by submitting an Offer-in-Compromise. If the offer is grounded on any reason other than doubt as to how much the tax liability is, financial information must be submitted along with the offer. If it is grounded on doubt as to the liability, IRS does not generally request a financial statement.

Except where the offer is based only on doubt as to liability, the taxpayer must agree to comply with all tax law rules on filing returns and paying taxes for five years or until the offered amount is paid, whichever period is longer. If these requirements are not met, the compromise terminates and IRS can seek collection of the original liability amount.

It is also important to note that notwithstanding the unwieldy amount of paper required to process a successful Offer-in-Compromise, the odds of acceptance are weighted against the taxpayer from the beginning. The IRS will reject an Offer-in-Compromise if: (1) all of the documents are not properly submitted; (2) the taxpayer fails to submit any additional requested documents; (3) the amount offered is less than what the IRS could expect to collect; or (4) if there is a public policy reason to reject it.

Are there other collection alternatives if I do not qualify for an Offer-in Compromise?

Answer:  Yes.  Another way to defer your tax payments is to request that the IRS enter into a payment plan with you—called an Installment Agreement.  Under an Installment Agreement, the taxpayer repays the entire tax liability over a period of time in monthly installments.  A taxpayer makes a request for an Installment Agreement on Form 9465.  The IRS charges a $43 fee for Installment Agreements, which will be deducted from your first payment if your request is approved.  Form 9465 requires less information than the hardship extension application.  Under certain circumstances, if your outstanding tax liability is under $50,000, you will not be required to submit financial statements. Even if the IRS grants your request to pay in installments, you will be charged interest on any tax not paid by its due date.  But the IRS will impose the late payment penalty at only half the usual rate (1/4% instead of 1/2%), if you file your return by the due date (including extensions).

    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.

The IRS Offshore Voluntary Disclosure Program: When Opting Out May Not Make Sense

    The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program. Whether or not the Offshore Voluntary Disclosure Program is beneficial to a particular taxpayer depends upon that particular taxpayer’s facts and circumstances. For example, there are instances in which Nardone Law Group may advise a taxpayer not to pursue the Offshore Voluntary Disclosure Program. See our prior article on one scenario where opting out of the Offshore Voluntary Disclosure Program may make sense. But, there are also circumstances where Nardone Law Group may recommend that a taxpayer take advantage of the Offshore Voluntary Disclosure Program, rather than opting out. This article discusses one situation in which opting out of the Offshore Voluntary Disclosure Program may not be appropriate.

When Opting Out of the Offshore Voluntary Disclosure Program May Not Make Sense

    As noted in our prior article, the 27.5% Offshore Voluntary Disclosure Penalty takes the place of various penalties otherwise imposed outside the Offshore Voluntary Disclosure Program. There are exceptions to some of the penalties otherwise imposed outside the Offshore Voluntary Disclosure Program, which could prevent those penalties from applying to certain taxpayers. Thus, there may be cases where a taxpayer in the process of making a voluntary disclosure would owe less by opting out of the Offshore Voluntary Disclosure Program. But, in certain instances, opting out of the Offshore Voluntary Disclosure Program may result in greater liability and/or the possibility of criminal prosecution.

Example

    The Internal Revenue Service has published Frequently Asked Questions and Answers related to the Offshore Voluntary Disclosure Program (“IRS FAQs”). The IRS’ FAQ examples provide some guidance on the decision whether to pursue the Offshore Voluntary Disclosure Program or opt out.

    For instance, consider the following example from IRS FAQ # 51.2: Assume a U.S. citizen taxpayer failed to report the sale of an apartment building he owned in a foreign country in 2008, but has now disclosed the sale to the IRS. The apartment building had a value of $10 million and the taxpayer’s unreported gain on the sale was $6 million. The tax owed from the apartment sale was $2,100,000. The Taxpayer deposited all of the $10 million from the apartment sale into a foreign checking account that he had owned since 2008. The high balance in the taxpayer’s foreign account for 2008, and as of June 30, 2009—the date the taxpayer’s Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”) was due—was $10 million. Additionally, the taxpayer had held the apartment building in a foreign grantor trust. The taxpayer had created the trust in 2008 right before selling the apartment building, and transferred the building to the trust at that time. The taxpayer did not file the required Form 3520 Annual Return to Report Transactions with Certain Foreign Trusts and Receipt of Certain Foreign Gifts (“Form 3520”) with the IRS to report creating the trust and transferring property into the trust.

Result Under Offshore Voluntary Disclosure Program

    According to the IRS, the Offshore Voluntary Disclosure Program penalty for the above example would be $2,750,000 (e.g., 27.5% of the $10 million highest foreign account balance). Also, the taxpayer would have to pay the $2,100,000 tax deficiency plus interest and a 20% accuracy-related penalty of $420,000. Thus, the total penalty under the Offshore Voluntary Disclosure Program would be $5,270,000. See IRS FAQ # 51.2.

Result by Opting Out of Offshore Voluntary Disclosure Program

    According to the IRS, had the taxpayer elected to opt out of the Offshore Voluntary Disclosure Program in the above example, the IRS would have imposed an FBAR penalty of $5,000,000 for 2008. The IRS has authority to impose a penalty for willful failure to file an FBAR in an amount equal to the greater of: $100,000 or 50% of the highest account balance for the reporting year. Here, assuming the IRS could prove a willful failure to file, a 50% penalty on the checking account balance of $10 million as of June 30, 2009 is $5,000,000. Additionally, the taxpayer would owe the tax deficiency of $2,100,000 plus interest and applicable penalties for failure to file a return and/or failure to pay tax. Moreover, the taxpayer would be subject to FBAR penalties for all other open years during which the aggregate balance in the foreign checking account exceeded $10,000. Furthermore, the IRS may determine during examination of the taxpayer that the failure to report was due to fraud. In that case, the IRS would impose a 75% civil fraud penalty on the $2,100,000 tax deficiency, resulting in a penalty of $1,575,000. Finally, the taxpayer would be subject to a 35% penalty on the highest account balance in the foreign trust for failure to file the Form 3520, resulting in a penalty of $3,500,000 (35% of $10 million). Had the taxpayer opted out in this case, his overall liability would be either $11,020,000 or $12,175,000, depending on whether the IRS imposed the accuracy-related penalty or the civil fraud penalty, respectively, to his tax deficiency.

    Thus, as you can see, opting out of the Offshore Voluntary Disclosure Program may not be the best option for some taxpayers. But, it is important to note that the above example is a simplified scenario. In some instances, taxpayers will qualify for reduced penalties due to mitigating circumstances, or will have other circumstances under which the 27.5% Offshore Voluntary Disclosure penalty would produce an unduly harsh result. Accordingly, it is important to have an experienced tax attorney evaluate your case to decide whether the Offshore Voluntary Disclosure Program is best for you, or whether opting out of the Offshore Voluntary Disclosure Program is more appropriate.

Contact Us

    Nardone Law Group represents businesses and individuals in federal and state tax controversies, 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.

The Impact of the Foreign Account Tax Compliance Act on International Investments

The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program and the impact of Foreign Account Tax Compliance Act on taxpayer's investments.

The Treasury Department announced on January 17, 2013 that Norway has now joined the ranks of countries which have signed or initialed model agreements that facilitate the effective and efficient implementation of the Foreign Account Tax Compliance Act (FATCA). The United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain preceded Norway as countries that have signed or initialed model agreements. Treasury reiterated that it is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.

FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act in March 2010. The legislation, which is designed to reduce tax evasion, is generally effective for tax years beginning after 3/18/10, the date of enactment. According to the former IRS Commissioner Shulman, the IRS pushed for and obtained passage of FATCA to meet the broad array of challenges that the IRS faces in the international arena.  Thus, the IRS is focused on a multi-year international tax compliance strategy that is tailored for both corporate and individual taxpayers. For individuals, what this means, is that the IRS wants to ensure that US taxpayers with overseas assets pay what they owe.  According to the IRS, rooting out individuals hiding their money in bank secrecy jurisdictions is very important and the IRS is committed to that effort.  Thus, the cooperation of various companies through the signing of model FATCA agreements advances the IRS's cause in the international tax enforcement arena.

Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Internal Revenue Service's 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.

To read more about the Offshore Voluntary Disclosure Program, please see our recent blog posts on the subject, specifically related to Foreign Mutual Funds and the National Taxpayer Advocate's Opinion.

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.

The IRS Offshore Voluntary Disclosure Program: Penalties and Opting Out

    The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program.  Whether or not the Offshore Voluntary Disclosure Program is beneficial to a particular taxpayer depends upon that particular taxpayer’s facts and circumstances.  For example, there are instances in which Nardone Law Group may advise a taxpayer not to pursue the Offshore Voluntary Disclosure Program.  This article discusses one situation in which the Offshore Voluntary Disclosure Program may not make sense.

What is the Offshore Voluntary Disclosure Program and What is the Penalty Structure?

    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.  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.

    Generally, taxpayers who participate in the 2012 Offshore Voluntary Disclosure Program must pay a penalty equal to 27.5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets during the period covered by the voluntary disclosure.  But, in certain circumstances, some taxpayers may qualify for a reduced penalty of 12.5% or even 5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets, as opposed to the general 27.5% penalty.  Moreover, under the Offshore Voluntary Disclosure Program, taxpayers must pay a 20% accuracy-related penalty on the full amount of underpayments of tax, as well as failure to file and failure to pay penalties, if applicable.

Opting Out of the Offshore Voluntary Disclosure Program

    Because the 27.5% offshore penalty takes the place of various penalties otherwise imposed outside the Offshore Voluntary Disclosure Program, there may be cases where a taxpayer making a voluntary disclosure would owe less if the Offshore Voluntary Disclosure Program did not exist.  This is because certain penalties imposed outside the Offshore Voluntary Disclosure Program:

    1) May not apply or may apply at a lesser rate to some taxpayers due to mitigating circumstances; or

    2) May not apply to the large base to which the 27.5% Offshore Voluntary Disclosure Program penalty applies (accounts, entities, and assets). 

    For example, assume a U.S. taxpayer held a foreign account with a high balance of $1 million, which generated income of $100,000 each year for the past 5 years.  The taxpayer mistakenly assumed he only had to report the income on his foreign tax return, and did not report any of the income on his U.S. tax return.  The taxpayer also did not report this foreign account to the IRS on a Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”), as is required for individuals with a financial interest in or signature authority over a foreign financial account.  After application of the foreign tax credit for taxes paid to the foreign country, the taxpayer had no tax deficiency for the unreported income, as reflected on the taxpayer’s amended U.S. individual income tax returns.

    The Offshore Voluntary Disclosure Program penalty in the above example is $275,000 (27.5% of $1 million).  But, if the taxpayer in this example decides to opt out of the Offshore Voluntary Disclosure Program, the penalty for failing to file an FBAR:

    1) May not be imposed, if the failure to file an FBAR was based on reasonable cause (i.e.,  based upon the advice of a tax professional); or

    2) May be $10,000 per account per year, if the failure to file an FBAR was not willful (here, $50,000).

    Thus, as you can see, opting out of the Offshore Voluntary Disclosure Program may be the best option for some taxpayers.  But, it is important to note that the above example is a simplified scenario.  In many instances, taxpayers will be facing additional penalties for the following: (i) failure to file certain other required information returns and forms; (ii) failure to file income tax returns; (iii) failure to pay the amount of tax shown on an income tax return; and (iv) accuracy-related penalty on underpayments of tax due.  Moreover, taxpayers should understand that opting out opens the case up for examination of all relevant years and issues.  Consequently, if issues that were not disclosed by the taxpayer are discovered under a full scope examination, those issues may be subject to review by IRS Criminal Investigation.   Thus, it is important to have an experienced tax attorney evaluate your case to decide whether the Offshore Voluntary Disclosure Program is best for you, or whether opting out of the Offshore Voluntary Disclosure Program makes more sense.

    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.

Fraudulent Transfer of Assets: The IRS Takes Into Consideration Assets of Successor Corporation for Offer-in-Compromise

The tax attorneys at Nardone Law Group have been representing financially distressed businesses more and more in recent years due to the economic downturn that has hampered business in Columbus, Ohio and throughout the United States.  While many business taxpayers with federal tax liabilities may have heard of the offer-in-compromise program, some of the nuances of the offer-in-compromise program are less well-known.  This article briefly describes how the Internal Revenue Service (“IRS”) deals with successor liability in reviewing an offer-in-compromise application filed by a corporate taxpayer after the recent Tax Court memorandum opinion Alessio Azzari, Inc., TC Memo 2012-310.  To read more on how the IRS uses successor liability to collect federal tax liabilities, read our recent article that can be found here.

The Offer-In-Compromise Program: A Primer

The Azzari case highlights the problem of attempting to conceal assets when the taxpayer is being aggressively pursued by the IRS for payment of delinquent federal tax liabilities.  A brief background on the offer-in-compromise program helps shed light on why the taxpayer in the Azzari case ran into problems. An offer-in-compromise is an agreement between a taxpayer and the Internal Revenue Service (IRS) that settles the taxpayer’s tax liabilities for less than the full amount owed.  There are three types of offers-in-compromise: (1) doubt as to collectability—where doubt exists that the taxpayer could ever pay the tax in full within the remainder of the statute of limitations on collection; (2) doubt as to liability—where a legitimate doubt exists that the assessed tax is correct; or (3) effective tax administration—that is, exceptional circumstances exist that would allow the IRS to consider an offer-in-compromise. 

In most cases, the IRS will not accept an offer-in-compromise unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP).  Thus, it is inherent in the offer-in-compromise program that a lower RCP will yield a lower acceptable offer.  The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.  Importantly, it also includes certain dissipated assets, or assets that the taxpayer transferred for less than full value.  As a result, if a taxpayer is being pursued by the IRS to collect federal tax liabilities, a taxpayer cannot transfer all of its assets in an effort to decrease its RCP.  The IRS sees through such conduct and will increase the RCP to include the transferred assets.  The Azzari case is a good example of the IRS expanding the RCP to include the assets of a third party successor corporation.

Successor Liability: Fraudulent Transfer of Assets

In Azzari, the Tax Court was asked to determine whether the IRS Appeals Office abused its discretion by rejecting a corporate taxpayer’s offer-in-compromise when the taxpayer failed to include the assets of its successor corporation in determining its reasonable collection potential.  The Tax Court concluded that the IRS Appeals Office did not abuse its discretion and remanded the case back to the IRS Appeals Office so that the taxpayer could resubmit the offer-in-compromise to include the successor corporation’s assets.  

Briefly, in Azzari, the taxpayer was a corporation called Allessio Azzari, Inc. (“Azzari”).  Azzari transferred some of its account receivable to its “brother-sister corporation” Artex Construction Co., Inc. (“Artex”), which had the same shareholders as Azzari, for less than fair market value.  The Tax Court concluded that the IRS Appeals Office did not abuse its discretion when it rejected Azzari's offer-in-compromise because it concluded that Artex was merely a successor corporation to Azzari and that its assets should be considered in determining Azzari's reasonable collection potential.

Generally, when a buyer-corporation acquires the assets of a seller-corporation, the buyer is typically not liable for the debts of the seller.  Successor liability, determined under state law, generally arises: (1) when the successor expressly assumes the liabilities; (2) when the transaction amounts to a de facto merger; (3) when the successor is a mere continuation of the seller corporation; and (4) when the transaction is entered into fraudulently to escape liability.  In most jurisdictions, a presumption of fraud arises when the assets are transferred for no consideration.  In Azzari, a presumption of fraud arose because the taxpayer transferred its accounts receivable arguably for no consideration and the Court found that the taxpayer's conduct was evidence of an intention to avoid its creditors.

Using Azzari as an example, taxpayers must be cautious of successor liability and the dissipation of assets rules when being pursued by the IRS for unpaid federal tax liabilities.  If the IRS believes that you have transferred assets inappropriately, they will pursue you and the third party that possesses those assets.  Thus, when preparing an offer-in-compromise, it is of the utmost importance to critically analyze the RCP taking into consideration assets that have been transferred within a certain amount of time for less than fair market value. 

Contact Nardone Law Group

Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their tax payments to the IRS. 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. 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 Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

Tax Planning Update: Increased Withholding May Avoid Estimated Tax Penalty

As the 2012 tax year begins winding down, it is important to be sure that you have made correct estimated tax payments throughout the year.  If you have not, you may be penalized for the underpayment of estimated taxes.  Some taxpayers with significant income in addition to their salary may find that the amount of tax withheld is not enough to cover their required estimated tax payments.  The tax lawyers at Nardone Law Group, LLC wanted to inform our clients in Columbus, Ohio how increased withholding can be used to avoid the estimated tax penalty. 

Estimated Tax Withholding Summary

If you are subject to the estimated tax, you must pay 25% of your required annual payment for the current year on April 15th, June 15th, September 15th, and January 15th of the following year for a calendar year taxpayer. The required annual payment is generally the lesser of 100% of the tax shown on last year’s return or 90% of the tax on your current return.  Under I.R.C. § 6654, to calculate your 2012 estimated taxes, if your 2011 adjusted gross income exceeded $150,000, you must pay the lesser of 110% of the tax shown on last year’s return or 90% of your 2012 tax liability.  If your quarterly estimated tax payments, plus your salary withholdings, do not total at least 25% of your required annual payment, then you may be penalized for underpayment of estimated taxes.  The problem is that you cannot simply avoid the penalty by increasing your estimated tax payment for a later period.  Thus, some tax planning is necessary.

Tax Planning: Increase Withholding as Solution

If you know your estimated tax payments will fall short of your required annual payment for the year, you may withhold more from your salary for the rest of the year to cover the difference.  Under I.R.C. § 6654(g)(1), income tax withheld is deemed a payment of estimated tax in equal amounts on each of the four installment due dates, unless you establish the dates on which all the amounts were actually withheld.  Thus, you can retroactively eliminate the estimated tax penalty if you withhold additional amounts from your salary for the rest of the tax year.

Example: You expect your 2012 tax liability to be $20,000.  Your 2011 return showed a liability of $18,500.  Your withholding for 2012 will only total $15,000 and you have made no estimated tax payments.  If you make an additional estimated tax payment of $3,000 on January 15, 2013, you will avoid any underpayment penalty for the last installment ($15,000 plus $3,000 equals $18,000, which is 90% of $20,000) but you may still be penalized for underpaying the first three installments.  On the other hand, if you withhold an additional $3,000 from your salary before the end of 2012, your total withholding ($18,000) will be treated as estimated tax payments of $4,500 on each of the installment due dates.  Since $4,500 is 25% of $18,000 (90% of $20,000), you can completely avoid the underpayment penalty for all four installments.

Nardone Law Group represents individuals and businesses in federal tax issues, including those who have fallen behind on their estimated tax payments to the IRS. If you are struggling with tax liabilities or are interested in knowing additional tax planning strategies, 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 Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.

Withholding of Tax on U.S. Gambling Winnings for Nonresident Aliens

Generally, a foreign person (that is, a "nonresident alien") is subject to a 30% tax on the gross proceeds from gambling winnings in the United States if that income is not effectively connected with a U.S. trade or business and is not exempted by treaty.  Thus, if you are a nonresident alien and have traveled to the U.S. to gamble at a casino, you will notice that the casino automatically withholds 30% of your gambling winnings, above a certain threshold amount.  If you gambled on slot machines, that threshold amount is $1,200.  The 30% tax on gambling winnings is to ensure the Internal Revenue Service (the "IRS" or "Service") receives their share of your gambling income up front.  The tax lawyers at the Nardone Law Group, LLC have noticed more and more disputes between nonresident aliens and the IRS involving withholding issues and frozen tax refunds related to taxes on gambling winnings.This article describes the Service's procedures for withholding taxes on a nonresident alien's gambling winnings and provides guidance as to obtaining a tax refund when you have lost more gambling than you have won.

What is a "Foreign Person" for IRS Purposes?

A foreign person is defined as a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate and any other person who is not a U.S. person. In the context of gambling in the United States, a nonresident alien is an individual who is not a U.S. citizen or resident alien.  Resident aliens are those who meet either the "green card" test or the substantial presence test.  For more information on resident versus nonresident alien status, see IRS Publication 519.  A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding taxes on gambling winnings. 

The 30% Tax on U.S. Gambling Winnings

Gambling winnings paid to a nonresident alien are subject to 30% withholding under Internal Revenue Code (the "Code")sections 1441(a) and 1442(a).  The casino reports your gambling winnings and the 30% tax withheld to the IRS on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. No tax is imposed on nonbusiness gambling income that a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel. It is also important to note that not every citizen of a foreign country is subject to the 30% tax on U.S. gambling winnings.

Refund of Tax on Gambling Winnings

If you are subject to the 30% tax, and you have gambled in the United States, you may be able to obtain a refund of the amount of the taxes withheld, if you are from one of the treaty countries listed under Gambling winnings (Income Code 28) in Publication 515.  According to the United States’ Tax Treaty with Canada, Canadians are exempted from the rule requiring 30% withholding on tax winnings. 

If you are from one of the treaty countries listed in Publication 515, the IRS will not voluntarily refund your money. Generally, you will need to prepare a file Form 1040NR, U.S. Nonresident Alien Income Tax Return, and you will need to be able to substantiate (prove) your gambling losses. Often times, the most difficult part of the process is to get the IRS to agree with your calculation of gambling losses. Thus, consulting with a tax attorney with experience in resolving controversies between gamblers and the IRS to thoroughly review your case can greatly benefit your chances of obtaining a refund of withheld gambling income taxes.

Contact Nardone Law Group, LLC

If you are a nonresident alien, and you have had taxes withheld from your gambling winnings in the U.S., you should contact an experienced tax lawyer today. The tax lawyers at Nardone Law Group, LLC have vast experience representing nonresident aliens before the IRS to obtain tax refunds. Our experienced tax lawyers will thoroughly review your case to determine whether you are entitled to a refund for the taxes withheld on your U.S. source gambling income. Contact us today for a consultation to discuss your case.