NYS Sales Audits

There is no denying that a sales tax audit is not a pleasant experience.  As a tax attorney and CPA that helps clients navigate through the audit process with minimal pain (emotional and financial), I have gained a unique perspective on the motivations of the state to enhance their collections of tax. As awful as this sounds, it should be a reminder that the best defense to an audit is to have adequate records. Often, a client does not have adequate records, since they were either unaware of the need for good records, or it was to much of a financial burden to maintain the records needed to avoid an audit adjustment. When a client does not have adequate records, the tax laws allow the state to start estimating the taxable sales, and they never estimate on the low side.

Since having good records is so critical to a successful audit, I spend a lot of time with my clients to organize and improve their sales tax records before the audit starts. We (my client and I) then sit with the auditors when they perform the audit to be available to answer questions. Most clients are initially uncomfortable being at the audit, but over time they understand the value of being there and helping influence the auditors, by showing our human side and showing that we will not be pushed around, in a friendly but productive fashion. If the auditor is being unreasonable, then we ask to speak to the persons supervisor and division head if we determine that would be productive.

If all else fails, and the client has poor records and the state creates a law bill the appeal of that sales tax bill is the next step. In the conciliation conference, a mediation occurs between the taxpayer and state to negotiate a settlement. Often the results of this process are very good, and a fair result can be obtained. If that does not happen, the next step would be to go to the Division of Tax Appeals. However, from my experience settling at the mediator produces the best outcome for most cases.

 

How Can the IRS Taxpayer Advocate Help!

A recent client came to me with a unique problem. He and his wife owed the IRS about $80,000. He was a NYS Judge and if the IRS filed a notice of federal tax lien (NFTL), it would be very embarrassing to him and since he handles business law cases, the Chief Judge may ask him to resign since the tax liens would effect his credibility in the court system.

The IRS wanted to file the NFTL to protect its interest. By law a NFTL gives other creditors notice that the IRS has a tax lien against your property. The tax lien itself (i.e. not the notice part) is created automatically once a taxpayer owes the IRS. Even after showing the IRS that the NFTL had no real value since the Judge had no assets (we obtained appraisals on all the taxpayers property), they still wanted to file the NFTL, even after we showed that it was not in there best interest to file the NFTL since the taxpayers ability to pay back the debt hinged on his ability to work and earn income.

We then went to the Taxpayer Advocate office. They assist taxpayers who are having difficulty dealing with the IRS. The office intervened and the IRS agreed that a NFTL would not be in the IRS or taxpayers best interest after we showed them a letter from the Chief Judge that my client ability to work required no public notice of this tax issue. We were able to establish an affordable payment plan to pay off the tax debt over five years without the negative effects of a tax lien.

Two uses of the IRS form 433-A, 433-B or 433-F

While involved with an IRS collection case, for matters over $50,000 the IRS will ask for a 433-F form to be completed, which is a financial disclosure of your assets and income, or a form 433-A/B form (a variety of the 433-F form) if an IRS Revenue Officer is assigned to your case. From the clients perspective they often under-estimate the importance of this form, and its proper preparation. I often see even CPA’s not completing the form correctly, so obviously the IRS has not made it easy for the taxpayer who has a tax issue. The main use of the form from the perspective of the IRS is to gather information on assets they can levy and seize, and to compute the monthly income you can pay them. From the clients perspective, it is very important to craft a picture of your assets and income so you form the basis of a payment plan offer to the IRS that is justifiable and that you can maintain without defaulting the payment plan. Therefore, it is critical to complete these forms in your best interests while remaining truthful. Its a skill but the results are worthwhile in resolving your tax debt problem since I often find that as I keep working on the form (in some cases 8-12 hours) I see ways to achieve a result that is very helpful to a clients case.

By: Timothy S. Hart

When is an Offer In Compromise a means for penalty relief?

I had a recent client that owed about $30,000 to the NYS Tax Department. The taxes related to late filed income tax returns for a few years, where he sold a sizable asset. We went through the normal procedure of filing the unfiled tax returns, and once the tax assessments were received we attempted to get the penalties abated. It was somewhat hopeless (to be honest). I felt bad since the client only makes about $20,000 a year in income so the penalty relief would have been very helpful to him. The Tax Department was very willing to listen, but they never granted any meaningful relief.

Then I had an idea. The client owned a piece of real estate that made him clearly solvent (assets greater than liabilities). One requirement, or method, of qualifying for an offer in compromise in NYS is that your insolvent (liabilities greater than assets). However, that said, the offer in compromise group is more willing than the NYS collections group to see the realty of a persons financial ability to pay, and in my case a person who owes more than one years worth of gross income is going to find it very hard to pay back the debt. I submitted an offer in compromise even though I knew it would be rejected since he did not qualify, but I had a hunch. The Tax Department called me to reject the offer, as I expected, but to my “surprise” agreed to remove all the penalties. The outcome was all that I could have hoped for.

By: Timothy S. Hart

Innocent Spouse Relief

In September 2013, the tax law was revised to greater benefits for those who are seeking tax relief related to debts incurred when they signed a joint tax return was an ex-spouse. The new tax law increases the chance that the Internal Revenue Service will hold that the ex-spouse is not liable for the sins of the other. Clients who are seeking this type of relief would benefit greatly from an attorneys assistance in correctly documenting and proving their case to the IRS.

The requirements of granting Innocent Spouse Relief are as follows:

1. You filed a joint tax return.
2. You file your claim within 10 years.
3. You did not transfer assets with your ex-spouse as part of a fraudulent transfer.
4. You did not know the return filed was false.

Once these threshold tests are met, your case is decided by the IRS based upon the following criteria.

1. Economic Hardship
2. Having Knowledge of the tax issue that created the tax debt
3. Current Martial Status (with person whose actions caused the tax debt)
4. Current compliance with the tax laws.
5. Mental or Physical health.

Please keep in mind not all of these requirements have to be met to have a successful claim. Since a joint tax return liability survives the divorce, a spouse who owes taxes to the IRS because of tax issues related to their ex-spouse can get relief under this tax rule.

By: Timothy S. Hart

IRS First-Time Abatement

The IRS First-Time Abatement Policy can be a very useful tool to lower an outstanding tax bill. It is most helpful when someone made a one-time mistake (late filing of return, late payment of tax, etc.) and the IRS penalized the taxpayer for this lateness.

If you have filed all of your tax returns, and have made arrangements (such as an installment agreement) to pay whatever tax is owed, you can ask the IRS to abate the penalty charged under the tax law policy called the IRS First-Time Penalty Abatement policy. This policy was implemented to help taxpayers who have a clean history of tax compliance (the IRS looks at the last three years), and to promote future compliance by working with the taxpayer by offering them this one-time opportunity. The IRS will not offer to remove the penalties when you speak to them about how to pay the tax, so it must be specifically asked for by the taxpayer (or his representative attorney).

This policy does not require reasonable cause (see Form 843) so it is simple and quick to request. However, the relief is not available for some penalties (Form 706- Estates), but it is generally available. Also, it is best to ask for the penalty relief when it will do the most good, and a tax attorney can tell you that.

If your track record is not clean, you can still request penalty relief by showing reasonable cause for the late filing or late payment. A showing of “reasonable cause” will require proving that the taxpayer exercised “ordinary business care and prudence” in trying to satisfy their tax obligations (filing and paying), but nevertheless failed to comply with the tax laws because of some specific circumstance. As you might imagine, this is not easy and that is why the IRS First-Time Abatement Policy is so helpful. It is important to consult with a tax lawyer to learn more about your options for penalty relief.

By: Timothy S. Hart

Income Tax Audits

As New York State Citizens, the top reason a person thinks they need a lawyer is when they are audited by the IRS or NYS Tax Department, or when they have unfiled tax returns that need to be filed and a tax payment plan established. However, timely tax planning is a better offensive approach to tax issues than being in a defensive mode. As New York Tax Attorney law firm, we can clearly state that a proactive approach to solving tax issues produces better results.

One common life event that benefits from advance planning is the tax issues related to receiving an inheritance. As New York readers may know, rarely do inheritances trigger a tax liability, unless it is in the form of a tax deferred account (i.e. 403(b), 401(k), etc.) that is received as a beneficiary. Less likely, but still a significant issue is that about 15% of estates in New York State have unresolved outstanding tax issues or tax liabilities. From a practical approach, this means the executor or beneficiaries of the estate are put into the position of needing to defend the tax issue or liability before they receive their inheritance since the IRS or NYS Tax Department can have a claim against the estate assets by filing a tax lien or tax warrant. Another area of concern is unreported income related to unreported assets (FBAR foreign account issues). This tax controversy would need to be resolved before the assets are distributed. Lastly, even with the high estate tax threshold of $5.25 million before an estate is taxable for federal tax purposes, the New York State threshold is only a modest $1 million, so it is triggered more often and needs to be planned out.

For these issues, a lawyer can work with the estate attorney to assist with these issues and reach a result that everyone can benefit from.

By: Timothy S. Hart

Tax Crimes

Under the U.S. tax law, a tax crime occurs when a person has violated the following law: “[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof…”. One who is found guilty of the tax crime “felony criminal tax evasion” shall be fined up to $100,000 for an individual and up to $500,000 for a corporation and/or face up to 5 years in prison. In addition, the convicted taxpayer of a FBAR tax crime will also be responsible costs to try the case. The two main types of tax evasion include: 1) the evasion of assessment and 2) evasion of payment of taxes. The evasion of assessment includes failure to file or filing a false instrument. Evasion of payment occurs after a tax is assessed by the IRS, and the taxpayer conceals assets available to pay taxes.

Under the US tax law, a taxpayer convicted of misdemeanor tax fraud charge is guilty of “[a]ny person required … to pay any estimated tax or tax, or required … to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations…”. One who is found guilty of the tax crime “misdemeanor criminal tax evasion” shall be fined up to $25,000 for an individual and up to $100,000 for a corporation and/or face up to 1 year in prison. In addition to the fine and/or jail time, a misdemeanor-convicted taxpayer will also be responsible for the costs of prosecuting the case. Normally, with a misdemeanor conviction there is little chance of prison time for this type of tax crime.

Criminal tax evasion and committing tax fraud are serious offenses that carry serious consequences. The common thread in these offenses is willfulness. A taxpayer must intentionally act or refused to act where required for a tax crime to occur, but that is difficult to prove for all parties involved (the US Attorney and/or taxpayer, or State).

By: Timothy S. Hart

IRS Tax Help

Many New York City and New York State Capital District residents know that tax season is right around the corner and it is not on top of their wish list of pleasurable activities. After all, the filing of income tax returns is a time consuming process, and the complex tax laws are sometimes confusing. For most of us, we wished there was a simpler way.

While the process can be painful, it does not compare to the hardship you will potentially  face if your tax return is audited by the IRS. People who make significant money (more than $200,000), are self employed, or have higher than normal itemized deductions are most likely to have to face the prospects of an income tax audit. You can get IRS tax help with a tax attorney or CPA. However, keep in mind your best audit defense is actually spending time with your tax return preparer to make sure the numbers on the return you are filing this season can be substantiated. I can’t tell you how many times someone says to me when I ask them if they reviewed the tax return? “No, I just signed the tax return and did not look at the numbers”. This is a very big mistake since both the IRS and NYS will hold you liable for tax issues in your tax returns. Of course, they can also penalize your tax preparer (usually either a $1,000 or $5,000 fine – higher fine if conduct is willful), but they will also hold you liable for the underpaid taxes and penalties so the tax problem is yours to resolve.

For those you who are selected for an income tax audit, you should not fear the worst. Most importantly, anyone under an income tax audit should get IRS tax help by hiring a tax attorney or CPA to help them, and should have that person respond to the IRS in a timely manner. Ignoring IRS income tax audit notification letters creates big problems for an individual since the IRS will simply adjust the tax return in its favor and you have no chance to provide any input. Therefore, keep in mind that when you sign your income tax return this year to review the return in detail, ask questions, and know what you are signing.

By: Timothy S. Hart

Amending Same Sex Couple’s Tax Returns

In 2011 we represented a client who had unfiled tax returns, and we created for him a tax payment plan. The client was a spouse in a same sex marriage. We prepared and filed the income federal income tax returns as single for the Internal Revenue Service, since they did not recognize the marriage.

Flash forward to 2013. When the Supreme Court ruled against Section 3 of the Defense of Marriage Act (DOMA), it created the opportunity for same sex married couples to file joint federal tax return. For the most part filing a joint tax return is more tax efficient for a couple, but it does have downsides since a joint tax return does create joint and several tax liability for any unpaid taxes. Under the tax law, for the tax year 2013, and future years, same sex couples must either file a joint income tax return or married filing separately tax return. For tax years before 2012, under the tax law a return filed now generally must file using a joint filing status, or married filing separately status, for all back tax years they were married.

If the 2012 tax returns were already filed, the possibility exists of amending the filed tax returns if that would produce a tax refund. A taxpayer seeking a refund must  generally file a refund claim within three years from the date the tax return was filed, or two years from the date the tax was paid. As a NY Tax Attorney, for most cases we have seen, the difference in the expected refunds from amending the tax returns has not been worth the time and expense of going through that process, but every case is unique and needs to be evaluated since if 1) only one spouse worked, or 2) one spouse was covered by others health insurance that was included in taxable wages, that would likely produce a benefit. Please keep in mind that filing jointly can also raise the overall tax liability, so a word of caution for that issue.

In summary, if you have unfiled taxes, or have filed but do not understand the tax laws well enough to determine the best way to obtain a refund for taxes paid. We can assist you with your back taxes and helping to reduce your tax debt, or obtain a tax refund if it is available.

By: Timothy S. Hart