Unfiled Tax Return Help

When we meet with clients who need unfiled tax return help, they often fall into three main categories.

The first type of client is the self employed person who due to financial difficulties was not able to make their estimated tax payments during the year, and when it came time in April to file their return they did not have the money to pay the taxes, so they decided not to file. While this is very understandable situation, after doing this for many years creates significant legal issues. The second type of client is the employee who modifies their income tax withholding so its very low, and then does not file their annual income tax returns. Obviously, when the IRS finds out about this, they force the client to have the correct income tax withholding taken out of their pay. The third type of client either is a procrastinator who just did not get around to filing their income tax returns, or the client had a traumatic event in their lives (a death, divorce) and this event caused them to fall behind.

The good news is that under the tax laws, and procedures applied by the IRS, it is very rare that any of the above client situations results in criminal charges for tax fraud or tax evasion. As a tax lawyer, I do see the State of New York prosecuting these cases much more frequently, but often we are able to get them reduced to misdemeanors (instead of a felony). Therefore, in most cases the solution to this tax problem is to negotiate a tax settlement with the IRS and State you live, and file the tax returns that are unfiled. When a client needs unfiled tax return help, what they really need is a way to pay the back taxes owed in an affordable manner.

Based upon the client’s financial status, I have found the IRS to be very fair in creating affordable tax payment plans. The State of NY tends to be less flexible, and typically wants the tax owed paid back in 60-72 months. Both the IRS and NYS also offer a method to compromise the tax debt, and based upon your financial status it may be possible to settle for much less than what you owe through an offer in compromise.

By: Timothy S. Hart

FBAR IRS – Foreign Bank Records

Recently the Court of Appeals for the Fourth Circuit affirmed a lower district court, and ruled that two US taxpayers are required to supply foreign account bank statements under a FBAR IRS subpoena. This ruling is consistent with other Courts around the country who have held that one can not invoke your fifth amendment rights to avoid producing the documents.

The rationale for the decision is based upon the Supreme Court case of Marchetti v. U.S. which held that there is a Required Records Doctrine exception to the Fifth Amendment rights where 1) the governments inquiry is essentially regulatory, 2) the information sought is required to be a preserved record that the regulated person has customarily kept, and 3) the records have assumed public aspects rendering them public documents. Taxpayers seeking to avoid production of the documents have had a very difficult time over coming the Required Records Doctrine. Therefore, one should consider an FBAR voluntary disclosure if you have undisclosed foreign accounts that have associated unreported income since the penalties for non-disclosure can be very high.

FBAR IRS background: The FBAR IRS report (The Report of Foreign Bank and Financial Accounts) is used to report a financial interest in, or signature authority over financial accounts in foreign countries. No FBAR IRS report is required when the account balance never exceeds $10,000 during the year. When filed by June 30th of each year, the reports become part of the Bank Secrecy Act database. The Bank Secrecy Act regulates offshore banking accounts and under that law contains various record keeping and inspection rights.

By: Timothy S. Hart

Help Back Taxes

Help back Taxes That is a common call for help that we hear as New York Tax Attorneys & CPA’s. In most cases the problem is compounded with a threat of an income tax levy by the IRS, or an income execution by New York State. In some cases once the tax returns are prepared no taxes are owed, but in most cases taxes are owed a either a tax payment plan has to be established, or an offer in compromise needs to be submitted.

Elsewhere on this website, we discuss in length payment plans and IRS offers in compromise. Here, I would like to give you two real life stories to show how the rules work and their benefits in real life situations.

1) Help back taxes example #1. In my first example of client called and said she owned her own business and was arrested for not filing her New York State tax returns for 2000 to 2007. The income tax liability under the tax laws was very substantial both for the IRS federal taxes ($1.2 million) and New York State taxes ($75,000). Her current income is about $110,000 a year, and she lives in the New York City area and can afford to pay $1000 a month toward the tax debt. Based upon these facts, a payment plan would not be an ideal solution since my client would be paying off the tax liability over a 10 year time period (or more), since that is the IRS collection period under the statute of limitation rules. The IRS may even refuse the $1000 a month request, and demand more. Assuming the IRS agrees to $1000 a month, every few years under a payment plan where the full debt can not be paid off in 10 years, the IRS will ask for updated financial information and try to get more per month. Not ideal, but at least the monthly payment is affordable. They IRS calls this a part pay installment agreement. However, not an ideal situation for either the taxpayer of the IRS. In this type of case an IRS offer in compromise would be the best way to settle this type of tax problem. Since the State of New York filed criminal charges, a payment plan with them would be the best situation to resolve the criminal issue and use the $1000 a month toward that debt.

2) Help back taxes example #2. In my second example of client was an employee but claimed very high withholding tax deductions so little state or federal taxes were taken from her paycheck. She made about $60,000 a year and owed about the same. She was very ill, and her income was uncertain. In this case we convinced the IRS that this taxpayer was not collectible, and the debt should not be in active collections. This allowed my client to pay nothing toward the tax debt and use all of her money to live on. Once her illness was resolved, she felt more comfortable at that time to start making monthly tax payments and then submit an offer in compromise to resolve the tax debt.

When a client calls and requests help with their back taxes, a request for help back taxes can lead to solution to their tax issues that will make a substantial difference in their lives. As a NY tax attorney we are here to help you with your tax problem.

By: Timothy S. Hart

IRS Debt Relief Program

The ability to qualify for a IRS debt relief program is contingent upon meeting certain criteria set by the tax law and IRS administrative tax rules. The two types of IRS debt relief programs are a 1) part pay installment agreement, and the second is an Offer in Compromise. Both of these programs require that all unfiled tax returns have been filed, and that you are current with the current period tax liabilities.

The first IRS debt relief program is a part pay installment agreement. The reason it is called part pay is that it is an IRS installment agreement in which you will not pay off the tax debt in full over the remaining collection statute of limitations (typically 10 years). Often this is a result of an income level that is only sufficient to support basic living expenses, which leaves little for the IRS to have to pay down the tax debt. Since the IRS will ultimately have to write off the balance of the unpaid tax debt, they will require the submission of a form 433-F or 433-A to prove out your income, expenses and assets. I have found from experience that this technique is very useful since it does not require a down payment like an Offer in Compromise would, and it takes much less time to enter into this type of agreement than an Offer in Compromise.

The second IRS debt relief program is a Offer in Compromise. This program produces great results if you qualify and you have the right fact pattern of a large tax debt owed, with little income after paying basic expenses, and no substantial assets. Also, you can not be currently in a bankruptcy. The penalties and interest on the unpaid tax debt will still accrue while your offer in being evaluated. There is a $150 fee, and the offer can be paid in either a lump-sum, with 20% down with the offer papers, and the balance in five or fewer payments within 24 months of the offer being accepted. The other payment option would be to enter into a periodic payment program with the IRS for the offer amount, all being paid within 24 months from the date of acceptance. In general; if you pay in five or fewer months from the date of acceptance, the lower the IRS will accept.

From my experience either IRS debt relief program produces significant benefits to bring the tax debt down to the point it is affordable to pay off.

By: Timothy S. Hart

How to file back taxes?

Often, the first question I am asked as a NY Tax Attorney by a client is “Am I in criminal trouble” for not filing my tax returns, and the second question is how to file back taxes?. The first step to resolving this tax issue is to determinate the  number of tax years that have back taxes owed. The only way to determine this amount correctly under the income tax law is to prepare the unfiled tax returns using actual data. To do this, tax data is needed for each unfiled tax year. If the income earned during the time period in question is income from an employer, the next step would be to obtain all the prior year wage statements and tax deductions to compute the taxes owed for that year. If the income during the time period was self-employment income, usually the best approach is to first obtain the bank statements for the business income to compute the tax liability, and then gather tax deduction documents to complete the process. Please be aware that over time the tax law changes, so you will need to compute each years tax liability based upon the tax laws in effect for that tax year.

Once, the income tax liability is known. Then, either a payment plan or offer in compromise can be established to resolve the tax debt. Under the tax law, the issue of of how to file back taxes is best handled by contacting the IRS and asking for an extension of time to prepare the tax returns. That way, the risk of a tax levy or tax lien is avoided during this time, and overall it shows cooperation by the taxpayer to deal with the tax problem. Once the income returns are filed, it usually taxes between 8-12 weeks for the IRS to process the returns. This time delay is very useful since it gives us time to develop a strategy with you on how to deal with the issue. For potential criminal issues, it is very rare that unfiled returns, or back taxes owed, cause criminal changes to be filed when the taxpayer files the returns before a criminal investigation is commenced. Therefore, it is always best to act promptly to this issue of back taxes and is a critical component on how to file back taxes. Form my experience as a NY Tax Attorney, This above approach is the best, and answers the main issue of how to file back taxes.

By: Timothy S. Hart

Can you file Bankruptcy on IRS Debt?

Under the tax law, filing for bankruptcy is one way to reduce or even eliminate your tax liabilities, but often it is not the best solution for our clients. In response to the question can you file bankruptcy on IRS debt? In general, there are two different types of bankruptcy, liquidation or “straight bankruptcy” (Chapter 7) and reorganization (Chapter 11 or Chapter 13). Liquidation or straight bankruptcy will result in liquidation of debts including some or even all of your income tax liabilities. Reorganization can provide a reasonable payment plan for taxes due to the IRS through the use of a Bankruptcy trustee.

Liquidation or straight bankruptcy is a process where assets, that are not exempted under federal or state law, are liquidated (sold) and then distributed to unsecured creditors on a pro-rata basis. Whatever amount is distributed to such creditors satisfies the remainder of the debt owed, regardless of what the actual balance of the debt is. In general, the IRS would be included in the group of unsecured creditors that is paid out of the liquidation proceeds unless they filed a tax lien. This type of bankruptcy is limited to debtors whose income is below a threshold amount.

Under the tax law, reorganization is a process that forces a payment plan through a Bankruptcy trustee. This would usually be a payment plan over 60 months. Creditors, including the IRS, must accept a payment plan in an amount that at least matches or exceeds the amount that would have been paid in liquidation and which will pay secured and priority creditors in full within five years. Non-dischargeable taxes are often considered priority debts and as a result must be paid within five years. In order for individual income tax liabilities to be dischargeable, the liabilities must meet the following general rules: 1.) More than three years must have elapsed since the tax return resulting in the liability was due, including extensions; 2.) The tax return must have been filed two years earlier than the bankruptcy petition; 3.) At least 240 days must have elapsed since the date of an IRS assessment. In addition, the tax debt must not be a result of a guilty plea of tax evasion or tax fraud.

Once you petition for bankruptcy, under the tax law, there is an automatic stay that prohibits collection activities from all creditors including the IRS. It is important to note that, the statute of limitations, the time that the IRS has to collect your taxes (10 years), will also freeze during this time and resume after the bankruptcy is concluded and an additional 6 months is tacked on. Filing for bankruptcy stays on your credit report for 10 years. However, a federal tax lien may be just as damaging to a credit report as bankruptcy. Bankruptcy is a complex process and should only be considered after careful consideration since better results may be obtained outside of a bankruptcy.

By: Timothy S. Hart

Innocent Spouse Relief

There are various favorable tax related reasons to file joint tax returns, but did you know that by doing this you and your spouse are each jointly 100% liable for the entire amount of the tax? This tax law is referred to as joint and several liability. This can certainly present problems, if one of the spouses understates income or misuses deductions, for example, without the knowledge of the other spouse. It is common in many marriages for one spouse to handle the finances of the household. What can a spouse do if his/her spouse files an incorrect or fraudulent tax return and finds himself/herself in a situation where they are liability for the additional tax, penalties, and interest owed? There are three types of relief under the tax law: 1.) Innocent Spouse Relief; 2.) Separation of Liability Relief; and 3.) Equitable Relief. The scope of this article is limited to Innocent Spouse Relief. Innocent Spouse Relief provides a spouse relief from liability of additional tax owed, when their spouse or former spouse either: 1.) Failed to report income; 2.) Reported income improperly; 3.) Claimed improper deductions or credits.

In general, Innocent Spouse Relief must be requested no later than 2 years after the date the IRS first attempted to collect the tax from you but their are exceptions to this rule. Under the tax law, Innocent Spouse Relief rules are effective for unpaid balances as of July 22, 1998 and tax liabilities arising after July 22, 1998. There are several conditions that must be met in order to qualify for Innocent Spouse Relief, including: 1.) You filed a joint tax return which understated the taxes and that understatement was a result of an error made solely by your spouse or former spouse; 2.) You establish that when you signed the tax return you did not have knowledge or should not have known that the return contained such error; 3.) After reviewing all of the facts collectively, it would be unfair to hold you liable for the error resulting in the understatement of tax. The errors that result in an understatement of tax include: unreported income, use of an improper deduction, credit or property basis claimed. Under the tax law, factors used to determine of unfairness to hold the spouse liable include, but are not limited to: 1.) whether you received a significant benefit from the understatement of tax, 2.) whether your spouse or former spouse abandoned you, and whether you and your spouse are divorced or separated.

By: Timothy S. Hart

Foreign Account Tax Compliance Act – FATCA

In March of 2010, the Foreign Account Tax Compliance Act – FATCA was enacted as part of the tax law Hiring Incentives to Restore Employment Act. The purpose of this act is to target United States taxpayers with foreign accounts that are not tax compliant and are using offshore accounts to evade taxes.

Under this tax law, Foreign financial institutions face consequences if they fail to enter into an agreement with the IRS to comply with Foreign Account Tax Compliance Act – FATCA. Beginning in 2014, the foreign financial institution will face a 30% withholding tax made to a proprietary account (securities originating in the United States) for failing to comply with Foreign Account Tax Compliance Act- FACTA. Account holders of such foreign financial institutions must provide such institution with Foreign Account Tax Compliance Act – FACTA required documentation. If the account holder fails to do this, the foreign financial institution must deduct a 30% withholding tax on any “with-holdable” payment credited to such account under this new tax law.

The Act requires that individual United States taxpayers to report certain foreign financial accounts and offshore assets on a separate form, Form 8938, if the total asset value of such accounts exceeds the reporting threshold. In general, if the total market value of the accounts is at or below $50,000 at the end of the tax year, there is no reporting requirement. The exception is if the total value was more than $75,000 at anytime during the tax year, then the accounts must be reported. Form 8938 must be attached to the individual’s tax return (usually Form 1040). The threshold amount is higher for individuals who live outside of the United States. The threshold amount also varies depending on whether the taxpayer is single or married under this tax law.

Under the Foreign Account Tax Compliance Act, taxpayers who do not have to file an income tax return, do not need to file Form 8938, regardless of the total market value of their foreign financial accounts. It is important to note that under FACTA there are penalties for those who fail to file accurately.

By: Timothy S. Hart

Petitioning the U.S. Tax Court

A taxpayer may petition the United States Tax Court (www.ustaxcourt.gov) if they have received a Notice of Deficiency, a Notice of Determination Concerning Collection Action, or a Notice of Determination of Worker Classification from the IRS. Once the IRS issues a Notice of Deficiency, for instance due to an unfiled tax return, the taxpayer only has 90 days to petition the Tax Court. You may also petition the Tax Court if you have filed a claim for innocent spouse relief and six months have passed without receiving a determination letter from the IRS. The Tax Court holds hearings in various major cities on a monthly basis throughout the year (except summer).

Subject to dollar limits, a taxpayer can choose to have their case conducted as either a small tax case or a regular tax case. You must check the appropriate box on Form 2. If you neglect to check a box, your case will be handled as a regular tax case. Small tax cases are handled with less formal procedures than regular tax cases. It is important to note, however, that unlike a regular tax case, the Tax Court’s decision in a small tax case cannot be appealed by the IRS or by the taxpayer.

The time period for the dollar limits for a small tax care vary depending on the type of IRS action you are seeking the United States Tax Court to review, but the magic dollar amount for each is $50,000. For review of a Notice of Deficiency, the amount of the Deficiency cannot exceed $50,000 for any tax year. For review of a Notice of Determination Concerning Collection Action, the total amount of the unpaid tax cannot exceed $50,000 for all tax years combined. For review of a Notice of Determination of Worker Classification, the amount in dispute cannot exceed $50,000 for any calendar quarter. For review of a Notice of Determination concerning innocent spouse relief, the relief sought cannot exceed $50,000 for all years combined.

To ensure that your case will be properly processed without delay, you should enclose a copy of the Notice of Deficiency you received from the IRS, a completed petition with all the necessary forms, located on the Tax Court’s web site (www.ustaxcourt.gov), a completed request for place of trial, as well as the $60 filing fee.

By: Timothy S. Hart

NYS Voluntary Disclosure Program

New York’s Voluntary Disclosure Program is designed to encourage taxpayers who have not filed and paid their taxes to voluntarily file their back tax returns and pay what taxes they owe. This program applies to all taxes administered by the NY State Tax Department including income tax, corporate tax, and sales taxes. It also applies to taxes handled by the NYC Finance Department. The significant advantage to this program include no penalties or criminal charges. Please note that this program does not apply to taxpayers who have filed their tax returns but did not pay in full.

There are several eligibility criteria that must be met including: there must be no current tax audit for the tax type and tax year(s) that the taxpayer is disclosing; the taxpayer must not have received a tax bill for the past due taxes that they are disclosing to the State; the taxpayer must not being under a criminal investigation by New York State; the taxpayer must not be seeking to disclose participation in a tax shelter that is a federal or New York State reportable or listed transaction.

How does the process actually work? The process begins with an online application where the taxpayer will disclose the taxes owed and the reason why they failed to report the income or file the tax returns. It is important that the taxpayer applying for the program to withhold from filing tax returns during the waiting period since they have to be filed with a certain section of the tax department. The taxpayer needs to wait until they receive an acceptance letter and an agreement requiring that the taxpayer file all returns owed in the future and pay all taxes owed on time. If accepted, the taxpayer must sign the agreement mail it back along with the tax returns. The taxpayer must then pay any tax and interest disclosed in the agreement. If the taxpayer cannot afford to pay the taxes due in full, they may be able to make payments in installments. However, in order to allow for installment payments, NYS may request additional financial information.

As mentioned, the benefits of the program include no penalties or criminal prosecution. However, it is important to note that this only applies to the taxes and tax period that the taxpayer disclosed in their application. For other taxes and tax years not disclosed, NYS may still impose penalties and prosecute criminally. It is important to remember that if the taxpayer violates any terms of the agreement, NYS does not need to honor these benefits and may use the information disclosed against you as well as possible civil or criminal penalties.

Compliance is essential to maintaining the benefits of this agreement. If the taxpayer intentionally provides false material information or omits material information in their application or other disclosure documents, they will be in violation of the agreement. If the taxpayer intentionally discontinues making payments as part of the agreement they will be in violation. Finally, the taxpayer will be in violation of the agreement if they intentionally fail to pay any taxes in the future or violate any of the tax laws.

This is a great program, especially for those taxpayers who simply failed to file for several years and may be facing significant penalties or those taxpayers who would ordinarily be facing criminal charges. Just remember, if you are going to participate and receive such benefits, you must be compliant otherwise the agreement will backfire and work against you.

By: Timothy S. Hart