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

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