Tax Problem Attorney Blog

Articles Posted in Tax Debt

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US citizens, legal permanent residents, and other covered individuals have an obligation to file and pay taxes on all sources of worldwide income. If an individual does not satisfy his or her filing and payment obligations, he or she may be subject to penalties for a failure to pay taxes, the failure to file taxes, or both.

While the following article will address a number of the penalties which can apply for non-filed taxes or nonpayment of taxes, this article does not address when civil or criminal fraud penalties could apply. Furthermore, if the failure to file or pay includes the failure to report sources of foreign income or foreign accounts, additional problems are likely to arise. The experienced tax attorneys of the Brager Tax Law Group can discuss your concerns, identify legal problems and work to develop effective solutions to your tax compliance issues.

What are the consequences for failure to file taxes?

A failure to file has occurred if, by the tax return’s due date, you have neither submitted a return nor made a request to the IRS for an extension of time. An individual or business entity’s failure to file is addressed by an array of statutes, including:

  • IRC 6651: Addresses the failure to file a tax return or to pay required taxes. IRC 6651 (a)(1) addresses the failure to file, while IRC 6651 (a)(2) addresses the failure to pay.
  • IRC 6654: Addresses the failure to pay an estimated tax onbligation. This law typically requires four estimated yearly payments with each payment comprising roughly 25% of the estimated tax liability. The amount of penalty is calculated as per IRC 6621.
  • IRC 6698: Addresses the failure to file a return for a partnership. Partnership returns are made mandatory by IRC 6031.
  • IRC 6011(e)(2): Addresses the failure to provide a required electronic return for partnerships with greater than 100 partners. The penalty is assessed for each partner beyond the 100 partner threshold.
  • IRC 6699: Addresses the failure to file for an S Corporation.

The failure to file penalty is typically greater than a failure to pay penalty. In most circumstances, the failure to file penalty is assessed at 5% of the unpaid taxes. This penalty is assessed for each and every month or part of a month where the tax is late. That is, if your filing deadline was April 15 and you do not file until June 2 of the same year, a penalty would be assessed for three months: May and the partial months of June and April. However, this penalty is capped at 25% of the amount of unpaid taxes. In contrast, if your return is filed more than 60 days late, a minimum penalty of the lesser of 100% of the unpaid tax or $135 will be imposed.

What are the penalties for failure to pay my full tax obligation?

The failure to pay penalty is assessed at half of 1% of the unpaid tax liability for each month or part of a month where the unpaid tax is overdue. Thus, as discussed above, the failure to pay taxes for even a single day in a month can result in the imposition of the full penalty. The failure to pay penalties can apply to income, gifts, estates, and certain excise tax returns.

However, it is important to note that a strategic request for an extension can reduce or eliminate potential tax penalties. That is, if a taxpayer requests a filing extension prior to the original deadline and pays a minimum of 90% of the actual tax owed by the original due date, then no failure-to-pay penalty will be assessed provided that the balance is covered by the extended payment date.

What if both the failure to pay and the failure to file penalty apply?

When both a failure-to-pay and a failure-to-file penalty can be imposed in any month, the penalty will be computed by subtracting the failure to pay penalty from the failure to file penalty. However, as discussed above, if your return is filed more than 60 days late, the IRS can impose a minimum penalty of the lesser of $135 or 100% of the unpaid tax.

The penalties that can be imposed due to a failure to file or pay taxes in a timely manner can, generally, only be eliminated if a taxpayer can show reasonable cause or otherwise prove that the failure was not due to willful neglect. The Brager Tax Law Group can work with US taxpayers to develop a legal strategy to correct tax compliance issues. To schedule a confidential consultation with an experienced tax lawyer call 800-380-TAX LITIGATOR, or contact our law offices online.

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Conversations between a CPA and his or her clients may or may not be shielded from disclosure to third parties. Whether the accountant-client privilege exists is a fact-specific inquiry where the fact that your disclosures may not have been confidential may not emerge until it is already too late. This is chiefly because federal law does not recognize a generalized privilege between accountants and their clients.

While a selection of states including Colorado, Missouri and Florida do recognize the privilege, the privilege will only apply in state courts or in federal courts that are applying state law. In federal courts applying federal law, only a limited statutory protection applies to accountant-client communications. In contrast, the attorney-client privilege is recognized by all 50 states and in the federal courts. Furthermore, additional confidentiality may be provided through the work-product doctrine.

What is the purpose of confidentially privileges?
The intent of the attorney-client privilege and the accountant-client privilege is to foster an environment that is conducive to the client being able to offer all relevant information without fear of subsequent disclosure. These privileges are created to encourage people to seek, respectively, legal or financial advice. Such rules can encourage individuals to seek advice and proactively resolve their problems rather than conceal issues until they become insurmountable. Without an expectation of confidentiality, it is foreseeable that individuals would forego professional advice or withhold essential information. However, before making a disclosure it is essential to understand that the accountant-client privilege can be extremely limited.

The accountant-client privilege is subject to many exceptions
When it exists, the accountant-client privilege prohibits the disclosure of confidential information that has been provided to an accountant by a client. The statutory basis for the limited federal protections, 26 U.S.C. § 7525(a)(1), reads, “With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.” In other words, in situations where the privilege is permitted to be asserted, the privilege would be equivalent to that provided by an attorney-client relationship.

Unfortunately, the broad sense of protection created by the previous provision is largely illusory. This is because the following section of the statute limits the application of the privilege to noncriminal tax matters before the IRS and noncriminal tax proceedings in the federal courts. 26 U.S.C § 7525(a)(2). Furthermore, any written communications relating to or regarding the promotion of the indirect or direct use of a tax shelter, as defined by 26 U.S.C § 6662 (d)(2)(C)(ii), are not protected by the privilege.

Furthermore, if a client was to pursue a malpractice action against his or her CPA, previously privileged communications may be admissible into evidence if they are relevant. Although similar problems can occur when suing an attorney for malpractice attorneys generally have higher duties of confidentiality than accountants. Considering that the taxpayer is ultimately responsible for the information he or she submits to the IRS, the possibility of malpractice can put an individual in a difficult quandary where they must choose between seeking accountability and disclosing their own tax problems.

Understanding the attorney-client privilege as applied to tax concerns
Many types of tax advice and legal guidance provided by a tax attorney may be protected by the attorney-client privilege, provided that the relevant requirements are met. This privilege is generally much more robust than the account-client privilege, although it cannot extend to the actual preparation of a tax return because such work is not generally considered to be legal advice.

However, a federal court recognized in US v. Deloitte, LLP that when at least some aspect of the material is prepared as part of an independent audit it can be protected by work-product if it is determined that the relevant portion of the material was prepared because of anticipated litigation. Furthermore, an individual who first retains an attorney and the attorney then engages with an accountant through a Kovel letter may be able to extend the confidentiality protections to cover the CPA as well. The use of an attorney merely as an intermediary would be insufficient to establish the privilege, but if the accountant is working under the direction of the attorney, the privilege would be likely to cover the accountant provided that the Kovel letter itself met legal requirements.

Put our legal experience resolving tax problems to work for you
The tax attorneys at the Brager Tax Law Group are dedicated to correcting taxes problems for our clients. To discuss your concerns confidentially, contact the Brager Tax Law Group online or call 800-380-TAX LITIGATOR to discuss your options.

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Las Vegas criminal defense attorney Paul Wommer, was convicted of tax evasion based on his failure to pay approximately $13,000 of interest and penalties imposed on the principal of his delinquent taxes. In a somewhat novel appeal to the 9th Circuit he argued he hadn’t committed “tax evasion” under Internal Revenue Code § 7201 because he had paid all of his tax debt, just not the penalties and interest. The court disagreed and instead took a more broad approach to the definition of taxes. Citing Internal Revenue Code § 6665(a)(2), which states that a tax shall also refer to the “additions to the tax, additional amounts, and penalties provided by this chapter,” the court found that the penalties would be considered taxes for tax evasion purposes. The Court also pointed to IRC Sections 6601(e) and 6671(a). IRC Section 6601(e) provides:

Interest prescribed under this section on any tax shall be paid notice and demand, and shall be assessed, collected, and paid in the same manner as taxes. Any reference to this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax.

IRC Section 6671(a) provides:

Any reference to this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax.

Thus, as the 9th Circuit saw it, tax evasion includes evading the payment of interest and tax penalties. Still its striking that the IRS would choose to pursue a criminal tax case based upon such a small amount of unpaid interest and penalties. Clients often do not view their conduct as being criminal, or they believe that because they are “small fish,” that the IRS will not bring a criminal tax case. While that may be true a lot of the time as Mr. Wommer found out with the wrong set of facts even small tax debts can morph into big tax problems.

Wommer’s case illustrates an increasing use of the evasion of payment prong of the criminal tax evasion statute. Internal Revenue Code Section 7201 makes it a crime not only to evade tax (as in filing a fraudulent tax return), but also willfully evading the payment of tax. Thus someone who willfully fails to pay their tax debt can be convicted of tax fraud even though their original tax return was perfectly proper. Of course not all non-payment of tax debt is considered tax evasion. However, Wommer stepped over the line when he started depositing money into the account of another individual in order to prevent the IRS from issuing a tax levy.

Call our experienced criminal tax attorneys at 1-800 Tax Litigator (1-800-208-6200) for a confidential consultation to discuss available options if you have been contacted by the IRS in connection with civil or criminal tax fraud or tax evasion, or any other high stakes tax problem.

Subscribe to the Free Online Publication, The Tax Terminator. It will keep you abreast of events that are making the news and perhaps affecting you or your business.

For the IRS to issue a Collection Due Process or CDP Notice. The CDP Notice is required by Internal Revenue Code Section 6330. The CDP notice is generally issued by the IRS on either Form LT-11 or Letter 1058, and it is titled “Notice of Intent to Levy and Right to Request A Hearing.” These letters give a taxpayer, who owes the IRS money, 30 days to file a request for a hearing with the Internal Revenue Service’s Appeals Division. More on this in a moment.

If the taxpayer doesn’t request a Collection Due Process hearing IN WRITING within the 30-day period, then the IRS may immediately begin seizure of bank accounts, accounts receivable, or any other assets. The IRS may even seize someone’s home, although this requires a lot more paperwork, and the approval of a federal district court judge.

An IRS internal document known as an IRS Program Manager Technical Assistance recently provided information on what will happen if the request for a CDP hearing is mailed timely to an incorrect office. The short answer is that the CDP hearing will be denied, and the IRS is legally free to begin levies and seizures. However, a taxpayer in this situation is, generally, permitted an “equivalent” CDP hearing; however, an equivalent CDP hearing does not carry with it the right to appeal to the United States Tax Court. It is only a timely filed request for a CDP hearing that will be appealable to the Tax Court if the IRS Appeals decision is not to the taxpayer’s liking.

In order for a CDP hearing request to be timely it must either be received by the correct IRS office within 30 days of the date of the CDP notice, OR be mailed timely to the correct office. In order to prove that the request has been mailed timely the best practice is to mail it by certified mail, return receipt requested, and obtain a stamp from the Postal Service showing the date on which the CDP request was mailed. Alternative delivery services such as FedEx may be used also, but the rules are a bit tricky.

Typically the CDP hearing requests must be sent to one of the four automated collection sites (ACS) maintained by the IRS around the country. However, cases assigned to an IRS revenue officer require that the request be sent to the Revenue Officer. In any event, the letter itself will explain where the CDP request should be sent, and if those instructions are followed, there won’t be a problem.

A CDP hearing is a valuable right which should almost never be waived. At a CDP hearing the Appeals Officer will consider:

• Collection alternatives such as installment agreement or offers in compromise.
• Whether the IRS has followed all laws and procedures • Subordination or discharge of a lien.
• Withdrawal of Notice of Federal Tax Lien.
• Innocent Spouse defenses • In limited situations, the correctness of the tax liability.

So if you receive a Notice of Intent to Levy and Right to Request a Hearing, make sure that you request a hearing within the 30-day time frame.

Contact our experienced Click here to Subscribe to the Free Online Publication, The Tax Terminator. It will keep you abreast of events that are making the news and perhaps affecting you or your business.

An Offer in Compromise (OIC) can be one of the best ways to avoid an IRS tax levy, and to reduce your tax debt if you have fallen far behind. Earlier this month I was speaking with a senior IRS collection official about Offers in Compromise, and he brought up an iMoney Pic.jpgnteresting point. First, a little background. The IRS will allow taxpayers to reduce the amount of their tax debts if the IRS concludes that it is unlikely that the tax debt will be paid during the remaining time the IRS has to collect. This time period is referred to as the Collection Statute Expiration Date or CSED. If the tax can’t be paid during the CSED then the IRS may accept a settlement amount.

The IRS calculates this settlement amount, by adding the taxpayer’s net realizable equity in assets to the amount collectible from future expected income after payment of “necessary” living expenses. This is known as the reasonable collection potential or RCP. The amount collectible from future expected income is determined based upon the period over which the taxpayer proposes to make payments. If the payment period is from 1 to 5 months then the future income is determined over a 12 month period. On the other hand, if the taxpayer wishes to make payments over more than 5 months (up to a maximum of 24 months) then the future income is calculated over the entire 24 month period.

To take a simple example. Assume a taxpayer owes the IRS $300,000, and has assets of $25,000. In addition, she has monthly income, after necessary living expenses, of $2,000. If the taxpayer can pay the offer amount in 5 months or less than the RCP, the amount offered, would be $49,000 ($25,000 + 12 months x $2,000). On the other hand, if the taxpayer needs more than 5 months, then the RCP would be $73,000 (25,000 + 24 months x $2,000).

Now for the tip from the IRS collection official with whom I spoke. The payments made over the 24 months do not need to be equal in amount! So in the above example it would not be necessary to pay $3,041.67 per month ($73,000/24 months). Instead the IRS could accept monthly payments of $1,500 per month for 23 months with a balloon payment of $38,500 in the 24th month. Any other variation is possible, so long as $73,000 is paid by the 24th month. However, there can be no renegotiation once the OIC is accepted. So if the taxpayer defaults in month 24 because she can’t afford the balloon don’t expect much sympathy. Do expect that the IRS will want a credible explanation, and documentation of the taxpayer’s ability to come up with the balloon payment. It may be friends or family, liquidation of assets (e.g. retirement accounts, real or personal property, etc.), forthcoming settlement, inheritance, wages, or the like. If the IRS financial analysis determines that the OIC cannot be funded, the offer will be rejected. The mere hope that things are going to get better won’t cut it.

If you have tax problems, and you are considering an offer in compromise or another alternative to your tax problems call the tax lawyers at Brager Tax Law Group, A P.C.

Click here to Subscribe to the Free Online Publication, The Tax Terminator! The IRS is busy and so is the FTB and EDD. This publication, The Tax Terminator, will keep you abreast of events that are making the news and perhaps affecting you and/or your business.

If you or your clients have tax problems and owe California State income taxes, the Tax Man Cometh! The California Franchise Tax Board (FTB) is collecting delinquent tax debts through the Financial Institution Record Match (FIRM) program. FIRM uses automated data exchanges to locate bank accounts held by Californians who have tax debts. The FIRM program will match records on a quarterly basis in order to collect tax debts from both individuals and businesses. No financial institution doing business within the state of California is exempt from participating in the program. However, in rare cases temporary exemption or suspension of participation may apply. Banks that chose not to comply are subject to large fines each year. Accounts that are eligible for tax levies include checking and savings accounts, as well as mutual funds. FIRM is similar to the Financial Institution Data Match (FIDM) program, which is used to collect delinquent child support debt.

The FIRM program allows the FTB to use data obtained from banks to find assets and garnish bank accounts up to 100 percent of the amount owed. As of April, the FTB began to serve tax levies on the bank accounts of individuals who have delinquent balances, including penalties, interest, taxes and fees that have been identified through FIRM. With the help of the FIRM program, the FTB expects to issue 475,000 tax levies this fiscal year, a 75 percent increase from last year.

In order to avoid tax levies you or your tax lawyer should consider possible alternatives including installment agreements, offers in compromise and bankruptcies.

Data between FTB and FIRM can be exchanged in two ways. In the first method, information regarding open accounts is given directly to the FTB for the Board to match accounts with delinquent taxpayers. This method is only available to institutions that are unable to match the information against their own records. Institutions that do not qualify for the first method must match taxpayer information against their own records. Banks can choose to hire a third-party transmitter to aid in matching the data. Because the accuracy of the data is of the utmost importance, banks must verify matches from third-party services before submitting them to the FTB.

A 10-day holding period follows the issue of the tax levy to the bank. During this time, the taxpayer or a tax attorney on the taxpayer’s behalf may negotiate the amount due or, if financial hardship is creating tax problems, discuss payment options. If the FTB levied an account in error, they will delay the garnishment while they verify the mistake and then issue a garnishment release notice. If the bank has already issued the payment, the Board will return the payment.
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United States v. Quinn (D. KS 2011) is one of several recent felony tax prosecutions, not for tax evasion, but for violation of Internal Revenue Code Section 7202. IRC Section 7202 makes it a felony to willfully fail to collect, account for, or pay over any tax due. In this case Ms. Quinn failed to pay payroll taxes for 7 quarters between 2003 and 2005. She finally got around to paying them in 2010, apparently after the IRS had filed criminal tax charges against her. Ms. Quinn challenged the finding that she failed to pay employment and individual tax and argued that since she had subsequently paid the tax due the charges should be dismissed.old_ball_and_chain.jpg

The court wrote in its opinion that a person has failed to pay taxes if they have not paid the amount due as of the due date, regardless of whether the taxpayer has subsequently paid. In Ms. Quinn’s case, she had recently paid the amounts due but this was not sufficient for the court to find her not guilty.

This does not mean that late payment of taxes will never prevent a criminal tax prosecution, and those who have not paid their taxes should seriously consider taking care of a tax problem before it turns into a criminal tax problem. Had Ms. Quinn gotten around to making full payment, or indeed even made good faith installment payments much earlier there is a chance that the case would never have gotten as far as it did.
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Tax lawyers representing a man accused of failing to file business income tax returns told the judge that obsessive-compulsive disorder was responsible for their client’s tax problems, the Calgary Herald reported.

Business tax debt can sink a business; frequent issues tax attorneys are called to deal with include payroll tax problems and tax audits.
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That’s not to say OCD is involved in the majority of the cases. But in this case, the man blames the condition for his inability to file business income tax returns. He faces 60 days in jail and a $10,000 fine if convicted of disobeying a court-issued compliance letter. The company, Harvest Brewing, is accused of not filing returns in 2004 and 2005. His attorney said Ronald Thomsen’s personal taxes are up to date because they are easy to file and the taxes are deducted right from his pay.

But when it comes to the business taxes, his client’s medical condition prevents him from dealing with the paperwork. The business taxes were about $45,000 a year in the five years prior to the years in question. However, Canada Revenue Agency does not know how much is now owed because they haven’t received any documentation in years. The business’s accountant has told Thomsen she would have the outstanding taxes filed by May but he has refused to turn over the paperwork.

That refusal is part of the medical condition, according to his tax attorneys.
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The Detroit News is reporting that Hollywood actress Teri Polo, perhaps best known for playing alongside Robert De Niro and Ben Stiller in “Meet the Parents,” has a tax lien for $433,736.

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The former Playboy pinup landed the role after a string of TV show appearances, including “The West Wing.” She is also appearing in “Little Fockers,” which is in theaters this year.

-The Internal Revenue Service filed a tax lien against Polo in August in Kent County Delaware in August 2009, claiming she owes $114,843.95 in income taxes from 2007.

California claims she owes $91,748 for taxes in 2005 and 2006, according to a tax lien filed in Los Angeles County in 2008.

-A second IRS tax lien in Delaware also claims she owes $227,144.48 in back taxes for 2005 and 2006.

Polo blames her tax problems on a costly divorce and being unable to work while raising two young children. She reportedly has reached a deal with the IRS to repay the tax debt.
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CNN reports Hollywood actor Wesley Snipes is off to serve a three-year prison sentence for failing to file tax returns.

While simple non-filing of tax returns doesn’t often result in criminal tax fraud charges being brought, in some cases, it may require being proactive, and consulting an experienced tax lawyer to prevent a tax problem from getting worse.
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Prosecutors alleged Snipes has earned $40 million since 1999 but filed no returns because of his involvement with a tax resisters group. Snipes denied membership in such a group and blamed his tax problems on an adviser. Jurors believed his contention that advisers were at fault when they acquitted him of more serious felony tax fraud and conspiracy charges. Still three years in jail can hardly be considered a vindication.

The New York Times reported the star of “Blade” and “White Men Can’t Jump” will serve the sentence at a federal prison in Pennsylvania.
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