Tax Problem Attorney Blog

Articles Posted in Tax Fraud

Innocent Spouse

Many married couples find it advantageous to file a joint tax return rather than filing separately. This comes as no surprise as the federal government has built a number of tax advantages for married couples filing jointly into the tax code. These benefits include:

  • Depending income distribution, a lower rate of taxation than they would face filing separately.
  • Increased limits for charitable deductions
  • IRA and retirement account benefits
  • Estate protection
  • Reduced tax administration expenses

However there are also drawbacks to filing jointly with your spouse – especially so if the relationship hits a rough patch or ends in divorce. This is because by filing jointly, you subject yourself to joint and individual liability for everything that appears on the tax return. In other words, absent an exception or relief both members of the couple are liable for everything that appears on the tax form regardless of who prepared it. If your spouse or former spouse made mistakes on the jointly filed taxes or took overly aggressive positions you could find yourself liable for underpayments, fines and penalties.

When is applying for innocent spouse relief appropriate?
The most common instance where issues of innocent spouse relief may come into play is where a couple is headed down the path to a divorce or has already divorced. Often, one of the partners in the marriage was responsible for handling the taxes and the other partner may have only had a limited role in preparing or overseeing the taxes. In the most extreme case, the other spouse may do little more than simply sign off on the return while trusting that his or her partner prepared the taxes thoroughly and accurately.

At some point, the spouse who participated only minimally in the tax preparation process may suspect that his or her spouse may have understated income, overstated deductions or exemptions, or otherwise violated the tax code or committed tax crimes. The innocent taxpayer does not want to remain liable for these outstanding tax debts and penalties because he or she did not create them or cause them. It may be appropriate for a spouse in a spouse in this or a similar position to file for innocent spouse relief.

To apply for innocent spouse relief a taxpayer must file Form 8857 with the IRS. The form must detail and explain why the taxpayer believes that he or she is entitled to such relief. By filing Form 8857 you are asking the IRS to establish a separate tax liability for you that is separate and apart from that of your current or soon-to-be former spouse, or ex-spouse. On the form you must provide information regarding your role in the tax preparation process, whether you were aware of the income, if you had reason to know about the inaccurate statements on the tax form. Depending upon the type of tax relief requested, the filing taxpayer may be required to prove that it would be unfair to hold him or her liable for the tax liability. Whether something is fair or unfair can be highly subjective, but the IRS has provided criteria to help in making this determination. Elements the IRS will examine to determine whether it would be fair to impose the tax against the spouse filing for relief include:

  • The nature of the erroneous item or items on the tax filing
  • The value of the erroneous item or items relative to the remaining items on the tax return
  • The level of participation by the filing taxpayer in the mistake or scheme
  • The filing spouse’s experience in business dealings
  • The filing spouse’s educational history
  • The financial circumstances of each spouse
  • Whether the filing party failed to ask reasonable questions about the return prior to authentication.
  • Is the understatement part of a recurring pattern or an isolated incident?

All of these items will be considered as part of the inquiry as to whether it would be fair to impose the tax liability and decline to provide relief. However other additional requirements apply. For instance, an application for relief must, generally, be filed within two years of the first collection action taken by the IRS, but there are exceptions.

Tax issues after a divorce?
While the standards to be granted innocent spouse status are high, taxpayers are entitled to appeal an IRS determination that is not in their favor to the United States Tax Court. The Brager Tax Law Group can assist you in filing either an initial application for innocent spouse status or in preparing an appeal. By securing this status you may be able to not only resolve the current debt, but will also bring most enforced collection activity to a halt. However, the extent of the relief even if granted can vary based upon the type of relief granted, the terms of the divorce decree, and even the timing of the divorce, and the division of assets. For a confidential tax consultation call our firm at 800-380-TAX-LITIGATOR today or contact us online.

Completion of tax form.

If you are living in the United States it can be difficult to miss the numerous announcements and pronouncements of the impending April 15th tax deadline. And yet, every year thousands of US taxpayers will fail to file and pay taxes.

There are a variety of reasons for this failure. These reasons can include situations where the taxpayer simply doesn’t want to pay tax and is concealing income. In other circumstances the taxpayer may know that he or she would be unable to pay and thought that concealing income by not filing would help their tax situation. In still other circumstances the taxpayer may be a young person who simply did not realize that he or she had a filing obligation or the severity of consequences that can follow a failure to report and pay taxes.

While taxpayers could have filed IRS form 4868 prior to the tax deadline to extend their filing deadline by 6 months to October 15, 2015, those who failed to file or extend by the original filing date no longer have this option. However there may be options to correct the tax problem and to come back into compliance with the tax system.

Who must file taxes every year?
To start with, if you would like to retain the possibility of receiving a tax refund, you must file a tax return. This is because only those who file their taxes are eligible to receive their income tax refund from the IRS. If you have overpaid your fair share of taxes, the only way to recover this money is to file your taxes.

Aside from those who would like to receive their income tax refund, your level of income determines whether you have an obligation to file taxes. While the filing threshold is adjusted annually, in 2014, all U.S. citizens, legal residents and others with sufficient connection to the United States who had $10,150 or more in income are required to file taxes with the IRS. If you are age 65 or older, you face similar tax reporting requirements, but the income threshold is greater. The threshold is also higher for married persons filing jointly, or for single persons filing as “head of household.” Those who are claimed as a dependent on another’s taxes face a lower reporting threshold because, as a dependent, the taxpayer is unable to claim their own exemption. Thus a dependent taxpayer must file if his or her earned income exceeds $6,200. However, if the dependent’s income is from interest, dividends or other unearned sources the reporting threshold is only $1,000. Those with net self-employment income of $400 or more must also file a tax return.

Expatriates living abroad must file and pay taxes or be subject to penalties and a potential “Customs hold”
The United States is one of two nations in the world that taxes on the basis of one’s citizenship. This means that U.S. taxpayers are obligated to report and pay tax on their worldwide income. This includes expatriates who are not currently living or working in the United States. However for many expats who are overseas and who are not immersed in the culture and information found in the U.S., complying with the numerous tax laws and foreign account disclosure requirements can be extremely difficult and burdensome. Nevertheless, expats must comply with their tax reporting, tax paying, FATCA, and FBAR obligations.

A “customs hold” is one tax enforcement procedure that targets expatriates who return to the United States either temporarily or permanently. A 2014 audit of the program by TIGTA revealed that the program is intended to target delinquent taxpayers who are living in foreign nations and jurisdictions. When the IRS says it is targeting delinquent taxpayers, this means that it is targeting taxpayers that the IRS has already assessed and found to be owning unpaid taxes. This may occur through an IRS correction to a taxpayer-filed tax return or through a non-filer return filed by the IRS on the behalf of the taxpayer. The common factor here is that the IRS has already assessed tax against the taxpayer and found unpaid tax to be due and owing.

If you have an unpaid tax obligation, the IRS many request a customs hold to be input into the Treasury Enforcement Communication System (TECS). Upon being added to this system, the taxpayer will be sent a letter indicating that a tax collection officer has advised the Department of Homeland Security regarding the taxpayer’s liability and that if the taxpayer attempts to enter the United States he or she will likely be interviewed by a customs officer. Typically the Customs and Border Agent will ask the taxpayer for the address that they will be staying at while they remain in the United States. An IRS agent will then likely make contact with you at some point during your stay about the tax liability.

Contacted by the IRS about unpaid tax?
Whether you are an expat or living in the U.S. and have been contacted by the IRS, the Brager Tax Law Group can help you resolve the issue and come back into compliance. To schedule a confidential tax consultation call 800-380-TAX-LITIGATOR or contact us online today.

Taxes

Most accountants, CPAs, and certified tax preparers are honest, hardworking people who are dedicated to their profession. Most tax professionals simply want to secure the best possible tax deal for their clients while following all best practices regarding accuracy. However some tax professionals may over emphasize their ability secure favorable tax treatment for their clients and may cross the line into overly aggressive tax minimization strategies. Even more troubling, other tax preparers may be corrupted by greed and act dishonestly by improperly obtaining or using client tax refunds or other client funds.

If you are a tax professional, you already understand the devastating impact allegations of this type can have on your professional reputation and livelihood. Therefore any tax professional potentially facing an investigation or referral to the IRS Office of Professional Responsibility (OPR) should immediately retain tax counsel. However laypeople may not understand that mistakes or other improprieties found in tax filings are ultimately the responsibility of the filer.

#1 Tax Lady Indicted for Tax Fraud
Before proceeding any further, it is important to note that this is merely an indictment meaning that charges have been filed and have been presented to the defendant, but they have not yet been proven. The defendant is still innocent under the laws of the United States until prosecutors can prove otherwise. However, this brings us to another important point; the IRS times its announcements of indictments, convictions, and plea deals to coincide with tax time. This approach is intended to deter both tax professionals and taxpayers from taking overly aggressive positions or engaging in questionable tax acts. Furthermore it has the added benefit of making taxpayers more wary so that they are more likely to ask their tax professional tough questions if things don’t seem quite right.

However, according to a press release from the U.S. Department of Justice, this deterrent effect did not prevent a slew of tax crimes from a Kalamazoo, Michigan based business. Federal prosecutors allege that Fontrice Lenee Charles participated in a number of tax schemes while promoting herself as the #1 Tax Lady. The main allegations contained in counts 1 through 25 of the indictment allege that Ms. Charles provided false information to the IRS to ensure that her clients would receive large tax refunds. Prosecutors alleged that Ms. Charles provided false information on 482 tax returns that resulted in excessive deductions of about $2 million. If convicted, Ms. Charles could face up to 5 years in prison, among other consequences, for each of these charges.

Ms. Charles also faces charges for alleged improprieties on her own income tax filings for 2010 and 2011. Prosecutors have alleged that Ms. Charles did not report the income from her tax preparation business in these returns and that she claimed a deceased individual as a dependent. Upon conviction, filing a false return can be punished with a prison sentence of up to 3 years.

Tax filers are also impacted by return preparer fraud

For clients of an accountant, CPA, or other tax professional who is convicted of fraud, providing false information or other improprieties the consequences can be harsh. The taxpayer is responsible for the information he or she provides to the IRS. In fact, when a taxpayer signs or otherwise authenticates their tax return, they are certifying the information contained within the tax filing is true and correct under the penalty of perjury. Even if the taxpayer was legitimately fooled by the representations of the tax preparer, errors will have to be corrected. This may include paying additional tax, interest and penalties to correct an underpayment. If excessive deductions were taken, the money will have to be paid back and additional penalties may also apply. In short, failing to ask difficult questions and make sure what your tax preparer is telling you adds up can lead to significant tax problems that may take years to correct.

Rely on our experience when handling tax issues due to preparer errors
The tax attorneys of the Brager Tax Law Group can provide representation for tax preparers who have been accused of tax fraud, errors or other improprieties. Furthermore we can work with individual tax payers who are simply attempting to return to compliance after discovering a tax problem. To schedule a consultation, 800-380-TAX-LITIGATOR or contact us online.

Taxes

The Wisconsin owner of several self-help and life development companies received a rather jarring wake-up call when he was convicted on tax crimes and sentenced to a year in federal prison. Eric T. Plantenberg had failed to file taxes for ten years from 2000 to 2010 after he began subscribing to the views of the Church of Compassionate Service. According to court documents the Church of Compassionate Service is a group that advances frivolous tax arguments, chiefly to individuals who are receptive to an anti-tax or anti-government message. Arguments related to and reminiscent of the group’s anti-tax position have been determined to be clearly frivolous by the courts since at least the early 1980s.

What did the tax scam consist of?
It is not uncommon for those promoting tax scams or frivolous tax arguments to associate their argument with a fundamental right and legitimate tax structures. Such an approach can give the frivolous tax argument an air of legitimacy by association and the strength of the fundamental right can cause a layperson to have questions about the extent of rights such as the freedom of speech or religion. In the case of the Church of Compassionate Service, their argument was that a taxpayer could take a religious oath of poverty and become “minister” in their organization. The minister’s income would then flow into the church, operating as a “corporation sole”, thereby relieving the “ministers” of any income, and thus, the obligation to pay or file taxes. The church would then return the money to the “ministers”. The church did not hold religious service or otherwise have any members beyond the “ministers”.

Can I stop filing taxes and paying taxes on religious grounds?
While an attorney or tax professional cannot offer tax advice regarding your specific circumstances without first scrutinizing your tax and financial records, the vast majority of people will not be able to successfully rely on a tax minimization argument like the one above. In fact, for nearly all taxpayers advancing an argument of this type would be considered frivolous. Advancing a frivolous tax argument can potentially be punished by a fine of $5,000, any other accuracy-based civil or criminal tax consequences, a penalty for an erroneous refund, and a civil fraud penalty.

There are extremely limited circumstances where a “corporation sole” argument could withstand scrutiny – chiefly when a bona fide religious leader holds property in the entity for the benefit of the religious organization. But, consider that as early as 1980, the courts had already announced that this type of tax scheme would not be applicable for the majority of filers. In United States v. Peister, the argument that a taxpayer was not liable to file or pay tax after taking an oath of poverty and becoming minister of a church of his own founding was rejected by the courts. In separate 1985 and 1986 cases criminal tax convictions were upheld against defendants who utilized religious entities to avoid tax obligations. In the 1987 case Svedahl v. Commissioner, a $5,000 penalty under § 6673 – Frivolous Tax Arguments – was imposed after defendants argued that purported church entities shielded their income from taxation. In the 2013 Berryman case it was noted that, “[c]ourts have repeatedly rejected similar [corporation sole] arguments as frivolous, imposed penalties for making such arguments, and upheld criminal tax evasion convictions against those making or promoting the use of such arguments.”

What violations and crimes are associated with the failure to file taxes?
Even without advancing a frivolous tax argument, failing to file taxes can constitute a crime or violation.. If this occurs you could be guilty of violating a number of provisions of the tax code including:

  • IRC 6651: It is a violation of the tax code to fail to file or pay taxes. Section (a)(1) discusses the failure to file which can be punished by a penalty of 5 percent, if the failure is for less than a month, or an additional 5 percent per a month thereafter – up to a 25 percent penalty in the aggregate.
  • IRC 6031: this section of the tax code makes it mandatory to file a partnership return. Failures to file these returns is addressed by IRC 6031.
  • IRC 6699: Addresses the failure to file for an S Corporation.

Failing to file taxes by itself, can lead to tax problems including fines and penalties. When those filing failures are further exacerbated by frivolous tax arguments and attempts to conceal the unfiled and unpaid taxes, facing criminal tax charges become increasingly likely. If you have failed to file taxes or are otherwise looking to correct past problems while minimizing the costs of coming back into compliance contact us online or call 800-380-TAX-LITIGATOR today.

currency

Each and every year April 15th brings fear and dread for millions of Americans who fear that they will face a hefty tax liability. Some may even choose to put off the filing by requesting an extension prior to the filing deadline, but the fact remains that the tax will have to be reported and paid at some point. However, for some, their tax return may contain an unexpected surprise: a significant tax refund.

But, if you didn’t expect to receive anything back or if you expected to have to pay, proceed with caution. The refund may be the product on an IRS error. Although the original mistake may be the fault of the IRS, you can still face an audit and other serious tax consequences.

Why are tax refunds issued?
When tax payments are exceeded by the tax liabilities a refund is due. Sometimes a refund is caused by excessive tax withholding. According to the IRS, in 2004, 77% of filed returns triggered a refund. The average refund for that year was $2,100. However, some refunds were significantly higher than this amount. If you receive a refund that doesn’t match your tax return it may indicate that a mistake has been made by the IRS.

You should expect a notice from the IRS within a few days of receiving the refund. If the amount is out of line with what you expected, it is prudent to hold on to the funds and not to spend them until you receive this notice that should explain the refund. If the explanation does not match the refund, you may need to return some or all of the money to the IRS. If you fail to do so the IRS can pursue you for the inadvertently disbursed funds, with interest.

A Mistaken Tax Windfall Can Result in a Prison Sentence
Consider the infamous case of, a Laguna Beach, California man, Stephen McDow who was mistakenly issued an IRS tax refund of $110,000. Mr. McDow found the refund deposited in his Citibank account after the rightful recipient, 67 year old Michelle D., mistakenly provided the IRS with her former bank account number that had been closed in or about 2005. After Mr. McDow received the money, he claimed he thought it was an answered prayer and spent the money to resolve past debts including student loans and expenses from a foreclosure.

Mr. McDow was charged with one felony count of theft of lost property. The potential sentence for the crime was enhanced by the fact that the property was worth over $65,000. Despite the fact that Mr. McDow may not have thought he stole anything he faced a 4 year prison sentence. It pays to be cautious and to wait for an explanation prior to spending a larger than expected refund. In the end, Mr. McDow’s family loaned him the funds to pay back Michelle D, and he was sentenced to 60 days in jail, and 18 months of probation. However if these resources had not been available, the consequences could have been even more severe.

An audit often comes after the refund
This case is clearly an outlier but errors of this type can and do occur and taxpayers must be wary. This is because many people assume that the issuing of a refund indicates approval or, at least, some level of review by the IRS. In reality, the audit can often follow the refund. In fact, in most situations, the IRS has up to 3 years to audit your return. Even if your return has been reviewed and the IRS has corrected math errors, an audit can still occur.

Rely on our experience to resolve your tax problems
The Brager Tax Law group is dedicated to assisting individuals and business with serious tax problems including those caused by an erroneous refund. We can advocate on behalf of the taxpayer and negotiate with the IRS to resolve the issue. To schedule a confidential and initial consultation call 800-380 TAX LITIGATOR or contact us online today.

prisoner

Temporary employment agencies have become a more prevalent part of the American work experience since the 2007 financial crisis and the difficult economic times that followed. While on one hand, temporary employment agencies can provide workers with an entry point into a new industry, on the other hand they require payment for their placement services that could otherwise be used to pay the worker a higher wage or to hire additional workers. Furthermore, when the temporary agency acts as the worker’s employer, certain duties and acts are required of the employer. Failure to satisfy these tax duties can lead to criminal prosecution and result in a prison sentence or significant monetary penalties.

How can an employer satisfy their obligation regarding business trust fund taxes?

Trust fund taxes are probably most familiar within the context of how a business withholds payroll tax from its employees’ paychecks every pay period. While the exact deductions on your paystub are likely to differ, commonly found ones include those for federal income tax, Social Security and Medicare taxes (FICA), state and local taxes, and voluntary deductions including an IRA or 401(k).

For the federal tax withholdings, the employer is acting as a trustee for the US government by holding these government-owned funds until it pays them over to the government. The important take-away here is that the money is not the employer’s – it belongs to the government. Other duties the employer may have include:

  • Maintaining compliance with workers’ compensation contributions and laws that may be applicable.
  • Providing, as per agreed-upon contractual terms, benefits and fringe benefits to which the employee is entitled. This can include sick pay, vacation pay, retirement plans, life insurance policies, and other benefits.
  • Collecting , accounting for and paying over of Social Security and Medicare taxes (FICA) and federal unemployment taxes (FUTA).
  • Filing quarterly payroll tax return with the IRS.

Can a business be penalized for failures to collect, account for and paying over trust fund taxes?
Yes, a business and its principals can face serious civil and criminal tax consequences for failing to satisfy their duties regarding payroll taxes. In fact, this is exactly what occurred to a family who ran two different temp agencies in Massachusetts. Each of the four family members were sentenced for their tax crimes. The sentences included:

  • Margaret Mathes — was sentenced to 80 months in prison and three years of supervised release.
  • Bosea Prum — The daughter of Ms. Mathes, Ms. Prum was sentenced to two years in prison and three years of supervised release.
  • Sam Pich — Bosea Prum’s brother-in-law was also sentenced to two years of prison and three years of supervised release.
  • Thaworn Promket — Ms. Prum’s husband faces one year and a day in prison and three years of supervised release.

All of the defendants pleaded guilty to conspiracy to defraud the IRS and mail fraud. They also pleaded guilty to structuring their monetary transactions solely for the purposed of avoiding tax reporting requirements. In addition to the charges that were common to all defendants, Ms. Prum also pled guilty to the filing of false employment tax returns and other offenses. Mr. Pich pled guilty to 17 counts of assisting in the filing of false employment tax returns. Pruomket pled guilty to an additional two counts of structuring and seven counts of filing false employment tax returns.

Aside from the prison sentences imposed, the defendants also owe more than $6 million in workers’ compensation fees and employment taxes. Ms. Mathes and Ms. Prum have been ordered to pay $100,000 within the next 45 days. Ms. Prum and Mr. Promket also ran into trouble with their personal taxes and have been ordered to pay back more than $500,000 to resolve underpayments of tax.

Rely on our experience resolving payroll tax issues
Problems with collecting, accounting for and paying over payroll trust fund taxes can lead to serious tax problems. The Brager Tax Law Group is dedicated to correcting Federal and California payroll tax issues and other serious tax concerns. To schedule a confidential consultation, call 800-380-TAX LITIGATOR or contact us online.

Taxes

While many people think that a criminal tax situation is something that cannot happen to them unless they had the intent to defraud the government, the truth is that criminal tax charges can be triggered by even a slight misstep. Mistakes on your taxes that are perceived as willful misstatements by an IRS agent, and accountant or tax preparer malpractice are but a couple of the common ways that well-meaning taxpayers find themselves facing serious criminal penalties including a federal prison sentence.

In short, the things an average person does not know about tax law or tax crimes can hurt them when faced with an IRS audit or criminal investigation. A tax lawyer can help a taxpayer by providing context for any actions or inactions that might be misinterpreted by the agent, and negotiate a more favorable outcome.

Indicators of Tax Fraud
IRM 25.1.2 provides guidance for IRS agents in investigative techniques to be used in identifying tax fraud. One of the methods utilized by agents is to look for and identify indicators, or “badges” of fraud. The IRS has developed lists of these badges of fraud regarding a taxpayer’s income, expenses and deductions, financial books and records kept, income allocations, the taxpayer’s conduct, and the methods of concealment utilized. In brief, the listed indicators of fraud for each category include:

  • Income – Signs of fraud include entire sources of income being omitted, unexplained increases in net worth, expenditures substantially exceed income, no explanation for the source of certain bank deposits, concealing accounts or assets, excessive dealing in cash, and cashing checks considered income at check cashing services.
  • Expenses or Deductions – Claiming dependency status for independent, deceased, or non-existent individuals, claiming false deductions, and claiming business deductions that are actually personal expenses are all considered badges of fraud.
  • Books & Records – Keeping multiple sets of books, irregularly numbering invoices, making false entries in the records, failing to keep records, providing false receipts, and engaging in nonstandard accounting practices can all lead to tax problems.
  • Allocations of Income – If income or profits are distributed to fictitious individuals, the IRS will consider this a sign of fraud.
  • Taxpayer Conduct – Rude or abusive behavior toward the agent, making false statements, incomplete disclosures, failure to follow the advice of an accountant, backdated documents, submission of a false W-4 and other similar acts are all considered badges of fraud.
  • Methods of Concealment – Placing assets in the names of others, transferring property in anticipation of tax bills, secret transactions, transactions outside the typical course of business, and reservation of rights or interests in purportedly transferred property are all considered to be as badges of fraud.

The foregoing is not a comprehensive list of all items considered badges of fraud by the IRS, but it does indicate the types of issues they are looking for.

What actions by the IRS agent may reveal a pending investigation?
If you are already in contact with an IRS agent, certain actions may tip you off that an investigation may soon follow. While it is good practice to contact a tax attorney immediately upon contact with an IRS agent, you should do so immediately if one of the following scenarios occurs:

  • You have been selected for a random audit and you know that the relevant tax years contain false statements or understatements of income.
  • An agent contacts you seeming particularly concerned about your goals for a transaction and what you hoped to accomplish rather than the form of the transaction itself.
  • You have been audited and in regular contact with an IRS agent. The agent then disappears for weeks at a time and will not return your calls.
  • You have been pursued by an IRS agent requesting that you satisfy a tax debt. You call the agent and he or she will not return your calls.
  • Your accountant, bank or financial institution informs you that your records have been subpoenaed.

While these scenarios do not cover every scenario that should raise an alarm, they do give a good sense of the types of events and scenarios that should trigger concern by a taxpayer. If you find yourself in one of the above situations or in similar circumstances, contact the Brager Tax Law Group immediately. Our tax professionals will work to protect you. Contact us by calling (800) TAX LITIGATOR or contact us online.

form 1040

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.

Law

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.