Recently in Tax Litigation and Tax Controversy Category

US and Hong Kong Announce FATCA Intergovernmental Information Sharing Agreement (IGA)

January 30, 2015,

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Hong Kong has been conspicuously absent from the list of early signatories of the Foreign Account Tax Compliance Act (FATCA). That ended last month with Hong Kong announcing its long-awaited entrance into a Model 2 IGA with the US government. Covered Hong Kong-based financial institutions must now enter into separate foreign financial agreements (FFAs) with the IRS. This new agreement could result in some painful lessons for US taxpayers who have failed to report or pay taxes on their international assets. The remainder of this post will analyze the IGA announced by US and Hong officials and some of the potential consequences of such an agreement.

What conditions does this IGA impose on Hong Kong Financial Institutions?

All foreign financial institutions falling under the purview of FATCA -- including investment entities, banks, insurance companies and custodial institutions - are required to register with the IRS. Aside from registration with the US taxing authority, the foreign financial institutions must comply with the terms of the IGA. Failure to adhere to these terms can result in a 30% withholding tax being imposed on relevant payments that originated in the United States.

According to the terms of the IGA (which is linked below), the IGA that Hong Kong negotiated and agreed to is a Model 2 IGA. There are two types of IGAs: Model 1 IGAs and Model 2 IGAs. Model 1 IGA is characterized by a process in which American account-holder information is turned over by the banks to the foreign taxing authority. The foreign taxing authority then turns that information over to the IRS. In contrast, a Model 2 IGA, such as this agreement, permits the direct transfer of information from the foreign bank or financial institution to the IRS. Article 2 also permits the IRS to make group requests regarding non-consenting accounts. A full accounting of foreign financial FATCA reporting requirements are set forth in Article 2 of the IGA.

Furthermore, according to the terms of the agreement, Article 3 sets forth stringent regulations for certain recalcitrant account holders. While foreign financial institutions must in some jurisdictions obtain the consent of account holders before exchanging information, penalties can still apply Under a Model 2 IGA, an individual must consent to reporting in order to open a new account. Furthermore, under this IGA model, the time period for a suspension of withholding due to account holder recalcitrance is limited. If the requested information has not been provided within six months after the information request is received, the withholding period will begin and the foreign financial institution will be required to withhold.

The IGA also contains provisions that permit foreign Hong Kong-based financial institutions to be treated as "exempt beneficial owners" or as "deemed-compliant foreign financial institutions". Exempt beneficial owners are typically exempt from the withholding and registration requirements imposed by FATCA. Government entities, qualifying international organizations, and the Hong Kong Central Bank are all entities that could be deemed non-reporting financial institutions. Furthermore relevant, qualifying accounts could also be excluded from the statutory definition of "Financial Accounts". Chiefly these accounts are "low risk" accounts. Other accounts that could receive similar treatment include a qualifying Hong Kong-based broad participation retirement fund, narrow participation retirement fund, the pension fund of an exempt beneficial owner, and financial institutions holding only low-value accounts. A broad array of additional account types and their factors to qualify for FATCA exemptions are set forth in Annex II of the IGA.

OVDP May Offer a Way Out of Tax Problems due to IGAs

Aside from information sharing agreements with foreign nations and financial institutions, there are also domestic US laws that require US residents to disclose their foreign financial accounts with a balance that exceeds $10,000 at any moment in the year. US residents who fail to comply with US tax law may find themselves the target of an IRS civil or criminal investigations.

The IRS has crafted the Offshore Voluntary Disclosure Program (OVDP) which may provide non-compliant US taxpayers with a means to correct their tax problems. There are a number of procedures that can be followed to apply for OVDP. One such procedure in the OVDP program is known as the "Streamlined Procedure". If you were to work with an experienced tax lawyer, he or she would likely make you aware that the Streamlined OVDP is fraught with legal pitfalls. This is chiefly because Streamlined OVDP requires a certification that that taxpayer's failures to report, pay taxes, and file FBAR were due to "non-willful" conduct. However, the IRS' definition of willful conduct is not the common definition. Rather, the IRS' concept of willful conduct is expansive and can be inferred by factors such as one's conduct in requesting delivery of foreign statements to a foreign address or meeting "in secret" with bank officials. If it appears that willful conduct is present, your matter may be referred for criminal prosecution.

Put our FATCA compliance experience to work for you

The experienced tax attorneys of the Brager Tax Law Group are dedicated to advocating for US taxpayers in order to correct their FATCA and other tax compliance issues. With years of experience handling tax issues involving foreign assets, our experienced attorneys can assist taxpayers with serious tax issues such as undeclared foreign bank accounts. Contact the Brager Tax Law Group today online or by calling 800-380-TAX LITIGATOR to discuss your legal options.

How does the IRS define "willful" conduct and how can it affect my OVDP Filing?

January 20, 2015,

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Many people assume that when the IRS discusses or references "willful" conduct, the agency is using the term "willful" in its ordinary sense. Unfortunately, while ignorance may be an excuse, those who fail to rely on the advice and guidance of an experienced tax professional, may find themselves embroiled in serious tax problems. While the IRS presents the Streamlined Offshore Voluntary Disclosure Program (OVDP) as a means to avoid civil prosecution and fines, failure to understand the program's requirements caused by not consulting a tax lawyer can result in harsh civil consequences or even a referral for a criminal tax prosecution.

What does the IRS consider to be willful and non-willful conduct?

For purposes of the Streamlined OVDP, non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. While this standard may appear to a layperson to offer non-compliant taxpayers a quick and easy path out of tax compliance problems, the reality is that the standard is much more stringent.

This is partly due to the fact that, as part of the streamlined process, a filer must provide a certification that his or her conduct was non-willful. Furthermore, as part of the certification the taxpayer must "provide specific reasons for [their] failure to report all income, pay all tax, and submit all required information returns, including FBARs. If [the non-compliant filer] relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice. If married taxpayers submitting a joint certification have different reasons, provide the individual reasons for each spouse separately in the statement of facts."

The requirement that a taxpayer prove that their conduct was not willful can be a difficult endeavor. To start, there is always the chance that IRS officials may disbelieve subjective statements made by the non-compliant taxpayer due to the likelihood of such statements to be self-serving. For instance, potentially innocent conduct could be interpreted as willful conduct due to the presence of badges of fraud. Signs that may indicate that conduct was willful to an IRS agent can include:

- Holding an account in a country or jurisdiction with banking secrecy laws. The historical, and most common example, of such a country with secrecy laws is Switzerland.

- Use of any entity or arrangement to conceal the ownership of the foreign account.

- Requesting the delivery of financial account statements to an address outside of the United States.

- Arranging for secret meetings with financial institution officials or foreign bank officials.

- Willful blindness to learning of one's FBAR and other tax obligations.

It can be difficult to determine the types of objective evidence that could prove taxpayer conduct was non-willful. Without legal guidance, the well-meaning disclosures you make as part of your certification may be interpreted as an admission to willful conduct and later be used against you.

There are many instances where a required disclosure provided for the purposes of a streamlined OVDP can have unexpected and unanticipated consequences. For instance, the claim that failure to satisfy reporting requirements was not willful due to an oversight by a tax professional can be a risky claim. First, most CPA and tax professionals will inquire as to whether the client holds foreign accounts. Failure to disclose such accounts to a preparer may constitute willful conduct. Additionally, as discussed above, the individual must certify that the non-reporting of the accounts was due to non-willful conduct despite a professional preparing the taxes. A false certification can also result in civil or criminal liability. Finally, a professional tax preparer with a client under investigation by the IRS may be called before a professional board. Because the accountant-client privilege is not recognized in most jurisdictions, your tax preparer may disclose information to protect his or her license.

2014 OVDP Program offers an alternative to risky Streamlined OVDP

As an alternative to the streamlined process, there is also the 2014 OVDP. The 2014 OVDP is offered as an alternative to the streamlined process, meaning that a person can choose one or the other. The 2014 OVDP is designed to function as an amnesty program. Thus, there may be some level of protection from referral to the IRS' Criminal Investigation Division. However, the 2014 OVDP does have a drawback in that a one-time 27.5 percent penalty is imposed on the maximum amount that was present in the foreign account. If criminal prosecution is a possibility, a 27.5 percent penalty may represent a substantial discount as penalties and fines imposed by criminal liability can exceed the account balances. Careful consideration is essential before a taxpayer selects a program, because rejection from the Streamlined OVDP renders an individual ineligible for the standard 2014 OVDP.

The tax law attorneys of the Brager Tax Law Group are dedicated to working with taxpayers and helping to correct and resolve their tax compliance issues. To schedule a consultation, contact us online or call us at 800-380-TAX LITIGATOR.


Tax Evasion Conviction of Las Vegas Attorney Paul Wommer Upheld by 9th Circuit Court of Appeals

January 6, 2015,

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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.

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Brager Tax Law Group Obtains over 6,500 Pages in Freedom of Information Act Request for Offshore Voluntary Disclosure Program Documents

November 18, 2014,

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Several months ago the Brager Tax Law Group requested IRS documents through a Freedom of Information Act (FOIA) request, which was filed on behalf of the TaxProblemAttorney Blog.com. The Brager Tax Law Group received a CD in response to this FOIA request. Out of the 7,092 responsive pages, the IRS sent over 6,500 pages and withheld the rest. This information was published on the Brager Tax Law Group website in November. The requested documents included material used in training IRS personnel in the Offshore Voluntary Disclosure Program (OVDP), determining Program penalties and instructing IRS employees on the Program. The purpose of the OVDP program is for individuals who have failed to file an FBAR (Foreign Bank and Financial Accounts Report) form with the IRS, or didn't report income from offshore activities to disclose their errors and to avoid criminal tax prosecution. The OVDP's current penalty is 27.5 percent, but there are other alternatives available to certain taxpayers which may provide additional relief.


The OVDP is a complex program with countless rules; at times these rules may be conflicting. What complicates these OVDP rules are the "technical advisors" who review decisions that are made by individual revenue agents. Instead of being approved by the courts, these decisions are approved by these unknown advisors. The IRS does not disclose the identities of these technical advisors, which then doesn't allow tax attorneys and their clients to communicate with these advisors directly. This material may shed some light on how decisions are being made.

The Brager Tax Law Group submitted a FOIA request in April and received the files about six months later. These files were stored on a password protective CD. These thousands of pages can be found on the Brager website on the offshore bank account problems page.

The Brager Tax Law attorneys are still in the midst of reviewing the documents. Since the IRS did not provide a complete response and there are many files that were redacted, it may be necessary to file suit in order to obtain the remaining documents.

If you have any offshore bank accounts or other tax problems, call the tax litigation attorneys at Brager Tax Law Group, A P.C.

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.

New FAQs For Offshore Voluntary Disclosure Program (OVDP) Released by IRS

October 16, 2014,

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Our tax lawyers have reviewed the IRS' newly issued FAQs for its Delinquent International Information Return Submission Procedures, the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States (SDOP), and the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States (SFOP). These programs are first cousins of the IRS' Offshore Voluntary Disclosure Program (OVDP), but technically are not part of OVDP, and are options for individuals who have failed to report income from offshore bank accounts, and who may have failed to file a Foreign Bank Account Reports, FinCEN Form 114, formerly TDF 90-22.1 (FBAR) or other international information reporting returns.

Perhaps the most disturbing FAQ is the one issued for the Delinquent International Information Return Submission Procedures. The procedures replace former OVDP FAQ 18, and became effective July 1, 2014. Under old FAQ 18, if a taxpayer failed to file an information reporting form, but had reported all taxable income, and paid all the tax the IRS would not impose a penalty. Under the new Delinquent International Information Return Submission Procedures however, even if all income has been reported, and taxes paid, the taxpayer must submit a "reasonable cause statement" with each delinquent information return. Before the issuance of the new FAQ, many tax attorneys believed (hoped?) that if a taxpayer met the requirements of old FAQ 18 that no penalty will be imposed without regard to whether there was reasonable cause.

The FAQ makes clear that if the IRS does not accept the reasonable cause statement then penalties will be imposed. The FAQ states that the reasonable cause determination will be based upon longstanding authorities, and cites to Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3). The FAQ suggests that a statement of facts made under penalties of perjury should be included with the late filed returns.

The cited authorities are not particularly helpful in determining whether or not reasonable cause exists. For example, Treas. Reg. Section 1.6038-2(k)(3) which references reasonable cause for the failure to file Form 5471 (related to controlled foreign corporations or CFCs) does not set forth any standard for determining reasonable cause.

These requirements essentially make the Delinquent International Information Return Submission Procedures worthless. It has always been the case that penalties for the failure to file international information reporting forms could be waived if there was reasonable cause. The procedure adds nothing in the way of protection, and it is unclear why it even exists. A taxpayer who has reasonable cause for the failure to file can assert that defense at any time. Our tax lawyers see little benefit to filing under these procedures. Taxpayers who are concerned about not meeting the reasonable cause test should consider instead whether they would be better off in one of the IRS' Streamlined Filing Compliance Procedures, or even a full-blown OVDP.

If you have any offshore bank accounts or other tax problems, call the tax litigation attorneys at Brager Tax Law Group, A P.C.

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.

Expect Increased Assessment and Collection of Trust Fund Recovery Penalties

August 22, 2014,

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Enforcement of The Trust Fund Recovery Penalty (TFRP) is a source of potential government revenue that, according to the Treasury Inspector General for Tax Administration (TIGTA), needs to be revamped to become more efficient. Under existing law, employers are required to withhold from their employees' salaries amounts to cover Federal income, Social Security, and Medicare taxes. These are referred to as "trust fund taxes." When the employer fails to pay these taxes, the IRS can collect them from "responsible persons," who have willfully failed to pay them. In determining who is a responsible person, the critical test is whether the person has the effective power to pay the taxes owed.

As the taxes get older, the possibility of collection by the IRS continues to decrease. As of June 2012, employers owed the United States government approximately $14.1 billion in delinquent employment taxes. That's one big employment tax problem! In their study of 265 statistically valid cases, TIGTA found that TFRP actions were not always timely or adequate in 99 cases. Sixty-five cases had untimely TFRP actions, twenty cases had TFRPs that could not be assessed because assessment statutes had expired, ten did not have adequate support for collectability determinations when the TFRP was not assessed, and nine cases with incomplete TFRP investigations were closed with an installment agreement or considered "currently not collectible" before determining whether a TFRP should be assessed.

TIGTA set forth a list of recommendations for the IRS with respect to the TFRP, which were all accepted and agreed to be implemented in the coming year. Many of the suggestions emphasized the responsibility of the group managers; for example, one recommendation was to emphasize to managers their responsibility to use the Automated Trust Fund Recovery System (ATFR) monthly and to increase the level of training offered.

There are also a number of technical improvements that TIGTA recommended. For example, components would be added to review and measure the timeliness of actions, systemic messages will be used to remind revenue officers about functions already in place to facilitate timely TFRP actions, and there will be an updated checklist box for installment agreements. TIGTA also encouraged an increased amount of cooperation between different groups. For example, revenue officers and managers were encouraged to work more closely with the IRS Information Technology organization to ensure the completion and adequacy of the improvements listed above. Also, revenue officers should coordinate with Collection Policy to revise the Internal Revenue Manual (IRM), to hold group managers more accountable.

Contact our experienced former IRS tax attorneys at 1-800 Tax Litigator (1-800- 380.8295) for a confidential consultation to discuss available options if you have employment tax problems

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.

The Family That Commits Tax Evasion Together May Go to Prison Together

October 4, 2013,

While tax fraud is often perpetrated by a single person, a recent case shows that offshore tax evasion can sometimes be a family affair as well. U.S. Attorney Preet Bharara recently announced a prosecution of an offshore tax evasion case involving multiple family members. This case illustrates the dangers involved when an older family member passes on without cleaning up his tax problems; this is especially true where there has been a failure to file Form TDF 90-22.1, Report of Foreign Bank Account (FBAR). Henry Seggerman, of New York and Los Angeles, pled guilty this summer to one count of conspiracy to defraud the U.S., as well as two counts of filing false tax returns in connection with his family's criminal tax evasion scheme.
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Along with four other siblings, Seggerman inherited a substantial estate from his father Harry Seggerman, a wealthy New York businessman who passed away in 2001. According to the Department of Justice ("DOJ"), the senior Seggerman's fortune totaled $24 million, over half of which was held in undeclared Swiss bank accounts. While the DOJ did not say that either Henry Seggerman or any of his siblings actively assisted the late Harry Seggerman with his offshore tax fraud during his lifetime, Henry Seggerman allegedly filed false tax returns after his father's death that grossly underreported the value of his father's estate. Furthermore, the tax return that Henry filed on behalf of his father's estate failed to disclose the over $12 million hidden in Swiss bank accounts.

According to the DOJ, Henry Seggerman and his family continued this offshore tax fraud scheme for over a decade after their father's death. Seggerman was accused of taking further steps to set up new Swiss bank accounts to conceal the funds inherited by himself and his siblings. Aside from controlling his own offshore bank account, Seggerman was accused of helping his brother repatriate funds from a Swiss bank account to the U.S. under the guise of loans from a foundation that he controlled.

Similar to many others who have been accused of committing offshore tax evasion, Seggerman is expected to fully cooperate with U.S. authorities in exchange for the possibility of a reduced sentence. Seggerman is expected to testify on behalf of the U.S. in the trial of Michael Little, an attorney who advised the Seggermans on financial issues. Little, who is accused of operating an 11-year offshore tax fraud conspiracy, has pleaded not guilty and is awaiting trial. Additionally, three of Seggerman's siblings have already pled guilty to conspiracy to defraud the United States and filing fraudulent tax returns. All three siblings are currently awaiting sentencing.

While no sentencing date has been set for Seggerman, he faces a maximum penalty of 11 years in federal prison. Additionally, he has already agreed to make a $600,000 restitution payment at the time of his sentencing; if the case follows past patterns it would not be surprising if the total restitution payments are in the 6 million dollar range.

Continue reading "The Family That Commits Tax Evasion Together May Go to Prison Together " »

Tax Preparers Beware! 6th Circuit Court of Appeals Affirms Dismissal of Tax Refund Suit Due to Inability to Prove Timely Filing of Amended Return

April 11, 2013,

The 6th Circuit recently taught an expensive lesson to a Michigan couple about carefully following procedure when dealing with IRS Tax Problems. In Stocker v. United States (6th Cir. 2013), the 6th Circuit affirmed the dismissal of Robert and Laurel Stocker's suit against the IRS challenging the IRS' denial of a $64,000 tax refund, holding that because the Stockers could not prove the timely filing of their amended federal tax return under the methods established in Internal Revenue Code (IRC) Section 7502, the District Court for the Western District of Michigan was correct in dismissing the case.

The Stockers' tax problems and subsequent loss of their $64,000 refund occurred because of a seeming minor error. Following an IRS tax audit of a business in which the Stockers had invested and lost money, Mr. Stocker's CPA prepared amended 2003 federal tax returns for the Stockers that entitled them to a $64,000 refund. Mr. Stocker's CPA advised him that the returns had to be mailed by October 15, 2007 to comply with the tax law. Unfortunately, though Mr. Stocker testified that he mailed the returns on that day, he neglected to bring copies of the certified mail receipts to the post office, therefore failing to obtain date-stamped receipts. Apparently this was because although the CPA's office manager prepared postage prepaid, certified mail return receipted requested envelopes for the Stockers she mistakenly retained the customer copies of the certified mail receipts for the 2003 amended returns, rather than giving these copies to Mr. Stocker so that he could present them at the post office as he mailed the returns.

This left the Stockers at a disadvantage when their tax dispute began, as the IRS' records stated that the envelope containing the Stockers' amended 2003 return was postmarked four days late. Compounding the Stockers' tax problems, the IRS failed to retain the postmarked envelope in question. Seeking help in their tax dispute the Stockers brought suit, but the District Court granted the IRS' motion to dismiss for lack of jurisdiction due to the suit being barred as past the three-year period for filing a claim for a tax refund. On appeal, the 6th Circuit affirmed.

The 6th Circuit was unmoved by the Stockers' attempts to prove the mailing date of their return through means other than those set forth in IRC Section 7502. As the IRS' records indicated that the returns were postmarked four days late, the Stockers could not prove timely delivery under IRC Sec. 7502(a)(1), which states that the postmark of the returns establishes the date of mailing. Additionally, Mr. Stocker's failure to obtain the certified mail receipt precluded the use of IRC section 7502(c)(1), which states that the "date of registration shall be deemed the postmark date". The court rebuffed the Stockers' attempts to prove timely delivery through circumstantial evidence; rather, the Court stated that its own precedent prevented any other method of proof. Finally, the court held that the District Court had not abused its discretion in refusing to draw the inference that the Stockers had timely filed their returns because of the IRS' failure to retain the postmarked envelope in violation of internal policy.

Despite the seemingly minor nature of the Stockers' mistakes, the 6th Circuit was highly unsympathetic to their plight. Ultimately, the court reiterated that only certain procedures are available to prove timely filing, and the Stockers' own mistakes precluded them from receiving relief, despite their innocent nature. While calling it "unfortunate" that the Stockers could not prove the timeliness of their return, the court sent a strong message to taxpayers that it was unwilling to make exceptions for even the most innocent of mistakes.

Continue reading "Tax Preparers Beware! 6th Circuit Court of Appeals Affirms Dismissal of Tax Refund Suit Due to Inability to Prove Timely Filing of Amended Return " »

Prominent Tax Attorney Found Liable for Civil Tax Fraud Penalties Due to Finding of "Willful Blindness" to Underreporting of Income

March 20, 2013,

After being convicted of criminal tax fraud and serving 18 months in federal prison, a prominent former California tax attorney recently found himself again the subject of an IRS investigation into his alleged tax fraud. After a criminal tax case that culminated in Owen G. Fiore's guilty plea to tax evasion for the 1999 tax year, the IRS began to seek civil tax fraud penalties against Mr. Fiore for 1996 through 1999. Although Mr. Fiore conceded the tax disputes and the tax fraud charges for 1998 and 1999, he disputed his fraud liability for 1996 and 1997. While the Tax Court felt that it was unclear whether some of Mr. Fiore's actions weighed in favor of a finding of tax fraud, the court took a novel approach and ultimately held that Mr. Fiore had been "willfully blind" to his unreported income, and consequently found him liable for tax fraud for the 1996 and 1997 tax years.

Borrowing heavily from criminal law principles and discussing relevant appellate jurisprudence on the issue, the Tax Court applied the infrequently-used (at least in the area of civil tax fraud) willful blindness concept to Mr. Fiore's actions in the years in question. Specifically, the court stated that if the IRS could prove by clear and convincing evidence that Mr. Fiore was "aware of a high probability of unreported income or improper deductions" and "deliberately avoided steps to confirm this awareness," the standard for civil tax fraud would be met.

Ultimately, the Tax Court found that Mr. Fiore met both prongs of the test for willful blindness. Discussing Mr. Fiore's extensive work experience and education, the court found that such experience ensured that he was aware of the risk of underreporting his income through generally neglecting firm administration. Furthermore, the court discussed Mr. Fiore's significant use of funds during the period in question, and inferred from this that he consciously chose to not pay taxes in order to have more funds on hand. As to the second prong of the test, the court found that since Fiore had access to bank statements, bills and deposit slips for each taxable year, yet failed to check them when preparing his tax returns, this constituted "deliberate" avoidance of steps to confirm the underreporting of his income.

After this discussion of Mr. Fiore's tax return problems, the Tax Court concluded that the finding of willful blindness not only weighed in favor of tax fraud, but deserved "particular weight" in determining whether Mr. Fiore had committed tax fraud. When added to other factors such as Mr. Fiore's repeated failure to cooperate in his IRS tax audits, consistent underreporting of income, and haphazard recordkeeping (none of which conclusively weighed in favor of a finding of tax fraud on their own), the court found that the IRS had met the burden of proof to show that Mr. Fiore committed tax fraud in 1996 and 1997.

Continue reading "Prominent Tax Attorney Found Liable for Civil Tax Fraud Penalties Due to Finding of "Willful Blindness" to Underreporting of Income " »

San Diego Used Car Dealer Sentenced in Tax Fraud Case

January 28, 2013,

Many people have the preconceived notion that used car salesmen are less than scrupulous and Mohammad Jafar Nikbakht didn't do anything to help that stereotype. Late last year in the United States District Court for the Southern District of California, Mohammad Nikbakht aka Freydoon Nikbakht was sentenced to 15 months in prison for criminal tax evasion for the year 2007. Mr. Nikbakht was the owner or co-owner of a number of wholesale used car dealerships in and around San Diego, California. He willfully and fraudulently understated his income on his Forms 1040 in a conscious attempt to avoid paying his federal income tax totaling over $200,000.

According to papers filed in his criminal tax case beginning in October 1999, Mr. Nikbakht purposely caused a false joint income tax return to be prepared on behalf of himself and his wife for tax year 1998, which substantially understated their income. Mr. Nikbakht signed and filed this fraudulent return with the Internal Revenue Service as well as doing the same for tax years 1999 and 2000. His intention was to knowingly and wantonly defraud the U.S. government of tax due and owing for those years.

In addition to filing false returns for 1998 through 2000, Mohammad Nikbakht allegedly also committed tax fraud by filing fraudulent Forms 1040 for the years 2002, 2003 and 2004, again purposely understating his income. For the years 2006 and 2007 he didn't file tax returns even though they were required. In his attempt to further criminally evade the income tax due and owing he operated a wholesale auto dealership under another dealer's license and had all of his income payments made payable to either cash or his ex-wife in an effort to hide his income. He moved money into, out of and between various bank accounts to hide the money from the IRS and created a sham corporation, opening a bank account in that corporation's name that he used to pay his personal expenses, again in a concerted effort to conceal his income.

Mr. Nikbakht eventually pled guilty to one count of the criminal tax indictment for 2007 with the remaining counts dismissed on the motion of the United States. In addition to 15 months in prison, Mr. Nikbakht was ordered to pay the IRS $124,454 in restitution and upon his release from prison will be on supervised release for three years. He will also be prohibited from opening checking accounts or incurring new credit card charges or opening additional lines of credit without approval of his probation officer.

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CPA Firm Dissed by 7th Circuit Court of Appeals

November 12, 2012,

Our tax lawyers have represented a fair number of clients in the Tax Court, and before the IRS in so-called unreasonable compensation tax audits. The issue generally arises in closely held C corporations who pay out all of their profits as salary to the shareholders, rather than allocating any portion to dividends. The advantage is that salaries are deductible--dividends are not. An IRS tax audit can, however, result in the IRS denying a portion of the salaries as not being an ordinary and necessary business expense pursuant to IRC Section 162.

That's what happened in Mulcahy, Pauritsch, Salvador & Co. v. Commissioner (7th Cir. 2012). Mulcahy et. al. is a medium size accounting firm in Illinois. According to its website the firm provides a variety of services including income tax preparation for all types of businesses and individuals, IRS and State tax audit representation, payroll reporting, QuickBooks setup support and training, business startup services, monthly bookkeeping and financial statements.

The Mulcahy firm appealed the IRS decision by filing a Petition with the United States Tax Court, and when it lost there they appealed to the 7th Circuit Court of Appeal hoping no doubt for a better result. After an analysis of the tax law, and the facts Judge Posner of the 7th Circuit decided against the CPA firm, and upheld the imposition of the 20% negligence penalty. Judge Posner rejected the defense to the penalty advanced by CPA firms tax attorneys that the CPA firm relied on the many individual employees of the firm who were "knowledgeable in income tax matters." He wrote "... there was conflict in this case: taking advice from oneself." But Judge Posner didn't stop there. First he badmouthed the firm's tax lawyers:

Remarkably, the firm's lawyers (an accounting firm's lawyers) appear not to understand the difference between compensation for services and compensation for capital, as when their reply brief states that the founding shareholders, because they "left funds in the taxpayer over the years to fund working capital," "deserved more in compensation to take that fact into account." True--but the "more" they "deserved" was not compensation "for personal services actually rendered." Contributing capital is not a personal service. Had the founding shareholders lent capital to the company, as it appears they did, they could charge interest and the interest would be deductible by the corporation. They charged no interest (emphasis in original).

Not content with leaving it there Judge Posner finished up as follows:
We note in closing our puzzlement that the firm chose to organize as a conventional business corporation in the first place. But that was in 1979 and there were fewer pass-through options then than there are now; a general partnership would have been the obvious alternative but it would not have conferred limited liability, which protects members' personal assets from a firm's creditors.

Why the firm continued as a C corporation and sought to avoid double taxation by overstating deductions for business expenses, when reorganizing as a passthrough entity would have achieved the same result without inviting a legal challenge [citation omitted] is a greater puzzle.

The Tax Court was correct to disallow the deduction of the "consulting fees" from the firm's taxable income and likewise correct to impose the 20 percent penalty. That an accounting firm should so screw up its taxes is the most remarkable feature of the case.

OUCH!

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Tax Evasion Conviction Affirmed by Seventh Circuit

August 14, 2012,

The sentence of an individual who pled guilty to tax fraud was affirmed by the Seventh Circuit Court of Appeals. John McKinney was charged with eleven counts of tax evasion and conspiracy to defraud, impede, impair, obstruct and defeat the functions of the Internal Revenue Service (IRS) in the collection of income taxes. McKinney's actions are a textbook example of how to turn a financial problem into a criminal tax problem.

McKinney and his brother owned a construction company. Mr. McKinney failed to pay his taxes seven years between 1999 and 2006. In 2003, the IRS placed federal tax liens against McKinney for taxes he owed. He avoided the taxes by transferring money earned from his company into separate nominee accounts, which the brothers used for personal and household expenditures. McKinney gave the IRS Revenue Officer false statements regarding his ability to pay his taxes.

When his wife and sister-in-law applied for residential mortgages, which McKinney was unable to qualify for because of the federal tax liens, McKinney falsely told loan officers that they were both full-time employees of his company. However, neither worked for the company or reported this employment on their tax returns. These financial transactions diverted business income earned by the brothers into assets owned by their wives, thereby avoiding IRS tax assessments and tax liens.

The brothers made false statements regarding their inability to pay income taxes, causing the unsuspecting IRS to close its investigation in 2007. However, the IRS discovered the brothers' tax fraud, and charged the brothers in 2011. McKinney pleaded guilty to one count of conspiracy, one count of tax evasion and three counts of making false statements. He was sentenced to nearly five years imprisonment with three years of supervised release. The court also ordered him to pay $1.5 million in restitution.

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Builder's Tax Problems are a Springboard to Criminal Tax Charges

August 8, 2012,

A North Carolina residential builder was arrested on criminal tax charges stemming from his civil tax problems. The Department of Justice and the IRS announced that William B. Clayton was charged with one count of attempting to obstruct IRS efforts to collect his unpaid tax liabilities and one count of knowingly converting and disposing of U.S. government property.

According to the indictment Clayton failed to file income tax returns from 1999 to 2004. He never filed for extensions. In 2005 and 2006, the IRS began assessment and collection proceedings against Clayton. In 2007, Clayton hired a certified public accountant to represent him before the IRS, and the CPA prepared and filed delinquent tax returns for him. Based on these returns, the IRS reduced its prior tax assessments. However, Clayton did not pay his liabilities, and collection proceedings against him continued. No doubt that included tax levies, and tax liens.

Between 2007 and 2010, Clayton allegedly obstructed the IRS' collection efforts. Clayton allegedly hid property located in Virginia, which he partially owned, from the IRS. According to the press release he destroyed property that he had previously built and owned but that the Service had seized. The IRS had planned to auction the property in an effort to pay down Clayton's tax liabilities. However, Clayton allegedly destroyed parts of the property and vandalized others.

If convicted, Clayton could face a maximum potential sentence of three years in prison and a fine of $250,000 on the tax law obstruction charge, and 10 years imprisonment and a fine of $250,000 on the conversion of government property charge.

As the IRS and the Department of Justice point out in their press release an indictment is merely an accusation. The defendant is presumed innocent unless proven guilty beyond a reasonable doubt.

Still if the charges are true it should be a reminder to people not to allow their tax problems to turn into something worse. Depending upon Clayton's finances, chances are he could have resolved his tax problems through an offer in compromise, or an installment payment agreement with the IRS, but instead he allowed things to proceed to a point where instead the IRS filed criminal tax charges.

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Preparers' Tax Fraud Affirmed by the Fifth Circuit

August 6, 2012,

Thumbnail image for 1125087_person_jail.jpgThe convictions of a couple that committed tax fraud were affirmed by the Fifth Circuit Court of Appeals. The husband and wife were the owners and operators of a firm that prepared personal income tax returns in Texas. Donald Womack misrepresented himself as an accountant who has previously worked for the IRS. His wife, Tonya, helped Mr. Womack with the business. Her role progressed until she began filing clients' returns with the IRS electronically. The couple used the same electronic filing identification number (EFIN).

The IRS first noticed the Womacks based on the unusual deductions that were claimed on their clients' returns. Several of the Womack's clients testified against the couple, including one man who testified that Mr. Womack offered to provide false mileage logs to substantiate vehicle mileage deductions. Other former clients stated that they had never given the Womacks any information that would support the deductions that the couple claimed, such as charitable or mortgage-interest deductions. These clients are probably lucky they didn't get charged with tax evasion themselves!

The government also used an undercover IRS special agent, who brought in his tax information to the couple. Although he had calculated that he owed $300, the Womacks gave him a choice of three tax refund amounts, ranging from $3,200 to $4,200. Mrs. Womack claimed that, although she had taken a tax preparation course, all of her errors were accidental. Mr. Womack did not offer any theory as to the cause of his inaccuracies.

A jury indicted the couple on 26 counts of conspiracy and aiding and assisting in the preparation of false tax returns. Mr. Womack was ordered to serve five years in prison, plus three years of supervised release. Mrs. Womack got off with three years of prison time, plus three years of supervised release. The court also ordered them to pay over $160,000 in restitution. This is over and above any civil tax preparer penalties that may be assessed against them under Internal Revenue Code (IRC) Section 6694.The Fifth Circuit affirmed their convictions in an unpublished opinion.

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Grammy Winner Faces Criminal Tax Charges

June 15, 2012,

Tax problems abound for Lauryn Hill, who won five Grammys for her 1998 debut album. Her album, "The Miseducation of Lauryn Hill," might describe her alleged actions to stop paying taxes and subsequent consequences. Former member of the Fugees band, Ms. Hill, who's also an actress, has been charged by the the Department of Justice with Failure to File a Tax Return, but not tax evasion, on gross income of slightly more than $1.8 million over a three-year period from 2005 through 2007.

In her response to the prosecution regarding her criminal tax problems, Ms. Hill posted a 1,270-word manifesto at mslaurynhill on Tumblr. Thumbnail image for LaurynHill.jpg

"For the past several years, I have remained what others would consider underground. I did this in order to build a community of people, like-minded in their desire for freedom and the right to pursue their goals and lives without being manipulated and controlled by a media protected military industrial complex with a completely different agenda. Having put the lives and needs of other people before my own for multiple years, and having made hundreds of millions of dollars for certain institutions, under complex and sometimes severe circumstances, I began to require growth and more equitable treatment, but was met with resistance."

Ms. Hill goes on to further describe her tax dispute: "I did not deliberately abandon my fans, nor did I deliberately abandon any responsibilities, but I did however put my safety, health and freedom and the freedom, safety and health of my family first over all other material concerns! I also embraced my right to resist a system intentionally opposing my right to whole and integral survival."

Finally she responds to her tax problems: "I conveyed all of this when questioned as to why I did not file taxes during this time period. Obviously, the danger I faced was not accepted as reasonable grounds for deferring my tax payments, as authorities, who despite being told all of this, still chose to pursue action against me, as opposed to finding an alternative solution."

Ms. Hill, who is facing one year in prison and a $100,000 fine for each year she failed to file, is one of a number of celebrities whose alleged tax fraud have made headlines, including Wesley Snipes, currently serving a three-year sentence.

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