Articles Tagged with tax penalties

In a 2019 U.S. Tax Court case, Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4, (2019) (Palmolive II), the Tax Court held that both penalties determined by the Revenue Agent in a tax audit and additional penalties later determined  by an Appeals Officer in the IRS Independent Office of Appeals met the written approval requirements of I.R.C. § 6751; thus making Palmolive Building Investors, LLC (Palmolive) a two-time loser. Palmolive was initially in Tax Court in 2017 (Palmolive I) over a disallowed charitable deduction for a façade easement.  As the owner of a historical building in Chicago, it had donated a façade easement to a conservation organization and took a large charitable deduction for the easement. In addition to questioning the $33,410,000 valuation of the easement, the IRS argued that the mortgages on the building limited the easement’s protection in perpetuity. The Tax Court agreed and concluded that the façade easement was not protected in perpetuity and therefore failed to qualify for a charitable deduction under I.R.C. § 170(h)(5)(A).

Following the disallowance in Palmolive I, the taxpayer returned to the Tax Court to dispute whether the penalties assessed by the IRS complied with the provisions of IRC Section 6751(b)(1).  During a tax audit, a Revenue Agent had asserted in a 30-day letter that Palmolive was responsible for a 40% penalty for a gross valuation misstatement and a 20% negligence penalty. These two penalties were approved on Form 5701 by the Revenue Agent’s supervisor. Subsequently, a 60-day letter was issued. The taxpayer took its case to the IRS Office of Appeals. The Appeals Officer assigned to the case proposed four penalties: the two assessed by the Revenue Agent and the Substantial Understatement and Substantial Valuation Misstatement penalties. The Appeals Officer’s immediate supervisor approved all of these penalties on Form 5402-c. In Tax Court, Palmolive argued that the initial determination of penalties was made by the Revenue Agent who did not assert the Substantial Understatement and Substantial Valuation Misstatement penalties; therefore the penalties asserted by the Appeals Officer were not approved as part of the first determination of the penalties.

In examining the validity of the penalty assessments, the court cited I.R.C. § 6751(b)(1) which states that penalties can only be assessed when the initial determination of such penalties are approved in writing by the immediate supervisor of the person making the determination. The court also pointed out that the Congressional motive behind enacting this provision was to make sure penalties were not used as bargaining chips. The court first noted that all penalties were approved in writing. The next issue was what defines an “initial determination” for the purposes if I.R.C. § 6751(b)(1). The court held that the initial determination is when the penalties were first communicated to the taxpayer. The court stated that the Revenue Agent’s 2008 mailing of the 30-day letter was the date of the initial determination and the Appeals Officer’s 2014 issuance of the Notice of Final Partnership Administrate Adjustment are both initial determinations. Since the IRS forms were signed by the respective supervisors prior to the time of the initial determinations, the penalties met the requirements of Section 6751(b) (1).

Have a Bankruptcy Judge Review Your Tax Fraud Penalty
Civil tax fraud penalties are 75% of the underpayment of tax attributable to tax fraud. Whenever the IRS believes that a taxpayer has intentionally violated a known legal duty, these penalties can be assessed, in addition to possible criminal prosecution.

The IRS or the California Franchise Tax Board (FTB) need to prove that tax fraud was committed by clear and convincing evidence. However, sometimes these penalties are assessed in situations where there is insufficient evidence to meet this standard. In these cases, having a bankruptcy judge review your tax fraud penalty can be an excellent option.

While bankruptcy can be a good option for taxpayers that just want to discharge some of their tax debt, it can also be an effective way to resolve a tax dispute. Section 505 of the Bankruptcy Code provides authority for a judge to determine the amount of legality of any tax or penalty relating to tax, regardless of whether or not the taxpayer has already paid the disputed amount.

How to Resolve a Payroll Tax Dispute
Payroll tax disputes often arise when a worker is paid as an independent contractor, but the IRS or California Employment Development Department (EDD) believes that the worker is an employee. There are some differences between federal and state requirements, but a business will often have to deal with both the IRS and EDD when a worker misclassification problem arises.

The 20-Factor Test

Many employers believe that as long as they have a contract stating that a worker is an independent contractor, they are covered. This is not true. A worker is legally classified as an employee or independent contractor based on the circumstances of the employment relationship.

What Are the Penalties for Failure to File a Tax Return?
If you owe tax and fail to file a return on time, the IRS can assess both civil and criminal tax penalties. The penalty for failure to file is separate from the penalty for failure to pay taxes, and both civil and criminal penalties can be assessed for the same return.

Penalty for File to File a Tax Return

The penalty for failure to file is 5 percent of the tax owed per month. Contrast that with the failure to pay penalty of only half a percent per month, and you can see why it is a good idea to file your return on time, even if you cannot pay your tax.

What Is an Abusive Tax Shelter
An abusive tax shelter is an investment scheme that attempts to reduce income tax without serving any other economic purpose. The value of income or assets is not changed, so the sole purpose of an abusive tax shelter is to avoid tax.

The IRS attempts to deter participations in abusive tax shelters through tax audits, summons enforcement, litigation and other methods. There is also an abusive tax shelter hotline, where anyone can anonymously provide information about abusive tax shelter transactions.

Analyzing an Abusive Tax Shelter

Do I Qualify for First Time Tax Penalty Abatement?
Many taxpayers are unaware that they may be eligible for relief from tax penalties under the IRS First Time Penalty Abatement policy. The penalty abatement is available for penalties due to a failure to file, failure to pay taxes, or a failure to deposit taxes.

Requirements for First Time Penalty Abatement

To qualify for First Time Penalty Abatement, you must meet the following requirements:

What to Do If You Are Accused of Tax Fraud
Tax fraud is a crime that involves intentional wrongdoing when failing to comply with a tax law. If you simply make a mistake when filing your taxes, the IRS may charge you with civil penalties, but they will not pursue any criminal charges. If, however, the IRS believes that you intentionally failed to meet your obligations as a taxpayer, you could face criminal penalties and jail time.

Tax fraud can result in up to 5 years and prison and a $500,000 fine. The IRS does not commonly pursue criminal charges, so if they have singled you out for a criminal tax violation, you should immediately consult with a tax attorney.

What to Do If You Are Accused of Tax Fraud