Sales Tax Holiday

It was reported in February that the Ohio Senate was looking to spur economic activity via the often used school sales tax holiday. This weekend, I had the pleasure of shopping for new vehicle for the family. It struck me as I was signing the mountain of documents in the financing department that if the Ohio legislature is wanting to spur economic activity through a reduction in sales tax why not lower the sales tax on car purchases? Of all the things I think South Carolina does wrong, there is one issue that I think they have mostly correct. In South Carolina, a 5% sales tax is applied to the purchase of a vehicle, but it is capped at $300.

I do not wish to engage in a discussion on the potential regressivity of the tax, as there could always be modifications, but the high sales tax in Ohio hinders the average family in affording the car they want/need. The sales tax on our modest used minivan ran slightly north of $1,300. This amount is not an insubstantial amount of money. With a government that professes to be be interested in spurring economic growth, a state that employs many in the car manufacturing business, and the anti-tax sentiment of the current state administration, we should take a serious look at the application of the sales tax to an item so integral to our daily lives.

Columbus Ohio Tax Attorney

IRS making noise regarding Quiet Disclosures.

On June 6, I wrote about the impending FBAR deadline and a use of “quiet disclosures” by foreign account holders to come into compliance with the FBAR requirements. As I stated in that post, the IRS was looking into penalizing individuals that attempt to skirt the OVDP process the IRS set-up to bring taxpayers into compliance. One June 11, 2013 the IRS filed suit to enforce the assessment of the 50% willful failure to file FBAR penalty. See United States v. Carl R. Zwerner, Case # 1:13-cv-22082-CMA (SD Florida, June 11, 2013).

This case is alarming for at least two reasons. The first is the actual filing of the lawsuit. Generally, the IRS has 10 years to collects amounts assessed against taxpayers. This same rule is applicable to assessed FBAR penalties, see Internal Revenue Manual. However, 31 USC §5321(b)(2) provides a time limitation for filing suit to collect the FBAR penalty. In this case, it appears the IRS was up against the deadline to file suit. We do not have any facts at this time to know whether the defendant was attempting to make payments or was being uncooperative. What we do know, is the IRS recently acknowledged the need to pursue quiet disclosures, and by filing this suit they were able to make public some of the defendants confidential tax matters. These tax matters just fortunately coincided with the IRS’ public position that taxpayers should not pursue quiet disclosures. In a very public manner, the IRS laid their cards on the table and alerted taxpayers to the cost of a quiet disclosure.

The cost in this case is the second area of concern. The defendant admitted to an interest in a Swiss bank account that had an approximate balance of a $1.5 million. The IRS has now assessed against the defendant penalties totaling over $3 million. The penalties alone are more than twice what the account is worth. Had the defendant pursued the OVDP process, he could have been looking at a penalty of approximately 20% of the highest account balance. Whether the penalties are fair under the Constitution is another matter, and one I cannot answer. But what is clear, is the IRS is quickly letting the tax practitioner and taxpayer community know of their intention to pursue these quiet disclosures. Should you have an FBAR matter, please contact a competent tax attorney.

Why did I get audited?

One of the first questions many of my clients ask me is “why did I get audited?” The recent scandal surrounding the IRS and conservative groups has not helped diminish the feeling clients have that they have been unfairly singled-out. I have heard IRS officials discuss how they followed events in the newspaper to determine if a taxpayer’s return should be picked up for review. But that practice, if ever done, is so last century. Today the IRS has the internet and powerful computer programs to assist in determining if your return should be selected for an audit.

There is not much known about the breadth of the IRS’ computer tracking program. Much like the fabled DIF score, the IRS keeps their trade secrets very secret. Perhaps the NSA could learn a few secret-keeping tips from the IRS. What is known is that the IRS can cull large amounts of data from internet usage to help it perform statistical modeling of people’s behavior. This modeling is said to help the IRS target taxpayers more successfully for audits. These audits mean potential for more income, as there is believed to be a $300 billion shortfall in taxes due to tax errors and evasion. So, if the IRS sends you a letter requesting your appearance at an audit, know that they have already done their research on you. Should you desire tax council, please contact my firm, but preferably not via a Verizon cell phone. 🙂

The IRS man cometh…..again.

Apologies to all for getting to this topic a month after the TIGTA report
was issued. Nevertheless, I want to take a moment to discuss the relevance of this report. The Treasury Inspector General audited the IRS’s handling of partial pay installment agreements. Partial pay installment agreements arise when the IRS reviews a taxpayer’s financial information and determines that the monthly amount the taxpayer can pay will not pay off the entire tax debt within the statute of limitations.

The Treasury Inspector General found that the IRS was not following their own requirements to review these installment agreements every two years. The IRS is suppose to review the agreements on a regular basis to determine the ability for greater collection. Tax practitioners have noticed for some time that our clients who have been placed into these installment agreements have not been followed-up on as the collection statute runs. For our clients, this has been a wonderful blessing, and often has resulted in significant reductions in what is paid versus what was owed.

Unfortunately for the taxpayer, the IRS has agreed with the findings and have stated they will work to implement better controls to ensure that proper reviews are done. This means for taxpayers in installment agreements, they will need to discuss with their tax advisor what the specifics are of their installment agreement. A reputable tax practitioner should have advised their client on the ramifications of each of the collection alternatives that the IRS provides. So taxpayers be forewarned, just because the IRS contacts you again regarding an installment agreement, it does not mean your prior representative did anything wrong. It may mean the IRS is finally doing what they were suppose to do all along.

The world of tax resolution has seen  quick growth in companies and attorneys assisting individuals and businesses with their tax matters. This increase in assistance has had an overall positive impact for taxpayers that find themselves struggling with the stress and burden of dealing with the IRS. However, while much good has been done, I am constantly amazed by the stories of woe that clients tell me of experiences with other firms that provide tax resolution services. The over-arching theme I routinely hear is that they were over-sold on what the firm could deliver, and based on those promises thousands of dollars were spent.

The most common belief that taxpayers have is that a tax attorney can immediately reduce the amount that is owed. The phrase “pennies on the dollar” is like fingernails on a chalkboard to me. If you are seeking assistance with your tax problems, and the person you are speaking to uses a phrase similar to “pennies on the dollar,” I suggest you seriously question whether you should move forward with their services. Yes, the IRS has a program whereby they may reduce the total amount owed, but this program is operated at the IRS’ discretion. Less than half of all offers are accepted by the IRS. Your representative should have a very candid conversation with you regarding the pro’s and con’s of pursuing an offer-in-compromise.

There also exists the myth of penalty abatement. While the IRS has recently relaxed some standards on who is eligible for an abatement of penalties, such an abatement is not a guarantee to anyone. I have been told from numerous clients that they met with tax practitioners that promised interest and penalties would be removed. Again, I caution moving forward with any representative that guarantees you an outcome.

In the end, when looking for representation to assist you with your tax matter, do not be afraid to ask the practitioner of their experience and education with tax. For example, were they an insurance defense attorney that now sells the firm as a tax firm? What education do they have in the area of tax? Was it a weekend seminar on how to prepare installment agreements, or have they focused on tax from law school and through continued studies and work as a professional. Ask who will actually be working on your matter and what their experience includes. Is your case going to be passed off from an attorney who was merely providing you a sales pitch to staff that has not received tax training? Ask them what are you getting for the fees paid? Finally, do not be pressured into signing up immediately. Most tax practitioners provide a free consultation. Call several and see who best fits your needs.

FBAR Deadline Approaching

June 30 is the deadline for individuals and other entities to file all required FBAR forms. The deadline is not like the typical postmark deadline that most associate with the filing of your tax return. The Department of Treasury requires this form to be received on or before June 30 of  the year following the calendar year being reported. The FBAR must be mailed to the following address:

United States Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621

If an express delivery service is required for a timely filed FBAR, address the parcel to:

IRS Enterprise Computing Center
ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226

Failure to file the FBAR can result in severe penalties being assessed against you. For the past several years, the Department of the Treasury, through the IRS, has made FBAR compliance and enforcement an area of focus. They have offered several programs by which taxpayers who have not been in compliance with the filing requirements can come forward under a structured reporting program. This program is called the Offshore Voluntary Disclosure Program, and should you believe you need to avail yourself of this program it would be best to seek the advice of counsel.

In Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May Be Missing Continued Evasion the GAO reported in April 2013 that more than 10,000 people may have tried to avoid the assessment of the FBAR penalties by amending returns and filing late FBAR’s. The Quiet Disclosure is done in the hopes that the IRS does not single any one taxpayer for the application of the appropriate penalties. In essence, the taxpayer is playing an audit lottery, whereby they hope the IRS is too overwhelmed with filings  that they have a minimal chance of being targeted specifically.  The GAO also reported that many taxpayers are apparently attempting to file properly as a going-forward concern and failing to amend or file for prior years.

The IRS has agreed with the GAO’s report, and has acknowledged that they will adopt the GAO’s method of review to help spot taxpayers who are looking to skirt the FBAR penalties.  The failure to file the FBAR form is a serious tax matter, and you should seek counsel to advise you of you options. Waters Law, LLC has helped individuals through the OVDP process and assisted in the reduction of the FBAR penalties for effected taxpayers. Contact us today for a free consultation.

Name(required)

Email(required)

Comment(required)

Submit

Δ

Who claims the dependents after a divorce?

A recent U.S. Tax Court case highlights why even when the divorce decree says you win, the Tax Court/IRS will say you lose. In Schenk v. Commissioner, 140 T.C. No. 10 (2013), http://ustaxcourt.gov/InOpHistoric/ShenkDivGustafson.TC.WPD.pdf, the Tax Court details the often common problem that divorced filers face when they file their federal tax return. In this case, the mother and custodial parent filed a tax return claiming a child that was later claimed by the father on his return. The IRS issued the father a notice of deficiency regarding non-reported income and removing a dependent that had previously been claimed by the mother. The father challenged the deficiency by arguing that according to the divorce decree he was entitled to claim the child.

Ultimately, the Tax Court read the language of the divorce decree as being ambiguous as to who had the right to claim the deductions. And, bolstered their arguments by referencing the requirements of Section 152 of the Internal Revenue Code. The Tax Court analyzed the legislative history of Section 152 and the technical elements of the section, to place the burden of clarity on taxpayers to prove their right to claim a dependent. In this matter, Mr. Schenk failed to have his ex-spouse execute a Form 8332 or similar declaration. The Tax Court made mention that the divorce decree does not demand execution of the Form 8332, and the divorce decree would not be a sufficient substitute for the form.

Unfortunately, as a tax attorney I have too many clients come to my office who have had the IRS propose similar adjustments as Mr. Schenk experienced. The tax benefits that accompany claiming a dependent, from Head-of-Household filing, extra exemptions, and associated tax credits, often times cause former spouses to race to get their return filed before the other has the opportunity. This case illustrates the potential great burden that a spouse can face in proving their right to claim a dependent if a divorce decree is not properly drafted. If you are currently going through a divorce you should request your attorney review with you in detail the tax implications of the divorce, including the downstream effects of being able to claim dependents. Should you still have concerns, you should feel free to consult with a tax attorney.

 

IRS Collection Snapshot

As tax attorneys, we strive to reduce the amount of taxes our clients have to pay. This goal is best accomplished when we assist someone in a transaction to provide the most advantageous tax structuring from the outset. Unfortunately, many of our clients come to us after the deal has been consummated, when there is little to be done. And, while we work hard to minimize the impact of an audit, it is not uncommon for a business or individual to conclude an audit with a balance owed to the IRS. The question then becomes what are your options in regards to paying these taxes. The IRS has established three potential means of collection for taxpayers unable to full-pay their liabilities.

The first, and most common, method is an installment agreement. Generally, an installment agreement is a series of monthly payments made by the taxpayer to the IRS. The time-frame for an installment agreement depends on two factors, 1) the length of time the IRS has to collect on the tax owed, and 2) the amount the IRS believes you can pay per month. There is a general 10 year period after the tax is assessed for which the IRS can collect on a tax. There are many things that can extend this time that need not be addressed in this post.

As for the second factor, the IRS determines what a taxpayer can pay by examining their financial information. After the IRS establishes the taxpayers monthly income, the IRS subtracts their reasonably allowed monthly expenses. The result is the amount the IRS reasonably believes the taxpayer can pay. per month. This amount is then extended out for the remainder of the 10 years that the IRS has to collect. The IRS is allowed to review the payment amount during the course of the agreement to ensure they are collecting the proper amount.

The second means of paying a tax debt is to submit an Offer-in-Compromise. The initial stages of an OIC are very similar to an installment agreement, wherein the IRS determines a reasonably expected monthly payment. Only the OIC goes further into the taxpayer’s finances to look for all potential sources of income/payment. They add any additional income to the monthly amount and multiply by a factor associated with the amount owed and time-frame for collection. The IRS then adds the collectible equity the taxpayer has in any assets to the prior sum. This final amount is known as the reasonable collection potential of the taxpayer, and is generally the minimum amount the IRS will accept as full-payment. The IRS is also able to make a determination on the possibility of future income of the taxpayer, and this can lead the IRS to deny an OIC if they believe there is the potential to full-pay the amounts owed.

The OIC is often misrepresented by companies as a “pennies on the dollar” tax payment option. This marketing is unfair to the taxpayer looking to get back on their feet when faced with past due taxes. First, around only 25% of offers are accepted by the IRS. This program is not a sure-shot for taxpayers. Furthermore, once you file an OIC you extend the statute of collections by at least one year. If your offer fails then you have granted the IRS more time to collect, and are no better off than when you started.

The final option for taxpayers is to qualify for currently-not-collectible. To qualify for this option the IRS has to determine that your monthly expenses are equal to or more than your monthly income. This is a good plan for those individuals that do not expect to increase their income during the remainder of the collection period, or for those that are close to the statute of limitations timeline. The hazard with the not collectible status is the continual accrual of interest and penalties that can quickly cause a rather small amount to become over-whelming. Also, with this status the filing of liens against the taxpayer is a near automatic process.

Your tax professional should take great care in explaining all of these options to determine which direction is best suited for your situation. We have seen too many individuals come to our office that paid good money to other businesses that promised to erase their taxes and nothing was done or the taxpayer did not have their case sufficiently explained to them. When working to resolve your tax problems communication with your adviser is vitally important.

 

Ohio Tax Collections

One theme I hope to address through this blog is the antiquated, unfair, and opaque system of tax collection that that state of Ohio imposes on its taxpayers. For full disclosure, my posts will always be biased toward the taxpayer, after-all I am a defense attorney. I will, however, try to be as objective as possible in this and subsequent posts.

My firm was recently engaged by a local business to assist in a sales tax collection matter. This was a rather straight-forward matter, in that the taxpayer had filed and paid their sales tax, although one year late. The Ohio Department of Tax had the returns listed as filed, but did not properly record any of the payments. By the time the taxpayer came to our office, the debt had been certified to the Ohio Attorney General’s Office for collection, and the taxpayer was receiving bills reflecting the amount owed. We worked with the taxpayer and the AG’s office to demonstrate that the taxpayer had paid the natural tax that was owed with all the returns.

This is where the tale takes a turn for the worse for the taxpayer and shows the unfair nature of the Department of Tax. Once the Department of Tax had completed a review of the matter, they determined we were correct and the tax had been paid. One would expect that the Department of Tax would merely subtract the amount paid from the amount they stated was due, and from there present a new bill to the taxpayer. Instead, the taxpayer received a bill that included a late-payment penalty that had previously not been assessed. This penalty was in excess of $10,000. If the taxpayer had merely moved forward with full-paying the amount due on the original notice they would have not incurred this additional penalty. Since the taxpayer had already paid the tax, and the Department of Tax had been unable to process those payments properly the first time.  My client suffered an excessive penalty that was originally not applied.

I understand the role of penalties. We need them to help coerce the majority of individuals to file and pay their taxes on time. I understand my client did pay late, and the Department of Tax has the discretion to apply a penalty. What I do not understand is how the Department of Tax was unaware that they had received many payments for many tax periods, assessed an amount owed, and when we show proof of payment they then increase the amount owed by attaching an additional penalty. How is this late attachment suppose to do what the penalties are designed to do? The taxpayer was already aware of the late-filings and late-payments and was working to correct the situation. Furthermore, the taxpayer would not have incurred these penalties if they had merely paid what was assessed to the AG’s office. The Department of Tax has penalized a taxpayer for paying a tax before it was assessed to the AG’s office. What message does that send to taxpayers? If you make us chase you, you will pay less than voluntarily paying late.

Hello world!

I have created this blog to serve as a mouth piece for the individuals who have felt the great weight of the IRS or the Ohio Department of Tax upon their shoulders. I hope this blog will help educate, entertain, and draw attention to the issues I see many people going through on a daily basis.  Being my first attempt at blogging, I hope any future readers bear with me as I try to move from barely computer literate to a functional modern blogger.