Tax Problem Attorney Blog

Preparers’ Tax Fraud Affirmed by the Fifth Circuit

August 6, 2012 | by Dennis N. Brager

The 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assessed against them under Internal Revenue Code (IRC) Section 6694.The Fifth Circuit affirmed their convictions in an unpublished opinion.
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Internal Revenue Service’s Office of Professional Responsibility (OPR) Censures Tax Attorney

July 19, 2012 | by Dennis N. Brager

The IRS’ tax lawyer, who failed to disclose multiple conflicts of interest.

While having an attorney-client relationship with the benefit plan’s promoter, the tax attorney wrote several opinions for prospective plan participants. These opinions pertained to a benefit plan’s qualification under Internal Revenue Code section 419A. The tax lawyer later became a co-trustee of the plan, and during his tenure, he represented individual participants before the IRS concerning their tax problems. The plan’s promoter was paying him throughout this time.

The tax attorney, who was not identified, never advised any of his clients of the conflicts and failed to obtain informed consents from any of the parties involved. The conflicts arose when the attorney agreed to represent multiple parties with opposing interests, to become the co-trustee of the plan and to receive compensation from the promoter. His obligations to other parties and his own self-interest limited his ability to represent each of his clients successfully. Because they were unaware of the conflicts, the clients were unable to seek alternative legal counsel.

The attorney has agreed to cooperate in the investigation, recognized his violations and will take additional continuing education ethics classes over the next two years. The IRS’ OPR Director Karen L. Hawkins reminded attorneys that informing clients of conflicts of interest “is not a mere nicety.” She continued, “Taxpayers who pay handsomely for tax advice and representation have a fundamental right to expect competent and diligent representation unfettered by a practitioner’s responsibilities or obligations to someone else, or by the practitioner’s self-interest.”

Those who violate Circular 230 are subject to monetary penalties, censure, suspension and disbarment. Not just tax attorneys, but also enrolled agents, and CPAs are subject to the provisions of Circular 230, and therefore must avoid representing conflicting interests, unless appropriate conflict waivers are obtained.
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Denise Rich, Ex-wife of Marc Rich, Expatriates

July 16, 2012 | by Dennis N. Brager

Denise Rich, former wife of commodities trader Marc Rich who was indicted in the 1983 on charges of tax fraud, gave up her U.S. citizenship, avoiding potential future tax problems. The 68 year-old woman is a Grammy-nominated songwriter whose songs have been recorded by Aretha Franklin, Mary J. Blige and Jessica Simpson. Rich (under her maiden name, Eisenberg) appeared on the Federal Register in the April quarterly edition of people who renounce their citizenship. By giving up her U.S. passport, she will likely save millions of dollars in taxes. She will also not have to go through the expense and aggravation of filing foreign bank account reports (FBARs) with the IRS.

The songwriter joins the growing number of individuals renouncing their U.S. citizenship in order to avoid taxes. According to government figures, nearly 1,800 citizens and permanent residents expatriated last year, a record since the data was first collected in 1998.

Rich has Austrian citizenship through her father. Although both Austria and the United States tax individuals on their worldwide income, Austria provides tax breaks for citizens who spend six months or more abroad per year.

Controversy recently surrounded Rich’s offshore bank account in the Cook Islands. Lee Goldberg, the former protector of the trust, alleged that Rich and Richard Kilstock, her son-in-law, moved or transferred trust assets without his permission, violating the terms of the trust. The case, filed in February, was dismissed in April.

U.S. citizens must pay taxes on their worldwide income. An intentional failure to do so could lead to criminal tax charges of tax evasion. Although Rich will no longer have to pay U.S. taxes, she is subject to an expatriation or “exit” tax. The “exit tax” calculation is based on the fair market value of an individual’s worldwide property holdings the day before that person leaves the United States. However, these taxes can sometimes be reduced or avoided through careful planning.

If you or someone you know is considering expatriation, you should speak with an experienced tax attorney to reduce the exit tax. Advanced planning is necessary. It may be helpful to get a professional appraisal done before calculating the difference between your basis (what you initially paid) and what your holdings are worth now.
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IRS Provides Half-Baked Foreign Bank Account Report (FBAR) Relief for Some Offshore Account Holders Who Live Overseas

July 2, 2012 | by Dennis N. Brager

Some FBAR (Foreign Bank Account Report) relief was announced on June 26th for offshore account holders who currently live outside of the U.S. The program will not take effect until September 1st, and the details have not yet been finalized. Taxpayers who qualify will file delinquent returns for the past three years, and FBARs for six years. Payment of any tax due, plus interest must be submitted at the same time.

Our tax attorneys see a big problem in this program because the IRS has stated that filing under this program provides no protection from possible criminal tax prosecution! All submissions will be reviewed by the IRS, but the degree of review will depend upon “level of compliance risk” as determined by the IRS. Those who are deemed to present low compliance risk will not have FBAR, tax fraud or other penalties asserted against them. However, those that are deemed to have a higher compliance risk will be subject to more thorough review, and possibly a full audit extended beyond the three year of tax returns that are filed. Of course with that tax audit may come full blown FBAR penalties, and no resort to the 27.5% ceiling available for 2012 Offshore Voluntary Disclosure Program(OVDP) filers. As regular readers of our tax problem attorney blog know maximum penalties can include willfulness penalties of up to 50% of the account balance, and civil fraud penalties of 75% of any tax due.

Compliance risk will be determined assessed based upon information provided on the returns filed, and “certain additional information” that will be required as part of the submission. According to the IRS website if there are no “high risk factors” and there is less than $1,500 in tax due in each of the three years then the taxpayer will be treated as low risk, and qualify for the non-assertion of penalties. Risk level will according to the IRS rise with the taxpayers ‘ income and assets, indications of “sophisticated tax planning” or tax avoidance, or if there is “material economic activity” in the U.S.

Interestingly the procedure appears to apply only to persons who did not file a tax return. Thus a person who at least filed a U.S. tax return, but failed to file FBARs, and who also did not report all offshore income would not be able to take advantage of this program.

There is no indication that the program will be retroactive. Therefore taxpayers who entered an earlier disclosure program and paid penalties of up to 25% on their offshore accounts are not entitled to a refund even though they would have qualified under the new program.

It may be that the IRS cures some of the apparent flaws before the program goes live. In any event, it means that a sophisticated analysis will need to be done to determine if one should wait until September 1, 2012 to enter the new program, or enter the 2012 Offshore Voluntary Disclosure Program immediately, or take some other action such as filing a quiet voluntary disclosure. What is increasingly clear is that no action is not an option.

California Franchise Tax Board (FTB) To Issue 475,000 Tax Levies for Delinquent Tax Debts

June 27, 2012 | by Dennis N. Brager

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

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

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

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

A 10-day holding period follows the issue of the tax levy to the bank. During this time, the taxpayer or a tax attorney on the taxpayer’s behalf may negotiate the amount due or, if financial hardship is creating tax problems, discuss payment options. If the FTB levied an account in error, they will delay the garnishment while they verify the mistake and then issue a garnishment release notice. If the bank has already issued the payment, the Board will return the payment.
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2011 FBAR Filing Date Reminder

June 21, 2012 | by Dennis N. Brager

FBARs (Foreign Bank and Financial Accounts Report Form TD F 90-22.1) are due June 30th. If you or your clients have $10,000 or more in offshore financial accounts and are U.S. citizens, residents and/or U.S. based entities, use this form to report a financial interest in or signatory authority over foreign accounts. In recent years, the IRS has increased enforcement of this required disclosure, and penalties for failure to file the FBAR include hefty fines and in some cases jail time.

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To ensure compliance, it is critical you complete the TDF 90-22.1 as soon as possible since, unlike other IRS documents, the FBAR form must be received (not just postmarked) by the Saturday, June 30th deadline. Normally under the tax law if documents are due on a weekend the due date rolls over until the following business day; however, those rules don’t apply to FBARs so it appears that it will be necessary to mail the FBAR via overnight delivery service on the 28th so it arrives by the 29th. That being said the IRS FBAR hotline has informally advised our tax attorneys that FBARs postmarked by the 29th will be considered as timely. Failure to file on time could mean large penalties, and no extensions can be requested.

Some individuals with foreign bank accounts might have skipped filing FBAR forms in the past. If that includes you or your clients, you may wish to consider the Offshore Voluntary Disclosure Initiative (OVDI), which was created to gain compliance from taxpayers, who wish to comply with tax laws regarding their offshore accounts. The IRS declared its offshore voluntary program a big success in 2009 and 2011. In 2009 alone, the IRS collected $3.4 billion.Those who willfully fail to file an FBAR are subject to penalties as high as 50 percent of the total balance of the account. Each year of non-compliance results in a separate violation and penalty, i.e. multiple 50% penalties are possible. Under that scenario penalties can actually equal 300% of the offshore account balances.

Through OVDI, some taxpayers may be eligible for penalties as low as five percent, although most will be stuck with a 27.5% penalty. In order to participate in the program, taxpayers must file all original and amended returns (including payment of back taxes and interest) for up to eight tax years. For more details see our article here.

If someone wants to obtain the benefits of the Offshore Voluntary Disclosure Initiative, he or she cannot simply make a “quiet disclosure,” meaning they cannot simply file the FBAR and amend other tax returns. Those individuals who make “quiet disclosures” risk being investigated, and subject to large civil FBAR penalties, but may be protected from criminal tax exposure.

However, every case is different, and only a complete investigation of all the facts by a qualified tax lawyer can help a taxpayer make the right choice.
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Grammy Winner Faces Criminal Tax Charges

June 15, 2012 | by Dennis N. Brager

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.

“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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Offshore Bank Account Owners at Liechtensteinische Landesbank AG (LLB) May be In Trouble

June 13, 2012 | by Dennis N. Brager

Lichtenstein tax authorities have notified Liechtensteinische Landesbank AG (LLB)’s U.S. clients with offshore accounts of at least $500,000 that their information is subject to being turned over to the IRS according to a report in Bloomberg.com. Apparently the IRS has made a so-called group request to LLB for these accounts to obtain the names of individuals it suspects of tax evasion, and FBAR (Foreign Bank Account Report) related crimes.

According to a spokesman for LLB quoted in the article, changes in Lichtenstein law allow the IRS to make group requests without providing the names of the specific individuals that the IRS is seeking. The spokesman also stated that in the Liechtenstein group request, U.S. authorities are also targeting lawyers, accountants, financial advisers, asset managers and those responsible for professional asset protection, who “conspired “with U.S. taxpayers to commit tax evasion, or other crimes. Apparently the IRS may be seeking information all the way back to 2001.

LLB is Lichtenstein’s second largest bank. Tax problems for offshore bank account holders in Lichtenstein date back to 2008 when information stolen from LGT Group was used by German authorities to prosecute tax fraud. The fallout extended to U.S. depositors at LGT who were investigated by the IRS. Since then the IRS has promoted several voluntary disclosure initiatives to attempt to convince U.S. persons who failed to file FBARs to settle up with the IRS. To date those programs have resulted in over 30,000 individuals making voluntary disclosures of the offshore bank accounts to the IRS. These programs have been accused by some tax lawyers as being too much stick, and not enough carrot.

IRS Does 180 on Offers in Compromise! “Pennies on the Dollar.” Is it Back?

May 22, 2012 | by Dennis N. Brager

The IRS has completely revamped its offer in compromise guidelines to greatly increase the number of taxpayers who will be able to qualify. Our tax attorneys will be revisiting many of the offers in compromise that are pending, and we recommend that all tax lawyers, enrolled agents, and CPAs who have clients who have submitted unsuccessful offers in compromise in the past review their clients’ current financial condition to see if they will qualify under the new offer in compromise guidelines.

The new guidelines are announced in a news release by the IRS (IR-2012-53, May 21, 2012). More details are available in Attachment 1 to Internal Revenue Manual (IRM) 5.8.5 Financial Analysis. The changes are dramatic! And like all tax law changes they are complicated and loaded with ambiguities.

The most revolutionary change that our tax attorneys have noted is the methodology of calculating the offer amount. The amount of the offer in compromise has always been determined by the amount of the reasonable collection potential (RCP). RCP is determined by adding the realizable value of the taxpayer’s assets to his Future Income (FI). Thus
Offer amount = RCP +FI

Future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future. In the past a taxpayer who could pay the offer amount in 5 monthly payments would multiply his monthly available income by 48 months to arrive at Future Income. A taxpayer who wanted to pay the offer amount over a 24 month period was required to multiply his monthly available income by 60 months to arrive at his Future Income. In both cases Future Income was added to the realizable value of the taxpayer’s assets to arrive at RCP, or the offer amount.

Under the new offer in compromise guidelines Future Income will be arrived at by multiplying the monthly available income by 12 if the offer can be paid in 5 monthly payments or less. If the taxpayer needs 24 months to pay the offer amount in full then the Future Income will be determined by multiplying the monthly available income by 24. The deferred payment option which allows payment over the life of the statute is no longer available. Our tax attorneys have formulated a simple example.

A taxpayer who has $50,000 in realizable equity in assets, and monthly future income of $2,000 will pay $74,000 if the offer amount can be paid in 5 months or less, and $98,000 if the offer will be paid over a 24 month period. This compares to offer amounts under the old guidelines of $146,000, or $170,000, respectively. The higher the monthly future income, the greater the discrepancy.

The new guidelines also include changes to the necessary living expenses:

Payments on delinquent State taxes may be allowed in full or in part.
Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education (note it says nothing about loans incurred by parents to pay for their children’s’ tuition).
When the taxpayer owns a vehicle that is six years or older or has mileage of 75,000 miles or more, the IRS will allow additional operating expenses of $200 or more per vehicle. (A variation of this has actually existed in the past, but it has been buried in the IRM so deeply that most IRS offer in compromise specialists are unaware of the existence of this provision).
The first $400 per vehicle of retired debt will not be added back to monthly available income.

Another welcome modification; the calculation of so-called “dissipated assets” has been radically altered. While the exact details are subject to numerous exceptions, and clarifications, in general assets which have been dissipated three years or more prior to the submission of the offer in compromise will not be included in the RCP. For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.

One thing that hasn’t changed is that zealous advocacy on the part of tax attorneys, CPAs and enrolled agents will still be essential to negotiate the best possible deal with the IRS. Careful planning on the timing of offers is also essential.

One of the few negatives is that even before these changes were announced the IRS was overwhelmed with the number of offers in compromise it was receiving. Things are likely to get worse. Our tax lawyers are guessing that very few offers in compromise will take less than a year for the IRS to process.

Another negative is that this is bound to bring unscrupulous “offer mills” out of the woodwork. Even with the new guidelines an offer in compromise is not for everyone, and the danger is that desperate taxpayers will wind up giving up their hard-earned dollars in the hopes of realizing a benefit which is not available to them.
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Criminal Tax: Tax Fraud and Tax Evasion vs. Failure to File Tax Returns

May 14, 2012 | by Dennis N. Brager

A physician in Kentucky was arrested and charged last month with four counts of tax fraud pursuant to Internal Revenue Code Section 7201, and two counts of failure to file tax returns in violation of IRC section 7203. According to the indictment Dr. Werner Grentz had failed to file income tax returns since 1999. There is a common myth that it is better not to file a tax return at all than to file a false tax return. Like most myths there is some truth to this one. The willful failure to file a tax return is a misdemeanor punishable by “only” one year in jail, and a fine of not more than $100,000. IRC Section 7203. On the other hand tax evasion a/k/a/ tax fraud is a felony, and the resulting imprisonment can run up to 5 years, plus a fine of not more than $100,000. IRC Section 7201.

One advantage of a misdemeanor over a felony conviction is that it won’t result in possible deportation for green card holders. We talked about this tax problem in a past blog post. Still, as Wesley Snipes found out, three years of failing to file a tax return can result in three years in prison.

Any “advantages” should not be used as an excuse not to file a tax return when there is some uncertainty about the correct position to take on a return. It is much better to file a return with missing or even incorrect information (provided that appropriate disclosures are made) than not to file a return.

In addition, in some instances the failure to file a tax return can be charged as tax evasion. That’s what happened to Dr. Grentz. The indictments spells out that he was being charged with failure to file for two of the years, but tax evasion for four different years. In order to be convicted of tax evasion it is necessary for the IRS to show an “affirmative act”, not merely an omission to do something like the failure to file a tax return. According to the indictment in addition to not filing his tax returns he engaged in the following affirmative acts:

He filed Form W-4 claiming that he was exempt from income tax; and
He set up bank accounts in the name of two corporations (which the IRS referred to by the pejorative term “nominees”), and deposited some of his compensation into bank accounts set up in the corporate names.

Those two actions were enough to cause a shift from charges of not filing a tax return to tax evasion.
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