Tax Problem Attorney Blog

Defenses to Unreasonable Compensation Allegations

June 7, 2017 | by Dennis N. Brager

The IRS tends to keep an eye on unreasonable compensation in three distinct situations. The first involves a C-corporation that overpays their shareholder-employees in order to increase its deduction for business expenses. The second involves S-corporations who underpay shareholder-employees to reduce payroll tax obligations, and shareholder FICA taxes. The third occurs in non-profit entities where key employees may abuse their authority to increase their own pay.

The first two situations involve cases where a shareholder-employee is going to receive income one way or the other, but may reduce their overall tax liability by characterizing the income as salary or dividends. For example, a C-corporation can deduct salaries paid to its employees as an ordinary business expense, but it cannot deduct dividends paid to shareholders.

This creates a potential tax planning opportunity, or a potential tax evasion opportunity, depending on your perspective. The IRS is particularly suspicious of closely-held corporations where the executives are also the major shareholders. If compensation is unreasonable, the IRS may want to recharacterize it as a dividend, resulting in an increase of tax liability, and possibly including accuracy-related penalties.

The Substitute Return: When the IRS Files Unfiled Returns For You

June 6, 2017 | by Dennis N. Brager

If you fail to file your tax return when you have a legal obligation to do so, the IRS can use the Substitute for Return (SFR) procedure to file it for you. There are several disadvantages to this scenario from a taxpayer’s perspective, and you should take action immediately upon receiving a notice that you haven’t filed your tax return.

First, the IRS will file your return based on reported information from your employers or businesses that paid you as an independent contractor, usually from W-2 or 1099 forms. However, the IRS has no way of knowing what deductions, exemptions, credits, or losses you are eligible to claim your tax return. Therefore, they will not give you credit for any of these amounts that could substantially reduce your tax liability.

Second, the failure to file a tax return is one of the badges of tax fraud, and the IRS may scrutinize a taxpayer who fails to file a return for other indications of tax fraud. This can result in civil tax fraud penalties of 75% of the amount of tax owed, or criminal tax fraud charges, that could result in more fines or jail time.

What Happens at a Collection Due Process Hearing?

June 5, 2017 | by Dennis N. Brager

A Collection Due Process (CDP) hearing may be your last chance to prevent an IRS collection action, such as bank account levy. It is also an opportunity request that the IRS withdraw or release its tax lien. At a CDP hearing, you may request an installment agreement, offer in compromise, innocent spouse defense, or you may dispute the amount of tax you owe. However, you can only receive a CDP hearing if you request it in writing within 30-days of receiving the IRS Notice of Intent to Levy.

A CDP hearing will be available if you receive any of the following notices:

Notice of Federal Tax Lien Filing

How to Appeal Your IRS Tax Audit

June 2, 2017 | by Dennis N. Brager

Most audits can be appealed internally within the IRS, without requiring litigation in Tax Court. The IRS Appeals Office is independent from the IRS auditing division, and would prefer to settle cases quickly rather to take them to Tax Court.

There are several reasons taxpayers should consider appealing the results of an IRS tax audit:

you can receive substantial savings on your tax bill

IRS Actions Affecting Passports of Delinquent Taxpayers

June 1, 2017 | by Dennis N. Brager

Your unresolved tax debt could prevent you from taking your next trip overseas. The IRS has the right to certify to the State Department that an individual has seriously delinquent tax debt. Upon receiving this certification, the State Department will generally not issue you a new passport, and will revoke your current passport.

Tax debt is considered “seriously delinquent” if it is unpaid, legally enforceable and assessed, is greater than $50,000 (indexed for inflation annually), and a notice of federal tax lien has been filed, AND the rights to appeal a levy have expired, or a levy has been made. In other words, the IRS has been doing everything it can to collect your tax debt, and you still have a large outstanding balance owed to the Treasury.

There are exceptions where debt will not be included when determining if you have seriously delinquent tax debt. The following amounts will not be included:

Can a Business Benefit from the IRS Offer in Compromise Program?

May 31, 2017 | by Dennis N. Brager

The IRS Offer in Compromise (OIC) program is commonly associated with taxpayers who owe tax debt, but have insufficient assets or resources to pay it off. The IRS will agree to settle the tax debt for less—sometimes significantly less—than the amount owed if the taxpayer agrees to pay as much as the IRS can realistically collect.

However, the OIC is also available for businesses, including businesses that are currently operating. This includes tax debt attributable to back payroll taxes.

First, the business must be current in filing all tax returns. The IRS will not even consider OICs from taxpayers that have not filed all required tax returns. They will return your OIC, and keep any money you sent as an initial deposit to be applied towards your outstanding tax debt.

Have a Bankruptcy Judge Review Your Tax Fraud Penalty

May 30, 2017 | by Dennis N. Brager

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.

Can the IRS Collect From a Non-Liable Spouse?

May 26, 2017 | by Dennis N. Brager

The IRS may be able to collect delinquent tax debt from a non-liable spouse in some cases. This means that tax debt that was accrued by one spouse on a return filed separately, may still result in collection action being taken on the other spouse. However, the IRS cannot pursue collection from a non-liable spouse in every case.

First, it is important to distinguish between joint tax debt and separate tax debt. Joint tax debt is any tax debt related to a return filed jointly. Separate tax debt could be related to a return filed before the taxpayer was married or a return filed after the marriage using the married filing separately status.

For joint tax debt, the IRS can collect from either or both spouses. They can levy your bank account, or your spouse’s bank account, or both. The Internal Revenue Manual states that wage levies should generally be applied to the spouse with higher earnings. However, in flagrant cases of neglect or refusal to pay, the IRS can levy the wages of both spouses.

How the IRS Initiates Criminal Tax Investigations

May 24, 2017 | by Dennis N. Brager

What seemed like a minor transgression when filing your tax return could end up being a tax crime punishable by years in prison. The IRS Criminal Investigation Division (CI) pursues about 3,000 criminal prosecutions per year to provide a deterrent effect to all taxpayers. If you have been chosen as one of the taxpayers to be “made an example of”, you could face severe fines or time in jail in the name of increasing tax compliance by other taxpayers.

The criminal investigation process often begins when an auditor or collection agent detects possible tax fraud. The IRS can also be “tipped off” by the public—anyone can submit a 3949-A Information Referral form to the IRS that reports suspected tax law violations. Other law enforcement agencies can also reported suspicious activity to the IRS.

Special agents may then begin a preliminary investigation. A supervisor will evaluate the information to determine if further investigation is warranted. At least two layers of CI management must review the information before a criminal investigation can proceed.

Avoid These Mistakes When Filing FBARs

May 22, 2017 | by Dennis N. Brager

Some taxpayers are not aware of the requirement that they file a Foreign Bank Account Report (FBAR) if the value of their foreign financial accounts exceeds $10,000 at any time during the year. Even taxpayers who are aware of their obligation to disclose offshore bank accounts may not understand every situation that will trigger an FBAR filing requirement, or the methods for disclosing a previously unreported foreign account.

The following are some of the most common mistakes when filing FBARs:

Failure to file FBARs