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Archive for Matthew Roberts

Section 530 And IRS Employment Tax Audits: Worker Classification And Relief

Section 530 And IRS Employment Tax Audits: Worker Classification And Relief

Worker Classification and Section 530 Relief

Employers are required to pay employment taxes to the IRS.  Generally, these payments consist of two portions:  the employee’s portion of FICA and income taxes and the employer’s portion of FICA and unemployment (FUTA) taxes.  Employers who fail to timely remit employment taxes to the IRS run the risk of being held liable for not only the employment taxes, but also penalties and interest for late payment.

But independent contractors are treated differently than employees.  Specifically, if a worker is properly characterized as an independent contractor (as opposed to an employee), the taxpayer making payment to the independent contractor is not required to remit payment to the IRS.  Rather, the independent contractor—particularly in the case of an individual sole proprietorship—pays self-employment taxes on the business’s net income.

Because of the distinction, taxpayers generally prefer to treat their workers as independent contractors.  Conversely, the workers prefer employee treatment.  In most instances, the tie will go the taxpayer-payor, though, because the payor has more leverage over the characterization of the worker as an independent contractor or employee.  That is, at least via contract.

Of course, the IRS is well aware of taxpayers’ general inclinations to treat their workers as independent contractors.  Congress is too.  Accordingly, under federal tax law, the IRS has the authority to recharacterize workers as employees, even if the two agree that they should be treated as independent contractors.

Taxpayers in these situations are not without defenses.  Although there are many, a common defense that may be raised is Section 530 relief.  To the extent a taxpayer can convince the IRS Section 530 relief applies, the taxpayer can avoid costly employment taxes.  Moreover, the taxpayer can continue to treat their workers as independent contractors.  A brief summary of Section 530 relief is discussed below.

Common Law Factors (Employee v. Independent Contractor) Read more

You Received An IRS CP15 Notice (re: Form 3520 Penalty), What Now?

You Received an IRS CP15 Notice (re: Form 3520 Penalty), What Now?

Overview of IRS Notice CP15

As our previous firm Insights discuss, there is a numbered notice for almost any communication the IRS provides to a taxpayer.  See, e.g., CP518 and CP504.  In some cases, the taxpayer may safely review a communication without taking any further action.  For example, the IRS routinely sends a summary of tax debts owed annually to taxpayers as a reminder of outstanding tax owed.  But, in other cases, a taxpayer must act promptly to preserve certain procedural rights permitted under the Internal Revenue Code (the “Code”) or existing IRS guidance.  Without doubt, the IRS CP15 Notice (“CP15”) is one that falls squarely in the latter group, requiring quick action by the taxpayer.

As the name implies, the IRS uses CP15 to notify taxpayers that it has assessed certain civil penalties against the taxpayer.  Generally, the CP15 will provide a short (indeed, very short) reason for the imposition of the civil penalty and also will provide the taxpayer of notice of the amount of the assessed civil penalty.

Although the IRS uses the CP15 for various civil penalties, the remainder of this article focuses solely on the IRS’s use of the CP15 for assessment of the civil penalty associated with a taxpayer’s failure to timely file a proper and complete IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts (“Form 3520”).  Moreover, this article will leave to another day a discussion of the civil penalty for receipt of certain foreign gifts, focusing solely on the reporting obligation applicable to foreign trusts.

What is the Form 3520?

The Form 3520 reporting obligation arises only in certain instances.  First, there must be a foreign trust involved in the transaction.  Second, only certain types of transactions result in a Form 3520 reporting requirement.  To break all of these requirements down even further, taxpayers must generally determine the following:

  • Whether the entity at issue is a trust?
  • If the entity is a trust for federal tax purposes, whether it is foreign or domestic?
  • If it is a foreign trust, whether the transaction with the foreign trust must be reported.

Each of these is discussed more fully below.

What is a Trust?

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Ninth Circuit Opines On Section 6751(b) And Its Application To Assessable Penalties

MATTHEW ROBERTS - Ninth Circuit Opines On Section 6751(b) And Its Application To Assessable Penalties

Section 6751(b) And Assessable Penalties

Section 6751(b) of the Code has been a potent weapon for taxpayers since the Second Circuit held in Chai that certain penalties are not valid without written managerial approval.  See Chai v. Comm’r, 851 F.3d 190 (2d Cir. 2017).  In Chai, the Second Circuit reasoned that written managerial approval must occur “no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer) asserting such penalty.”  And, after the decision in Chai, the Tax Court has gone further in holding that the IRS must obtain written managerial approval of certain penalties before the IRS “formally communicates to the taxpayer its determination that the taxpayer is liable for the penalty.”  See, e.g., Clay v. Comm’r, 152 T.C. 223 (2019).  For more detailed information on Section 6751(b), readers can view my article in The Tax Adviser here.

But not all civil penalties in the Code are subject to deficiency procedures—i.e., they do not require the IRS to issue a statutory notice of deficiency to provide the taxpayer with judicial review prior to assessment.  These so-called “assessable penalties” may be assessed at any time by the IRS prior to the IRS providing notice of the civil penalty to the taxpayer.  Although, in some instances, the IRS will provide notification of the proposed civil penalty prior to making the assessment to permit the taxpayer to contest the penalty determination administratively.

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IRS Issues FBAR Reference Guide

IRS Issues FBAR Reference Guide

The IRS and FBARs

On March 30, 2022, the IRS issued Publication 5569Report of Foreign Bank & Financial Accounts (FBAR) Reference Guide.  The 12-page publication provides helpful information to both taxpayers and tax professionals regarding FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) The IRS’s issuance of Publication 5569 also shows that the IRS will continue its education campaign on FBAR compliance and filing obligations.  This article summarizes the information that is located in IRS Publication 5569.

Who Must File an FBAR?

By statute and regulation, all U.S. persons must file an annual FBAR if they have a financial interest in or signature or other authority over any financial account(s) located outside the United States, provided the aggregate balance(s) of the account(s) exceed $10,000 at any time during the calendar year.

Who is a U.S. Person?

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IRS Goes After Holocaust Survivor For Willful FBAR Penalty

IRS Goes After Holocaust Survivor For Willful FBAR Penalty

FBAR Penalties

On March 8, 2022, the Southern District of New York issued its Opinion in the case of United States v. Schik, No. 20-cv-0221 (MKV), 2022 U.S. Dist. Lexis 41148 (S.D.N.Y. Mar. 8, 2022).  In that case, the United States brought a lawsuit against a Holocaust survivor for willful failure to file an FBAR for one year:  2007.  Incredibly, the United States sought to assess the maximum willful FBAR penalty against Mr. Schik—i.e., 50% of the foreign account balance—which would have resulted in close to a $9 million FBAR penalty.  As seems more and more common, the United States moved for summary judgment on the willfulness determination.  This article discusses the Schik case.

FBARs Generally 

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IRS Notice 2007-83 Declared Unlawful Under The Administrative Procedure Act

IRS Notice 2007-83 Declared Unlawful Under The Administrative Procedure Act

The Administrative Procedure Act

The Internal Revenue Code (the “Code”) contains over one hundred different civil penalties for various acts or failures to act.  For example, Section 6707A requires taxpayers, in certain instances, to report certain transactions that they have entered into, particularly those that the IRS has determined have the potential for tax avoidance or evasion.

These “reportable transactions” can generally be broken down in more subsets, one of which includes “listed transactions.”  For these purposes, a “listed transaction” is one that is the same or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction identified by notice, regulation, or other form of published guidance as a listed transaction.  Generally, listed transactions are reported on IRS Form 8886, Reportable Transaction Disclosure Statement.

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The Research and Development Credit – Section 41

The Research and Development Credit – Section 41

Taxpayers are always interested in whether certain expenditures qualify as tax deductions.  But many taxpayers often forget that expenditures may alternatively qualify for various tax credits.  And all things being equal, taxpayers should generally prefer tax credits over tax deductions as the former are more valuable monetarily than the latter.

Regrettably, many taxpayers are unaware that they qualify for certain tax credits.  For this reason, thousands of taxpayers each year fail to file the necessary forms with their tax returns, rendering the credits unclaimed.  After a number of years, these credits are gone forever due to the statute of limitations for refund claims.

This article explains one of the more commonly missed tax credits:  the research and development credit under Section 41.[i]  This article also discusses the IRS’s renewed interest in this credit and its new refund claim procedures applicable to taxpayers who seek to claim the credit after January 10, 2022.

The Research & Development Credit

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The IRS’s Voluntary Disclosure Practice (VDP): IRS Revises Form 14457

Matthew Roberts, JD - The IRS’s Voluntary Disclosure Practice (VDP): IRS Revises Form 14457

On February 15, 2022, the IRS announced that IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and the accompanying instructions to the form had been revised.  Because the revisions provide clarification on certain issues that caused confusion during the submission process, the revisions are welcome news to many tax professionals, including this writer.  The revisions are discussed more fully below.

Introduction to the Voluntary Disclosure Practice 

A full primer on the IRS’s Voluntary Disclosure Program (“VDP”) can be found here.  In short, the VDP permits non-compliant taxpayers an opportunity to come forward, file missing or amended returns correcting prior year reporting, and pay the government taxes that are owed.  In exchange, the taxpayer making the disclosure receives what is akin to amnesty, provided the taxpayer meets all of the eligibility requirements of the VDP.  This can result in significant reduction of criminal risks and exposure for the non-compliance in addition to significant reductions in civil penalties associated with the non-compliance (in some cases).

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What Happened To My Joint IRS Income Tax Refund? The IRS’s Authority To Offset

Matthew Roberts - Joint IRS Income Tax Refund

Generally, when a taxpayer makes an overpayment of tax, the IRS refunds the overpayment to the taxpayer.  But this is not always the case.  For example, the IRS has the statutory authority to credit (or offset) an overpayment against certain other tax debts, including pre-existing federal tax debts.

This offset issue is common with many types of taxpayers:  individuals, corporations, etc.  However, the issue becomes much more common and also confusing with married taxpayers.  This article discusses some of these offset issues in the context of married individuals.

The IRS’s Right of Offset 

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The Evolving Standard Of “Willfulness” In FBAR Cases: Where Are We Now?

The Evolving Standard Of “Willfulness” In FBAR Cases: Where Are We Now?

The concept of “willfulness” is an important one in the FBAR civil penalty context.  Indeed, a taxpayer’s willful failure to file a timely and accurate FBAR may result in significant penalties:  the higher of 50-percent of the unreported account balance at the time of the violation or $100,000 (adjusted for inflation).  Take this simple example:

Mark is a dual citizen of the United States and Australia.  Mark routinely travels to Australia to visit his family. In one year, Mark chooses to live and work in Australia, making $300,000 as an independent contractor.  Mark deposits the funds from his work in an Australian bank account.

When tax time comes, Mark files an income tax return reporting the $300,000 of income.  However, he fails to file an FBAR reporting the maximum account balance in the foreign account, which was $200,000.  If the IRS determines that Mark’s failure to file an FBAR was willful, the IRS may assess a $100,000 willful FBAR penalty against him.

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Willful FBAR Penalties And A District Court’s Authority To Remand IRS Willful Penalty Computations

Willful FBAR Penalties And A District Court’s Authority To Remand IRS Willful Penalty Computations

Willful FBAR Penalties

The Schwarzbaum case has received a lot of attention in the last few years from tax professionals.  For example, in 2020, the district court concluded—contrary to some other federal court decisions—that the simple act of signing a federal tax return and not filing an FBAR does not in and of itself constate a finding that there was a willful FBAR violation.  See U.S. v. Schwarzbaum, No. 18-CV-81147, 2020 WL 1316232, at *8 (S.D. Fla. Mar. 20, 2020).  In 2021, after finding that Schwarzbaum’s conduct in failing to file FBARs was willful, the district court granted the government’s motion for an order requiring Schwarzbaum to repatriate millions of dollars of foreign assets to provide security to the government for full payment on the affirmed willful FBAR penalties.  See U.S. v. Schwarzbaum, 128 AFTR 2d 2021-6436 (S.D. Fla. Oct. 26, 2021).  Months later, though, the district court changed course and granted Schwarzbaum a stay of repatriation until after the Eleventh Circuit reviewed the district court’s decision on willfulness.  See here.

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Criminal Tax Statutes Of Limitations And Suspensions: 18 U.S.C. § 3292 And The Fifth Circuit’s Decision In Pursley

Criminal Tax Statutes Of Limitations And Suspensions: 18 U.S.C. § 3292 And The Fifth Circuit’s Decision In Pursley

In civil and in criminal cases, the Government must generally act within a certain prescribed time to take action against taxpayers.  In legal parlance, this period of time is known as the “statute of limitations.”  The statute of limitations generally forces the Government to show its hand and file suit more quickly to avoid prejudice to taxpayers, which may occur through stale evidence or faded memories.

The statute of limitations for many criminal tax cases is located in I.R.C. § 6531.  For example, that provision states that the Government must generally bring a criminal action against a taxpayer within 6 years after the commission of the offense.  But there are exceptions to this general rule.  Indeed, the recent Fifth Circuit Court of Appeals decision in U.S. v. Pursley discusses one notable exception potentially applicable to taxpayers with foreign activities and foreign accounts:  18 U.S.C. § 3292.

Relevant Facts.[i]

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