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Archive for Matthew Roberts

Can You Go To Jail For Not Paying Your IRS Taxes?

Can You Go To Jail For Not Paying Your IRS Taxes?

Taxpayers routinely ask me if they can go to jail for not paying their federal income taxes.  Admittedly, the bar is not that high for felony tax evasion—the government must only prove three elements:  (i) willfulness; (ii) the existence of a tax deficiency; and (iii) an affirmative act constituting evasion or attempted evasion of tax.[i]  Because the existence of a tax deficiency is generally not a big issue in non-payment cases, the government is left focusing on the remaining two elements:  the taxpayer’s state of mind and evidence of affirmative acts.

Although the bar for federal tax evasion is low, the government does not have the resources nor the will to go after all evasion non-payment cases.  Instead, the government carefully picks and chooses the cases it believes to have the best chances for obtaining criminal convictions.  Predictably, this is where the types and quantities of affirmative acts come into play.  Because the recent Sixth Circuit decision in Pieron[ii] shows this well, that decision is the topic of this article.

Background

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What Should I Do if I Missed The FBAR Filing Deadline?

What Should I Do if I Missed The FBAR Filing Deadline?

Missing any deadline is stressful.  But missing a tax deadline is more so.  Per the Bank Secrecy Act (Title 31 of the U.S. Code), certain taxpayers must file so-called FBARs (currently FinCEN Form 114)[i]  with the government each year if they meet the filing requirements.  Taxpayers who fail to file a timely and proper FBAR can be held liable for significant civil penalties.  However, there are options to regain compliance, provided the taxpayer meets certain eligibility requirements and acts before the IRS discovers the non-filing.

When is the FBAR Filing Deadline?

Generally, as it stands now, the FBAR filing deadline is October 15 of the year after the year in which a taxpayer meets the following requirements:[ii]  (1) the taxpayer is a U.S. citizen; (2) the taxpayer had a financial account or accounts during the tax year; (3) the financial account is located in a foreign country; (4) the taxpayer had a financial interest in the account or signature or other specified authority over the financial account; and (5) the aggregate amount of the value of the account or accounts in U.S. dollars exceeded $10,000 at any point during the calendar year.  If a taxpayer meets all of these requirements, subject to some exceptions, the taxpayer must timely and properly file an FBAR with FinCEN (i.e., the FBAR is not filed with an income tax return).

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Flint Demonstrates The Risks In Trying To Make A Willful IRS Streamlined Filing Non-Willful

Flint Demonstrates The Risks in Trying To Make A Willful IRS Streamlined Filing Non-Willful

How Do I Know If I Have An IRS Form 3520/3520-A Filing Obligation?

How Do I Know If I Have An IRS Form 3520/3520-A Filing Obligation?

How Do I Know if I Have an IRS Form 3520/3520-A Filing Obligation?

Interests in or transactions with foreign trusts can cause headaches for federal income tax purposes.  Depending on the interest or transactions at issue, U.S. citizens or residents may have to file a Form 3520, a Form 3520-A, or both each and every single tax year.  And the failure to file either form when required can (and often does) result in significant civil penalties.

But, commonsensically, these civil penalties only apply if the entity in question is a “foreign trust”—which begs two questions:  (1) what is a “trust”; and (2) when is it “foreign”?  The Fifth Circuit’s recent decision in Rost v. U.S., No. 21-51064 (5th Cir. Aug. 11, 2022) provides some insight on these two questions and is discussed more fully below.

IRS Form 3520 and Form 3520-A Civil Penalties

Prior to any discussion of Rost, it is important to understand what was at stake in that case:  civil penalties.  As indicated above, federal tax law requires the disclosure of foreign trusts.  Under section 6048(a), a “United States person” must report “the creation of any foreign trust” and “the transfer of any money or property (directly or indirectly) to a foreign trust.”[i]  For these purposes, a “United States person” includes U.S. citizens and residents.[ii]  These disclosures are required on IRS Form 3520.  If a U.S. person has an IRS Form 3520 filing obligation and fails to timely file a Form 3520, the IRS can impose a “penalty equal to the grater of $10,000 or 35 percent of the gross reportable amount.”[iii] Generally, the “gross reportable amount” is the amount that should have been disclosed—e.g., the amount of funds transferred to the foreign trust.

Federal law also requires the disclosure of certain ownership in foreign trusts.  Under section 6048(b), anyone treated as the owner of a foreign trust under the grantor trust rules must ensure that the foreign trust annually files a Form 3520-A with the IRS.  If the foreign trust fails to file a Form 3520-A (which can be common), the grantor must file a substitute Form 3520-A with the IRS.  If a U.S. person has an IRS Form 3520-A filing obligation and fails to timely file a Form 3520-A, the IRS may impose “a penalty equal to the greater of $10,000 or 5% of the gross reportable amount.”[iv]  In these instances, the “gross reportable amount” is “the gross value of the portion of the trust’s assets at the close of the year treated as owned by the United States person.”[v]

The Facts of Rost.

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Collins Reminds That Corrective Actions Alone Do Not Always Negate Willful FBAR Penalties

Collins Reminds That Corrective Actions Alone Do Not Always Negate Willful FBAR Penalties

As a general matter, the FBAR is not a difficult tax form to prepare, at least for most taxpayers and their tax professionals.  At its very basics, it merely asks for identifying information regarding the taxpayer and certain basic information regarding foreign accounts held outside the United States.  Thus, one would suspect that the failure to timely file this seemingly innocuous information return should not result in significant penalties.

However, tax professionals know better.  Under Title 31, a taxpayer’s willful failure to file a timely and accurate FBAR can result in penalties of up to 50% of the foreign account balances, a penalty that can be applied over multiple years. And because federal courts and the IRS view certain reckless behavior as constituting “willfulness,” the bar for willful FBAR penalties can be a seemingly low one.

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How To Successfully Fight the Section 6721(e) Intentional Disregard Penalty

How To Successfully Fight the Section 6721(e) Intentional Disregard Penalty

Section 6721 provides the IRS with authority to impose civil penalties against taxpayer-employers who fail to timely file correct information returns (e.g., Forms W-2/W-3 and Forms 940/941).  Under section 6721’s three-tiered penalty structure, the penalty varies, depending primarily on when the correct information return is eventually filed and, in some cases, the size of the employer.  However, if the IRS can show that the failure to timely and properly file an information return was due to “intentional disregard,” the IRS is permitted under section 6721(e) to impose a penalty of 10% “of the aggregate amount of the items required to be reported correctly.”  Thus, for example, if a taxpayer-employer improperly files an incorrect Form W-3 where gross wages should have been reported as $500,000 for the year, the IRS can impose a section 6721(e) penalty in the amount of $50,000 against the taxpayer-employer.

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Can The IRS Deny My Submission Under The Streamlined Filing Compliance Procedures?

Can The IRS Deny My Submission Under The Streamlined Filing Compliance Procedures?

Introduction

Federal tax law imposes various reporting requirements on U.S. taxpayers (citizens and residents) who have foreign transactions, foreign financial accounts, and/or interests in foreign entities.  Taxpayers who fail to timely and properly file these information returns run the real risk of significant civil penalties for the non-reporting.  However, for almost a decade, the IRS has offered certain qualifying taxpayers limited amnesty to regain compliance—at reduced civil penalty rates—through the Streamlined Filing Compliance Procedures (“SFCP”).

But not all taxpayers qualify for the SFCP.  For example, taxpayers who “willfully” failed to file foreign information returns or pay U.S. tax on foreign income are ineligible.  Moreover, taxpayers who are otherwise eligible may be deemed ineligible if the IRS concludes that the taxpayer’s SFCP submission omits important information.  Because taxpayers have a strong incentive to use the SFCP—as opposed to other methods to regain compliance—the IRS routinely polices the submissions that are made under the program.  The federal district court decision in Jones v. U.S., No. CV-19-04950-JVS (C.D. Cal. May 11, 2020), offers a glimpse into what can potentially go wrong if a SFCP submission is flagged by the IRS for additional review.

FBARs

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A Primer On The Employee Retention Credit (ERC)

A Primer On The Employee Retention Credit (ERC)

The Employee Retention Credit – Introduction

Congress acted quickly during the worldwide COVID-19 pandemic to provide hiring and other economic incentives to employers.  One particularly helpful relief provision—the employee retention credit (“ERC”)—provided employers with potentially refundable credits for wages that they paid to their employees during certain periods of 2020 and 2021.

Regrettably, Congress’s swift action and subsequent tinkering with the rules and requirements of the ERC left many employers confused as to whether they qualified for the credit in any given calendar quarter.  In an attempt to reduce this confusion, this article provides a primer on the ERC including certain applicable rules and eligibility requirements to claim the ERC.

COVID-19 Legislation 

Congress originally enacted the ERC relief provisions on March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136 (the “CARES Act”).  Congress later revised the ERC rules through enactment of: (1) The Taxpayer Certainty and Disaster Relief Act of 2020, Pub. L. No. 116-260 (the “Relief Act”) (enacted December 27, 2020); (2) the American Rescue Plan Act of 2021, Pub. L. No. 117-2 (the “Rescue Plan Act”) (enacted March 11, 2021); and (3) the Infrastructure Investment and Jobs Act, Pub. L. No. 117-58 (the “Infrastructure Act”) (enacted November 15, 2021).  The IRS issued guidance on the ERC through FAQs and various Notices.

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IRS Tax Penalties And The Tax Professional Reliance Defense

IRS Tax Penalties And The Tax Professional Reliance Defense

IRS Tax Penalties and the Tax Professional Reliance Defense

No one wants to pay federal taxes.  And this truism applies more so with respect to federal tax penalties.  Accordingly, clients often call upon their tax professionals to request waiver or abatement of any asserted penalties.

Chief among the waiver or abatement defenses is so-called “reasonable cause.”[i]  To show reasonable cause, a taxpayer must show that he or she exercised ordinary business care and prudence in determining a tax obligation but nevertheless was unable to comply with the tax obligation.[ii]  Because taxpayers routinely rely upon their tax advisers, federal courts have for some time now recognized a reasonable cause defense for reliance on a tax professional.

Contrary to popular belief, the usage of a tax professional to prepare a tax return is not a get-out-of-jail free card.  Rather, taxpayers have the burden of proof to show that reliance on the tax adviser was reasonable under the circumstances.  In many cases, this requires a taxpayer to meet all three requirements under the United States Tax Court’s decision in Neonatology.  This article discusses the Neonatology requirements and the professional reliance defense.

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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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