Tag Archive for IRS Penalties

IRS Blocked Over “Assessable Penalties” In Foreign Ownership

https://www.taxconnections.com/Alicea-Castellanos-CPA-TEP-NP/12275480/United-States/New-York/New-York/profilepage

Citing a fuzzy definition, the American Tax Court holds that the IRS lacks authority to assess and collect after an owner of foreign companies fails to file or pay penalties. How will this play out in future cases?

The U.S. Tax Court, in Farhy v. Commissioner, has distinguished between a penalty that the IRS is authorized to issue and a penalty that has been properly assessed.

For the tax years 2003 through 2010, Alon Farhy owned 100% of Katumba Capital Inc., a foreign corporation incorporated in Belize. For the tax years 2005 through 2010, Farhy was 100% owner of Morningstar Ventures Inc., also a foreign corporation incorporated in Belize.

Farhy had a reporting requirement under Section 6038(a) to report his ownership interests in both companies: Taxpayers must usually file Internal Revenue Service Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” to disclose interest or ownership in a foreign corporation. Failure to do incurs penalties starting at $10,000 per form per year.

During the years at issue, Farhy participated in an illegal scheme to reduce the amount of income tax that he owed and, in February 2012, signed an affidavit describing his role in that scheme. He was granted immunity in a non-prosecution agreement that he signed that September. Four years later, the IRS notified Farhy of his failure to file the 5471s; the Tax Court has acknowledged that Farhy’s failure to file was willful and not due to reasonable cause.

In late 2018, the IRS assessed an initial penalty (under Internal Revenue Code Sec. 6038(b)) of $10,000 for each year at issue and continuation penalties totaling $50,000 per year. The IRS did comply with the written supervisory approval requirements for the penalties. A few months later, the IRS levied to collect the penalties.

Defendant’s Answer
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Written by | Posted in Foreign Ownership • IRS Penalty

Form 3520 And Substitute Form 3520-A For Foreign Trusts And Gifts From Nonresidents

Gary Carter Form 3520-A

Section 6048 of the Internal Revenue Code requires a United States person, as defined for FBAR reporting, (and the executor of the estate of a US decedent) to file Form 3520 to report:

  • Certain transactions with foreign trusts,
  • Ownership of foreign trusts, and
  • Receipt of certain large gifts or bequests from certain foreign persons.

Additionally, an owner of a foreign trust might be required to file a Substitute Form 3520-A if the foreign trust fails to file Form 3520-A (See SUBSTITUTE Form 3520-A below). Here is Form 3520 and Instructions.

What Is a Foreign Trust For Which Form 3520 Must Be Filed?

Although the Internal Revenue Code (IRC) refers to trusts in numerous sections, nowhere in the IRC is the term “trust” actually defined. There is a definition of foreign trust. IRC Section 7701(a)(31)(B) says: “The term ‘foreign trust’ means any trust other than a trust described in subparagraph (E) of paragraph (30).” Subparagraph (E) describes “any trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.”

So a foreign trust is one that is not under the jurisdiction of United States courts or controlled by a United States person. But what is a “trust”?

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Written by | Posted in FBAR • Foreign Trusts • Form 3520/3520-A

Navigating The Shoals Of IRS Penalty Abatement – Types Of Defense (Part II)

Now that you may have missed the income tax filing and payment deadline perhaps it is a good time to understand how to cope with penalization as it can get woefully expensive – not to mention mind numbing – if you go about it have baked.

There are a handful of defenses you can attempt to assert when it comes to navigating the shoals of IRS penalty abatement, chose with care and proper counsel.

The key IMHO is to comport yourself with law abiding dignity whilst deliberately navigating through these general options, including: Read More

Written by | Posted in TaxConnections

Navigating The Shoals Of IRS Penalties

For those of us inclined to the proverbial ‘head-bury’ strategy with Big Brother, it is best to understand the civil penalties assessed when IRS systems catch up – as measured in tangible $$ out the pocket. For the brave of heart, navigating the shoals of IRS Penalties can be intimidating to comprehend but it is far from rocket science.

Understanding IRS civil penalties starts with picking up Part 20.1 of the Internal Revenue Manual (IRM).  Here you will find guidance on all areas of civil penalties imposed by the Internal Revenue Code (IRC).

Criminal penalty provisions are contained in IRM 9.1.3 and beyond the scope of this post. Read More

Written by | Posted in IRS

10 Pointers Regarding IRS Bills, Penalties And Interest Charges

Many people have been reaching out to me to learn specifically about what they are up against for failing to hit the tax deadline of April 15th. To help those of you in this situation I’ve highlighted below what I believe to be the top 10 most valid points in regards to IRS bills, penalties and interest charges as detailed in IRS Publication 594 The IRS Collection Process.

1. Federal income tax returns are systematically checked for mathematical accuracy. If there is any money owed, you will be sent a bill. So don’t worry so much about math errors on the federal tax return as it will be caught. Generally speaking if you catch a math error after the tax return was submitted it can make sense in many instances to wait for the IRS to contact you with the changes before going through the brain damage of filing an Read More

Written by | Posted in Audit • Federal • IRS • Tax Tips

Zip It During A Tax Audit

TaxConnections Picture - Zipped Mouth ShutIf you chose to represent yourself in an Internal Revenue Service Examination realize the IRS Revenue Agent (RA) or Tax Compliance Officer (TCO) assigned to your file is trained very thoroughly to advocate on behalf of the United States Government. One method used quite often is to create a (false) sense of security in the personal interview setting or even on the phone with cathartic yet repetitive narratives. This is done in my humble opinion to lull you into a sense of complacency which subsequently if not held in check leads to providing responses way beyond the scope of the audit matters in question. More importantly when you talk too much you are creating opportunity for the RA or TCO to potentially broaden the authority of the audit should you happen to say something inadvertently that could appear circumspect.

When it comes to the actual audit process:

1. Recognize the IRS RA or TCO assigned your file is a person too who is just trying to do their job of advocating as aggressively as allowed by law on behalf of the US government and resist the urge to posture aggressively in response as it accomplishes very little to nothing and is generally futile. Most RAs and TCOs are reasonable and I’ll even go out on a limb saying that there even a few that are outstanding which can be a sincere blessing. If however you get an IRS RA or TCO that is a unilateral jackass – they do exist – this is where you need to focus on internalizing emotions and recognize you can request a different examiner. Read More

Written by | Posted in Federal • Individual • IRS • United States

It Has Been QUITE A Tax Season! A Review Of IRS Activity

According to the newly released 2012 IRS Data Book, the IRS collected almost $2.5 trillion in federal revenue and processed 237 million returns, of which almost 145 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 81 percent were e-filed. More than 120 million individual income tax return filers received a tax refund, which totaled almost $322.7 billion. On average, the IRS spent 48 cents to collect $100 in tax revenue during the fiscal year, the lowest cost since 2008.

The IRS examined just under one percent of all tax returns filed and about one percent of all individual income tax returns during fiscal year 2012.  Of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds.

An electronic version of the 2012 IRS Data Book can also be found on the Tax Stats and the following are some highlights worth noting.

In FY 2012, IRS initiated 5,125 criminal investigations.

In FY 2012, the IRS closed 60,793 applications for tax-exempt status and other determinations. Of those, the IRS approved tax-exempt status for 52,615 organizations. In FY 2012, the IRS recognized more than 1.6 million tax-exempt organizations and nonexempt charitable trusts.

In Fiscal Year 2012, General Counsel received 31,295 Tax Court cases involving a taxpayer contesting an IRS determination that he or she owed additional tax.

IRS workforce and the resources that the IRS spends to collect taxes and assist taxpayers. In Fiscal Year (FY) 2012, the IRS collected more than $2.5 trillion, incurring a cost of 48 cents, on average, to collect $100.

IRS’s actual expenditures in FY 2012 was less than $12.1 billion, which was used to meet the requirements of its three core operating appropriation budget activities.

In FY 2012, the IRS employed a total workforce of 97,941, including part-time and seasonal employees.

Written by | Posted in Federal • Individual