The IRS is using its extensive Big Data resources to pin-point their investigations to the wealthiest areas in Orange County, California. The idea being that anyone who is selected for investigation in these areas will result in a higher tax liability than those who live in less affluent areas. The government is looking for non-filers, persons engaged in on-line and virtual currency transactions, businesses cheating or delinquent on employment taxes and individuals with undisclosed foreign bank accounts.
When a taxpayer does not file and the IRS has information statements indicating a filing requirement, the IRS uses the data to file a return on behalf of the taxpayer if there is a projected balance owed. In 2012, the IRS used information statements to file 803,000 returns for taxpayers under the Automated Substitute for Return program, totaling $6.7 billion in additional taxes owed. And the sad thing about this is in just about every case, the amount actually owed when a tax return is filed by the taxpayer is much lower than what the IRS says a non-filer taxpayer owes. We even had cases where the IRS ended up owing our clients money.
Before contacting a non-filer, the IRS will often attempt to identify the non-filer’s occupation, location of bank/savings accounts, sources of income, age, current address, last file return, adjusted gross income of last filed return, taxes paid on last filed return – amounts and methods of payment (withholding, estimated tax, pre-payments), number of years delinquent, and the non-filer’s standard of living. They will search public records for evidence of additional unreported income, tax assessor and real estate records for assets held by the non-filer, and records of professional associations and business license bureaus for information on businesses being operated by the non-filer. They will also search sales tax returns and the state records to disclose corporate charter information including principals of any businesses that have failed to file returns. They will contact the last known employer to determine if the non-filer is still employed and the specific occupation of the non-filer.
It is to those individuals, who deliberately fail to comply with their obligation to file required tax returns and pay any taxes due and owing, that IRS Criminal Investigation devotes its investigative resources. In the most egregious cases or if the Special Agent discovers subsequent acts of tax evasion (false statements, refusal to make records available, etc.), criminal prosecution is recommended to the United States Attorney’s office.
On-line And Virtual Currency Transactions
The increased use of on-line transactions with such services that include but are no limited to eBay and Craigslist and the increased use of virtual currencies such as Bitcoins have also raised interest by the Department Of Justice.
Many people think of online auction sites, such as eBay and Craigslist, as virtual garage sales — a convenient way to clean out cluttered closets and attics stuffed with old clothes, books and knickknacks inherited from relatives.
But if you’re a frequent or big-time seller, the government might consider your proceeds to be income and could come after you for taxes.
The tax law requires the gross amount of payment card and third-party network transactions to be reported annually to participating merchants and the IRS. With this information the IRS can now track your sales and make sure they are being reported on your individual income tax return.
Bitcoins, a widely used virtual currency, are an alternative to money online. Unlike regular money, Bitcoins are not backed by any government or company. The currency is circulated without intermediaries such as banks. As such the government believes that taxpayers are able to avoid reporting income using this currency,
The IRS Criminal Investigation Division has committed a team of IRS Special Agents to master Bitcoin and other virtual currencies. The IRS knows that to use Bitcoins, one needs a virtual wallet along with private keys and public addresses. Unknown to many Bitcoin users is the fact that every Bitcoin transaction is included in a ledger called a block chain.
The IRS is simply accessing the block chain to review all Bitcoin transactions. From that point, the IRS works its way back to the public address that was used in the Bitcoin transaction. While the public address itself does not identify the user, the IRS has been very clever in associating the public address with the identity of the Bitcoin user. Thus, Bitcoin and other cyber or crypto currencies do not provide the level of complete anonymity many have ascribed to crypto currencies.
While the IRS has been focusing on the use of virtual currencies and crypto currencies in money laundering cases, the IRS is now focusing on the ability and likelihood that some users are committing tax evasion and tax fraud with virtual currencies. This is especially true because large amounts of virtual currency can change hands anywhere in the world instantaneously. Used correctly, it is another financial tool in our ever-shrinking world. Used incorrectly, it is a very dangerous tool for those with a leaning towards and involved in illegal activities including tax evasion.
The IRS is especially vigorous in going after payroll taxes withheld from wages that somehow don’t get paid to the government. The IRS calls it trust fund money that belongs to the government.
That makes any failure to pay—or even late payment—much worse.
In fact, that’s so regardless of how the employer or its principals use the money and regardless of how good a reason they have for not handing the money over to the IRS. When a tax shortfall occurs in this setting, the IRS will usually make personal assessments against all responsible persons who have an ownership interest in the company or signature authority over the company accounts.
The practice the government is going after is sometimes called “pyramiding.” The Department of Justice defined pyramiding where the business has made minimal payments of its tax debts and that attempts to induce voluntary compliance failed. To stop the bleeding in a case like this, the Justice Department can seek an injunction to require a company and its principals to make timely tax deposits, to pay all withheld employment taxes, and to timely file all employment tax returns.
The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person.” The penalty is assessed under Section 6672(a) of the tax code, and the IRS uses it liberally. You can be responsible and therefore liable even if have no knowledge that the IRS is not being paid. If there are multiple owners, multiple officers, multiple check signers, they all may draw a 100% penalty assessment.
When multiple owners and signatories all face tax bills they generally squabble and do their best to sic the IRS on someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck paying while another who is even guiltier may get off scot-free.
If the IRS is going after individuals, the IRS will still try to collect from the company that withheld on the wages. The IRS also wants to make sure this kind of bad tax situation doesn’t occur again and the IRS wants to collect as much money as quick as possible from as many parties as it can get to.
Undisclosed Foreign Bank Accounts And Unreported Foreign Income
The 2010 Foreign Account Tax Compliance Act (“FATCA”) which requires foreign banks and financial institutions to report the assets of their American account holders is now in full swing. This information is being transmitted to the IRS and the IRS is comparing this information what was reported on U.S. Federal Income Tax Returns. FATCA was passed as part of the U.S. government’s effort to crack down on U.S. tax evaders. Initially, the IRS concentrated its efforts on Swiss Banks but now banks in all foreign countries are subject to the severe penalties for noncompliance and lack of compliance would limit their ability to do business in America.
This focus has led to an increase in the enforcement of the requirement that Americans and American residents file a Foreign Bank Account Report on every account held abroad that is worth more than $10,000.
Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges which if sustain can result in jail time.
U.S. taxpayers with account holdings should seriously consider coming forward and disclosing their assets to the IRS. If you have never reported your foreign investments on your U.S. Tax Returns, the IRS has established the Offshore Voluntary Disclosure Program (“OVDP”) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.
Where Do The Highest Earners Live In Orange County, California?
Given the resources involved in any tax investigation (criminal or civil), the IRS is looking to focus on those areas that are more affluent and therefore yield the greatest potential for prosecution and revenue collection. When looking at different areas one factor that may be considered by the IRS is sales prices of real estate in Orange County, California. The five most expensive zip codes in Orange County based on median sales price data from 2012 are as follows:
You might have noticed a trend by now. Four of the five most expensive zip codes in Orange County occur within the same city. Newport Beach is clearly one of the priciest real estate markets in the country. In fact, if we ran this list out to the ten most expensive zip codes, Newport Beach would have five of the top ten spots and is almost a million dollars more than the next most expensive market, Pacific Palisades.
The Stakes Are High!
So if you receive an audit notice or even worse a visit by government agents, it is important that you don’t ignore this. Protect yourself from excessive fines and possible jail time.
Original Post By: Jeffrey Kahn
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