Orange County Tax Attorney Blog | California Tax Litigation Lawyer | Irvine Offshore Bank Accounts Law Firm

Prosecutors seek offshore account information from Wegelin & Co.

2012-02-04T21:30:12Z

Offshore bank accounts are a hot topic in the tax world because the IRS recently released its newest voluntary offshore disclosure initiative. This program allows California taxpayers to disclose their offshore accounts and accept a penalty in lieu of criminal tax evasion charges.

The IRS' handling of offshore accounts consists of a carrot and stick approach. Although the offshore disclosure initiative is a "get out of jail free" card for many taxpayers, the IRS also aggressively pursues offshore bank account holders and the banks which help them hide assets. The most recent development in this area is the Justice Department's charges against Switzerland's oldest bank.

]]> The Justice Department says that Wegelin & Co. aided American taxpayers in tax evasion schemes by setting up accounts for them under false names or shell companies. Three Wegelin bankers were indicted in connection with this scheme and many tax fraud cases against American citizens may arise out of information that the 271-year-old bank will hand over to prosecutors.

"Wegelin Bank aided and abetted U.S. taxpayers who were in flagrant violation of the tax code," a prosecutor said. "And they were undeterred by the crystal clear warning they got when they learned that UBS was under investigation for the identical practices."

UBS was fined $780 million for its handling of American offshore accounts. UBS also handed over the account information of its US clients to prosecutors. Authorities say that Wegelin took note of the UBS prosecution and stepped up as an alternative for US taxpayers who were seeking to hide assets. It is unclear how many taxpayers will face prosecutions as a result of Wegelin's charges.

Source: CNN Money, "U.S. charges oldest Swiss bank in tax fraud case," James O'Toole, Feb. 2, 2012

Collaboration Between Agencies Helps Stop Identity Theft

2012-02-02T18:35:52Z

The IRS, Department of Justice, Secret Service, and even the U.S. Postal Service all worked together in recent months to crackdown on identity theft. The group effort helped stop identity thieves from filing fraudulent tax returns and led to 58 arrests, including three Southern California residents.

Identity theft and tax fraud are serious problems for taxpayers in the United States, leading to financial ruin that takes years to recover from. The recent IRS efforts to curb this activity include monitoring 250 check-cashing operations for signs of identity theft.

]]> For victims of identity theft, this crackdown may help clear their names. As a part of the effort, the IRS has introduced new screening methods to prevent fraudulent returns from being issued.

Fraudulent returns are often filed early and refunds issue without investigation. The IRS may become suspicious only when the real taxpayer files their return. The attempt to stop the fraudulent refunds from being issued has caused some delays for honest early filers, which the IRS says they are working to clear up.

The ongoing investigations could also lead to increased contact from the IRS for people with unclear or confusing tax returns. This can be a stressful situation for both potential fraud victims who receive notification of investigation, and people suspected of tax fraud. Having an experienced advocate during this process can alleviate uncertainty and expedite the resolution.

Identity theft can start anywhere Social Security numbers are stored, such as schools or hospitals. Consumers should use caution when choosing to provide their Social Security number to an entity.

Sources: Wall Street Journal, "IRS Spearheads Bid to Head Off Identity Theft," Laura Saunders and Kristina Peterson, Feb. 1, 2012.

Seeking guidance: confusion arises out of OVDI programs

2012-01-28T19:20:50Z

In our last post we discussed new concerns being raised by Nina Olson, the National Taxpayer Advocate, regarding the IRS' administration of the offshore disclosure initiatives. Olson says that she is concerned that taxpayers who unintentionally failed to disclose assets are being disproportionately punished while criminal tax evaders are receiving slaps on the wrist.

The most current voluntary disclosure program comes at a time when the IRS is aggressively pursuing investigations into Swiss banks that it suspects are harboring bank accounts which facilitate U.S. tax evasion. New rules are also being drafted for overseas banks which will make it easier to determine whether U.S. persons have a financial interest in foreign accounts.

]]> Attorneys say that they are worried about clients who signed up for the voluntary disclosure initiative only to find that it was unfavorable. Cases in which it may make sense for a taxpayer to opt out include situations where the taxpayer didn't report income but also does not have a deficiency.

"The IRS is trying to coerce people," one attorney said. "The problem with the opt-out is the taxpayer almost certainly faces an examination and certainly faces a skeptical IRS agent reviewing their file."

The IRS insists that its disclosure program is voluntary and that taxpayers won't be treated in a negative fashion just because they opt out of the program. It is unclear whether IRS agents will be given more guidance in whether they can lower penalties for those who remain in the disclosure program. Some attorneys even reported stalling until more guidance is issued by the IRS commissioner.

Source: Bloomberg, "IRS Called Easy on Criminal Tax Evaders in Watchdog's Critique," Jan. 17, 2012

Nina Olson takes on the offshore bank account disclosure initiative

2012-01-26T18:21:25Z

National Taxpayer Advocate Nina Olson says that criminal tax evaders are receiving a sweetheart deal from the IRS through its voluntary offshore bank account disclosure initiative. Although those who are intentionally hiding assets can come forward and pay a set penalty to avoid criminal prosecution, the system is often unfair to California taxpayers who unknowingly shielded assets from taxation, Olson says.

In cases of innocent taxpayers, there are times when not participating in the voluntary disclosure program could result in lower penalties but also trigger a vigorous audit.

]]> There are two very common situations in which California residents may be unintentionally shielding assets abroad. The first situation involves dual citizens who may not know that accounts in their second country of citizenship need to be disclosed to the IRS. The second case involves individuals who inherit offshore accounts which turned out to be undisclosed.

The imposition of penalties on OVDI participants also appears unfair in some instances. One lawyer says that he has a client who unintentionally failed to disclose offshore income which resulted in a tax bill of $4,000. The IRS wanted to smack an additional $550,000 in penalties on this particular client which seems grossly disproportionate to the amount of tax that was outstanding.

The reason why the IRS wants to assess such a large penalty is the fact that the penalty is levied against the taxpayer's largest bank account or most expensive asset, which means that a small tax bill can turn into a massive penalty headache even if it is unrelated to the large account which the penalty is based off of.

In our next post we will discuss additional concerns that Nina Olson raised about the administration of the OVDI programs.

Source: Bloomberg, "IRS Called Easy on Criminal Tax Evaders in Watchdog's Critique," Jan. 17, 2012

How to avoid tax scams from cyber criminals

2012-01-17T16:01:01Z

Being contacted by the IRS is a scary thing especially if you have done nothing wrong. Unfortunately, many taxpayers feel harassed by the IRS every year because they have fallen victim to identity theft. Identity theft is increasingly being used to file fraudulent returns which can result in an audit when a taxpayer files his or her legitimate return. It is important to have an experienced California tax attorney on your side to help you deal with the IRS and restore your good standing with the government.

The IRS recently warned of a wave of suspicious communications being made on its behalf. Apparently criminals are pretending to be the IRS and soliciting personal information to steal an individual's identity. These schemes are known as "phishing" scams and result in millions of dollars in theft losses every year. Many of the criminals involved in these scams even use the IRS logo or names of officials to make their communications seem more authentic.

]]> It is important to remember that the IRS does not initiate contact to taxpayers through email to request financial or personal information. Any emails claiming to be from the IRS should be considered suspicious and forwarded to phishing@irs.gov. Remember not to reply to these emails, click on any links, or open any attachments.

Typically the IRS mails a letter or calls to contact a taxpayer. Letters or calls from the IRS usually mean that a taxpayer is under investigation and that it is time to call a tax attorney. If you receive a call and are unsure whether the person on the phone is a legitimate IRS employee then it is best to either contact your tax attorney or call the IRS directly at 1-800-829-1040 to determine whether the IRS actually contacted you.

Source: IRS, "Don't be Scammed by Cyber Criminals," IRS TAX TIP 2012-08, January 12, 2012

The thin line between business expenses and hobby losses

2012-01-15T17:34:29Z

Last week we discussed the fact that sometimes business expenses are characterized as hobby losses by the IRS. The line between business expenses and hobby losses is sometimes thin, especially in the context of new businesses.

We also discussed a recent tax court case that involved an author who claimed $19,140 in businesses losses associated with his worldwide trip that was taken to gather material for a book. The IRS disallowed the expenses and stated that the would-be author really had hobby losses, not business expenses.

]]> Taxpayers are entitled to deduct all of the "ordinary and necessary business expenses paid or incurred during the taxable year in carrying on a trade or

business." In the context of business expenses, one of the crucial questions that arises is whether a taxpayer is engaged in a trade or business. This is determined by a three-part test which consists of the following questions:

Whether the taxpayer claiming business losses undertook the activity intending to earn a profit.
Whether the taxpayer is regularly and actively involved in the activity.
Whether the taxpayer's activity has actually commenced.

The problem that the taxpayer in the tax court case ran into is that he did not present evidence of "continuous or repeated activity as an author." The tax court case was decided last week, nearly five years after the taxpayer's trip, and the taxpayer failed to author any books at all during this time.

And although other employment doesn't preclude the deduction of expenses associated with being an author, the fact that the taxpayer was a full-time employee and failed to write any books caused the court to determine that the taxpayer did not show "some intent or effect on his part to engage in and continue in the writing field with substantial regularity and with the purpose of producing income and a livelihood."

A related problem is that the taxpayer did not have the necessary receipts or documentation to support his deductions.

The taxpayer was able to escape paying an accuracy-related penalty however because his decision to deduct the trip expenses was made on the advice of an experienced tax professional.

Source: T.C. Memo. 2012-4, "Michael S. Oros v. Commissioner of Internal Revenue," Docket No. 19400-009, Jan. 5, 2012

IRS reopens Voluntary Disclosure Program for offshore accounts

2012-01-10T17:26:00Z

The IRS has reopened the Offshore Voluntary Disclosure Program (OVDP) for offshore bank account holders. This is a significant opportunity for California taxpayers with hidden overseas accounts to disclose these accounts to the IRS and avoid the possible criminal tax evasion penalties that are typically associated with offshore accounts.

Contact an experienced California offshore bank account lawyer if you have bank accounts overseas that have gone unreported to the IRS. An attorney who exclusively practices tax law and is experienced in tax evasion defense can assist taxpayers with their accounts and make sure that their exposure to penalties is minimized.

]]> The IRS reportedly collected over $4.4 billion from the 2011 and 2009 programs and expects even more revenue from the 2012 program. IRS Commissioner Doug Shulman recently noted the success of the past disclosure programs and expressed his hopes for the 2012 program.

"We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government," Shulman said. "This new program makes good sense for taxpayers still hiding assets overseas and for the nation's tax system."

The last disclosure program ended in September and the 2012 program is open for an indefinite amount of time because of the strong interest shown by taxpayers. Although there is no deadline for the most recent OVDP program, it is important not to delay in contacting an attorney to handle your case. The terms of the 2012 OVDP program can change at any time and the IRS has the ability to increase penalties for some taxpayers or abruptly end the program at any time.

"As we've said all along, people need to come in and get right with us before we find you," IRS Commissioner Doug Shulman said. "We are following more leads and the risk for people who do not come in continues to increase."

Source: IRS, "IRS Offshore Programs Produce $4.4 Billion To Date for Nation's Taxpayers; Offshore Voluntary Disclosure Program Reopens," IR-2012-5, Jan. 9, 2012

Upstart California business expenses may be hobby losses

2012-01-08T17:18:22Z

This is the year that many Orange County residents will follow their passions and start their own businesses. The current economic climate has shown many Californians that being an employee of someone else is not as risk-free as it once was, which is why increasing amounts of Californians are going into business for themselves while still employed. Normally, businesses can deduct expenses but the deduction of business expenses may not be as straightforward for many upstart businesses.

Contact an experienced California tax law attorney if the IRS contacts you because it disagrees with your deduction of expenses for a new business. Often the IRS will consider business expenses associated with a new business to be "hobby losses." The difference between business expenses and hobby losses is significant when it comes to a tax audit because this may result in an accuracy related penalty being assessed against a taxpayer.

]]> One recent tax court decision deals with business losses associated with a new business. The case involves an Intel employee who wanted to author a book about a trip around the world. In addition to being a MBA holder, the man was also an experienced photographer and he planned on photographs being a large part of his book.

The man completed his trip in 2006 and 2007 while on a paid leave from Intel. The four-month trip included stops in South America, Asia, Africa and Australia. On average, the man would spend three days in each country taking pictures and journaling.

The man's tax preparer told the man that he could deduct the expenses associated with his worldwide trip as business expenses for his 2006 tax return because the trip was research for his book. The man claimed a $19,140 loss, which was disallowed by the IRS.

We will discuss specific details on the IRS' position and the tax court's ruling in our next post.

Source: T.C. Memo. 2012-4, "Michael S. Oros v. Commissioner of Internal Revenue," Docket No. 19400-009, Jan. 5, 2012

IRS harassment prompts teacher to sue

2012-01-06T22:02:49Z

In our last post we discussed the importance of calling an Orange County tax attorney if you are contacted by the IRS. We also began discussing the tax issues that one teacher faced after someone stole his identity and filed a false return for a refund. The identity theft prompted the IRS to send the teacher audit letters and the IRS continued to harass the teacher even after he filed an affidavit of identity theft.

The teacher grew angry after repeatedly calling the IRS and telling them that he had filed the identity theft affidavit. The teacher said the response was usually "Well this department doesn't communicate with this department.

"Their bureaucracy is just, wow," the teacher said. "All they try to do is just sort of placate you, and it's just ridiculous because you know it's going on with a lot of people."

]]> "You're on hold, and then you're transferred from one ill-informed representative to another," his wife said.

The teacher said that he has called the IRS about a dozen times and has sometimes been placed on hold for over an hour. The IRS has also told him that he would be called back several times but no one has ever returned his calls.

"We understand that this is a frustrating process for identity theft victims, and we share their frustrations," an IRS statement about the teacher's case said. "These are some of the most complex cases we handle. The IRS is firmly committed to working with people to take care of these issues as quickly as possible. We have been working hard to speed up resolution of refund fraud cases and help get these fixed promptly for taxpayers. We have put more people into this area to help resolve these cases as fast as we can."

The teacher's case highlights the fact that dealing with the IRS can be a very time-consuming and frustrating experience for a taxpayer. This is why contacting a tax law attorney is often preferable to dealing with the IRS alone. A tax law attorney will know who to contact and properly document the situation to prevent a tax situation from worsening.

Source: The Tampa Tribune, "Tax fraud victims sue IRS for refund," Elaine Silvestrini, Dec. 31, 2011

Teacher says he feels victimized by the IRS

2012-01-02T21:39:06Z

Dealing with the IRS can be a frustrating experience. Save yourself a headache by contacting an experienced Orange County tax attorney if you are sent a letter or given a call by the IRS. Remember, there is no harmless contact by the IRS even if you have done nothing wrong.

One teacher recently found this out the hard way. He was called by the IRS and told that they wanted to audit his tax return. The taxpayer thought this was odd because he typically filed jointly with his wife and he had not even filed taxes yet that year. It turns out that his identity had been stolen and used to file a fraudulent tax return. Although the teacher filed an affidavit of identity theft fraud, he kept being harassed by the IRS.

]]> After continued letters warning of an audit, the teacher and his wife decided to sue the IRS. They are annoyed that their name has not been cleared and that the IRS has not taken the proper actions in their case.

"We're basically not receiving what's ours because somebody else did something fraudulently," the teacher said of his delayed refund. "And I just don't understand why it's affecting us."

The couple still has not received their refund and hope that other identity theft victims will join their lawsuit as a class action. In our next post we will discuss further details of this particular case and highlight the importance of contacting an experienced tax professional to avoid experiencing a similar frustrating situation.

Source: The Tampa Tribune, "Tax fraud victims sue IRS for refund," Elaine Silvestrini, Dec. 31, 2011

More last-minute tax saving tips

2011-12-30T15:36:39Z

The year is not over and it is not too late to make some shrewd moves to save on your yearly tax bill. In our last post we discussed the importance of proper tax planning for high income individuals and the fact that some deductions may trigger an IRS audit. We also discussed three tax saving tips that the IRS recently issued including donating to charity, installing green-energy appliances, and making changes to an investment portfolio.

Each of the IRS' tax saving tips can help a California taxpayer save money, but each tip has several rules and exceptions that may apply. That is why it is important to consult with an experienced tax professional if you are considering taking one of these last-minute deductions.

]]> The last three of the IRS' tax saving recommendations involve retirement and business-related deductions. For example, the IRS recommends making the maximum contribution to retirement accounts. Elective deferrals made to workplace retirement programs such as 401(k) accounts must be made by Dec. 31 but individuals can make IRA contributions until April 17, 2012 and apply these to 2011 taxes. Low-to-moderate income individuals may also qualify for the Retirement Savings Contribution Credit, but the election to take other credits may impact or eliminate the possible benefit of this credit.

Individuals over age 70.5 can make a Qualified Charitable Distribution (QCD), which is a charitable contribution made directly from an individual retirement account to a qualified charity. The maximum annual limit for QCDs is $100,000 and the benefit is even available to those who do not itemize deductions.

Finally, it is important not to overlook the possibility of taking the Small Business Health Care Tax Credit. This credit is available to small employers that pay at least half of their employee health insurance premiums. The credit is worth up to 35 percent of the premiums paid.

Source: Internal Revenue Service, "Six Year-End Tips to Reduce 2011 Taxes," Special Edition Tax Tip 2011-09, Dec. 21, 2011

IRS releases last-minute tax reduction tips

2011-12-28T15:12:01Z

Orange County residents with high incomes are more likely to itemize their tax deductions and to be targeted by an IRS audit. The IRS is more likely to scrutinize the deductions that a high-income earner takes and the failure to provide supporting documentation for a deduction can get a taxpayer into serious legal trouble.

An experienced tax law attorney can help high-income individuals establish a proper tax plan that can reduce the chance of an audit and be honored if an audit does occur. A proper tax plan may include deductions that reduce a person's overall taxable income, but any such deductions should be properly supported to avoid the risk of penalties.

]]> The IRS recently released a list of tax saving tips that Orange County residents should consider. The tips include the following suggestions:

Make charitable contributions. Donations that are made to qualifying charities before Dec. 31 are deductable for this year. This includes donations made by credit card if the card is charged by Dec. 31, regardless of when the bill is paid.

Install energy-saving and green-energy home improvements. Up to $500 in tax savings are available to Californians and additional tax benefits are available from the Residential Energy Efficient Property Credit.

Make investment portfolio adjustments. It's not too late to sell stocks. Normally, losses from stocks are deductable up to the amount of stock gains made during the year. If your portfolio had a particularly bad year you can also apply $3,000 of stock losses to other income. Losses above the $3,000 amount can be carried forward for future years.

We will cover additional last-minute tax saving tips in our next post.

Source: Internal Revenue Service, "Six Year-End Tips to Reduce 2011 Taxes," Special Edition Tax Tip 2011-09, Dec. 21, 2011

What to do if you receive a 90-day or 30-day letter from the IRS

2011-12-23T19:54:06Z

In our last post we discussed the importance of calling a California tax law attorney when the IRS sends a notice of deficiency. A notice of deficiency is also called a 90-day letter because it states that a taxpayer has 90 days to either submit a Form 1040 tax return, consent to the IRS' deficiency assessment, or explain why the taxpayer is not required to file taxes.

A 90-day letter is somewhat similar to a Proposed Individual Tax Assessment, Letter 2566, which is also called a 30-day letter. The 30-day letter typically comes before the 90-day letter and lets a taxpayer know that the IRS does not have a record of that taxpayer's individual tax return. The letter also proposes a tax assessment including penalties based on income reported to the IRS by a taxpayer's employer or banks. Upon receiving a 30-day letter, a taxpayer can send in a Form 1040, consent to the proposed tax liability and penalties, or submit a statement explaining why the taxpayer does not need to file a tax return.

]]> Ignoring either of these forms can have serious consequences. The tax code allows the IRS to collect taxes through liens if a taxpayer neglects or refuses to pay a tax assessment. A taxpayer does have rights however, which is why it is important to contact an experienced tax law attorney if the IRS decides to send either a 30-day or 90-day letter. Failure to contact an attorney or deal with the IRS can result in significant fines and penalties, including the inability to contest the IRS' assessment of taxes at a later time.

Source: United States Tax Court, "Kamps v. IRS," Dec. 14, 2011, T.C. Memo 2011-287

The consequences of ignoring a notice of deficiency

2011-12-19T19:29:28Z

The IRS' collection procedures can be unfair and complicated. When the IRS decides that an Orange County resident owes money, it can simply take the money it feels entitled to. A California tax law attorney can help those who face levies and other collection actions fight against the harsh collection practices of the IRS.

It is important to call an attorney when the IRS makes contact. Those who fail to take action can lose up to 90 percent of their paychecks. Ignoring the IRS will not make your tax issue go away. The IRS was recently allowed to continue collection efforts against one pair of taxpayers who repeatedly failed to file taxes and ignored IRS notices. The tax court also determined that the taxpayers were not entitled to fight their tax liability because they received a 90-day letter, also called a notice of deficiency, for each of the tax years at issue.

]]> The IRS did not even have to meet with the taxpayers face-to-face because the taxpayers failed to file their previous returns and did not submit financial statements to support their case. The IRS further alleged that the taxpayers' arguments were frivolous and only designed to delay the collection of the tax due.

The taxpayer's failure to address letters of deficiency made it impossible to dispute the amount of taxes that they owed. The taxpayers could not even claim that they had not received the letters because the IRS produced a Form 3877 to show that the notices were mailed to the right place. This case highlights the importance of getting an attorney involved in the collection process as early as possible.

Source: United States Tax Court, "Kamps v. IRS," Dec. 14, 2011, T.C. Memo 2011-287

IRS warns of fines and jail time for offshore bank account holders

2011-12-16T23:18:31Z

In our last post we discussed a recent speech by IRS Commissioner Douglas H. Shulman on offshore bank accounts and the IRS' continuing pursuit of California residents with undisclosed foreign assets. The IRS is going to continue to pressure banks and foreign governments to disclose the identity of California taxpayers with hidden assets. Shulman said that the IRS has more tax evasion cases and banks on its radar and that he expects a new wave in tax evasion prosecutions in the coming years.

The IRS Commissioner highlighted the thousands of taxpayers who took advantage of the recent voluntary disclosure programs. These programs allowed taxpayers to avoid the stiff criminal penalties associated with tax evasion cases and to return to the standard reporting system. The IRS Commissioner said that he hopes the IRS' aggressive pursuit of offshore bank account holders will "change the calculus" of would-be tax evaders and discourage wealthy California individuals from hiding money overseas.

]]> "I think it's fair to say that we are well on our way to deterring the next generation of taxpayers from using hidden bank accounts to cheat on their taxes," the IRS Commissioner said. "People who may consider hiding money offshore should also take note of ours and the Department of Justice's success record when it comes to criminal prosecutions. People hiding assets offshore have received jail sentences running from months to years, and they have been ordered to pay hundreds of thousands and even millions of dollars."

Exorbitant fines and jail time can often be avoided in tax evasion cases. An experienced tax law attorney can help a client avoid such drastic consequences which is why experienced representation is vital in any tax evasion case.

Source: IRS, "Commissioner Douglas H. Shulman Speaks at the IRS/George Washington University 24th Annual Institute."