In a prior post, we discussed the increase in expatriate Americans who renounced their citizenship in the past year. Eduardo Saverin, a Facebook co-founder, has also renounced his citizenship ahead of the company's IPO. While the entrepreneur stands to save tens of millions of dollars from the move, he denies that taxes motivated his decision in any way. Regardless, his renunciation has been perceived by some as tax evasion, and has prompted some Congressional leaders to act.
]]> U.S. Senators Bob Casey and Charles Schumer have combined to draft legislation that would penalize those the government determines gave up their passports into order to avoid taxes. In particular, the law would give the Internal Revenue Service the power to presume that anyone who gave up their citizenship and owed on average $148,000 or more in taxes or had at least $2 million in net worth did so to eschew their tax bill.The presumption would be rebuttable, however. But taxpayers unable to provide alternative explanations would be subject to two penalties. First, they would be prevented from ever returning to the U.S. Second, any investments that person still had in the U.S. would have an increased capital gains tax of 30 percent applied to them.
The name of the proposed law is the Ex-PATRIOT Act, which is an acronym for "Expatriation Prevention by Abolishing the Tax-Related Incentives for Offshore Tenancy." It remains to be seen whether the law will achieve its goals, but it has the potential to revise the calculus driving the increase in Americans renouncing their citizenship in recent years.
Source: Los Angeles Times, "Two senators want to stop Facebook's Saverin from dodging taxes," Jim Puzzanghera, May 18, 2012.
]]>One couple discovered that for themselves recently. By 2007, they had accumulated nearly $30,000 in tax debt. They negotiated an OIC with the IRS in which they would have to pay $2,000. But that was not all. They also agreed that if they received any tax refunds in 2008 resulting from "overpayments" made during 2007 or before, then the IRS could take those refunds to satisfy the debt as well.
]]> On their income tax return for 2007, the couple took two credits and also claimed money from the federal government's stimulus package. When the IRS kept the couple's refund, they took the agency to court. The case went all the way to the U.S. Court of Appeals for the Second Circuit, which recently released its ruling in favor of the IRS.The couple's legal argument focused on the plain meaning of the terms "overpayment" and "refund." They asserted that money refunded due to tax credits does not represent an overpayment of tax and therefore should not be forfeited to the IRS under the terms of the OIC. Tax credits are used by the government to effect certain policies, such as helping those with low incomes. They are also especially helpful to taxpayers because they reduce a person's tax liability dollar for dollar, and some can be refunded.
But the court did not agree. The court ruled that the terms in question should be viewed not according to their plain meaning, but according to the definition given them by the Internal Revenue Code. A section of the Code states that an overpayment of tax includes refunded credits that are more than the amount of tax a person owes. Therefore, the IRS's withholding of the couple's refund was proper.
While OICs can be quite beneficial, it is important to understand the legal implications of any agreement with the IRS.
Source: Journal of Accountancy, "Terms in OIC agreement take meaning from Code, court holds," Alistair M. Nevius, May 3, 2012.
]]>In an effort to prevent overseas tax evasion, the U.S. government passed more rigorous financial reporting criteria under the Foreign Account Tax Compliance Act. Under that act--called FATCA for short--taxpayers have to file a new form that discloses offshore assets. Penalties for failing to comply with the act can be severe. Foreign banks also have responsibilities under the law.
]]> But the banks are responding to the law by cutting ties with many of their American customers. Some have precluded Americans from opening accounts with them, and others have even closed active accounts held by U.S. citizens.Americans living abroad with offshore accounts are therefore faced with a difficult decision. On the one hand, they can retain the benefits of U.S. citizenship, but comply with the FATCA requirements, pay taxes and possibly lose out on the ability to bank with some foreign institutions. On the other hand, they can eschew FATCA compliance and its associated costs while gaining access to those institutions, but at the cost of their citizenship.
According to the Federal Register, nearly 1,800 Americans living in foreign countries decided to no longer remain citizens of the United States in 2011. While this represents an increase from three years earlier, the number of renunciations is still a very small percentage of the overall population of U.S. citizens living abroad.
Many instances of renunciation took place in Switzerland, whose banks have been the primary target of Internal Revenue Service investigations into offshore tax evasion. Renunciations can have their own costs, however, including an "exit tax" that depends on a person's assets and taxes paid.
Source: Bloomberg, "Wealthy Americans Queue to Give Up Their Passports," Giles Broom, May 1, 2012.
]]>The reason for the high tax bill is the way in which Facebook has chosen to compensate its employees. In addition to a normal salary, some workers have received restricted stock units, or RSUs. They are not like more traditional employee stock options. Instead, they are paper placeholders that do not--and cannot--become real shares until there is a specified "liquidity event."
]]> When RSUs become stock, the Tax Code does not treat them like stock, however. Because RSUs are part of an employee's compensation package, the IRS deems them ordinary income in the year of their vesting. The amount of that income depends on the value of the company's stock at the time the RSUs vest in an employee.The trouble is that all this income is a paper gain. After a liquidity event, such as an IPO, an employee may owe millions of dollars in taxes, but have insufficient funds to pay the bill because the income is tied up in shares of stock. Employees may have to sell off some of their shares to meet their tax obligations, and Facebook is helping them do that.
But RSUs are an increasingly popular form of employee compensation, especially in the technology industry. Employees who receive RSUs should plan for the potential tax consequences so that they do not get taken off guard and potentially become the subject of an IRS audit.
Source: CNN Money, "Facebook employees face $4 billion tax bite," Stacy Cowley, May 9, 2012.
]]>The central issue for decision in the case was the length of time the IRS had to pursue the taxpayers who were allegedly using the shelters to engage in tax evasion. To answer such a question requires a detailed examination of tax law to determine which statute of limitations applies to the particular activity conducted by the tax shelters.
]]> Under most circumstances, the IRS has three years to go after taxpayers it believes have not complied with the tax laws. But the law raises that limit or eliminates it altogether in certain cases. The Son of BOSS tax shelters used creative means to raise the purchase price of a capital asset, so that when it came time to sell the asset, the realized gain would be less. By reducing gain, people could lower or eliminate their capital gains taxes.The IRS considered this activity an "omission of income," which would allow it to apply a six-year statute of limitations. Some taxpayers disagreed and took the issue to court, where the Supreme Court eventually ruled, by a 5-4 margin, that the IRS improperly used the six-year statute of limitations, and would instead have to abide by the standard three-year limit.
Many of the Son of BOSS cases lie outside the three-year statutory period, however, which means the IRS cannot pursue them. While some estimate that the Court's ruling could cost the IRS upwards of $1 billion in revenue, the decision emphasizes that the IRS must follow the rules outlined in the Tax Code's statutes of limitations.
Source: The Wall Street Journal, "IRS Loses Tax-Shelter Case," John D. McKinnon, April 25, 2012.
]]>The IRS imposes financial penalties on taxpayers who fail to file returns and fail to pay required taxes by the stated deadline. These charges continue to mount over time--along with interest--and have the potential to create a substantial tax debt. Ignoring the problem will only make it worse, so the IRS recommends that taxpayers file as quickly as they can and pay as much of their tax bill as they are able. This will help to reduce the penalties and interest.
]]> To help speed along the process, the IRS keeps the quick e-file option open for many people until October 15. In addition, some taxpayers can take advantage of the IRS's Free File software, which is a program that can make filing easier. To qualify, taxpayers must have income equal to or less than $57,000.But not everyone can afford to pay the whole of a tax debt in one fell swoop. Taxpayers whose debt is too great for them to pay off at once do have options, however. The IRS offers installment agreements, which allow a person to pay off a debt over a set period of time. An experienced tax attorney can help negotiate an installment agreement that fits a taxpayer's individual financial circumstances.
Source: Internal Revenue Service, "Missed the Income Tax Deadline - IRS Offers Help for Taxpayers," Special Edition Tax Tip 2012-06, April 19, 2012.
]]>After criticism from the National Taxpayer Advocate, the IRS has taken steps in recent years to reform and improve the offer in compromise program. These steps included making the OIC process smoother for ordinary taxpayers whose debts or income were below certain thresholds. People have responded to the improvements by filing more offers, with the IRS reporting an increase of more than 13,000 offers between 2007 and 2011. The effect of the recent recession has also caused more taxpayers to seek the aid of an OIC.
]]> But the TIGTA report indicates that the IRS was not prepared for the increase in offers in compromise. The agency uses two locations to respond to offers, and TIGTA revealed that the number of offers exceeded their capacity to handle them. Over 7,000 offers were not even assigned to an IRS employee yet, and some had not been dealt with in over half a year. The IRS can transfer offers from one location to another, but both were so overloaded that one could not have helped the other process offers any faster.But the OIC program still remains a valuable and effective tool for taxpayers with difficult tax debts. The IRS has stated that it will take steps to respond to the offers more efficiently, including adopting a smoother process for all offers.
Source: Forbes, "Trying To Come Clean With The IRS? Get In Line." Ashlea Ebeling, April 12, 2012.
]]>Last week, one state's attorney general alleged that Sprint Nextel had failed to pay the state approximately $100 million in sales taxes collected since 2005. The attorney general filed a tax fraud lawsuit against the company, arguing that Sprint withheld tax payments in order to improve its pricing margin vis-à-vis competing companies in the communications market.
]]> According to the state's attorney general, the lawsuit against the company originated when a whistleblower filed a separate suit last year. Sprint is being prosecuted under the state's False Claims Act, which imposes heavy penalties on violators. A person or business found in contravention of the act must remit three times its tax liability to the state. In Sprint's case, that means it could owe in excess of $300 million in taxes and penalties.Sprint representatives have responded to the tax fraud lawsuit, remarking that the allegations are false and that it has paid all sales taxes required by law. There is a lot at stake for the company, which posted a nearly $3 billion loss in 2011. Although different tax laws apply to corporations and individual persons, on one level Sprint's tax issues are similar to those of ordinary taxpayers except that there are a few extra zeros involved. Tax fraud is a serious charge, and people can face significant consequences if found guilty.
Source: CNNMoney.com, "Sprint hit with $300 million tax fraud lawsuit," Julianne Pepitone, April 19, 2012.
]]>Statutes of limitations are an important part of the law and generally provide a legally defined time period within which a person must make a claim or a governmental entity must bring charges. In the area of taxes, they dictate the time the Internal Revenue Service can pursue taxpayers for civil and criminal tax violations, such as tax evasion or fraud. But once that time period expires, the IRS can no longer impose penalties on a taxpayer.
]]> But like many areas of tax law, the statutes of limitations are complex and subject to an extensive variety of exceptions. Broadly speaking, the IRS has three years to pursue taxpayers for problems with a given year's return. That time period begins to run from the later of two dates: when the tax return was due or when it was filed. For example, the IRS could still go after taxpayer errors on a 2000 return that was filed a decade later.But in some cases, the statute can be pushed to six years or even eliminated altogether, meaning the IRS could conceivably bring a case at any time in the future. Criminal tax matters often are subject to a 6-year statute of limitations. It is important to note, however, that in civil tax fraud cases, the IRS is not bound by any statute of limitations.
Although the rules tend to benefit the IRS, there are practical considerations that weigh in taxpayers' favor. Older tax controversies sometimes lack detailed documentation, making it hard for the IRS to bring a case, even if it is statutorily entitled to do so. People facing tax controversies can turn to an experienced tax attorney to discover how the applicable statute of limitations applies to their case.
Source: The Wall Street Journal, "When Can Tax Cheats Relax?" Laura Saunders, April 13, 2012.
]]>When conducting a tax fraud audit, IRS agents and examiners are trained to spot certain hallmarks of fraud as listed in the Internal Revenue Manual. An IRS examiner who believes that a taxpayer has committed fraud may bring that person to the attention of higher-level officials, such as a first-line manager and a Fraud Technical Advisor. These officials determine if the taxpayer's return meets the criteria for civil or criminal penalties, which can include time in jail.
]]> But when TIGTA checked a sample of 116 field audits, it found that in one out of five audits, examiners either overlooked potential fraud or failed to address fraudulent activity. TIGTA then extrapolated this 20 percent rate over the total number of field audits conducted and estimated that the IRS missed collecting approximately $20 million per year from taxpayers in penalties alone.TIGTA recommended two changes to current IRS policies to better detect tax fraud. First, it stated that examiners should have a more detailed and thorough Fraud Development Lead Sheet, one of the important documents an examiner uses during a field audit. Second, TIGTA argued that Fraud Technical Advisors--more senior and experienced IRS officials--should bring their increased expertise to bear by playing a greater role in tax audits.
The IRS declined to adopt the first recommendation, stating that it had already revised the lead sheet to its satisfaction. It did adopt something similar to the second recommendation, however, pledging to inform examiners that Fraud Technical Advisors can be helpful in audits.
TIGTA has urged that the IRS become more thorough during audits. Therefore, taxpayers who become the subject of an audit should know what rights they have and what penalties they could potentially face.
Source: Treasury Inspector General for Tax Administration, "Actions Can Be Taken to Reinforce the Importance of Recognizing and Investigating Fraud Indicators During Field Audits," Reference Number: 2012-30-030, March 29, 2012.
]]>Some taxpayers have fashioned arguments to support the broad proposition that the Internal Revenue Service lacks the power to tax people. One suggests that the IRS does not have the ability to tax because Congress's creation of the agency was deficient in some regard. Another proposes that a state, such as California, is independent from the United States, and its residents therefore do not come under the authority of the IRS. Both arguments run counter to established law, and neither has been successful.
]]> Other arguments focus on a taxpayer's personal beliefs. Some have asserted that their religion bars them from paying taxes. They often aver that they are morally opposed to providing money for government activities which go against their religious beliefs. While people have the constitutional right to exercise their religion freely, this does not provide an authority to refuse to pay taxes.Some arguments are fairly strange. A few taxpayers have refused to pay taxes or give their Social Security numbers to employers for withholding purposes because their number contains a certain combination of digits that they find disquieting. This most often occurs with the sequence "666," which some believe is the sign of the devil.
The tax avoidance arguments presented in the last two posts have been proved wrong through litigation and some are outright odd. These two facts should discourage any taxpayer from employing them in the future. But there is a danger that some taxpayers could attempt to use them. It appears that there are entities that promote such arguments and distribute pamphlets to taxpayers. Some even include examples of letters that a taxpayer could use to make such arguments to the IRS.
Taxpayers should know that the IRS warns that taking such positions could subject them to substantial financial penalties and imprisonment. The IRS does not look favorably upon what it calls "frivolous" arguments and will take taxpayers to court if necessary.
Source: CNNMoney.com, "Strange tax evasion schemes," Blake Ellis, April 6, 2012.
]]>We have all heard the stories of people who engage in tax evasion by simply not reporting income or by falsifying figures. There is a perhaps lesser-known, but arguably more interesting, form of tax evasion which can still land a taxpayer in legal trouble with the government. Over the years, many inventive taxpayers have attempted to avoid paying taxes by presenting a variety of strange arguments to the Internal Revenue Service.
]]> Some arguments are based on a legal discipline called statutory interpretation, which seeks to elucidate the occasionally unclear meaning of our laws. In analyzing the Code language that states who must pay taxes, some taxpayers have taken the position that the word "individual" does not include human beings or natural born persons. This argument is untenable, however, and has been repeatedly rejected by the courts.Other taxpayers have homed in on the IRS's phrase "voluntary compliance" and have used it to argue that people can pay taxes at their discretion. This argument too, is unsupported. In this context, "voluntary" means only that the IRS allows people to do their own returns. It does not relieve people of their obligation to file returns or pay taxes when they are legally required to do so.
In our next post we will continue to discuss other unsuccessful arguments that have been advanced to avoid paying taxes.
Source: CNNMoney.com, "Strange tax evasion schemes," Blake Ellis, April 6, 2012.
]]>This is no small problem, because failing to pay taxes on time can subject a person to stiff tax penalties and interest. The Internal Revenue Service, however, has offered some tax tips to those who are facing this dilemma:
]]> • Avoid procrastination. Failing to address a tax problem only makes matters worse, so the IRS recommends that taxpayers meet the filing deadline and pay as much of their debt as they can afford. By doing so, a taxpayer can diminish penalties and interest.• Certain taxpayers, however, may be eligible to pay their taxes at a later date and avoid a penalty for late payment. But extensions are not available to everybody, and taxpayers must apply using Form 1127-A and submit it before April 17.
• For those who cannot pay the debt at once, the IRS allows tax debts to be paid off over time through installment agreements. Taxpayers must meet certain criteria before becoming eligible for an installment agreement.
While installment agreements can be beneficial for some taxpayers, they do have fees and other consequences. In addition, the rules related to filing, penalties and interest can be complex. Depending on the facts and circumstances of their cases, taxpayers may have additional options to deal with their tax debt.
Source: Internal Revenue Service, "Tips for Taxpayers Who Can't Pay Their Taxes on Time," IRS Tax Tip 2012-64, April 3, 2012.
]]>TaxMasters advertised frequently on television in California and around the country, touting its ability to work with the IRS to reduce a person's tax debt. According to the case made by the state attorney general, however, the IRS placed liens on the assets of some of the company's clients after TaxMasters neglected to engage the IRS about their cases. As mentioned in our prior post, the company also let vital deadlines pass without action, a practice that can lead to tax penalties.
]]> The court ordered TaxMasters to pay a significant sum of money--$195 million--intended to penalize the company and return $113 million to clients. But since TaxMasters recently filed for bankruptcy, it is unclear how much anyone will receive. In its bankruptcy filing, it listed its assets at $50,000, while its liabilities were at least $1 million.The state attorney general stated that customers were "taken advantage of" by TaxMasters. According to the state's case, the company did not inform clients of various aspects of their contractual relationship, such as the fact that the company did not issue refunds. The state has vowed to try to get as much money from the bankruptcy case for the company's former customers.
The judgment in this case emphasizes the necessity of carefully choosing an experienced and dedicated attorney to help with tax issues. IRS problems can have significant consequences, and taxpayers should consult with a tax lawyer who can help resolve those tax problems.
Source: CNNMoney.com, "TaxMasters slapped with $195M fraud judgment," James O'Toole, Mar. 30, 2012.
]]>There are many reasons why a person may be more likely to receive a tax audit. The most obvious one is not following the rules. Failing to file a return in a timely fashion suggests that a person may be attempting to evade taxes. Such people will get extra attention from the IRS, which has penalties in place for people who file late. Taxpayers who also do not fill out forms correctly are likely to catch the IRS's watchful gaze.
]]> Taxpayers are also audited in greater numbers based on what they claim on their returns. For example, the IRS is more likely to scrutinize the returns of those who claim a high amount of charitable deductions to make sure that the deductions are truthful and accurate. In addition, taxpayers who claim a home office deduction stand at a greater risk to receive an audit. The rules for claiming the deduction are quite narrow and specific. Many ineligible people improperly take the deduction, so their returns may see a higher level of examination.Other audits come about because of what a person has. Small business owners are often audited because they have the chance to underreport income. Wealthy taxpayers with offshore accounts and foreign assets are increasingly becoming the targets of audits because the IRS suspects that they are sheltering income from taxation. The IRS has instituted new rigorous reporting requirements for those with assets overseas.
Taxpayers who are honest, accurate and document everything copiously will be in a good position if they are audited. But it can take more than detailed records to satisfy the IRS. An experienced tax attorney can provide assistance to those under the IRS's microscope.
Source: CNNMoney.com, "11 tax audit red flags," Blake Ellis, Mar. 28, 2012.
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