IRS providing tax relief for victims of severe winter storms, flooding, and mudslides in California

The IRS announced on January 10, 2023 that California storm victims now have until May 15, 2023 to file various federal individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, relief is available to affected taxpayers who live or have a business anywhere in Colusa, El Dorado, Glenn, Humboldt, Los Angeles, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Bernardino, San Diego, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Ventura, Yolo, and Yuba counties.

The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

The tax relief postpones various tax filing and payment deadlines falling on or after January 8, 2023, and before May 15, 2023, additional time to file through May 15, 2023. As a result, affected individuals and businesses will have until May 15, 2023 to file returns and pay any taxes that were originally due during this period. This includes 2022 individual income tax returns due on April 18, 2023 as well as various 2022 business returns normally due on March 15, 2023 and April 18, 2023. Among other things, this means that eligible taxpayers will have until May 15, 2023 to make 2022 contributions to their IRAs and health savings accounts.

In addition, farmers who choose to forgo making estimated tax payments and normally file their returns by March 1, 2023 will now have until May 15, 2023 to file their 2022 return and pay any tax due. The May 15, 2023, deadline also applies to the quarterly estimated tax payments, normally due on January 17, 2023 and April 18, 2023. This means that individual taxpayers can skip making the fourth quarter estimated tax payment, normally due January 17, 2023, and instead include it with the 2022 return they file, on or before May 15, 2023.

The May 15, 2023 deadline also applies to the quarterly payroll and excise tax returns normally due on January 31, 2023. In addition, penalties on payroll and excise tax deposits due on or after January 8, 2023, and before January 23, 2023, will be abated as long as the tax deposits are made by January 22, 2023.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2023 return normally filed next year), or the return for the current year (2022).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “FEMA-3591-DR”.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

IRS Criminal Investigation Division Releases Its 2022 Annual Report

On November 3, 2022 the IRS released the Criminal Investigation Division’s (CI) annual report, highlighting significant successes and criminal enforcement actions taken in fiscal year ending September 30, 2022.  The IRS noted that a key achievement was the identification of over $31 billion in tax fraud and other financial crimes.

In issuing this report IRS Commissioner Chuck Rettig stated:  The cases the IRS-CI team investigated over the past fiscal year touch multiple continents and require cooperation with partners around the globe. This is why IRS-CI continues to cement itself as the preeminent law enforcement agency investigating financial crimes on a global scale.

According to the report, CI initiated over 2,550 cases in fiscal year 2021 (up from 2,500 in the previous fiscal year), applying approximately 70% of its time to tax related investigations. CI is the only federal law enforcement agency with jurisdiction over federal tax crimes achieving a conviction rate of over 90.6% in fiscal year 2022.   IRS-CI is the only U.S. federal law enforcement agency that focuses 100% on financial investigations.

IRS Criminal Investigation Division Expands Its International Network

The report states that in the last fiscal year IRS-CI built upon its existing network of U.S. field offices and international attachés to combat financial crimes across the globe through the agency’s alliance with the Joint Chiefs of Global Tax Enforcement (J5) and public-private partnerships with financial institutions and the Fin-Tech industry to deter and identify criminal activity. Additionally, IRS-CI joined Taskforce Kleptocapture in March 2022 to target Russian oligarchs and other sanctions-evaders and to identify potential sanction evaders or sanctioned assets as part of a global strategy to deter Russia’s aggression. As of September 2022, the agency had identified nearly 50 individuals and entities for potential sanctions-related enforcement.

IRS-CI Chief Jim Lee stated “Our team follows the money. We’ve been doing it for more than 100 years, and we’ve followed criminals into the dark web and now into the metaverse. Tax and other financial crimes know no borders. If you violate the law and end up in the crosshairs of an IRS-CI special agent, you are likely going to jail.”

Case Examples Included In The Annual Report

The Tampa Field Office investigated Michael Dexter Little for tax-related crimes. He was sentenced to 19 years and six months in federal prison in January 2022 for conspiracy to commit wire fraud, conspiracy to commit money laundering and aggravated identity theft. Little also had to forfeit at least $12.3 million, traceable to his offenses. He filed a series of false tax returns, claiming massive, bogus fuel tax credits. He filed the false returns in his own name and the names of co-conspirators, as well as identity theft victims. He obtained at least $12.3 million in fraudulent tax refunds and attempted to obtain at least $27 million more. Little and his co-conspirators used scheme proceeds to purchase real estate and other assets for themselves.

The Oakland Field Office investigated Jeff and Paulette Carpoff for running a billion-dollar fraud scheme centered around DC Solar. Investors were duped into investing in DC Solar based on fake financial and engineering reports, and the money was used to fund the Carpoffs’ lavish lifestyle, which included a NASCAR sponsorship, ownership of a minor league baseball team, luxury real estate and more. The federal government seized and auctioned off 148 of the Carpoffs’ vehicles to recoup more than $8 million for scheme victims. In November 2021, Jeff Carpoff was sentenced to 30 years in prison, and in June, Paulette Carpoff was sentenced to 11 years in prison.

The Special Agent’s Role In The IRS Criminal Investigation Division

An IRS Special Agent works for CI. Special Agents are duly sworn law enforcement officers who are trained to “follow the money”. They investigate potential criminal violations of the Internal Revenue Code, and related financial crimes. Unless they are working undercover they will identify themselves with credentials which include a gold badge. The same gold badge appears on their business cards. Generally, IRS Special Agents travel in pairs if they are going to interview someone. One to conduct the interview, and the other to take notes, and act as a witness if necessary.

If you are contacted by an IRS Special Agent it is because he or she is conducting a CRIMINAL investigation. It is possible that the Special Agent is only interested in you as a witness against the target of the IRS investigation. However, it is a bad idea to speak to Special Agent without a criminal tax attorney present. IRS Special Agents are highly trained financial investigators. If you are the target or subject of an IRS criminal investigation you are not going to talk your way out of it, by “cooperating”; instead you may be giving the IRS more evidence to use against you.

Even if the IRS Special Agent tells you that you are only a witness you should still consult with an experienced criminal tax attorney BEFORE speaking with an IRS agent. If you make misstatements that you think put you in a better light you could change your role from a witness into a target. The best tactic is to simply tell the Special Agent that you are uncomfortable talking to him until you have had a chance to speak with your attorney. Then ask him for his business card. In this way your tax attorney can contact the Special Agent directly, and determine the best course of action.

There are a number of statutes in the Internal Revenue Code that authorize the federal government to prosecute individuals, including those dealing with tax evasion, fraud and false statements, failure to file returns, failure to pay tax, etc. Some, like the tax evasion statute, are worded in particularly broad terms and may ensnare the unwary or careless taxpayers.

If CI recommends prosecution, it will give its evidence to the Justice Department to decide the special charges. Individuals are typically charged with one or more of three crimes: tax evasion, filing a false return, or not filing a tax return. All of which are tax fraud.

Two Special Programs Run By CI

With the avalanche of billions of data flowing to IRS, CI has been running two special programs: the International Tax Enforcement Group (ITEG), and the Nationally Coordinated Investigations Unit (NCIU). Both focus on increasing the rate of taxpayer compliance with income reporting requirements contained in the Internal Revenue Code – particularly those pertaining to the disclosure of foreign financial accounts, reporting of virtual currency transactions, and reporting transactions involving cannabis.

What Should You Do?

Very quickly a criminal investigation can turn to the worst for a targeted taxpayer so you should promptly seek tax counsel who can act proactively before the IRS does. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and other locations within California protect you from excessive fines and possible jail time. Also, if you are involved in cannabis, check out how a cannabis tax attorney can help you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

IRS-Extends-Its-Wave-Of-Tax-Relief-To-Victims-Of-The-July-2022-Kentucky-Storm-Flooding

IRS Extends Its Wave Of Tax Relief To Victims Of The July 2022 Kentucky Storm Flooding

The IRS announced on August 2, 2022 that storm victims in parts of Kentucky now have until November 15, 2022 to file various individual and business tax returns and make tax payments.

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual or public assistance. Currently, individuals and households that reside or have a business in Breathitt, Clay, Floyd, Johnson, Knott, Leslie, Letcher, Magoffin, Martin, Owsley, Perry, Pike and Wolfe counties in Kentucky qualify for tax relief. The same relief will be available to any other locality added later by FEMA. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

IRS Tax Relief Details

The tax relief postpones various tax filing and payment deadlines that occurred starting on July 26, 2022. As a result, affected individuals and businesses will have until November 15, 2022, to file returns and pay any taxes that were originally due during this period.

Additionally, individuals who had a valid extension to file their 2021 return due to run out on October 17, 2022, will now have until November 15, 2022, to file. However, because tax payments related to these 2021 returns were due on April 18, 2022, those payments are not eligible for this relief.

The November 15, 2022 deadline also applies to quarterly estimated income tax payments due on September 15, 2022, and the quarterly payroll and excise tax returns normally due on August 1, 2022 and October. 31, 2022. Businesses with an original or extended due date also have the additional time including, among others, calendar-year partnerships and S corporations whose 2021 extensions run out on September 15, 2022 and calendar-year corporations whose 2021 extensions run out on October 17, 2022.

In addition, penalties on payroll and excise tax deposits due on or after July 26, 2022 and before August 10, 2022  will be abated as long as the deposits are made by August 10, 2022.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2022 return normally filed next year), or the return for the prior year (2021). Be sure to write the appropriate FEMA declaration number on any return claiming a loss.

Here are the applicable FEMA declaration number to use: FEMA declaration number – DR-4663-KY

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  You can also check out the KahnTaxLaw Coronavirus Resource Center.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

New Mileage Rates Announced By IRS For Balance Of 2022

In recognition of recent gasoline price increases, the IRS announced an increase in the optional standard mileage rate for the final 6 months of 2022.

For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022. The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute.

Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes instead of relying on actual costs which require substantiation beyond maintaining a mileage log.

Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011.

Limitation Of Deducting Business Mileage

Before the 2017 Tax Cuts And Jobs Act was enacted into law, many taxpayers relied on the IRS’ annual publication of the mileage rates to be used for business travel. For many taxpayers this was a significant tax deduction but the 2017 Tax Cuts And Jobs Act changes that.

Why fewer taxpayers will be itemizing in 2022:

Increase Of Standard Deduction $12,950 for single filers; $19,400 for heads of household; and $25,900 for joint filers.

Limit On Deduction For State And Local Taxes A taxpayer may claim an itemized deduction of only up to $10,000 ($5,000 for a married taxpayer filing a separate return) in (i) personal state and local property taxes, and (ii) state and local income taxes (or sales taxes in lieu of income taxes).  Taxes paid or accrued in carrying on a trade or business are not subject to this limitation.

Limit On Deduction Of Mortgage Interest For mortgages incurred after December 31, 2017, taxpayers may deduct interest on up to $750,000 of principal (mortgages existing before January 1, 2018 are still subject to the pre-existing law’s $1 million limit). But for all taxpayers there is no longer a deduction for interest paid on home equity loans.

Elimination Of Miscellaneous Itemized Deductions And Deduction For Moving Expenses A taxpayer can no longer deduct miscellaneous itemized deductions which include unreimbursed employee expenses and tax preparation costs.  Also the deduction for moving expenses is gone.

But for those who can benefit from deducting costs of operating an automobile for business, charitable, medical or moving purposes, here are the rates for 2022:

2022 Tax Year Mileage Rates:

Purpose Rates 1/1 through 6/30/22 Rates 7/1 through 12/31/22
Business 58.5 62.5
Medical/Moving 18 22
Charitable 14 14

 

Time Limits For Keeping Your Tax Records

Even though your current income tax return is processed by the IRS and a refund is issued, that does not mean the IRS can later question or audit the tax return,  In fact the Statute Of Limitations allows the IRS three years to go back and audit your tax return.  That is why it’s a good idea to keep copies of your prior-year tax returns and supporting backup documentation for at least three years. In the case of backing of any deductible mileage, you will need to retain your travel log showing the distance traveled, who you visited and the purpose of the visit.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Metropolitan Los Angeles (Long Beach) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Be Prepared – All Taxpayers Should Plan Ahead For Natural Disasters.

Floods, wildfires, hurricanes, tornados and other natural disasters happen quickly and often with little warning.  No one can prevent these disasters from happening, but people can prepare for them.

IRS Tax Relief Details

The IRS usually announces tax relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

In each declaration the IRS will postpone certain deadlines for taxpayers who reside or have a business in the disaster area. As a result, affected individuals and businesses will have additional time to file returns and pay any taxes that were originally due during a disaster period. This relief typically extends also to businesses and includes payroll tax deposits.

Always check the declaration for areas covered, taxes covered and the extended date.

Tax-related Events That Often Happen After A Disaster:

The IRS gives taxpayers more time to file and pay. Taxpayers whose address of record is in an area qualifying for IRS disaster tax relief will automatically receive extra time from the IRS to file returns and pay taxes. The IRS’s disaster assistance page provides disaster updates and links to resources. Information is usually available on the IRS Twitter account as well. Taxpayers can also call the agency’s disaster line at 866-532-5227 with questions.

Taxpayers can qualify for a casualty loss tax deduction. People who have damaged or lost property due to a federally declared disaster may qualify to claim a casualty loss deduction. They can claim this on their current or prior-year tax return. This may result in a larger refund.

Taxpayers can apply for a disaster loan or grant. The Small Business Administration offers financial help to business owners, homeowners, and renters. This help is for those in a federally declared disaster area. To qualify, a taxpayer must have filed all required tax returns.

Taxpayers who relocate need to submit a change of address. After a disaster, people might need to temporarily relocate. Those who move should notify the IRS of their new address by submitting Form 8822, Change of Address.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles Metropolitan Area (including Long Beach and Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. And if you are involved in cannabis, check out what our cannabis tax attorneys can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Why It Is Important To Tell The Difference Between A Hobby And A Business For Tax Purposes

Your “hobby business” could land you in Tax Court – avoid IRS pitfalls by how you structure your small business.

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit.  Many enterprising people successfully develop a hobby into a going concern and actually receive income from it. That income must always be reported and taxes paid on that money regardless of your situation. If you leave that hobby as a hobby, under the tax law, you are not allowed to deduct any of the losses incurred by activity in that hobby but any income from a hobby must be reported on Schedule 1, Form 1040, line 8. That is the reason most people turn their hobbies into businesses once they start making money.

Factors To Consider When Determining Whether An Activity Is A Business Or A Hobby.

The IRS considers the following factors to make this determination:

  • The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
  • The taxpayer puts time and effort into the activity to show they intend to make it profitable.
  • The taxpayer depends on income from the activity for their livelihood.
  • The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
  • The taxpayer has enough income from other sources to fund the activity.
  • Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
  • There is a change to methods of operation to improve profitability.
  • Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
  • The taxpayer was successful in making a profit in similar activities in the past.
  • Activity makes a profit in some years and how much profit it makes.
  • The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.

Exception When Hobby Losses Are Deductible.

By showing that your pursuit of your “hobby” is an activity engaged in for profit, you may be able to deduct those years where you incurred losses if you meet certain presumptions.

For activities not involving the breeding, training, showing, or racing of horses, the presumption is that you business is an activity engaged in for profit where you show annual net income from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the most recent taxable year.  So if for the first three years your activity has incurred losses, you must show net income in years four and five (even if only $1.00 in each year) in order to still be able to deduct the first three years of losses.

For activities involving the breeding, training, showing, or racing of horses, the presumption will work in the same fashion except you must show annual net income from an activity for 2 or more of the taxable years in the period of 7 consecutive taxable years which ends with the most recent taxable year.

Challenges In U.S. Tax Court.

Despite these presumptions, the IRS does not always see your hobby as a viable business, and that is where tax difficulties arise. There are a number of court cases where the question of hobby or business has been decided for the particular business by the IRS, and under challenge, the cases end up in Tax Court. Here are five cases that landed in Tax Court worth discussing.

  1. Fishing: In Busbee v. Commissioner, T.C. Memo 2000-182, this taxpayer decided to hold fishing tournaments. These tournaments required him to promote the activity through flyers, speaking engagements, and other marketing efforts. He had to recruit participants and sponsors. He intended his hobby of fishing tournaments to supplement his retirement income as he developed it into a business. Through the process, he became an expert in bass fishing. The Tax Court considered all of this, and allowed his business.

In Peacock v. Commissioner, T.C. Memo 2002-122, this taxpayer began tournament fishing in his retirement. Sailing everywhere on his personal yacht, he and his wife fished specifically for the pleasure of participating in the tournament, especially when these tournaments were in exotic locales. In this case, the Tax Court decided this was not a business but a hobby for the activity was not “motivated primarily by the pursuit of profit”.  What probably hurt their case, even subtly, was the fact that they had just sold a business and were now millionaires.

  1. Golfing: In William James Courville v. Commissioner, T.C. Memo 1996-134, an optical engineer, after 30 years of employment, was laid off. He decided to become a professional golfer, but took only 4 golf lessons while a “professional”. He did not qualify for the senior tour, and ended up with no income from this activity. However, he did submit a Schedule C, listing expenses totaling over $16,000. The Tax Court declared that he “failed to establish that his golfing activity was carried on with the actual and honest objective of making a profit”.
  2. Track and field coaching: In Parks v. Commissioner, T.C. Memo 2012-105, the taxpayer began his professional career as a writer of freelance articles on the sport of track and field. Over a number of years, he owned a track and field magazine, coached at a number of different locations, studied with one of the foremost experts in the industry, then basically tried to establish himself and his trainees as credible within the field. By 2006, this man had a winning contestant who qualified for the Olympic trials, and by 2009, that contestant signed the taxpayer coach to a lucrative contract as his exclusive coach, and things only got better for the taxpayer. However, in a tax period of 9 years, the coach showed only a $43 profit, so the IRS claimed hobby not business. The Tax Court considered the case in great detail and decided primarily (although not all points) for the taxpayer, saying his income was growing and he had great potential for success. They did not see track and field as a typical hobby, and that did work to the taxpayer’s benefit.
  3. Writing: There is an infamous case which always gives people a chuckle, and that is the man who decided to write about prostitution. Vitale v. Commissioner, T.C. Memo 1999-131. Ralph Louis Vitale, Jr., in 1999, claimed on his tax return that he was in the business of writing about prostitution. When this taxpayer began his “research” four years before his retirement, he was still a full-time employee. Over the course of time, he visited a large number of brothels doing his “research” and always paying for services in cash (no records kept). He did keep a journal detailing each of his visits and expenses, and eventually developed a manuscript from his notes. Vitale submitted his manuscript to a vanity publisher, paying $4,375 to publish it. All tolled, after he received $2,600 in royalties, the publisher went bankrupt. Subsequently, the book rights were returned to him, and he again began marketing his book throughout the industry. The IRS said this was just a hobby and disallowed Vitale’s deductions. So Vitale went to Tax Court.  At first, the Tax Court felt that the taxpayer had a profit motive and overruled the IRS, even though the court also made comments about the “recreational” qualities of the contents of his book. The court did like his record-keeping and marketing and felt it showed his professionalism. But then the Tax Court disallowed all of his deductions, for the taxpayer could prove none of them (remember the cash payments?).  Nevertheless, the court did not penalize this taxpayer in any way, saying that he had made a reasonable attempt to comply with the law.

The U.S. Tax Court weighs “profit motive” most heavily in each of their decisions. Profit is a key decider when considering whether an activity is hobby or business. Is your hobby truly for profit or only for pleasure? That is foremost and basic premise that the Tax Court considers.

What Should You Do?

There seem to be two “hobbies” that trigger audits most frequently and those are horses or yachts. Both are money pits, and so if people can figure out a way to make a business out of them, that will provide either tax deductions and/or income to cover the high expenses of each. The IRS knows this, and is very strict when applying the rules to these activities. When structuring these, pay very close attention to business start-up details.

Regardless, if you follow good business practices when converting your hobby into a business, you have a greater chance of convincing the IRS it is a real business. Your business records must be up-to-date and accurate, and your business plan must lay out a course for creating profit from your activity in the future. That written business plan can be a real asset if you end up in Tax Court versus the IRS.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Five Tax Shelter Promoters and Two Appraisers Indicted in Syndicated Conservation Easement Tax Scheme

Conspiracy Allegedly Involved Sale of Over $1.3 Billion in Fraudulent Tax Deductions

The U.S. Justice Department (“DOJ”) announced on March 1, 2022 that a federal grand jury sitting in Atlanta, Georgia, returned a superseding indictment on February 24, 2022 charging seven individuals with conspiracy to defraud the United States and other crimes arising out of their promotion of fraudulent tax shelters involving syndicated conservation easements dating back nearly two decades. One of the defendants, Herbert Lewis, was previously charged in an indictment returned on June 9, 2021.

Alleged Syndicated Conservation Easement Tax Scheme

According to the superseding indictment, Jack Fisher, an Atlanta certified public accountant (CPA); James Sinnott; Yekaterina Lopuhina, aka “Kate Joy;” Lewis, an Atlanta-area CPA; Victor Smith, an Atlanta-area CPA; Clayton Weibel, a licensed appraiser; and Walter D. Roberts II, aka “Terry Roberts,” a licensed appraiser, engaged in a conspiracy to design, market and sell false and fraudulent charitable contribution tax deductions to high-income clients.

Fisher and Sinnott allegedly caused partnerships to donate conservation easements over land owned by the partnerships. In conjunction with those donations, Fisher and Sinnott allegedly used two hand-picked appraisers, Weibel and Roberts, to generate fraudulent and inflated appraisals of the conservation easements that frequently valued the easements at amounts at least 10 times higher than the price that was actually paid for the partnership — often within months of the appraisals. According to the superseding indictment, the partnerships then claimed a charitable contribution tax deduction in the inflated amount of the conservation easement, resulting in a fraudulent tax deduction flowing to the clients who purchased units in the partnership.

Fisher, Sinnott, Joy, Lewis, Smith and other co-conspirators allegedly promoted, marketed and sold partnership units for $25,000 and guaranteed at least a 4-to-1 tax deduction ratio to their clients, which meant that four units with a total cost of $100,000 would yield a $400,000 tax deduction. The marketing materials allegedly stated, for example, that depending on their personal tax rate, such a $400,000 deduction could result in the client receiving $170,000 back within months of purchasing their units for $100,000. Fisher, Sinnott and Joy allegedly provided Roberts and Weibel with spreadsheets containing information purportedly used to value the conservation easements necessary to deliver the tax deduction ratio promised to their clients.

Indictment Details

The superseding indictment charges that the syndicated conservation easement transactions were abusive tax shelters lacking in economic substance or a business purpose. Despite Fisher, Sinnott and Joy allegedly attempting to disguise the transactions as real estate deals, the indictment alleges that the transactions were simply the illegal sale of inflated tax deductions.

Additionally, Fisher, Sinnott, Joy, Lewis and Smith allegedly helped clients claim charitable contribution tax deductions after the close of the tax year by accepting late sales, generating backdated documents and preparing, and causing the preparation of, false and fraudulent tax returns and false documents, among other items. In total, the defendants allegedly sold over $1.3 billion in false and fraudulent tax deductions through this scheme.

All defendants are charged with conspiring to defraud the United States, for which they face a maximum sentence of 5 years in prison.

In addition, Fisher, Sinnott, Joy, Roberts and Weibel are charged with one count of conspiracy to commit wire fraud, for which each faces a maximum sentence of 20 years in prison if convicted. Lewis and Smith are both charged with wire fraud, for which they each face a maximum sentence of 20 years in prison for each count.

Fisher, Sinnott, Lewis, Smith, Roberts and Weibel are charged with aiding and assisting in the preparation of false returns related to the syndicated conservation easement tax shelters, for which they face a maximum sentence of 3 years in prison for each count.

Fisher, Sinnott, Joy and Lewis are also charged with filing false personal tax returns, for which they each face a maximum sentence of 3 years in prison for each count.

Finally, Fisher is charged with money laundering arising from his purchases of multiple luxury vehicles and domestic and foreign properties with the proceeds of unlawful activity. He faces a maximum sentence of 10 years in prison for each count.

In addition to the statutory maximum periods of incarceration, each of the defendants also faces a period of supervised release, monetary penalties, restitution and forfeiture. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

** Keep in mind that an indictment is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law. **

Actions by DOJ help support IRS’ campaigns to fight fraudulent tax shelters.

Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division stated: “The Tax Division is continuing to prioritize prosecution of fraudulent tax shelters, which are designed to enable taxpayers to pay far less than their fair share.  Those who contemplate promoting fraudulent tax shelters involving syndicated conservation easements – and the accountants, appraisers and tax preparers who create and execute strategies to assist them – should know that the Tax Division and IRS will unravel even the most elaborate schemes.”

Chief Jim Lee of IRS Criminal Investigation (IRS-CI) stated: “This superseding indictment demonstrates IRS Criminal Investigation’s commitment to investigate and prosecute illegal tax shelters.  IRS-CI special agents are focused on ending abusive syndicated conservation easements that allow perpetrators of these schemes to enrich themselves while their wealthy clients skirt their tax obligations.”

What Should You Do?

Whether you are a involved in a potentially fraudulent tax shelter or the promoter of one, it is important that you seek legal counsel as soon as possible to preserve your rights and/or mitigate your losses.  The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California know exactly what to say and how to handle issues with the IRS as well as State Tax Agencies.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.  Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.Top of Form

IRS Looking For Taxpayers To Report Gig Economy Income, Virtual Currency Transactions, And Foreign Source Income And Assets

Chances are you are involved in one of these areas –

  1. Income from the Gig Economy,
  2. Dealing with Virtual Currency, or
  3. Having Foreign Source Income And Assets.

If so, pay particular attention to what the IRS will be looking for on your 2021 income tax return.

Gig economy earnings are taxable

Generally, income earned from the gig economy is taxable and must be reported to the IRS. The gig economy is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website. Taxpayers must report income earned from the gig economy on a tax return, even if the income is:

  • From part-time, temporary or side work,
  • Not reported on an information return form – like a Form 1099-K, 1099-MISC, W-2 or other income statement or
  • Paid in any form, including cash, property, goods or virtual currency.

TAX TIP – If you incurred expenses to produce this income, those expenses should be reported on your tax return so you do not pay more in tax than what the law requires.

Virtual currency reporting and tax requirements

Again for 2021, there is a question at the top of Form 1040 and Form 1040-SR asking about virtual currency transactions. All taxpayers filing these forms must check the box indicating either “yes” or “no.” A transaction involving virtual currency includes, but is not limited to:

  • The receipt of virtual currency as payment for goods or services provided;
  • The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;
  • The receipt of new virtual currency as a result of mining and staking activities;
  • The receipt of virtual currency as a result of a hard fork;
  • An exchange of virtual currency for property, goods or services;
  • An exchange/trade of virtual currency for another virtual currency;
  • A sale of virtual currency; and
  • Any other disposition of a financial interest in virtual currency.

If an individual disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, they should check “Yes” and use Form 8949 to figure their capital gain or loss and report it on Schedule D (Form 1040).

If they received any virtual currency as compensation for services or disposed of any virtual currency they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040 or 1040-SR, line 1, or inventory or services from Schedule C on Schedule 1).

TAX TIP – Make sure to report the basis of any virtual currency disposed of which will reduce your gain so you do not pay more in tax than what the law requires.

Reporting Foreign Source Income

A U.S. citizen or resident alien’s worldwide income is generally subject to U.S. income tax, regardless of where they live. They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.

U.S. citizens and resident aliens must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. They must also report earned income, such as wages and tips, from sources outside the United States. An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.

TAX TIP – Make sure you file a tax return on a timely basis to claim these benefits. If both your tax home and abode are outside the United States and Puerto Rico, you have until June 15, 2022 to file your tax return or file an extension (to October 15, 2022).  Those serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return also have until June 15, 2022 to file your tax return or file an extension (to October 15, 2022).

Reporting required for foreign accounts and assets

Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.

Further, separate from reporting specified foreign financial assets on their tax return, taxpayers with an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2020, must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-filing System website.

TAX TIP – The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is the same as that of Form 1040. FinCEN grants filers who missed the original deadline an automatic extension until October 15, 2022, to file the FBAR. There is no need to request this extension.

Penalties For Filing A False Income Tax Return Or Under-reporting Income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you and if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

IRS Making It Easier For Taxpayers To Come Into The Voluntary Disclosure Program

A tax crime is complete on the day the false return was filed.

It is a federal crime for anyone to knowingly and willfully file an income tax return that he or she knows to be false in some material way. 26 U.S.C. § 7207 provides:

Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. Any person required pursuant to section 6047 (b), section 6104(d), or subsection (i) or (j) of section 527 to furnish any information to the Secretary or any other person who willfully furnishes to the Secretary or such other person any information known by him to be fraudulent or to be false as to any material matter shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both.

In filing false tax return cases, the Government does not need to prove that it has been deprived of any tax by reason of such filing of the false return; even if it is shown that additional taxes may be due, the person can still be held accountable because they willfully filed a false tax return.

Avoiding Criminal Prosecution By Submitting To Voluntary Disclosure

The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted.  It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution.  When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.  However, if the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the IRS’s Voluntary Disclosure Practice.

Required Elements Of A Qualified Disclosure

IRS administrative practice recognizes that a taxpayer may still avoid prosecution by voluntarily disclosing a tax violation, provided that there is a qualifying disclosure that is (1) timely and (2) voluntary. A disclosure within the meaning of the practice means a communication that is truthful and complete, and the taxpayer cooperates with IRS personnel in determining the correct tax liability. Cooperation also includes making good faith arrangements to pay the unpaid tax and penalties “to the extent of the taxpayer’s actual ability to pay”.

Timely.

A disclosure is timely if it is received before the IRS has begun an inquiry that is (1) “likely to lead to the taxpayer” and (2) the taxpayer is reasonably thought to be aware” of that inquiry; or the disclosure is received before some triggering or prompting event has occurred (1) that is known by the taxpayer and (2) that triggering event is likely to cause an audit into the taxpayer’s liabilities.

Voluntary.

Voluntari­ness is tested by the following factors: (1) how far the IRS has gone in determin­ing the tax investigation potential of the taxpayer; (2) the extent of the taxpayer’s knowledge or awareness of the Service’s interest; and (3) what part the triggering event played in prompting the disclosure (where the disclosure is prompted by fear of a triggering event, it is not truly a voluntary disclosure).

No voluntary disclosure can be made by a taxpayer if an investigation by the Service has already begun. Therefore, once a taxpayer has been contacted by any Service function (whether it be the Service center, office examiner, revenue agent, or a special agent), the taxpayer cannot make a qualifying voluntary dis­closure under IRS practice.

A voluntary disclosure can be made even if the taxpayer does not know that the Service has selected the return for examination or investigation may be too restrictive. Consequently, if there is no indi­cation that the Service has started an examination or investigation, Tax Counsel may send a letter to the Service stating that tax returns of the taxpayer have been found to be incorrect and that amended returns will be filed as soon as they can be accurately and correctly prepared. This approach has the advantage of putting the taxpayer on record as making a voluntary dis­closure at a time when no known investigation is pending. However, neither the taxpayer nor the lawyer can be completely certain that the volun­tary disclosure will prevent the recommendation of criminal prosecution.

Form 14457, Voluntary Disclosure Practice Preclearance Request and Application

Form 14457 has been revised by IRS permitting taxpayers who may face criminal prosecution for willful violation of tax law to voluntarily disclose information to the IRS that they failed to previously disclose.

Updates and additions to this form include:

  • IRS Criminal Investigation now accepts photocopies, facsimiles and scans of taxpayer signatures. Previously, Part II of Form 14457 had to be mailed.
  • An expanded section for reporting virtual currency.
  • A penalty structure for employment tax and estate and gift issues.
  • A check-box for inability to pay in full.

Doug O’Donnell, Deputy Commissioner Services and Enforcement stated “This is an important form and process for people who recognize it’s better to step forward and address their tax situations head-on, before facing IRS enforcement action.  The revised form includes a number of updates, and we encourage people to review the guidelines and consult a trusted tax professional.”

“Quiet Disclosure”

Where no IRS examination or investigation is pending a taxpayer’s alternative is the preparation and filing of delinquent or amended returns. Such action is called a “Quiet Disclosure”.  The advantage of filing delinquent or amended returns without a communication drawing attention to them is that the returns may not even be examined after being received at the Service Center. In such an event, the taxpayer not only will have made a voluntary disclosure but will have avoided an examination as well. The disadvantage is that during the time the returns are being prepared, the taxpayer may be contacted by the Service and a voluntary disclosure prevented.  Another disadvantage is that the IRS could use the filed amended income tax returns to constitute an admission that the correct income and tax were willfully not reported and institute criminal prosecution.

What Should You Do?

There is no set formula as to whether a taxpayer should pursue a Voluntary Disclosure or Quiet Disclosure.  It really depends on a case by case basis which is why you are best served by consulting with a criminal tax attorney expert in evaluating these matters.  Your financial well being, as well as your personal freedom may depend on the right answers. If you or your accountant even suspects that you might be subject to a criminal or civil tax fraud penalty, tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California can determine how to respond to these inquiries and formulate an effective strategy.  Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you.  Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.Top of Form

 

IRS To Consolidate Processing Centers Despite Huge Backlog Of Unanswered Taxpayer Inquiries

On February 7, 2022 the Treasury Inspector General For Tax Administration (“TIGTA”) issued a report evaluating the IRS’s efforts to close the Fresno California Tax Processing Center and its continued planned closure of the Austin Texas Tax Processing Center.

The IRS entered this filing season with several million original and amended returns filed by individuals and businesses that have not been processed due to challenges of the COVID pandemic.  Yet despite the IRS facing a huge backlog, it continues with its September 2016 plan to consolidate Tax Processing Centers to two end-state sites (Kansas City, Missouri, and Ogden, Utah).

The IRS says that this consolidation is warranted because tax return projections show that electronic filing will continue to increase, resulting in decreased paper processing operations at the Tax Processing Centers. As a result, the IRS continues its Tax Processing Center consolidations and will end its Submission Processing operations in Fresno, California, by September 2021 and Austin, Texas, by September 2024. At the end of this consolidation process, two Tax Processing Center locations, Kansas City and Ogden, will remain.

What TIGTA Found –

As of August 2021, TIGTA estimates that the IRS is facing a total staffing deficiency in its Submission Processing function of around 2,598 employees. Although the IRS has several initiatives underway to help address its hiring shortages, to date these approaches have not been successful. Further, the hiring shortfalls have been exacerbated since the COVID pandemic and are resulting in millions of tax returns not being timely processed, refunds not being timely issued, and taxpayers not timely receiving assistance with their tax account issues.

In addition, the transfer of work not directly related to the processing of tax returns further hampers the Submission Processing function’s ability to deliver its core mission of processing tax returns and addressing tax accounts. For example, the Fresno Tax Processing Center transferred work related to three specialty programs to the Kansas City and Ogden Tax Processing Centers, each of which had and continue to have millions of returns not processed and other account work remaining unworked. This specialty program work requires resources which could otherwise be directed to process the backlogged work.

Finally, outdated mail processing equipment is contributing to the loss of millions of dollars in revenue and the inefficient use of limited resources. This places its operations at risk for inefficient and untimely execution of tax return processing. For example, this outdated equipment cannot properly detect remittances. In Calendar Year 2021 alone, the IRS reports $56 million in lost opportunity costs due to untimely check deposits. Yet the cost to replace or rebuild the current equipment is only a fraction of those lost costs, ranging from $360,000 to $650,000.

TIGTA’s Recommendations to IRS

TIGTA made six recommendations for improvements, including that the IRS postpone the closure of the Austin Tax Processing Center until hiring and backlog shortages are addressed.

Here are the recommendations and IRS’ responses …

# TIGTA Recommendation IRS Response
1 Allocate adequate funding to support Submission Processing function transition of its clerical staff to the new, higher graded position descriptions.

 

The IRS agreed with this recommendation and has submitted a request for approximately $39 million under the Fiscal Year 2024 budget formulation process to provide a permanent increase in annual funding levels that will support the cost of upgrading the positions and maintaining them at the higher level. IRS management is also evaluating options and the associated trade-offs involved to upgrade the position descriptions from existing appropriations. Additionally, management stated that the recent 2.2% increase to the General Schedule Base Pay Scale, plus the adjustment for locality pay, raised a portion of the affected employees above the $15 per hour rate, which should alleviate some of the pressure of competing with outside employers for workers.

 

2 Postpone any further steps for closing the Austin Tax Processing Center until hiring shortages and backlogs of work at end-state sites are adequately addressed.

 

The IRS disagreed with this recommendation. IRS management stated that the Submission Processing Center Consolidation revalidation is ongoing and a decision on the Austin consolidation will be made once the revalidation is completed. This decision will then be communicated to all Submission Processing employees.

 

3 Identify and implement interim solutions that will address the resource constraints currently being placed on the Submission Processing function due its backlog.

 

The IRS agreed with this recommendation and plans to continue meeting with stakeholders on a regular basis to identify interim solutions that accommodate resource needs. IRS management also plans to continue pursuing potential opportunities for automation of data entry into the Treasury Financial Crimes Enforcement Network web portal throughout Fiscal Year 2022.

 

4 Ensure that timely advancements are made to the digital platform of Forms 3949-A, Information Referral To Report Suspected Tax Law Violations By A Person Or A Business, to develop automatic routing of the forms directly to the business units to alleviate the Submission Processing workload.

 

The IRS agreed with this recommendation and plans to identify those capabilities required to support the implementation of automatic routing of Forms 3949-A directly to business units.

 

5 Evaluate the placement of USDA transcript work if the IRS does not meet its automation targets or the inventories do not continue to decline as anticipated.

 

The IRS agreed with this recommendation. IRS management shares weekly updates with executive leadership to inform them of the program’s status and confirm proper placement of the USDA transcript program. As of September 20, 2021, automation for the USDA program is shown to be fully paperless, and 3,078 counties have suspended mailing Form CCC-941, Commodity Credit Corporation Average Adjusted Gross Income (AGI) Certification and Consent to Disclosure of Tax Information, requests to the IRS. IRS management has also suspended mailing reject notices to the USDA in lieu of electronic delivery. As anticipated, the inventories declined to the point that all electronic USDA inventory is current and timely.

 

6 Ensure that efforts to evaluate and purchase updated or new mail opening/sorting technology are timely executed.

 

The IRS agreed with this recommendation and plans to take the actions necessary for the evaluation and purchase of a replacement for the equipment used for opening and sorting mail and ensure that those necessary actions are carried out timely. Because this procurement action is dependent on funding and is subject to competing priorities, IRS management will reevaluate continuing actions if implementation is not successful within three years.

 

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2022, taxpayers who expect to owe for 2021 should have their 2021 income tax returns done now so that the 2021 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2021.

Remember that COVID does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

Also, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized during this period and a taxpayer is not agreeing to extend such, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

The take away from this – use the Federal government’s downtime to your advantage to prepare for the future.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles (including Long Beach and Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.