Universal Tax Lessons (Even For President Trump) In Michael Cohen Guilty Plea

The guilty plea and sentencing memorandum by President Trump’s former fixer Michael Cohen have some big tax lessons, but they are surprisingly universal. The hunt for Mr. Cohen started in earnest when the feds searched his office and home. It is a rare treat for investigators to comb through files in a normally off-limits attorney’s office. Soon thereafter, Mr. Cohen said he would take the Fifth. It wasn’t long after that when he ended up pleading guilty to campaign violations. He also pleaded guilty to income tax evasion and lying to federally insured banks. Here are a few takeaways, that are actually pretty simple when you think about it.

FILE – In this Nov. 29, 2018, file photo, Michael Cohen walks out of federal court in New York. The moment of reckoning has nearly arrived for Cohen, who finds out Wednesday, Dec. 12, whether his decision to walk away from President Donald Trump after years of unwavering loyalty will spare him from a harsh prison sentence. (AP Photo/Julie Jacobson, File) photocredit: ASSOCIATED PRESS

Report All Your Income. You must file a tax return every year with the IRS if your income is over the minimum level. Remember, the U.S. taxes all income wherever you earn it. You have to file, but make your return as complete and accurate as you can. Filing false returns is even worse than failing to file. Remember Wesley Snipes? He was convicted of three misdemeanor counts of failing to file tax returns, but he escaped the more serious felony charges.

Don’t Be Willful. Everyone can make mistakes, but don’t be willful. Willfulness means you acted with knowledge that your conduct was unlawful. According to the IRS, willfulness is a voluntary, intentional violation of a known legal duty. You may not have meant any harm or to cheat anyone, but that may not be enough. The failure to learn of filing requirements, coupled with efforts to conceal, may mean that a violation was willful. Even willful blindness, a kind of conscious effort to avoid learning about reporting requirements, can be enough. Accountability and transparency are nearly universal lessons.

Don’t Obstruct the IRS.  Some people end up in criminal tax trouble simply because they mishandle a civil IRS audit. Whether it is the FBI or the IRS asking questions, don’t lie. And don’t engage in evasive or obstructionist behavior during an IRS audit. Many taxpayers in a civil audit think they can outsmart the IRS or manipulate the government to come out ahead. That doesn’t mean you have to agree with everything the IRS says in an audit. But, there is an established way of proceeding, and an above-board way to communicate with the IRS. Deception and obstruction are not the way.

Transparency, Good; Secrecy, Bad. Hiding things nearly always looks bad. You might have good reasons to hide things from competitors, an ex-spouse, etc. Remember how much trouble soccer stars Ronaldo Messi and Cristiano Ronaldo had over their secret tax structures? The secrecy itself was a major reason they faced criminal tax charges. Even if there is a good reason to hide ownership of entities from the public, make sure the ownership is not hidden from the government.

Careful With, ‘I Didn’t Understand.’ ‘Gee, I didn’t understand that,’ seems to feature in many criminal tax cases. But the defense does not always work. With executives and professional people, it is less likely to work. One of Messi’s primary defenses in his criminal tax evasion trial was that he did not understand. He said he signed many documents without reading them. He is an athlete, not sophisticated in financial matters, but it was still not enough to get him off the hook.

Report Foreign Accounts. If you have an interest in any foreign bank or other financial account, pay attention. A mere signature power is enough, even if it is not your money. You must file an annual FBAR form if the aggregate value of the accounts at any point in the calendar year exceeds $10,000. Penalties are huge. The Swiss bank controversy of the last 10 years netted the IRS over $10 billion. Much of it came down to these little FBAR forms. FBAR penalties can swallow entire accounts (100% or more), and criminal penalties can include up to 10 years in prison. And with FATCA, foreign banks are revealing American account holders. The resources of the U.S. government are becoming even more vast.

Watch Your Lifestyle. If you are skirting your tax obligations and living lavishly, you may be a big target. These were some of prosecutors claims against Paul Manafort. The indictment said that Manafort “spent millions of dollars on luxury goods and services for himself and his extended family through payments wired from offshore nominee accounts to United States vendors.” The indictment claims that he did not report and pay taxes on the income. Some athletes, entertainers, and high income individuals have faced similar claims. 

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New IRS Offshore Account Policy, Bigger Penalties For Secret Accounts

It has been ten years since the IRS started winning big in foreign bank account cases. Some people have gone to prison, but the vast bulk of offshore accounts have been disclosed under the IRS programs designed for taxpayers to come forward. In fact, the IRS has collected over $10 billion in taxes and penalties, and more keeps coming in. The biggest and longest running of the amnesty programs, the Offshore Voluntary Disclosure Program, or OVDP, closed on September 28, 2018, unless you filed your initial papers before that deadline. If you did not file by then, you could still enter the Streamlined program, but you have to consider streamlined audits. Now, the other offshore shoe has fallen in this IRS memorandum. The new rules are effective for all disclosures after September 28, 2018. And the possible penalties have gone up quite significantly. Here are the major differences between the old OVDP and the new practice.

Photocredit: Getty

The IRS says taxpayers will be required to request preclearance (which used to be optional).  The criteria for preclearance are unaffected. Therefore, a taxpayer denied preclearance under the old OVDP would probably also be denied preclearance under the new disclosure program.

As with the old OVDP, preclearance and an initial submission are to be made to the IRS Criminal Investigation office in Philadelphia. The initial submission will continue to involve the filing of a Form 14457. However, the Form 14457 will be revised, and will require applicants to provide a narrative statement about their circumstances. The narrative statement will require taxpayers to disclose the facts and circumstances of their assets, entities, related parties, and any professional advisors involved in the tax noncompliance in order for the taxpayer to be preliminarily accepted into the new program.

Unlike the old OVDP, taxpayers will not submit documents to the Austin, Texas IRS office after being preliminarily accepted into the program. The Austin office will no longer be collecting and assembling the large submission of documents required under FAQ #25 of the old OVDP. Instead, the Austin office will route disclosures to a field agent. The disclosure process, document submission, and payment will occur directly with an IRS field agent. Nevertheless, if taxpayers want to stop interest accruing on their underpayments, they can choose to submit payments to the Austin office before a field agent is assigned.

The IRS field agent is supposed to follow standard examination procedures for assembling and reviewing disclosures, rather than the more informal compliance check model that field agents used to review OVDP submissions.

Disclosures will generally involve a six-year disclosure period, reduced from OVDP’s 8 years. But penalties are the big development. The new program allows IRS field agents much more discretion to assert penalties. The flat penalty structure appears to be gone. Perhaps the new discretionary penalty structure is an attempt to reduce the number of “opt-outs,” taxpayers who left OVDP because they thought the flat penalty was too rigid and their facts mitigated toward a lower penalty.  Nevertheless, the IRS memorandum does provide some guidance on what possible penalties may be applied.

Penalties will generally be asserted “under existing laws and procedures.” This suggests that field agents will need to support any penalty asserted for civil fraud or willfulness based on the specific facts of a disclosure. Therefore, in many cases, the new program will not offer a significant reduction in civil penalties compared to a disclosure outside of the new disclosure program.

Nevertheless, there are a potential benefits the new disclosure program may provide. For example, the field agent may assert penalties for civil fraud under IRC § 6663 or § 66651(f), generally equal to 75% of the underpaid tax. In the new program, if the agent asserts the civil fraud penalty, the penalty will generally be applied to only the single year with the highest tax liability, and not to all six years. However, this benefit is not absolute. The field agent can “in limited circumstances” choose to apply it to more than one tax year in the disclosure period, and can even extend the penalty beyond the six-year disclosure period if the taxpayer “fails to cooperate and resolve the examination by agreement.” In the old OVDP, the IRS did not have much recourse if a taxpayer refused to sign a closing agreement and chose instead to opt out. In the new program, it appears the IRS can assert higher penalties for non-cooperative taxpayers.

The 50% willful FBAR penalties can also be applied. The IRS guidance so far does not say if this penalty will be applied to one year or to multiple years. However, it says that the FBAR penalties will be applied in accordance with the penalty guidelines under these Sections of the Internal Revenue Manual: 4.26.16 and 4.26.17. That probably means the penalty would be applied to the year with the highest aggregate balance. Many taxpayers who choose to disclose their foreign assets outside of the Streamlined program do so because they have indicia of willfulness (e.g., partial or inconsistent prior reporting). Therefore, the 50% “willfull” FBAR penalties may turn out to be fairly common.

Nevertheless, the new program’s flexibility (or unpredictability) may offer some relief to taxpayers whose facts indicate non-willfulness, but who cannot disclose through Streamlined because of a more technical issue.  For example, original tax returns cannot be filed through Streamlined by taxpayers who reside in the United States. In the old OVDP, these taxpayers would be subject to the flat 27.5% penalty, even though their noncompliance was non-willful. Under the new program, non-willful taxpayers in the U.S. who need to file original returns may be able to disclose through the new program and qualify for lower penalties than taxpayers whose noncompliance was willful.

Even if the field agent asserts the 75% civil fraud penalties and 50% willful FBAR penalties, taxpayers can request that the penalties be mitigated to the lower 20% accuracy-related penalty, and to non-willful FBAR penalties. However, the IRS expects that the reduction of penalties will be “exceptional,” at least where the taxpayers’ facts support the higher penalties.

The IRS retains discretion to impose additional penalties for failure to file information returns, such as Forms 8938 or Forms 5471. These penalties were abated in the old OVDP in lieu of the 27.5% flat penalty. The IRS says that these penalties will not be automatically imposed, but it does not say that these additional penalties are expected to be exceptional. Thus, whether or not they are imposed may come down to the field agents’ discretion.

If a taxpayer disagrees with the penalties the field agent imposes, the taxpayer can appeal to the IRS’s Office of Appeals. This appeals procedure also brings the disclosure process in closer conformity to the procedures a taxpayer would find in a quiet disclosure or in an opt-out case under the OVDP.

Overall, this disclosure program seems significantly less predictable and considerably more severe than the OVDP, at least for taxpayers who do not have sympathetic facts. It might end up being primarily attractive to taxpayers who are worried about their criminal exposure, since the disclosure may not offer material reduction in civil penalties over a quiet disclosure or a disclosure under the Internal Revenue Manual.

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Americans Renouncing Citizenship? Not What You Might Think

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The U.S. Treasury Department has published the names of people who renounced their citizenship during the third quarter of 2018. The quarterly public list is required by law. The published numbers are probably lower than the actual number of those who expatriated, with many apparently not counted. Both the IRS and FBI track Americans who renounce. 

Numbers have been flat for the first three quarters of 2018 (1,099, 1,090, and 1,107). In 2017, the number dropped for the first time in five years (5,133) from the previous year (5,411), which had been a record.

The roughly five-year upswing in expatriations was not over one issue, but tax considerations are at least a part of the equation. The reasons for renouncing can be family, tax and legal complications, and some renouncers write why they gave up their U.S. citizenship

Expats have long clamored for tax relief. One law motivating some is FATCA, the Foreign Account Tax Compliance Act. FATCA has been ramped up worldwide, and requiring an annual Form 8938 filing if your foreign assets meet a threshold. What is FATCA?

FATCA was enacted in 2010, and over five years, was painstakingly implemented worldwide by the U.S. Treasury Department. In now spans the globe with an unparalleled network of reporting. America requires foreign banks and governments to hand over secret bank data about depositors. Non-U.S. banks and financial institutions around the world must reveal American account details or risk big penalties. Some renounce because of global tax reporting and FATCA. Dual citizenship is not always possible, as this infographic  shows. America’s global income tax compliance and disclosure laws can be a burden, especially for U.S. persons living abroad. Their American status can make them untouchable by many banks.

Americans living and working abroad must generally report and pay tax where they live. But they must also continue to file taxes in the U.S., where reporting is based on their worldwide income. A foreign tax credit often does not eliminate double taxes. Moreover, enforcement fears are palpable for the annual foreign bank account reports called FBARs. They carry big civil and even potential criminal penalties. The civil penalties alone can consume the entire balance of an account.

Ironically, even leaving America can be costly. America charges $2,350 to hand in your passport, a fee that is more than twenty times the average of other high-income countries. The U.S. hiked the fee to renounce by 422%, as previously there was a $450 fee to renounce, and no fee to relinquish. Now, there is a $2,350 fee either way. The State Department said raising the fee was about demand and paperwork, but the number of American expatriations kept increasing. Moreover, to exit, one generally must prove 5 years of IRS tax compliance. And getting into IRS compliance can be expensive and worrisome. For some, a reason to get into compliance is to renounce.

However, if you have a net worth greater than $2 million, or have average annual net income tax for the 5 previous years of $162,000 or more, you can pay an exit tax. It is a capital gain tax, calculated as if you sold your property when you left. A long-term resident giving up a Green Card can be required to pay the exit tax too. Sometimes, planning and valuations can reduce or eliminate the tax, but the tax worry can be real, even for those who will not face it.

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Pay Your Taxes In Bitcoin, Trigger Tax Losses On Price Drop Too

With Bitcoin and other crypto prices down again, many holders don’t want to sell. But if you owe taxes, how about paying them in Bitcoin? Selling now may trigger tax losses to use next year too. In Ohio, you can now make state tax payments in Bitcoin. It’s only for Bitcoin at present, but the permitted crypto should expand according to OhioCrypto.com. Ohio beat out Arizona, Georgia, Utah and New Hampshire, where efforts to accept crypto for taxes failed. The transaction fee is zero during an initial three-month introductory period, and then 1% thereafter. Even if you owe taxes to Ohio, that does not necessarily mean you qualify. So far, this is just for businesses operating in Ohio. If you operate a business in Ohio and have a tax bill, you can register at OhioCrypto.com. All payments are processed by third-party processor, BitPay. Payments are converted to dollars before deposit into a state account. 

Ethereum, Bitcoin and Ripple coins (physical). (Photo by Ulrich Baumgarten via Getty Images)

Payment Protocol-compatible wallets include BitPay Wallet; Copay Wallet; BTC.com Wallet; Mycelium Wallet; Edge Wallet; Electrum Wallet; Bitcoin Core Wallet; Bitcoin.com Wallet; BRD Wallet; and Bitcoin Cash (BCH) Wallets. If you don’t have one, OhioCrypto.com says you can create one. 

Remember, the IRS ruled that cryptocurrency is property in Notice 2014-21. That classification as property has some big tax consequences, accentuated by wild price swings.  If you owe $5,000 in taxes, you could pay the $5,000 in dollars. If you pay with $5,000 worth of Bitcoin, as long as the crypto is worth $5,000 when you pay, you’re home free, right? Not really. You need to consider the sale you just made. The transfer of the crypto to the tax man is a sale, and that could mean more taxes for the year of the payment. If you bought the crypto for $5,000 the day you pay your taxes, there’s no gain.

But suppose you bought the crypto a year ago for $1,000 and it’s worth $5,000 when you use it to pay taxes? That’s right, you have a $4,000 gain. Hopefully, it is a long-term capital gain, which would make the taxes lower. But you still have taxes to pay—because of your tax payment. You could trigger a tax loss too, if you had bought the crypto for $7,000 and transfer it for taxes when it is worth $5,000. All sorts of transfers can trigger taxes. For example, payments using virtual currency made to independent contractors are taxable transactions to both parties. The recipient has income measured by the market value at the time of receipt.

What’s more, as with other payments to independent contractors, payers engaged in a business must issue IRS Forms 1099. You can’t enter “1,000 Bitcoin” on IRS Forms 1099. You must value the payment in dollars, as of the time of payment. A payment made using virtual currency is subject to Form 1099 reporting just like any other payment made in property. The person paying the independent contractor with crypto just sold it. Whether that triggers a gain or loss depends on the payor’s tax basis. The gain might be capital or ordinary. If you hold it for more than a year, the best deal is long-term capital gain treatment.

But actually, gain or loss depends on whether the virtual currency is a capital asset in your hands. Most people can probably say they are investors in crypto, not a dealer or someone using it in their trade or business. But it is worth considering. Ordinary income vs. long term capital gain treatment can spell a big difference. You might have to pay only 15% on long term capital gain. But top long term capital gain rates are 20%, plus the possibility of the 3.8% net investment income tax under Obamacare.

Every time you transfer crypto, you might trigger gain or loss. Tax basis and holding period are important, as is record keeping. If you receive virtual currency as payment, you must you include its fair market value in income. Report the fair market value in U.S. dollars on the date you receive it. If you “mine” virtual currency, you have income from mining, and the fair market value of what you produced is income.

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13.3% California Taxes Triggers Moves & Trusts To Avoid Taxes

California income taxes are high, up to 13.3%. Plenty of people try to avoid California taxes by moving shortly before a major income event. That is not a new idea, although there is more of it now than ever before. One added reason is the federal tax law’s $10,000 cap on deducting state taxes. You might not feel the pain of that rule until you prepare your 2018 tax return, but that time is coming soon. Besides, many high tax state residents start thinking of moving right before a big income event. They might be selling a company, settling a lawsuit, or sitting on a mountain of Bitcoin. Done carefully, and with the right kind of income, a tax-motivated move can cut the sting of California’s high 13.3% state tax.

Yet even moving to avoid California taxes can be tough. If you are dealing with the state’s notoriously aggressive Franchise Tax Board you can still have problems. A related and newer approach that is still largely untested involves setting up a new type of trust in Nevada or Delaware. A ‘NING’ is a Nevada Incomplete Gift Non-Grantor Trust. A ‘DING’ is its Delaware sibling. There is even a ‘WING,’ from Wyoming. Let’s say you can’t move quite yet, so you wonder if a trust in another state might work? The usual grantor trust you form for estate planning doesn’t help, since the grantor must include the income on his return.

Credit: Shutterstock

Some sellers hold significant assets and move states before they sell. California may have a claim on some of the sales proceeds even if the move is well-timed, bona fide, and permanent. Indeed, California can also dispute the move, arguing that a move in March really was not a move until July. With a Nevada or Delaware Incomplete Gift Non-Grantor Trusts, the donor makes an incomplete gift to the trust, and the trust has an independent trustee. The idea is to keep the grantor involved but not technically as the owner. New York State changed its law to make the grantor taxable no matter what, but California has not yet done so. Thus, some marketers of NING and DING trusts offer it as an alternative or adjunct to the physical move. The idea is for the income and gain in the NING or DING trust not to be taxed until distributed. At that point, the distributees will hopefully no longer be in California. The chosen trustee must not be a resident of California.

Tax-deferred compounding can yield impressive results, even if it is only state income tax that is being sidestepped. If the NING or DING trust is being used to fund benefits for children and will grow for years, it may make even more sense. Parents frequently fund irrevocable trusts for children, and may not want the trust to make distributions for years. The parents might also remove future appreciation of trust assets from their estates. For tax purposes, most trusts are considered taxable where the trustee is situated.  For NING and DING trusts, one common answer is an institutional trust company.

For trust investment and distribution committees, the committee members should also not be residents of California. Even if you jump through all the requisite hoops, the NING or DING trust may still pay some California tax. For example, if the trust has any California source income, it will still be taxable by California. Interest, dividends and gains from stock sales are intangibles, typically not California sourced. But gain from California rental properties or the sale of California real estate is sourced to California no matter what.

Outside of New York residents, the jury is out on NING and DING trusts. The facts, documents, and details matter. California tax lawyers know that the state rarely takes aggressive tax moves lying down. Still, California seems more likely to attack these trusts in audits rather than through legislation. Even so, state tax fights in California can be protracted and expensive. But if one is careful, willing to bear some risk, and there is sufficient money at stake, the calculated risks can make sense.

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Give Employees Guns For Christmas? Get Tax Bill

Especially in these highly charged times, guns are not the most universal of gifts. But one company this holiday season has given guns to its staff, prompting some mixed reactions. The owners of a novelty glassware company gave employees pistols and rifles, a “unique and memorable” Christmas present. A Wisconsin boss gave his entire staff guns for Christmas. Bruce and Ben Wolfgram are father-and-son owners of Benshot, a Wisconsin-based company selling drinking glasses embedded with bullets. Sixteen employees got the gifts. “Our main motivator was personal safety and protection, but we live in a local hunting community so we already know how people feel about weapons,” Ben, 35, told Yahoo Lifestyle. “We also know our employees and their families well, so there’s lots of trust here.”

photocredit: Getty

The mechanics involved a collective $8,000 in gift cards to gun stores. Employees had to undergo a gun-safety course at work. Given the $500 per employee, the taxes are worth considering. Aren’t gifts tax-free? Not always, and distinguishing between income and gifts can be tough. If gifts are made out of “detached and disinterested” generosity, they aren’t taxable. But gifts to employees beyond small amounts are usually viewed as compensation by the IRS. Any individual can give gifts to another and avoid gift tax as long as the gifts are no more than $15,000 a year. And if they’re really gifts, there is no income tax either. Still, get used to thinking that taxes apply everywhere. If you win the lottery or hit it big at the casino, you pay tax. If you win goods instead of cash, their value is income. When Pontiac gave away cars on Oprah, the recipients were on the hook for taxes even though they didn’t receive cash.

For employees, the IRS considers certain gifts or benefits too small to tax, so called de minimis benefits, including such things as:

  • Controlled, occasional employee use of photocopier
  • Occasional snacks, coffee, doughnuts, etc.
  • Occasional tickets for entertainment events
  • Holiday gifts
  • Occasional meal money or transportation expense for working overtime
  • Group-term life insurance for employee spouse or dependent with face value not more than $2,000
  • Flowers, fruit, books, etc., provided under special circumstances
  • Personal use of  a cell phone provided by an employer primarily for business purposes

But not all holiday gifts are tax free. Whether an item or service is de minimis depends on all the facts and circumstances. Notably, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, don’t include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you must include the value of that gift as extra salary or wages regardless of the amount involved.

If something is taxable, the employer must withhold extra taxes from the employee’s cash pay to make up for any property given in kind. Can’t you claim it was a gift? A briefcase or a country club membership from your boss is not made from “detached and disinterested generosity.” Instead, it is meant to reward you for a job well done, and to help secure your services in the future. It is worth checking out the IRS rules for what constitutes a de minimis fringe benefit.

If employee works unpaid overtime and you reward him with tickets to the Super Bowl, they are wages. You’re supposed to increase the withholding on his cash wages to cover the value of the tickets. But that works only if you pay with a combination of cash and goods. If a buddy who isn’t a regular employee helps out at your business occasionally and you thank him with tickets? The IRS says to report them as pay on Form 1099. The IRS likes those forms, and increasingly relies on information matching. And that’s one reason why mistakes with Form 1099 can cost big.

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Need A Tax Opinion? Here’s Why You Might Want One For IRS

I write tax opinions, so I am biased about their value. Yet it surprises me how many people pay for tax opinions without thinking about what they are getting. Conversely, many don’t get a tax opinion despite the need. If you wait until you are audited, it is too late. What exactly is a tax opinion? Distinguish between tax opinions about your own situation from tax opinions attached to investment programs. The best type of tax opinion is customized. It is formal written advice about your own tax circumstance, whatever they are.

You might have settled some litigation and received money, or paid big legal fees. You might have moved states, liquidated a business, sold or exchanged a stockpile of Bitcoin, or had an involuntary conversion or casualty loss. You might have received a legal settlement you hope is tax free because of physical injuries or sickness. You might be claiming that your stock sale proceeds are tax exempt as qualified small business stock. Whatever your situation, you want formal tax advice about the strengths and weaknesses of your position before you file your return and spend your money.

IRS Audit report and calculator on a desk.

Tax opinions are usually thorough, discussing your facts and numbers, and the legal authorities. But when it comes to the bottom line conclusion, tax opinions generally conform to one of the following choices:

  • Not frivolous = There’s a 10% to 20% chance your argument will prevail.
  • Reasonable Basis = There’s a roughly one in three chance you’ll win.
  • Substantial Authority = There are cases both ways, but there’s probably about a 40% chance you’ll win.
  • More Likely Than Not = The odds are better than 50% that you’ll win.
  • Should = It’s about 60% likely that you’ll win.
  • Will = Your tax treatment is nearly assured.

Under IRS standards, the tax practitioner must assume there will be an audit. That way, the opinion’s conclusion is not based on audit lottery. In reality, of course, audits are rare. One common question is the extent to which an opinion will get you out of penalties if the IRS disagrees with your treatment. In general, the higher the standard of opinion, the more it can help with penalties. However, even a lower level opinion helps. Even an opinion that you have a reasonable basis for your tax position can be enough to protect you if you disclose your position on your return.

Of course, just penalty protection isn’t enough. You don’t want to end up paying all of the tax and all of the interest, even if there are no penalties. What you really want is to have your tax position upheld. An opinion can help. In fact, an opinion can help put you in the best possible light on both the facts and the law. Although customized tax opinions are arguably the best kind, there is another type of tax opinion. Some tax opinions are marketed in connection with investment offerings. 

Example: Your broker pitches you to buy an interest in an LLC owning railroad cars that will carry special food products. You get a prospectus showing you’ll get depreciation and tax credit benefits worth five times your investment in the first 12 months. You can’t sell for three years, but who needs sales proceeds when you’re getting tax benefits like that! A tax opinion included with the prospectus says it is “more likely than not” you’ll get your tax benefits. You may have had no contact with the law or accounting firm rendering the opinion.

You probably don’t think of them as looking out for your interests, as they are representing the promoter or sponsor of the investment program. Still, it’s clear you’re supposed to be impressed by the opinion. You may get your own tax adviser to formally or informally opine on it too. Be careful with tax opinions of this sort. Sometimes, these investments go bad. The IRS may deny the tax benefits, and there may be litigation. One type of litigation is with the IRS. Another is between investors and promoters if the investment goes under or tax benefits are denied.

To return to the customized type of tax opinion, try to plan ahead and get some tax advice before you sign documents or make major decisions that will impact your taxes. Often, that kind of tax advice can precede a formal tax opinion naturally. That way, the tax adviser is part of the process and can help shape the tax opinion and make it stronger. And once the tax opinion is written and your tax returns are filed, you have a ready source of authority if the IRS comes knocking. If they do, don’t hand the opinion to the IRS. Instead, use it as a ready source to cut and paste into targeted responses to the IRS. Having all that work done in advance can make a world of difference.

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