Tag Archives: Tax

IRS Audits, Tax Bills, Liens & Levies Can All Bring Grief

Opening a notice from the IRS can be worrisome. It is rarely good news. Even if it isn’t an audit, it may be some kind of correction to your return, a query about it, a request for payment, a request for a return, or worse. It may be a Notice of Federal Tax Lien, or even a Notice of Levy. For many, a notice of audit may seem especially worrisome, because it brings so many uncertainties. Of course, audits are statistically rare. Even the IRS admits that audits are rare. But that fact is hardly a comfort if you happen to be the one audited. Any IRS action can be fraught with uncertainty, fear, and even grief.

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For some, the negative emotions the IRS provokes are strong and debilitating. This is understandable given the high stakes involved, including (in a tiny percentage of cases) the possibility of jail time. One–but by no means the only–context for these emotions involves whether to fight a tax bill or give in, whether to wait out a bad tax problem until the IRS finds it or to pro-actively try to address it, etc. Still other are how to fix hidden offshore accounts or other serious tax issues.

The five stages of grief are denial, anger, bargaining, depression and acceptance. Swiss-American Psychiatrist Elisabeth Kübler-Ross wrote about it in her 1969 book, On Death and Dying. Dr. Kubler-Ross probably didn’t have tax problems in mind when she came up with the five stages. Yet consider this progression for an IRS problem:

1. Denial. My tax problem really isn’t a problem. The IRS will never find me. I pay lots of taxes. No one told me about this, so it isn’t my fault. I don’t get Forms 1099 or other incendiary items anyway, so who’ll know? Certainly not the IRS!

2. Anger. Someone (my bank, my employees, my relatives, my enemies) must have told the IRS about me.  How dare the IRS put me in this position? I’ll flee the country. I’ll sue my accountant. It’s my ex’s fault—he/she was the one who caused this problem anyway, not me. The IRS is crooked anyway, and they’ll waste the money I pay them. The government can’t do this to me. These penalties are unfair and onerous.

3. Bargaining. OK, I think I need to pay something to the IRS. I can make a deal, or just tell the IRS about part of the problems. That will look good, like I’m really honest. Besides, there’s no way for the IRS to check my story. I can even get my friend/spouse/CPA/next door neighbor to put in a good word and corroborate my story. It really wasn’t mine, it really isn’t income, who’s to say that I got $10,000 anyhow. I’ll say I got $1,000. Next time I’ll do it right. It’s crazy to amend anything for the past.

4. Depression. I give up. This is the worst thing that’s ever happened to me. I sent off the papers but maybe I should have just gone AWOL with a backpack. I could have lived off the grid in Jakarta. I’m a sap to be in this spot, writing checks to the IRS. I feel sick.

5. Acceptance. This deal isn’t free, but it’s not bad either. At least this way I can sleep at night.  Now I can spend my money without going through all sorts of crazy gyrations.

Not all of these emotions appear in every case, of course. In fact, some people don’t go through any of these stages. Yet this progression can happen and isn’t as crazy as you may think. In fact, this parallel track can also play out:

  1. I don’t mind paying any amount, as long as I don’t go to jail!
  2. I don’t mind paying taxes, but I shouldn’t have to pay big penalties!
  3. I already pay more than my fair share of taxes, and besides, they’ll never audit me.
  4. OK, I’ll write the checks for taxes and penalties if I have to.
  5. Now that it’s done, I should have just ignored it and they never would have caught me. Besides, I was never worried about going to jail.

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Long List Of Americans Who Renounced Citizenship Is More About Taxes Than Trump

As the dust settles on a long new list of Americans who renounced their citizenship, one organization’s refrain is to renounce US citizenship not because of Trump, but because of American taxes. The latest quarterly list published in the Federal Register names the individuals who renounced their U.S. citizenship, or who terminated their long-term U.S. residency (green cards), during the second quarter of 2017. The total for the first quarter of 2017 was 1,313. The number on the second quarter’s list went up to 1,759, which is the second highest quarterly number ever (second only to the fourth quarter of 2016 which had 2,365 published expatriates). Some observers may want to blame President Trump for the spike, but it is much more likely that longstanding tax issues are the real culprits.

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The total for calendar 2016 was 5,411, which was up 26% from 2015, when the total was 4,279 published expatriates. The 2015 total was 58% more than 2014. These lists of those who expatriated may not seem too big, but just how complete these lists actually are remains unclear. Despite the official list, many leavers are not counted. Curiously, though, both the IRS and FBI track Americans who renounceThe reasons for renouncing can be family, tax and legal complications. There is no single explanation, although some renouncers write why they gave up their U.S. citizenship

One recurrent theme motivating some is FATCA, the Foreign Account Tax Compliance Act. It was enacted in 2010, and took years to implement. It is having an impact bigger than these expat numbers reveal. Some renounce because of global tax reporting and FATCA. Dual citizenship is not always possible, as this infographic showsFATCA has been painstakingly implemented worldwide by President Obama’s Treasury Department. It 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.

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 abroad. Foreign banks are sufficiently worried about the IRS that many simply do not want American account holders. FATCA has been ramped up worldwide, and requiring an annual Form 8938 filing if your foreign assets meet a threshold.

Americans living and working in foreign countries 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. Many claim a foreign tax credit, but it generally 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, though, 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 still increased after the fee hike. 

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! The exit itself can be expensive too. 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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Native American Marijuana Hits Nevada, And It’s Tax Free

A tribal Cannabis consulting firm in Nevada has helped arrange key compacts with Native American tribes. Tribal Cannabis Consulting (TCC) is a national consulting firm specializing in Native American cannabis policy. It successfully established the first cannabis compacts between the Nevada Governor’s Office and the Ely Shoshone and Yerington Paiute tribes. The compacts were recently signed by Nevada’s Governor, authorized under Senate Bill 375. Tribal Cannabis Consulting is led by Cassandra Dittus, co-founder and president, in partnership with Joseph Dice, co-owner. In Nevada and elsewhere, Native American tribes are sparking Marijuana businesses.

Marijuana plants are grown at Essence Vegas’ 54,000-square-foot marijuana cultivation facility on July 6, 2017 in Las Vegas, Nevada. On July 1, Nevada joined seven other states allowing recreational marijuana use and became the first of four states that voted to legalize recreational sales in November’s election to allow dispensaries to sell cannabis for recreational use to anyone over 21. Since July 1, sales of cannabis products in the state have generated more than $1 million in tax revenue. (Photo by Ethan Miller/Getty Images)

During the 2017 Nevada legislative session, Dittus lobbied with senators, assemblymen, and tribal leaders to pass Senate Bill 375, despite multiple opposition groups. The law opened the gateway between tribes and Nevada to work together with TCC to compose the historic tribal cannabis compacts. Tribal Cannabis Consulting offers a full spectrum of industry needs in Native American communities. The firm helps tribes to set up their own regulatory systems, and to expand their economic presence in the national cannabis market.

From writing regulatory codes to training tribes on how to issue medical cards, TCC assists with the creation of all government components in conjunction with traditional dispensary and cultivation operational services. Dittus spent nine years battling cancer, before a bone marrow transplant saved her life. Since then, she has helped build seed-to-sale tracking systems, run commercial dispensary and cultivation facilities, infusion centers, and licensed more than 45 legal cannabis operations.

With medical marijuana legal in most states and recreational marijuana legal in a growing number, there is still much talk about taxing the profits. Some still fear that the industry will be taxed to death, and that with the continuing federal tax problems of section 280E of the tax code, the industry faces a tax double whammy. That’s one reason Native Americans might have a clever work-around. In 1987’s California v. Cabazon Band of Mission Indians, the Supreme Court ruled that in states permitting gaming, tribes can conduct gaming on Native American lands unhindered by state regulation. A year later, Congress enacted the Indian Gaming Regulatory Act of 1988, creating a regulatory framework for gaming on Indian lands.

Today, Native American tribes are expanding beyond casinos into marijuana. As governments try to exact on taxes to cash in, the idea of a tax-free ticket to the industry is not lost on Native Americans. Some tribes are considering changes to tribal laws as well as looking at commercial opportunities. Native American tribes and their wholly owned tribal corporations are not subject to federal income taxes on their earnings. Some types of tax-exempt organizations are taxed on some types of income. Yet tribes are exempt from federal income taxes even when conducting commercial activities. They can form corporations to conduct business and their income remains exempt. Native Americans are U.S. citizens, and unlike their tribes, individuals are subject to federal income taxes. Even exempt tribal income can be taxed when distributed to individual members of the tribe. As governments try to exact on taxes to cash in on marijuana, the idea of a tax-free ticket to the industry is not lost on Native Americans. 

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Ignoring 83% Of Payroll Tax Mismatches, IRS Leaves $7 Billion Uncollected…Until Now

The IRS is well-known for information matching. Take IRS Form 1099. It is common knowledge that if you fail to account for income reported on a Form 1099-MISC, you will receive an IRS notice asking why, or even proposing a tax bill. You might reasonably assume that employment taxes would be even more cross-checked. For example, the IRS’s Combined Annual Wage Reporting (CAWR) Program compares: (1) the employee wage and withholding information reported to the IRS on employment tax forms; to (2) withholding documents filed with the Social Security Administration. The purpose of the IRS-CAWR Program is to ensure that employers report the proper amount of employment taxes and Federal income tax withholding on their employment tax returns.

No one likes scrutiny from IRS

However, it appears not to be working so well. The Treasury Inspector General for Tax Administration (TIGTA) recently evaluated whether the IRS-CAWR Program’s document matching process accurately identifies and selects the most productive cases. You can read the report in full. Unfortunately, the resulting report says that billions of dollars of underreported taxes from employers are not being addressed. Most discrepancies are simply not being worked by the IRS, the report reveals.  The report’s analysis of 137,272 Tax Year (TY) 2013 discrepancy cases found that the IRS worked only 23,184 (17 percent) cases. The remaining 114,088 (83 percent) discrepancy cases were not worked, and they had a potential underreported tax difference of more than $7 billion.

The report also says that discrepancy case selection processes do not ensure that priority is given to working discrepancy cases with the highest potential tax assessment. TIGTA analyzed the 114,088 discrepancy cases that were not worked to identify those 23,184 with the highest potential underreported tax amounts by case type. It turned out that these had total potential underreported tax of more than $6.8 billion. Furthermore, TIGTA’s analysis of the 114,088 TY 2013 unworked IRS-CAWR discrepancy cases showed that if the IRS had selected the 23,184 auto-generated cases with a higher average assessment potential to work, it would have selected cases with more than $128 million in assessment potential.

In addition to changing its selection methodology to work case types with the highest potential tax assessment, the IRS could further increase its return on investment by including prior year discrepancy cases when working current year discrepancy cases for the same employer.  TIGTA’s analysis found that 3,137 of the discrepancy cases identified in TY 2013 also had discrepancy cases in TY 2012, with potential underreported tax totaling more than $448 million for TY 2012.

TIGTA recommended that the IRS Commissioner, Small Business/Self-Employed Division, evaluate the current agreement and workload processes with the Social Security Administration, as required, to determine if changes could be made; revise its case selection criteria to include auto-generated cases with the highest potential tax assessment; coordinate with the Information Technology organization to review and prioritize programming enhancements; and take actions necessary to implement the proposed upgrade to include prior year discrepancy cases when current year discrepancy cases are selected for the same employer.

The IRS agreed with six of seven recommendations. IRS management did not agree to include prior year discrepancy cases when current year discrepancy cases are selected for the same employer. However, it will consider employers that have a prior year discrepancy case as part of the selection criterion for current year cases.

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CEO Gets 10 Years’ Prison For Employment Taxes And Fraud

A 51-year old medical doctor and entrepreneur named Sreedhar Potarazu was sentenced to 119 months and 29 days in prison for defrauding shareholders and failing to account for and pay over employment taxes to the IRS. Sreedhar Potarazu is an ophthalmic surgeon licensed in Maryland and Virginia. According to court documents, in September 2000,  founded VitalSpring Technologies Inc. (VitalSpring), which provided data analysis and services relating to health care expenditures. In 2015, VitalSpring started doing business as Enziime LLC. Potarazu was CEO, President, and a Director.

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He provided false and misleading information to shareholders, who made more than $49 million in capital investments in the company. Potarazu also concealed from his shareholders the fact that the company failed to account for and pay more than $7.5 million in employment taxes to the IRS. For example, in 2014, Potarazu provided shareholders with a written summary of operating results that reflected VitalSpring’s 2013 revenues to be approximately $12.9 million. In fact, the 2013 revenue was less than $1 million.

Potarazu also concealed from shareholders that VitalSpring owed substantial employment taxes to the IRS. Potarazu provided false corporate income tax returns to shareholders that overstated VitalSpring’s income, and he omitted the accruing employment tax liability. From 2011 to 2015, in addition to his salary paid by VitalSpring, Potarazu diverted at least $5 million from the victim investors and VitalSpring for his own personal use.

Potarazu admitted that from 2007 to 2016, VitalSpring accrued employment tax liabilities of more than $7.5 million. Potarazu withheld taxes from VitalSpring employees’ wages, but failed to fully pay over the amounts withheld to the IRS. He was a “responsible person” obligated to collect and remit the employment taxes to the IRS. Potarazu was aware of the employment tax liability as early as 2007. In fact, between 2007 and 2016, he was frequently apprised of the mounting employment tax problems.    

Even so, he repeatedly failed to file employment tax returns with the IRS. He also failed to pay over any of the employment tax withheld from employees’ wages. Between 2008 and 2015, instead of paying over employment tax, Potarazu caused VitalSpring to make millions of dollars of expenditures, including thousands of dollars in transfers to himself and others. He also spent money on publishing his book, “Get Off the Dime,” on a sedan car service, and travel. Potarazu’s book, Get Off The Dime: The Secret of Changing Who Pays for Your Health, was reviewed by Newt Gingrich, who called it compelling and informative: “His vision of empowering patients and employers, by using innovative technology, having transparent costs, and integrating social networking, can truly revolutionize the system from one that fails to one that works.”

In addition to the term of prison imposed, U.S. District Court Judge Gerald Bruce Lee ordered Potarazu to serve three years of supervised release, and to pay $49,511,169 in restitution to the shareholders and $7,691,071 to the IRS, and forfeiture of several homes, vehicles, and bank accounts. He was remanded into custody. In May 2017, VitalSpring and subsidiary Enziime LLC filed for Chapter 7 in the U.S. Bankruptcy Court in the Eastern District of Virginia.

The IRS can be tough on collecting income taxes, and even tougher where payroll taxes are concerned. The money is withheld from employee wages, and is supposed to be paid over to the IRS. If the IRS doesn’t get it, the losses can mount quickly. This is trust fund money that belongs to the government, and no matter how good a reason the employer has for using the money for something else, the IRS is strict. The IRS can target the owners of the business, plus check signers and other responsible persons who had a role–or could have had a role–in the failures to pay. However, even by the standards of bad payroll tax cases, this was a bad one. Dr. Potarazu was defrauding his shareholders, and simultaneously defrauding the IRS. Eventually, it all unraveled.

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Watchdog Report: IRS Continues To Rehire Problem Employees

As an employer, would you rehire a former employee guilty of misconduct? Say, someone you caught falsifying official forms, peeking at secured confidential files, or misusing company property? It is hard to see how.Most employers breathe a sigh of relief when such an employee departs. You don’t hire them back. How about rehiring hundreds of such misbehaving workers? Rehiring is for someone you want back, not someone who was a problem. But the IRS may be different from your average employer. The IRS continues to rehire former employees with conduct and performance issues, according to a newly released report from the Treasury Inspector General for Tax Administration (TIGTA). You can see the full report and the full IRS response here.

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From January 1, 2015, through March 31, 2016, the IRS hired nearly 7,500 employees, of which more than 2,000 had been previously employed by the IRS. Given the substantial threat of identity theft and the magnitude of sensitive information that the IRS holds, hiring employees of high integrity is essential to maintaining public trust in tax administration and safeguarding taxpayer information.

The overall objective of this audit was to follow‑up on a recommendation in a prior report to determine whether IRS management updated hiring policies to fully consider past conduct and performance issues prior to hiring former employees. The IRS has not effectively updated or implemented hiring policies to fully consider past IRS conduct and performance issues prior to making a tentative decision to hire former employees, including those who were terminated or separated during an investigation of a substantiated conduct or performance issue.

Although most employees rehired by the IRS do not have prior conduct or performance issues, TIGTA found that more than 200 (approximately 10%) of the more than 2,000 former employees who were rehired between January 2015 and March 2016 were previously terminated from the IRS or separated while under investigation for a substantiated conduct or performance issue. More than 150 of these employees (approximately 75%) were seasonal. Four of the more than 200 employees had been terminated or resigned for willful failure to properly file their Federal tax returns; four separated while under investigation for unauthorized accesses to taxpayer information; and 86 separated while under investigation for absences and leave, workplace disruption, or failure to follow instructions. This includes positions with access to sensitive taxpayer information, such as contact representatives.

The IRS follows specific criteria to disqualify applicants for employment. However, past IRS employment history is not provided to the selecting official for consideration when making a tentative hiring decision. IRS officials stated that it would be cost prohibitive to review prior issues before a hiring decision and tentative offer has been made.  However, the IRS was unable to provide documented support for this position. In addition, TIGTA could not verify that the IRS always considered prior issues because reviews are not always documented. TIGTA also found that 27 former employees failed to disclose a prior termination or conviction on their application, as required, and were rehired by the IRS.

Although the IRS may have had a valid basis to rehire some of the more than 200 former employees with prior conduct or performance issues, TIGTA has serious concerns about the IRS’s decision to rehire certain employees, such as those who willfully failed to meet their Federal tax responsibilities. TIGTA recommended that the IRS Human Capital Officer provide the selecting official with access to former employee conduct and performance issues, and require that the basis for rehiring employees with prior employment issues be clearly documented. In their response, IRS management agreed in principle with the recommendations and plans to update current practices and policies to ensure that data reflecting prior performance and misconduct is utilized in the hiring process.

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Even If Your Payroll Firm Steals Your Employment Taxes, You Must Pay IRS

Criminal payroll tax cases keep on coming. A disbarred attorney who owned a Pennsylvania payroll company has been sentenced to 8 years in prison, plus ordered to pay nearly $5.3 million to the IRS. Robert McAndrew, Jr. pleaded guilty to tax crimes involving his defunct payroll company. Although he was sentenced to 8 years in federal prison after he pleaded guilty, he could have faced prison for much longer. In fact, he could have faced over 100 years of prison in all, given the 21 counts of tax evasion he was facing.

His company was called NEPA Payroll Services. Both taxpayers and the IRS alike were defrauded. In fact, the withhold tax money was never sent to the IRS. Moreover, the victims were still on the hook for their tax debts, plus penalties and interest. When McAndrew was sentenced, the judge set his repayment schedule initially at $25 per quarter, followed by $150 a month to begin during three years’ supervised released following his incarceration. Is it likely much of the $5.3M will actually be paid back? The answer is obvious.

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With more than $5 million owed, it is highly unlikely that McAndrew will ever put a dent in the monies he owes. The IRS is being urged to prosecute more payroll tax violations. After all, the trust fund money belongs to the government, and any failure to pay is serious. Payroll services are one common answer, so the employer does not have discretion to use the money to pay vendors, or for anything else. But what if the payroll service itself takes the money? That horrific possibility featured prominently in a report from the Treasury Inspector General.

Be careful who you hire too. When a tax shortfall occurs, the IRS will usually make personal assessments against all responsible persons who have ownership in or signature authority over the company and its payables. The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person” under Section 6672(a). You can be liable even if have no knowledge the IRS is not being paid. If you’re a responsible person the IRS can pursue you personally for payroll taxes if the company fails to pay. The 100% penalty equals the taxes not collected.

The penalty can be assessed against multiple responsible persons, allowing IRS to pursue them all to see who coughs up the money first. “Responsible” means officers, directors, and anyone who makes decisions about who to pay or has check signing authority. When multiple owners and signatories all face tax bills, they generally do their best to direct the IRS to someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck, while another may pay nothing. Meanwhile, the government will still try to collect from the company that withheld on the wages.

The IRS also wants to make sure this kind of bad tax situation doesn’t occur again. The government can shut down the business, or in extreme cases, may seek criminal penalties. More commonly, the government can seek an injunction to stop the bleeding so the government gets its tax money. Where a business gets deeper and deeper into tax debts, the practice is sometimes referred to as pyramiding. If a company is making minimal payments of tax debts, the IRS may try to induce voluntary compliance. In some cases, the Justice Department will seek an injunction to require timely deposits and payments of all withheld employment taxes and to timely file all employment tax returns. Whatever your situation, try to steer clear of these issues. Get help early. Stay ahead of payroll taxes. Consider using a payroll service that doesn’t allow you the choice whether to use the payroll tax money for something else. But when you select a payroll service, check them out, and make your selection carefully.

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