Tax Controversy Lawyer Blog

The Internal Revenue Service (IRS) and to some extent the South Carolina Department of Revenue (SCDOR) understand that times are tough and people are having a hard time making ends meet. If you owe back taxes and are flat broke after you pay for necessities, then you may be able to get the IRS off your back until you get back on your feet.

The IRS has the ability to place your account in Currently Not Collectible (CNC) status. If they do then you will no longer receive threatening letters or phone calls about your past due taxes and YOU DO NOT HAVE TO MAKE ANY PAYMENTS. The IRS will not issue bank levies or wage garnishments while your account is in CNC status. However, the IRS will typically file a Federal Tax Lien to protect its interest in the past due taxes. In addition, you will continue to receive letters from time-to-time that inform you of your current balance. Interest and penalties continue to accrue while your account is in Currently Not Collectible status.

Currently Not Collectible status is temporary in nature and your case may be reviewed every two years or so to make sure you still qualify. If your situation improves and the IRS feels like you can afford to make payments, they will take your account out of CNC status and will request some type of payments, typically an Installment Agreement.

As for the South Carolina Department of Revenue (SCDOR), they have an administrative position that if you, or anyone in your household, is receiving a paycheck -- and get this -- even unemployment checks are considered paychecks -- then you will not qualify for Currently Not Collectible status. So if your unemployment has run out and no one in your household has a job, then you can get some relief with the South Carolina Department of Revenue. If not tough luck, you better be ready to cough up some money each month or face wage garnishments and bank levies.

Continue reading "Currently Not Collectible (CNC): The Times are Tough Collection Defense" »

South Carolina DME sales tax audits are ramping up throughout SC. The Department of Revenue is opening sales tax audits for Durable Medical Equipment retailers requesting lots of records and information. The audit period is generally three years. If you have received a South Carolina SC DME sales tax audit notice you do have options.

South Carolina has several sales tax exemptions that apply to certain durable medical equipment or DME items. For example, South Carolina Code of Laws provides:

SECTION 12-36-2120. Exemptions from sales tax.

Exempted from the taxes imposed by this chapter are the gross proceeds of sales, or sales price of:

(28)(a) medicine and prosthetic devices sold by prescription, prescription medicines used to prevent respiratory syncytial virus, prescription medicines and therapeutic radiopharmaceuticals used in the treatment of rheumatoid arthritis, cancer, lymphoma, leukemia, or related diseases, including prescription medicines used to relieve the effects of any such treatment, free samples of prescription medicine distributed by its manufacturer and any use of these free samples;

(b) hypodermic needles, insulin, alcohol swabs, blood sugar testing strips, monolet lancets, dextrometer supplies, blood glucose meters, and other similar diabetic supplies sold to diabetics under the authorization and direction of a physician;

(c) disposable medical supplies such as bags, tubing, needles, and syringes, which are dispensed by a licensed pharmacist in accordance with an individual prescription written for the use of a human being by a licensed health care provider, which are used for the intravenous administration of a prescription drug or medicine, and which come into direct contact with the prescription drug or medicine. This exemption applies only to supplies used in the treatment of a patient outside of a hospital, skilled nursing facility, or ambulatory surgical treatment center;

(d) medicine donated by its manufacturer to a public institution of higher education for research or for the treatment of indigent patients; and

(e) dental prosthetic devices;

Continue reading "South Carolina Sales Tax Audits Ramp Up for Durable Medical Equipment (DME) Retailers" »

The North Carolina Department of Revenue has launched a fight against approximately 350 online retailers. The North Carolina Department of Revenue is seeking the identity of the purchasers with North Carolina addresses as well as a description of the purchases. The most visible case is a North Carolina sales tax audit of Amazon.com. In the Amazon.com case alone there are about 50 million purchases covered.

North Carolina charges a "use tax" on out-of-state purchases of goods for use or consumption in North Carolina. If you or your business has purchased goods from Amazon.com since 2003, the North Carolina Department of Revenue may get your identity and a description of what you purchased. If you have not paid the North Carolina use tax on these purchases, you may be the subject of a North Carolina Department of Revenue use tax audit in the future.

Lucky for you, Amazon.com is not giving up without a fight and neither is the American Civil Liberties Union.

Amazon filed a lawsuit in April in the U.S. District Court for the Western District of Washington against the North Carolina Department of Revenue in response to a state request for purchase records dating back to August 2003 of customers with a North Carolina shipping address.

In June, the American Civil Liberties Union filed a motion to intervene in the lawsuit. The ACLU contends that the Department's demand for information is unconstitutional, as the Department can assess taxes based on retail sales without knowing what customers purchased. The ACLU argues the product descriptions reveal personal and private information about consumer choices, and that the Department should narrow the scope of its request in order to protect privacy rights. The Department counters that it only asks for product descriptions in order to determine the correct tax liability.

In accordance with the Internet Freedom Tax Act, remote sellers (i.e. online retailers) are generally required to collect taxes where they maintain a physical selling presence. If they do not have such a presence, they are not required to collect sales tax. Thus, in online transactions with out-of-state retailers, the consumer typically has the obligation to calculate and pay a use tax. North Carolina seeks voluntary compliance from taxpayers, requesting inclusion of a "consumer use tax" on residents' individual tax returns for items purchased or received through the mail.

Currently, North Carolina levies a general retail sales and use tax of 5.25 percent. Most counties levy an additional 2.5 percent local sales and use tax on items taxed by the state at the general rate. Thus, the combined general state and county tax rate is 7.75 percent in all counties with the exception of Mecklenburg County (which has a combined general state and county tax rate of 8.25 percent due to inclusion of a 0.5 percent public transit tax). Further, Surry, Sampson, Pitt, Martin, Haywood, Cumberland, Catawba, and Alexander counties have an additional 0.25% sales tax. The actual use tax rate may be different depending on the date of the purchase.

Continue reading "North Carolina Department of Revenue Sales Tax Audit of Amazon.com May Result in Use Tax Audits for Online Buyers" »

Once the shock has worn off from being audited by the IRS or finding that the IRS wants to collect those back taxes you have not paid, you will want to know what your options are to resolve the tax debts. There are a number of tax solutions that a taxpayer may avail himself or herself of to finally get a good night's sleep. One such tax solution, the Installment Agreement, is key to paying down and eventually eliminating the tax debt. And, while it may not cause all memories of your dealings with the IRS to fade into oblivion, it sure will help.

The Installment Agreement is an agreement entered into between the IRS and the taxpayer to pay down the IRS-assessed liability, i.e., your tax debt, over time. If you qualify for an Installment Agreement, the IRS will establish a payment plan where the taxpayer agrees to make monthly payments and in return the IRS will not issue bank levies or wage garnishments. The Installment Agreement payments are usually applied toward the oldest debt first, and once that debt is paid the payments are applied to the next oldest debt and so on and so forth until all the tax debts are paid or are uncollectible.

Careful attention must be paid to structuring the Installment Agreement, because sometimes the IRS allows an Installment Agreement with a small monthly payment for the first year and after that the new payment amount is bumped up to a payment that many taxpayers cannot afford. I call these "teaser" Installment Agreements. This scenario typically applies to taxpayers with significant credit card or other unsecured debts. The IRS does this to allow taxpayers time to reduce these "non-allowable" expenses and otherwise get their finances in order so that they can afford to make heftier payments down the line. This is not to say that this practice does not have its benefits. Taxpayers just need to be aware of the "teaser" Installment Agreement.

While not perfect, the Installment Agreement can be extremely helpful in permitting the IRS to collect what it will, and still allowing the taxpayer to get a solid 8 hours of sleep...OK, maybe 6 at the very least...

Continue reading "Counting Sheep? Consider an Installment Agreement" »

The United States Tax Court, located in Washington, D.C., is comprised of traveling Judges who preside over civil tax trials in cities throughout the United States. In order to have your case heard in Tax Court, a taxpayer must file a Tax Court Petition within 90 days of receipt of his or her Statutory Notice of Deficiency. This Notice, often called "the ticket to Tax Court", tells you that the IRS has proposed adjustments to your tax return and determined that you owe additional tax (and interest...and maybe even penalties).

If you disagree with the Statutory Notice of Deficiency, you can begin tax litigation proceedings by filing a Tax Court Petition which outlines the reasons why you believe the IRS erred in assessing additional tax against you. You do not have to pay the amount that the IRS proposes to assess in order to file the Tax Court Petition and to go to Tax Court. The ability to have a judge determine who is right and who is wrong before you are legally obligated to pay the tax is one of the attractions of the United States Tax Court as a forum for resolving IRS tax disputes.

The Tax Court offers a surprisingly relaxed environment in which to attempt to resolve your tax dispute. Tax Court Judges rarely stand on convention, preferring an open dialogue with the taxpayer and the IRS attorney. The Judges prefer that the taxpayer and the IRS stipulate, or agree to, the relevant facts and resolve as many issues as possible prior to trial. IRS attorneys are granted Settlement Authority while representing the IRS in Tax Court and are extremely open to reaching a settlement, if at all possible. If the taxpayer and IRS can reach a basis of settlement, a trial can be avoided.

Continue reading "The United States Tax Court: An Overview" »

For most taxpayers, the amount that they owe in taxes is pre-paid to the IRS through employee withholdings, amounts deducted by employers from each paycheck throughout the year. These withholdings are required to be paid to the US Treasury by the employer periodically throughout the year. But, for those persons who are self-employed, independent contractors and the like, paying federal income taxes to the US Treasury can often get put to the side.

Because the self-employed individual receives compensation directly from its customers, rather than the periodic paycheck that most people receive, the IRS requires self-employed persons to make estimated tax payments on April 15th, June 15th, September 15th and January 15th of the following year. Quarterly estimated tax payments must be made by a self-employed individual if he or she expects to owe at least $1,000 in tax for the current tax year.

A self-employed taxpayer is required to make the quarterly estimated tax payments in amounts which equal either 25% of 90% of the amount of tax due for the current year; or, in amounts equal to 25% of 100% of the amount of tax due for the prior year. As a result, many tax return preparers and tax return preparation software compute and provide quarterly estimated tax payment vouchers based on 100% of the previous years taxes. Taxpayers should use these vouchers to make their estimated tax payments.

For many reasons, taxpayers do not make proper estimated tax payments. Generally, the end result is a large tax bill on April 15. Some taxpayers will have the resources to pay the bill in full, many others will not. Either set of taxpayers will be charged an estimated tax penalty to compensate the government for the time value of money it lost when the estimated tax payments were not made.

Continue reading "Self-Employed? Just Do It...Four Times a Year!" »

A relatively common occurrence with many businesses, is a failure to pay over withheld income and employment taxes. Often cash-strapped businesses hope that conditions will improve and decide to use the withheld taxes as working capital to fund operations. The Internal Revenue Service and other taxing authorities HATE being an "unwilling participant in a floundering business".

In response to all too often finding itself as a unwitting lender, the Internal Revenue Service received authority from Congress in 1954 to assess personal liability against "responsible persons that willfully fail to pay over" withheld income and employment taxes.

The Trust Fund Recovery Penalty results in personal liability for 100% of the withheld income and employment taxes ("Trust Fund" taxes) for every "responsible person" assessed. While deemed a penalty, the Trust Fund Recovery Penalty is a collection device used by the Internal Revenue Service to recoup those taxes it has credited to other taxpayers. As such, the Service typically assesses the penalty against as many taxpayers as possible, to increase the odds of repayment. While this may seem to be unfair, it depends on who you ask.

Example: ABC, Inc. owes federal payroll taxes of $1,000,000.00, of which $750,000.00 are "Trust Fund" taxes. ABC, Inc.'s President, Vice President, Chief Financial Officer and Treasurer were all assessed the Trust Fund Recovery Penalty. As a result, each person assessed the TFRP owes the US Treasury $750,000.00, which accrues interest until paid. The IRS is prohibited from collecting more than $750,000.00 (excluding interest) no matter the source. So let's say ABC, Inc.'s President pays $500,000.00, Vice-President pays $225,000.00, and Treasurer pays $25,000.00. According to ABC, Inc.'s CFO, it seems like a good deal. All he owes is the interest.

Of course, the best course of action is not to count on luck. The best way to avoid this conundrum is to make sure the withholdings are deposited in the correct manner and on schedule. Don't make the mistake of failing to deposit: it can cost you more than just your business.

Continue reading "Employers Beware: Failure to Pay Employee Withholdings Can Result in Personal Liability" »

After various studies pertaining to accuracy in the reporting of income and expenses by cash intensive businesses, the IRS has created a new guide for its agents to refer to when conducting audits of such firms. With the tax "gap" reportedly at hundreds of billion of dollars, the IRS has begun training its Revenue Agents to be more savvy in interviewing business owners and recognizing indicators of unreported income.

According to the guide, businesses that make a routine practice of misappropriating cash often have a pattern of reporting losses and/or low profit margins that are insufficient to sustain the business or its owners. The IRS lists the following indicators of unreported income:

• A lifestyle that cannot be supported by the income reported

• A business that reports losses each year yet continues to operate

• Account balances increasing annually despite reporting of low net profits or losses

• Business debt decreases, remains low, or doesn't increase despite reporting of low profits or losses

• A wide gap between the taxpayer's gross profit margin and that typical of the industry

• Uncommonly low annual sales given the type of business

The IRS specifically refers to the following businesses as "cash intensive": restaurants, bail bonds, beauty shops, car washes, check cashing locations, coin operated amusements, convenience stores, laundromats, and scrap metal processors. These types of businesses must ensure that they are keeping detailed and accurate records of their sales and expenses. That way when the IRS auditor contacts you, you will be prepared for the Information Document Request you are sure to receive.

Continue reading "IRS Agents Using New Cash Guide to Hunt for Unreported Income" »

Imagine a family member passes away and leaves the family farm or business to you. Internal Revenue Code Section 2032A allows for a Special Use Value to be applied to family farming operations as well as closely held businesses. However there are several requirements that must be met to claim the reduced value on the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. If these requirements are not met then you may receive a Notice of Deficiency from the IRS showing a vast increase in your taxable estate, coupled with a significant increase in tax and the imposition of hefty penalties. Unfortunately, this scenario can and does happen, as the IRS may find that the taxpayer insufficiently established the method of valuation.

In general, the value of the gross estate of a decedent includes the value at the time of his or her death of all real and personal property. However, the executor or personal representative can often significantly reduce or even eliminate the estate tax when a large portion of the estate's value includes real property used for business or farming.

The executor or personal representative should elect the special use valuation if material participation by the deceased owner and/or a member of the owner's family in the operation of a farm or closely-held business can be established. Material participation must be shown to have existed for periods totaling 5 years or more during the 8 years immediately preceding the date of the decedent's death. Material participation can be shown in a variety of ways, but physical work and participation in management decisions are the principal factors the IRS considers in determining whether material participation has occurred.

Once the special-use election has been made, qualified heirs or their family members must continue to materially participate in the operation of the farm or closely-held business for the next 10 years. Further, the heirs may not dispose of the property during this 10-year period. Failure to comply with these rules results in a recapture of the special use value benefit.

If the IRS finds that the method of valuation was not sufficiently established, the estate could be burdened with hundreds of thousands of dollars of additional tax. In this scenario, the estate is entitled to an Appeals Conference with an IRS Appeals Officer and if not resolved in appeals, has the right to take the case to the United States Tax Court.

Continue reading "Estate Taxes: A Special Use Value Can Save the Farm" »

If you have ever been audited by the Internal Revenue Service, then you know audits are no walk-in-the-park. They can take a long time to conclude and that's not good for your nerves. However, eventually they do come to an end and the IRS will provide you with a copy of the Revenue Agent's Report and proposed changes. Luckily for taxpayers this letter is not the end of the road. You have 30 days to file a written protest as to why you disagree with the proposed changes. The IRS Office of Appeals will review your protest and the audit file and contact you or your tax controversy attorney to schedule a conference.

The function of the IRS Office of Appeals is to settle tax disputes, which typically arise in the form of proposed adjustments after an audit, in a more relaxed and informal way. The Appeals conference is conducted by correspondence, by telephone or in person. At the conference, you or your tax controversy attorney will meet with an Appeals Officer to discuss your return and make your case as to why the IRS erred in its audit of your return. The Appeals Officer, truly known for his or her neutrality, considers your position and may offer to settle your case right then. The trick to getting your way in Appeals is preparation, preparation, and preparation.

Continue reading "Think the IRS is Wrong? Appeal It - And Win!" »

The IRS has selected approximately 260,000 returns claiming the first-time homebuyer credit for correspondence audits so far in 2010. The audits are apparently the result of filers failing to include sufficient documentation with their tax returns. These correspondence audits constitute approximately 21% of all correspondence examinations. Accordingly, the IRS is truly turning up the heat this summer on those claiming the first-time homebuyer credit.

The IRS requires homebuyers claiming the credit to attach the following:

• A copy of the settlement statement showing all parties' names and signatures, the property address, the contract sales price, and the date of purchase

• In the case of a mobile home, a copy of the executed retail sales contract

• In the case of a newly constructed home where you do not have an executed settlement statement, a copy of the certificate of occupancy

Additional documentation may be necessary, as indicated below:

Homebuyers who purchased after April 30, 2010, but before July 1, 2010, that entered into a binding contract before May 1, 2010 to purchase a home before July 1, 2010, must also attach:

• A copy of the pages from a signed contract to make a purchase

Homebuyers who are claiming the credit as a long-time resident of the same main home must attach copies of one of the following:

• Form 1098, Mortgage Interest Statement

• Property Tax Records; or

• Homeowner's insurance records

Continue reading "The IRS Attacks: First-Time Homebuyer Credit Claims" »

When I was a child, my mother surprised me one glorious morning with a Rottweiler puppy. She justifiably handed me a piece of steak and explained that I was to give the steak to the Rottweiler because it would never bite the hand that feeds it. And, fingers in tact years later, she was correct. It seems the IRS never learned that lesson--their newest (and perhaps oldest) targets are restaurant owners. (Not surprising, as we all knew only audits satiate that IRS hunger).

The IRS requires employers to file an annual tip allocation return, Form 8027. While approximately 50,000 returns were filed last year, an independent firm the IRS hired estimates that figure should be tripled. The IRS plans to align its files with the independent firm's information and send letters of inquiry to non-filers.

If you own a restaurant and have not filed Form 8027 or know that there are problems with the form you filed, you need to contact a tax professional before the IRS contacts you.

On a related note, most restaurant employees are likely unaware that the IRS requires employees who receive tips to keep "sufficient proof" to show the amount of tip income for the year. The IRS considers a daily record ("tip diary") of tip income "sufficient proof". The IRS provides a form, Form 4070A, that employees may use to keep a daily record of tips. Using this particular form is not mandatory, but keeping "sufficient proof" of tip income is.

Continue reading "The IRS Attacks: The Hand that Feeds It" »

I am a big fan of college football and spend most of my fall Saturdays watching football games. Sometimes I wonder what the coaches are thinking when they call certain plays. Last fall during a particularly exciting play where the UGA quarterback was sacked by the opposing team's defensive end, I wondered what the left tackle was thinking. Of course, he may have been thinking about the next play, or perhaps the post-game festivities, but I guarantee you that he was not thinking about the tax ramifications of the Nike insignia on the quarterback's jersey.

Though it may have been the last thing on the left tackle's mind, President Adams and the IRS have given it some thought. Corporate sponsorships are just one example of unrelated business income that is the prey of a new onslaught of IRS audits targeting colleges and universities. UGA in particular has been targeted, and the IRS is auditing the income it receives from subsidiaries such as parking, catering, golf courses, and food services.

The IRS recently published the results, garnered through questionnaires sent to 400 schools, of a major compliance initiative for smaller colleges and universities. The IRS has set its sights on unrelated business income, such as that earned from corporate sponsorships, advertising, and facility rentals. Almost 50% of smaller colleges and universities (5,000 students or less) never filed Form 990-T, and thereby did not pay tax on such income.

Smaller colleges and universities nationwide should be in ready position for this IRS offensive. Tax controversy attorneys defend individual, corporate and non-profit organization clients against IRS audits.

Continue reading "The IRS Attacks: Your College's Blindside" »

As a rule, spouses who file their income taxes under the status of Married Filing Jointly are jointly and severally liable for any income tax liability shown on the return as well as any additional income tax liability which may arise as the result of an audit. In other words, if your spouse makes a mistake on your jointly filed income tax return, you may be held both jointly liable (both you and your spouse) and severally liable (just you) for the amount of the underpayment caused by your spouse's error. And, to add to the fun, the amount of income earned by either spouse is irrelevant in determining joint and several liability. So, even if you report zero income for a given tax year, you could be held personally liable for the entire amount of the tax liability that results from any underpayment or your spouse's error on your jointly filed return.

However, the IRS and certain states provide "innocent spouse" relief from joint and several liability when the appropriate circumstances exist. Typically, there are three types of innocent spouse relief. A common theme of the relief provisions is lack of knowledge on the part of the "innocent spouse". If a spouse can show that he or she neither knew nor should have known of the error on the jointly filed income tax return, that spouse may not be held liable for any portion of the underpaid tax and penalties associated with such error. In this instance, a failure to communicate may not save a marriage but it might just save some taxes.

Continue reading "Is a Failure to Communicate Just Too Taxing? Get the Innocent Spouse Relief You Deserve" »

The average American's wallet has probably felt quite a bit lighter in the past few years. And so has the IRS'. Like much of the American public, the years-long recession has the IRS lodged firmly between an economic rock-and-a-hard-spot. But, unlike most Americans, the IRS' vast network of resources, both monetary and from a personnel standpoint, pretty much guarantees that it won't go hungry.

Due to the economic downturn, the amount of tax that the IRS has collected has decreased 3.3 percent, while government spending continues to increase. Although about 84 percent of all taxes are paid on time by taxpayers, the other 16 percent who either under-report income or overstate deductions results in about a $300 billion per year loss to the IRS. In order to combat these substantial losses, the IRS has ramped up its tax collections efforts through the addition of thousands of new IRS employees and smarter, more powerful computers designed to sniff-out taxpayers who aren't paying. These efforts are aimed principally at the individual taxpayer because the underreporting of individual income tax is the single greatest component to the annual tax gap, i.e., the missing $300 billion per year.

Those taxpayers who should be most concerned with the IRS' heightened collection efforts are high-income taxpayers, self-employed individuals and taxpayers who received pass-through income from partnerships, S-corporations or LLCs, or those persons who claim deductions which are well in excess of reported income. Also on the chopping block are those individuals who fail to file tax returns entirely. It is suspected that increased examinations, quicker assessments and stronger collections efforts will be seen in connection with these non-filers.

So, although times continue to be tough for pretty much everybody, the IRS is taking a hard line on the soft economy. Taxpayers are well-advised to carefully and timely report and pay over all income tax owed because if they don't, the IRS WILL come knocking.

Continue reading "Taxpayers Beware! The IRS Shifts Its Collections Efforts Into Overdrive" »