Tax Controversy Lawyer Blog

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" »

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" »