Archive for April, 2010

Real Estate Professional

Monday, April 5th, 2010

Real Estate Professional

A key real estate issue that appears over and over in IRS Tax Audits is what to do about real estate losses.  In other words, can the taxpayer fully deduct such losses?  The answer to this question, like most things legal, is Yes and No.

Investors who qualify as real estate professionals can elect not to treat rental activities in which they “materially participate” as passive activities.  This lets them deduct their full loss from the activity, not just their first $25,000, regardless of their overall adjusted gross income.

Investors meet the material participation requirement for a particular activity by participating throughout the year on a regular, continuous, and substantial basis. They demonstrate this by meeting one of the following seven tests:

1. They participate in the activity for more than 500 hours during such year.
2. Their participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year.
3. They participate in the activity for more than 100 hours during the taxable year, and their participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year.
4. The activity is a significant participation activity for the taxable year, and their aggregate participation in all significant participation activities during such year exceeds 500 hours.
5. They materially participated in the activity for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year.
6. The activity is a personal service activity and they materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year.
7. Based on all of the facts and circumstances, they participate in the activity on a regular, continuous, and substantial basis during such year.

Investors who materially participate in one or more activities qualify as real estate professionals if they satisfy two further tests:

1. They spend at least 750 hours per year in real property trades or businesses in which they materially participate. Qualifying real property trades or businesses include property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Personal services performed as an employee are not treated as performed in real property trades or businesses unless the employee owns 5% or more of the employer entity. (This means 5% of a corporation’s outstanding stock or voting interest, or 5% of a partnership’s capital or profit interest.)
2. They spend more than half of their working time on real estate activities in which they materially participate.

Qualifying real estate professionals should keep a contemporaneous business diary or appointment book to verify their service. While Treasury Regulations don’t prescribe specific recordkeeping requirements, they don’t allow a post-event “ballpark guesstimate.” Real estate professionals complete the “Reconciliation for Real Estate Professionals” in Part V of Schedule E to identify themselves as such.

Material participation is defined separately for each activity. However, investors can elect to treat all of their real estate activities as a single activity. This makes sense if no single activity meets the 750-hour test to qualify for “real estate professional” status, or if the real estate professional is a passive investor (not meeting the material participation test) in an activity generating losses that would be disallowed if the professional chose not to aggregate that activity with their others. Taxpayers make the election by filing a statement with their original, timely-filed return for any taxable year in which they qualify. The election is binding for the year made and all future years (even if they no longer would qualify to make the election) and can be revoked only if there is a “material change” in the investor’s facts and circumstances.

Investors whose income is too high to claim the rental real estate loss allowance and who don’t qualify as real estate professionals can buy passive income generators, or “PIGs,” for tax-free income to be “soaked up” by real estate losses. These are generally limited partnership interests generating taxable income from real estate, oil & gas, equipment leasing, and similar sources treated as passive activities.

Posted in Avoid Paying Too Much Tax, Real Estate Deductions & Income | Comments Off

IRS Levies and Collection Due Process Hearings

Monday, April 5th, 2010

Most persons subject to an IRS levy are entitled to a pre-levy administrative hearing, also called a collection due process (CDP) hearing. At least 30 days before the first levy is issued, the IRS generally must provide the person with written notice of the right to a hearing.  When making a jeopardy levy, a levy against state tax refunds, or, for levies issued after September 22, 2007, a disqualified employment tax levy, the IRS can provide notice of the right to a CDP hearing after the levy is issued.  The notice must explain levy procedures and appeal rights, and provide ways for the person to contact the IRS.  An offset of an overpayment against back taxes is not a levy and does not give the taxpayer a right to a CDP hearing.

A request for a CDP hearing must be made within 30 days after the date of the CDP notice. A timely written request is a jurisdictional prerequisite to judicial review of CDP hearings, and also begins the suspension of the statutes of limitations for collections, lawsuits, and criminal prosecutions. The taxpayer may also engage in oral discussions with the IRS, but the 30-day time limit is not affected. 

CDP hearings are held by the IRS Appeals Division. The hearing must be conducted by an impartial IRS agent with no prior involvement in the case. The taxpayer may raise spousal defenses, challenge the appropriateness of the IRS collection actions, and offer collection alternatives, including Offer In Compromise. A CDP hearing can also resolve issues related to the CDP hearing notice and request. However, a CDP hearing cannot address the assessment underlying the deficiency unless the taxpayer did not receive a notice of deficiency or have any other opportunity to challenge the deficiency. 

After the hearing, Appeals mails the taxpayer a dated notice of determination setting forth its conclusions.   The taxpayer has 90 days to file a court petition challenging a determination relating to innocent spouse relief, and 30 days to challenge any other determination. If a court determines that the taxpayer’s petition was filed in a court that lacked jurisdiction, the taxpayer has an additional 30 days to refile the petition in the correct court. If the amount of the taxpayer’s tax liability was considered at the CDP hearing, the court can review the liability; otherwise, the court reviews the CDP determination for abuse of discretion. The periods of limitation for collection after assessment, criminal tax prosecutions and civil suits are suspended from the date the IRS receives the taxpayer’s written request for a hearing until the date the IRS receives the taxpayer’s written withdrawal of the request for a hearing or the determination resulting from the hearing becomes final because the time for seeking review or reconsideration has expired.

A taxpayer who fails to timely request a CDP hearing may ask for a similar administrative hearing called an equivalent hearing. Equivalent hearings do not entitle the taxpayer to seek judicial review of the IRS’s determination.

The statutes and regulations for pre-levy notice and hearings apply to collection actions that are initiated after January 18, 1999. A taxpayer’s right to a CDP hearing based on a levy notice issued after January 18, 1999, was not affected by a lien notice issued before that date because the lien and the corresponding levy did not constitute a single collection action for purposes of CDP hearings.  CDP proceedings are not available for collection actions initiated and completed before January 18, 1999.  The Tax Court did not have jurisdiction to review a continuous wage levy when the collection action was initiated before January 19, 1999.

Posted in Collection Due Process, IRS Collections | Comments Off

The Collection Due Process Rules

Monday, April 5th, 2010

The collection activities of the IRS will begin following the tax audit where it’s found there is tax due.  The collection activities will sometimes proceed to the filing of a lien or notice of levy.  At this point the taxpayer is entitled to request a Collection Due Process hearing with an IRS Appeals Officer.

We’re going to provide a long quotation of the rules of Collection Due Process (CDP) hearings.  This will enable the curious to read for themselves how the CDP works:

5.12.1  Lien Appeals

  • 5.12.1.1   Appealing the Notice of Federal Tax Lien
  • 5.12.1.2   Collection Due Process (CDP)
  • 5.12.1.3   Collection Appeals
  • 5.12.1.4   Taxpayer Advocate

5.12.1.1  (12-09-2003)
Appealing the Notice of Federal Tax Lien

  1. Taxpayers may have two opportunities to appeal certain collection actions.
    1. Collection Due Process Hearing, and the
    2. Collection Appeals Program.

     

  2. Taxpayers may also contact the Taxpayer Advocate’s office for assistance. See IRM 5.12.1.4 and IRM 131.7.2.

5.12.1.2  (12-09-2003)
Collection Due Process (CDP)

  1. Effective 1/19/1999, under IRC 6320, the Internal Revenue Service must notify taxpayers in writing of their right to a Collection Due Process (CDP) Hearing with the Office of Appeals following the filing of a Notice of Federal Tax Lien. When a timely request is received the taxpayer also establishes the right to a judicial review of the Appeals determination.
  2. Taxpayers may be entitled to a due process hearing if a timely request for a hearing is received. See IRM 5.1.9.
  3. Taxpayers are entitled to an equivalent hearing if the CDP hearing is not requested within 30 days. The taxpayer cannot file a judicial appeal of a decision from an equivalent hearing.
  4. The CDP notice must be sent to the taxpayer within 5 business daysafter the NFTL is filed. The notice must be:
    1. Given in person
    2. Left at the residence or usual place of business, or
    3. Sent by certified or registered mail to the taxpayer’s last known address.

     

  5. The notice will include:
    1. The amount of unpaid tax.
    2. The right to request a hearing during a 30 day period beginning the 5-day period described in (4) above.
    3. Administrative appeals (i.e., meet with the employee’s supervisor, a Collection Appeals Program, etc.) available to the taxpayer with respect to the lien and procedures relating to such appeals.
    4. The provisions of IRC 6320 and 6330 that relates to a CDP hearing and the provisions of the Internal Revenue Code relating to release of liens. (These provisions are explained in Publication 1660).

     

5.12.1.2.1  (12-09-2003)
Hearing Issues

  1. Certain issues and considerations must be undertaken during the hearing process. The taxpayer may raise any relevant issue relating to the unpaid tax including:
    1. appropriate spousal defenses,
    2. challenges to the appropriateness of the collection action,
    3. collection alternatives including, installment agreement, offer-in-compromise, posting of a bond, etc.
    4. challenges to the existence or amount of the underlying tax liability.

     

    Note:

    The taxpayer may raise the issue of underlying liability only if the person did not receive a statutory notice of deficiency for the tax liability or did not have any other opportunity to dispute the tax liability, i.e., a type of tax for which a statutory notice of deficiency was not sent and no appeal was offered.)

     

  2. Certain issues may not be raised at the hearing:
    1. The issue was raised and considered at a previous hearing about a notice of levy or seizure under IRC 6330 or in any other previous administrative or judicial proceeding, and
    2. the person raising the issue participated meaningfully in the previous hearing or proceeding.

     

5.12.1.2.2  (12-09-2003)
Requirement of Investigation

  1. The appeals officer at the hearing will obtain verification that the requirements of all applicable law or administrative procedures have been met. You may be asked to clarify certain issues. As a basis for the determination, the Appeals Officer must consider;
    1. the verification presented by Compliance,
    2. issues raised, and
    3. whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concerns of the person that the collection action be no more intrusive than necessary.

     

5.12.1.2.3  (12-09-2003)
Judicial Review of Determination

  1. The taxpayer has 30 days from the date of the determination by the Appeals Officer to appeal the determination. The determination may be appealed to the Tax Court or if the Tax Court does not have jurisdiction, to U.S. District Court.
  2. If a court determines that the appeal was to the wrong court, the taxpayer has 30 days after the court determination of incorrect filing to file an appeal in the proper court.
  3. The Office of Appeals retains jurisdiction with respect to any determination, including subsequent hearings requested by the person who requested the original hearing on issues regarding:
    1. collection actions taken or proposed with respect to Appeals’ determination, and,
    2. changes in circumstances of the taxpayer that affect Appeals’ determination after the person has exhausted all administrative remedies, i.e., CAP.

     

5.12.1.2.4  (12-09-2003)
Suspension of Collection and Statute of Limitation

  1. If a hearing is timely requested, the running of the period of limitation will be suspended from the date of receipt of the request for the period during which the hearing and associated judicial appeals are pending. The suspension will end when the decision of the Appeals office becomes final, i.e., 30 days after issuance of the determination if it is not appealed to a court. If appealed to court, the suspension ends when the case become final. The period of limitation for collection will not expire before 90 days after a determination becomes final. See IRM 5.1.9 for procedures on suspending the statute.
  2. Levy action under any circumstances will be suspended during the appeals process. Certain other collection actions such as offsets, summonses to collect information and suits to collect, may occur.
  3. See IRM 5.1.9 for additional information.

5.12.1.2.5  (12-09-2003)
When is the CDP Notice (L3172) Generated

  1. The CDP notice, L3172, Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRC 6320, is generated:
    1. when the original lien filing (after 1/18/1999) is requested;
    2. only once if liens are filed in multiple jurisdictions for the same tax period;
    3. only for the first NFTL filing after 1/18/1999 (even if a NFTL was previously filed for the same taxable period before the effective date).
    4. when subsequent assessments are made and a lien is requested;
    5. for individual taxpayers;

      Note:

      When there is a joint liability each spouse will be sent the same notice in a separate envelope addressed respectively to each spouse at their last known address.

       

    6. for partnerships and corporations

     

  2. The notice for a right to a hearing will not be generated for refiled or estate tax liens.
  3. The L3172 can be printed three business days after the NFTL is printed. It must be mailed no later than two business days after it is available for printing.
  4. TC 582 indicates that a lien was requested. When the NFTL is requested through ALS, it is also an indication that the L3172 generated. Check with the ALS Unit to determine when the notice was mailed.
  5. Facsimile copies may be generated by revenue officers and other employees with access to ALS, as necessary.

5.12.1.2.6  (12-09-2003)
Issuing the CDP Notice

  1. The Service is required to notify taxpayers after a NFTL has been filed. The Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (Letter 3172, Exhibit 5.12.1-1) must be mailed within 5 business days after the NFTL is filed.

    Note:

    The taxpayers 30 day period for requesting a hearing begins the day following the 5 business day period after the filing of the NFTL.

     

    Note:

    The taxpayer’s copy of the NFTL will be mailed with the collection due process notice.

     

  2. The notice must be sent certified mail.

    Note:

    Use registered mail only if the taxpayer resides outside the United States. There is no international certified mail.

     

  3. CDP notices generated for liens filed out of the area will have the name and telephone number of the contact person for the originating area office.
  4. In rare instances, it may be necessary to hand carry a NFTL to the recording office. Obtain a Serial Lien Identification (SLID) number from the Automated Lien System (ALS) Unit and provide the information necessary to complete the lien document, before recording the lien. Following this procedure ensures that the CDP notice is generated and mailed timely.
  5. When a lien is filed in a different jurisdiction at a later date for a tax period that has previously received a right to a hearing. a L3171, Notice of Additional Federal Tax Lien Filing (Exhibit 5.12.1-2), is issued.

5.12.1.2.7  (12-09-2003)
CDP Notices Prepared Manually

  1. The L3172 can be manually generated by ALS using the Notadd option. Co-obligor (spouse with a different address or individual partners) information must be entered into ALS before the notice is generated.

    Note:

    Remember to provide address information to the ALS Unit.

     

    Note:

    Each individual partner listed on the NFTL, spouse or ex-spouse must be sent a L3172 certified mail within 5 business days.

     

    Note:

    For a single member LLC (disregarded entity) the CDP notice is sent to the single member, not the LLC).

     

  2. If the above method is not used to generate the L3172, it is the responsibility of the employee making the lien filing determination to ensure that the CDP notice is timely issued and mailed.
  3. When mailing addresses are not available for the partners’ residence and the place of employment is not the partnership, revenue officers will attempt to provide the L3172 in person.
  4. Document each attempt in the case file.
  5. When requested, the ALS Unit will fax copies of co-obligor liens to the appropriate employee for L3172 preparation and mailing.
  6. ALS Units will create the L3172 if addresses are provided prior to the notice generating.
  7. If the L3172 is prepared by the revenue officer when a new address is located in the case file or on master file,then the Revenue Officer should:
    1. calculate the taxpayers 30 day response due period beginning the day after the date the L3172 is dated.
    2. print or type ’substitute’ across the top.
    3. obtain a certified mail label from the post office.
    4. document the case file

     

  8. If the revenue officer elects to mail the L3172, when the taxpayer has not provided documentation to change the master file address, print or type ‘duplicate’across the top.
  9. Retain the date stamped receipted copy of the certified mail label in your case file.

    Note:

     

    The receipted copy must be retained for 10 years after the end of the processing year.

5.12.1.2.8  (12-09-2003)
Corrected NFTL Generates New L3172

  1. The provisions of IRC 6320 requires that taxpayers be given one appeal per tax period per assessment.
  2. ALS generates a new L3172 when the taxpayer’s name or tax period is corrected on the NFTL. The notice will have a new 30 day response date for the taxpayer.

    Note:

    ALS will not generate a duplicate L3172.

     

    Note:

    A new L3172 will not be generated on a NFTL once it has been recorded.

     

  3. The five business day certified mail rule applies.
  4. A new L3172 must not be issued when the name is corrected to Limited Liability Companies (LLC) – notification on the LLC or the individual owner is sufficient.

5.12.1.2.9  (12-09-2003)
Undelivered L3172

  1. The ALS Unit will return all undelivered L3172s issued by revenue officers.
  2. Research the case file to determine if there is a new address.
    1. If there is a new address (not on master file), note the information and return to the ALS Unit to have a new notice issued. Document the case file and retain returned envelope.
    2. If there is not a new address, document the case file and retain the envelope.

     

5.12.1.2.10  (12-09-2003)
Providing the L3172 to the Taxpayer’s Representative

  1. Employees responsible for making lien filing determinations are also responsible for ensuring that the taxpayer’s representative receives a copy of the L3172. While there is no five business day certified mail requirement, a copy should be mailed as soon as possible.
  2. If the mailing address is available when a NFTL is requested and the taxpayer’s representative is identified, you may mail the notice personally or fax the name and address to the ALS Unit.
  3. The copy of the L3172 to the representative will be mailed the same day as the taxpayer’s, if possible, but in no instance shall it be mailed later than five days after the taxpayer’s.
  4. When you notify the taxpayer’s representative provide a copy of the L3172, attach Letter 3262 (Exhibit 5.12.1-5). This letter informs the representative of the lien filing and explains that the L3172 was mailed to the taxpayer.
  5. When you notify the taxpayer’s representative of an additional lien filing, attach Letter 3271 (Exhibit 5.12.1-6). This letter explains that a NFTL has been filed in a different jurisdiction and that the taxpayer is not entitled to additional appeal rights because the appeal rights were provided with the original NFTL filing.

5.12.1.2.11  (12-09-2003)
Nominee and Alter-Ego Situations

  1. Persons Identified as nominees or alter-egos are not entitled to a Collection Due Process hearing.
  2. Issue Letter 3177, Notice of Federal Tax Lien Filing – Nominee and Alter-Ego (Exhibit 5.12.1-3), when you mail the lien. There is no requirement to send this notice certified mail. Review IRC 6325(b)(4) provisions. See IRM 5.12.3
  3. The person identified as the nominee or alter-ego is entitled to the appeal process under the Collection Appeals Program (CAP).
  4. The taxpayer in this situation must receive the right to a hearing notice (L3172), if a notice has not already been issued for all periods on the lien. This notice will not be generated by ALS. Employees assigned the case must ensure that the response due date is calculated and that the notice is sent certified mail within the required five business day mailing period.
  5. Forward the date stamped receipted copy of the certified mail label to the ALS Unit for retention. Note your case file.

5.12.1.2.12  (12-09-2003)
Child Support Obligations

  1. There is no jurisdiction based on IRC 6305 to restrain or review the assessment and collection of Child Support Obligations balance dues. The Code states that the assessment and collection are not subject to review by the Secretary in any proceeding.
  2. Accordingly, IRC 6320, Collection Due Process, does not apply to this type of liability. Do not issue a right to a hearing notice (L3172).
  3. The taxpayer does not have the right to request an appeal under the Collection Appeals Program.
  4. Issue Letter 3527, Notice of Federal Tax Lien Filing – Child Support Obligations (Exhibit 5.12.1-4), with a copy of the NFTL.

    Note:

    Do not include child support obligations on NFTLs with tax liabilities.

     

  5. There is no certified mail requirement for this letter.
  6. This notice will not be generated by ALS. Employees assigned the case must ensure that the response due date is calculated and that the notice is sent certified mail within the required five business day mailing period.

5.12.1.2.13  (12-09-2003)
Request for an Appeal

  1. A taxpayer may appeal any action related to the filing of a NFTL (i.e., underlying liability (under certain circumstances), filing, withdrawal, discharge, etc.) Detailed Appeals procedures are contained in IRM 5.1.
  2. Requests for appeal hearings will be mailed directly or faxed (if contact has been made with the taxpayer by phone or in person and the taxpayer history file is documented with the date of contact and the case file is documented that the taxpayer wishes to send the letter by fax) to the revenue officer. Employees may attempt to resolve issues with the taxpayer, however, this does not extend the 30 day period. If an agreement is reached, the request must still be sent to Appeals. If you are trying to resolve issues with the taxpayer before the taxpayer has filed a request for a hearing with Appeals, it is essential that you inform the taxpayer that their discussions do not extend the 30-day period in which the taxpayer may request a hearing.
  3. Appeal rights related to dyed diesel fuel liens will be forwarded immediately to the Examination employee.
  4. Requests for appeals based on ACS lien filings will be mailed to the ACS Support Unit at the ACS site identified in the L3172.
  5. Prepare a case file for Appeals. It should contain:
    1. a copy of the L3172.
    2. a copy of the NFTL
    3. a legible copy of the Form 3877, certified mail certificate
    4. the original or fax copy of Form 12153, Request for Collection Due Process Hearing
    5. the envelope in which the request was mailed, if available.

     

  6. Forward envelopes received with Form 12153, Request for Collection Due Process Hearing, received after the 30-day response period has lapsed to the Office of Appeals with the Appeals case file. The envelope or a faxed Form 12153 is important when determining the actual date of mailing and may be the deciding factor as to whether the taxpayer is entitled to a collection due process or equivalent hearing.

5.12.1.2.14  (12-09-2003)
CDP Case Documentation and Case Review Requirements

  1. The Service is required by law to notify a spouse/ex-spouse or business partner listed on the NFTL of their collection due process appeal rights.
  2. The Service established a policy to provide the taxpayer’s representative or attorney with a copy of the appeal rights.
  3. Revenue officers will document case histories with spouse/ex-spouse, business partner and POA notification, i.e., 6/5/2000, requested ALS send CDP notice to POA and ex-spouse….provided new address for ex-spouse.
  4. During the case review process, group managers will note the case file whether or not revenue officers are documenting, where appropriate, that CDP notification has taken place in the above referenced situations.
  5. Check IDRS and ALS to ensure that the case can be closed. Case files should not be closed or archived during the period (45 days) in which the taxpayer has to respond. A copy of the case file must be forwarded to Appeals along with all documents as specified in this IRM and IRM 5.1.9.

5.12.1.2.15  (12-09-2003)
Rescinding the Collection Due Process Notice

  1. In instances where the Service has filed a NFTL in error, we are able to correct the situation by withdrawing the NFTL. With the implementation of IRC 6320, we have the added responsibility of ensuring that taxpayers are made aware of their appeal rights and that those rights are protected when an error is made.
  2. Refer to IRM 5.1.9.3.5.1 for detailed instructions.

5.12.1.2.16  (12-09-2003)
Lien Filing During Levy Appeal

  1. A lien may be filed using standard lien filing criteria during the period prior to the taxpayer requesting a levy appeal.
  2. When a levy appeal has been requested, a lien may not be filed unless the government’s interest is at risk. The following are examples of when you may want to file a lien:
    1. The taxpayer is an in-business corporation, pyramiding liabilities.
    2. Individual or business assets are being liquidated, or
    3. The taxpayer has threatened to file bankruptcy.

     

5.12.1.2.17  (12-09-2003)
Levy During Lien Appeal

  1. If the notice requirements in 5.11.1 have been satisfied, Letter 3172 does not create a new waiting period before a Notice of Levy can be issued. However, once the taxpayer appeals the lien filing, generally, no Notice of Levy will be issued during the administrative or judicial appeal. See IRM 5.1.9.3.3, General Handbook, for a description of when property can be levied during the appeals process.

5.12.1.3  (12-09-2003)
Collection Appeals

  1. The Collection Appeals Program (CAP) was implemented to provide taxpayers with an opportunity to have collection actions reviewed by an impartial party outside the Collection function. CAP appealable Collection actions are liens, levies, seizures, and installment agreement denials or terminations. In addition to NFTLs, appealable lien actions include the denial of a notice of withdrawal of NFTL and denials of discharge, subordination or nonattachment. An appeal to CAP is also allowed for taxpayers who want to dispute the decision on administrative appeal of liens. Refer to IRM 5.1.9.
  2. Provide the taxpayer with a copy of Publication 1660, Collection Appeal Rights, if an appeal is requested.
  3. Inform the taxpayer that your decision must be discussed with your immediate supervisor before beginning the Collection Appeals process.

5.12.1.4  (12-09-2003)
Taxpayer Advocate

  1. Taxpayers often contact the Taxpayer Advocate’s office when they are attempting to resolve collection issues.
  2. Taxpayer Advocate cases and Applications for Taxpayer Assistance Orders may be initiated because of lien actions.
  3. While this is not an appeal, the Taxpayer Advocate’s office can reverse collection actions.
  4. See IRM 5.1 for criteria and procedures.

Posted in Collection Due Process | Comments Off

How to Avoid Conviction of Tax Fraud

Friday, April 2nd, 2010

The Criminal Investigation Division (CID) of the IRS is charged with investigating offenses under the revenue laws and related offenses. These include a wide variety of tax and nontax crimes. Most prominent of the crimes that CID investigates under the Internal Revenue Code are tax evasion, failure to file, false statements, and forcible interference with the revenue laws.

CID also investigates money laundering crimes under Title 18 of the United States Code, Crimes and Criminal Procedure, including aiding and abetting the commission of offenses, conspiring to defraud the United States, filing false claims, and making false statements.

CID can also investigate Title 31, Money and Finance, violations, including violations of the laws regarding currency transaction reports, certain customs forms, and reports of foreign and financial accounts.

Since CID has limited resources, it focuses on cases involving the highest priority, including cases involving organized crime, narcotics trafficking, public corruption and white collar crimes. For the year 2000, the IRS is concentrating on abusive foreign and domestic trusts.

CID begins about 7,000 investigations each year, of which about one-half result in recommendations for criminal prosecution. Of those, most result in convictions either by plea or trial. Because of these limited resources, CID tries to concentrate on cases that have a high deterrent value, or as it likes to put it, cases that are most likely to result in voluntary compliance with the revenue laws on the part of the public. This policy of maximum deterrence is very prominent in case selection, and as a result, CID often takes cases that do not have high dollar value but still have a great deterrent impact. In the past CID has recommended prosecution not just of corporate executives but also of blue collar workers.

In many cases, however, CID looks for substantial taxes owed, a clear duty on the part of the taxpayer to pay those taxes, and a relatively straightforward or uncomplicated case from the perspective of evidence and prosecution. Matters such as the health of the taxpayer do not prevent prosecution and only deter CID in cases in which the taxpayer’s poor health might evoke sympathy from a jury and therefore undermine the attractiveness of the case for prosecution.

When a case is opened, it is assigned to one or more special agents. Often, there is a joint investigation, using the services of revenue agents of the Examination Division as well as CID. Joint investigations usually arise from revenue agent audits that are accepted as fraud referrals by CID. In such cases, the special agent works cooperatively with the revenue agent to develop the fraud case.

Special agents usually perform a great deal of background work even before they make the initial direct contact with the taxpayer. They anticipate that the target will refuse to cooperate with an investigation. The background work therefore yields information they might not otherwise get and also arms them for interviews with the taxpayer.

The background work includes investigation of many sources of information, including IRS records, courthouse records, bankruptcy court records, other public records, government agency records, and any other public source that the agent may know of.

The next step is to make the initial contact with the taxpayer. The agent identifies himself to the taxpayer, states that he is a special agent of the Internal Revenue Service assigned to investigate the taxpayer, and advises the taxpayer of his Miranda rights.

CID agents have a wide variety of voluntary and compulsory investigative tools. Perhaps the most important of these is the summons power. A summons is an administrative subpoena that commands the summoned person to appear, to testify, and to bring books and records. There are very few limits to the IRS’s summons power. Special agents may use the summons power in aid of a criminal investigation, and as long as the information they seek may be relevant to that investigation, a standard that has been interpreted extremely broadly by the Supreme Court, they may obtain summoned records.

The legally recognized defenses to an IRS summons are:
(1) lack of possession of the records;

(2) attorney-client privilege or work product doctrine;

(3) a number of technical statutory defenses such as second inspection, impermissible church inspection, improper purpose (narrowly construed) and a few others, and;

(4) Fifth Amendment privilege against self-incrimination and other Constitutional challenges.

This leaves the field wide open for CID to obtain almost all of the taxpayers books and records, as well as third party information such as that from banks, brokers, accountants, and the like.

One of the most important of the agent’s investigative tools is his own ability to go out and get witnesses’ statements. Agents may also use informants, conduct surveillance, use pen registers (to record telephone numbers dialed from a particular number), obtain postal covers (to obtain names and addresses of the taxpayer’s business associates) and occasionally perform undercover roles. CID has legal authority to request electronic surveillance, but it is rarely if ever invoked as a policy matter. The IRS is prohibited from nonconsensual monitoring of telephone or other conversations.

DEFENSES AND STRATEGIES – HOW WE DO IT
Taxpayers can ask attorneys to become involved in CID cases at virtually any stage. It is critical for accountants and other return preparers to recognize the signs of a potential fraud referral and refer the client to a tax attorney experienced in these matters at the earliest possible stage. Unfortunately, in many of these cases, attorneys are advised of the investigation only after it is too late, that is, after the taxpayer has confessed to the special agent, or the recommendation for prosecution has gone forward, or some other irretrievably damaging action has occurred.

Therefore, the first and possibly best defense to any CID investigation is to make sure that the taxpayer remains silent from the very first contact. Special agents understand the taxpayer’s right to consult an attorney and do not take it as an admission of guilt. Moreover, there is always plenty of time to open up by cooperating later, after and upon the advice of counsel.

Therefore, every taxpayer should be advised to say nothing to the special agent except, “I do not wish to be interviewed and I would like to consult my attorney.”

The client should then immediately call his attorney.  Tax fraud investigations make this step so extremely important.  Often clients are inclined to call their return preparer. This is a serious mistake, since preparers do not have a client privilege, are not trained in evidentiary issues and ordinarily lack the criminal defense instincts and training to be able to deal effectively with CID. Even when the preparer may have a privilege, such as when he aids the attorney, it is a narrow one, easily breached.

If you are the subject of an investigation by the CID of the IRS, do not hesitate to call John Ellsworth today. John Ellsworth offers 35 years of experience defending criminal cases of all manner and from all walks of life. His tax experience is extensive and will work toward assuring that you have an acceptable result from any such investigation.

Posted in Criminal Tax Problems, Tax Fraud, Tax Lawyer Help | Comments Off

What? You Have Unreported Income?!

Friday, April 2nd, 2010

Check it out.  The IRS efforts to nab unreported income represents the largest component of tax avoidance and tax fraud.  Look out, because now the IRS has developed a new tool for identifying returns with a high probability of unreported income.  If you hang around these tax lawyer blogs long enough you’ll probably hear of the DIF score assigned to tax returns person by person in order to pinpoint returns ripe for audit.  But what you probably haven’t heard of is the new computer algorithm called the Unreported Income Discriminal Index Formula (UI DIF). 

Traditionally all U.S. returns are assigned a DIF score that ranks the possiblity of inaccurate information on the return.  But this new UI DIF takes this computer magic one step further:  the UI DIF rates the probability of income being omitted from the return.  Ouch!  The IRS has customarily used indirect examination methods to identify unreported income, but until now has had no systematic scheme for locating such revenues.  UI DIF levels the playing field, giving the IRS the ability to systematically identify and kick out for audit returns at high risk for unreported income and today all returns receive a UI DIF score in addition to the customary DIF score.

Tax audit representatives and tax audit lawyers alike are beginning to see more and more returns under audit with the main thrust being bank acccount analyses that seek to examine bank account deposits versus income tax income.  Call John Ellsworth of IRS-SOLV today if you have unreported income.  Let John help you address this issue before the IRS police come knocking at your door!

Posted in Bank Records, Criminal Tax Problems, Tax Fraud, Tax Lawyer Help | Comments Off

Are Off-Shore Credit Cards Legal Under IRS Law?

Friday, April 2nd, 2010

Well, yes.  It is not illegal to have an offshore credit card.  However, there is a good chance that some people are using offshore credit cards to avoid paying income taxes.  After all, credit cards allow easy access to offshore funds and accounts in so-called tax-havens (Caymans, anyone?).  These allow income to be hidden.  U.S. citizens, don’t forget, are required to pay taxes on income earned anywhere in the world.  Tax audit lawyers see this over and over again–citizens who are earning money abroad who aren’t aware (or don’t care) that they owe taxes on that earned money.  The IRS has now taken several steps to fight tax-avoidance schemes perpetrated with credit cards issued by offshore banks.

U.S. courts have issues summonses on American Express and MasterCard aimed at offshore credit cards issued in Antigua, Barbuda, the Bahamas, and the Cayment Islands.

This first summons alone netted over 237,000 credit cards issued through 28 banks in 3 countries.  The IRS believes there could be 1 million to 2 million U.S. citizens with debit/credit cards issues by offshore banks. 

Be careful where you bank, eh?

Posted in Bank Records, Criminal Tax Problems, IRS Tax Audits, Tax Fraud | Comments Off

Who the IRS is Really After

Friday, April 2nd, 2010

The IRS is re-weaving its audit net.  Now it is beginning to focus on some key areas where it suspects it will find noncompliance with tax requirements.  After years of research and meetings the new focus will be on areas of high-risk of noncompliance.  In a kind of a just systematic approach the IRS will focus first on promoters and second on participants.  [Note:  A promoter is someone who sells another on a tax-avoidance scheme that violates standard IRS law].

This new initiative will focus on these key areas:

  1. Offshore credit card users.
  2. High risk, high income taxpayers.
  3. Abusive schemes and promoter investigations
  4. High income non-filers of tax returns.
  5. Unreported income (we’re seeing this right now with an emphasis on child care in home where income goes unreported)
  6. National Research Program.

Elsewhere in this blog we will discuss the particulars of some of these high risk tax audit areas.

Posted in Criminal Tax Problems, IRS Tax Audits, Tax Fraud, Who Gets Picked For Audit | Comments Off

How We Defend You

Thursday, April 1st, 2010

Your first line of defense is John Ellsworth, tax audit attorney.  John has 35 years of experience dealing with the IRS and has defended every kind of taxpayer and entity over the years.

The first thing we’re going to do in your defense is make sure we have the Information Document Request in hand.  This is the document filed by the IRS that tells us exactly which of your documents they want to see.  We then assign a staff member from our Document Staff to work with you in assembling those documents.  Sometimes we need to help you retrieve missing documents, sometimes we need to help you replace missing documents, and sometimes we need to create an affidavit to be filed in lieu of documents.

Second we’re going to meet with the IRS without you.  In our experience there’s nothing more dangerous than allowing the IRS unfettered access to a taxpayer.  That’s how Martha Stewart got in trouble and went to prison–not for what she had done but for what she told the investigators.  So John is going to insulate you from the IRS auditors and examiners.

Third we’re going to meet with the IRS auditor and turnover your documents and affidavits, if any are used.  We’re going to answer the questions they wanted to ask you and we’re going to provide answers that are truthful and forthcoming while at the same time protecting you from your dealings with the IRS.  Sometimes people are missing documents or sometimes they have estimated deductions–we’re going to handle these situations with the IRS so that the issue doesn’t develop into something far more serious.

There are many other steps involved, but these should give you a pretty good idea how we make this audit work to your advantage so that you’re being proactive rather than reactive.

Posted in Business Audits, Tax Audit Protection, Tax Lawyer Help | Comments Off