Individuals, professionals and companies often contact us for assistance with questions related to tax matters involving the Internal Revenue Service, State of Ohio, and local taxing authorities. As former Department of Justice Tax Division personnel and tax law specialists, we understand firsthand many of the internal goals, strategies and perspectives of the IRS and state tax agencies. If you have been contacted by the IRS, a state agency or are experiencing problems or tax controversies call us at (614) 223-0123 or contact us to schedule an initial consultation.
Here are some of the most frequent questions we are asked, and a brief initial answer to help you get started. These answers do not constitute legal advice and are not intended to create nor do they create an attorney client relationship.
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What relief may individuals obtain under the bankruptcy code?
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What is the difference between a civil and criminal tax case?
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What should I expect if I receive a statutory notice of deficiency?
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What should I do if I am concerned about non-reported income or inflated/ fictitious deductions?
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Are there warning signs that a civil tax case is heading toward a criminal matter?
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Can I be placed in a non-collectable status with the Internal Revenue Service?
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Why do I owe so much in interest on my delinquent tax liability?
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What are some of the relevant IRS tax publications in civil tax matters that I can read?
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What is the difference between a witness, subject, or a target of a CI investigation?
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What is the Internal Revenue Service offshore voluntary disclosure program?
ANSWER: To solve tax controversies, without litigation, on a fair and impartial basis to both the Government and the taxpayer and in a manner that enhances voluntary compliance and public confidence in the integrity and efficiency of the IRS. This is accomplished by developing and supervising nationwide programs for the administrative system of tax appeals. For more information please see I.R.M. 1.1.7
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How does one distinguish between the work product doctrine and the Attorney-client privilege communication?
ANSWER: The work-product doctrine is distinct from the attorney-client privilege and differs from it in significant respects. It is both broader and narrower. The doctrine is broader in that it is not limited to communications between lawyer and client. It includes fact gathering from discussions with third parties and the lawyer's mental impressions. It is narrower, however, in that it is a qualified privilege and applies only if the work is prepared "in anticipation of litigation." It is this latter factor—the "in anticipation of litigation" element—that is usually determinative of whether work-product protection applies. For this reason, the "in anticipation" element is often described as the linchpin of the work-product test.
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ANSWER: Individuals may obtain relief under the bankruptcy code through liquidation (Chapter 7), a debt repayment plan (Chapter 13), or a reorganization plan (Chapter 11).
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Chapter 7 - Liquidation. Chapter 7 Liquidation is the prototypical bankruptcy. In exchange for the debtor relinquishing all of his non-exempt assets to the trustee in bankruptcy—who then liquidates them and distributes the proceeds to his creditors—the debtor receives a discharge of personal liability from those pre-petition debts. The debtor does not have to commit any of his future earnings or property to repaying creditors, only his present non-exempt property.
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Chapter 13 – Individual Debt Adjustment Plan. Bankruptcy relief under a Chapter 13 individual debt adjustment plan differs considerably from that afforded in Chapter 7. Under Chapter 13, in exchange for committing his future property and disposable income to repaying creditors, the debtor is permitted to retain his pre-bankruptcy assets. This is a very important practical difference. It affords the debtor, who is in default, the opportunity to retain certain collateral. As stated, to qualify for relief under Chapter 13, the debtor must propose a plan to repay certain pre-petition debts over a certain period of time. Payment is made from the debtor’s post-petition disposable income and after acquired property. Upon the debtor’s completion of payments under the plan, the debtor receives a super discharge, i.e., discharge of personal liability for almost all pre-petition debts.
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Chapter 11 Bankruptcy. Chapter 11 bankruptcies provide a means for a financially distressed business to attempt to restructure its debts and ownership interests in a negotiated way with its creditors and stockholders, subject to court review and certain legal limitations.
ANSWER: Civil tax cases involve a variety of situations from inadvertent failure to report income, re-characterization of income, deductions, or credits, or other legitimate disputes between the taxpayer and the IRS as to the treatment or characterization of certain tax items, as well as the collection of a taxpayer’s federal tax liabilities. Criminal tax cases, on the other hand, involve a willful and intentional violation of the Internal Revenue laws, such as intentionally underreporting income. It is that simple. In general, the IRS must bring criminal charges within six years of the due date of the return at issue. The most common tax crimes are tax evasion, failure to file, and false or misleading statements on a tax return.
ANSWER: It is a systematic inspection of a taxpayer’s records involving analyses, tests, and confirmations. There are a number of different types of audits. The type of audit, nature of the agents involved, and the audit program that resulted in the selection of the taxpayer’s return for audit provides important information as to what information the IRS is seeking and the issues that are likely to be raised. Thus, it is imperative that the taxpayer or the taxpayer’s representative have a complete understanding of the audit process to minimize, to the greatest extent possible, the impact of the audit on the taxpayer’s business or the taxpayer individually.
ANSWER: Tax returns are selected for examination by computerized mathematical techniques and by personnel who manually identify them for examination.
As to the computerized mathematical techniques, most returns are classified under what is referred to as the DIF system, which is a computer-based mathematical technique the IRS uses to score income tax returns according to their tax-change potential. Under the DIF system, the IRS developed mathematical formula based upon data collected in Taxpayer Compliance Measurement Program (TCMP) examinations, from which computer programs are developed. These programs measure the likelihood of tax change based on the information taken from the return and gives the return a DIF score. DIF returns are then ranked according to score from highest to lowest, with the highest scored returns having the greatest audit potential and made available to examination for manual screening.
Experienced examiners also manually classify returns as having audit potential. The examiners look for significant issues likely to result in tax changes or that require examination to achieve voluntary compliance by an identifiable group of taxpayers. The key requirement for selection is whether the item or issue to be examined is significant. To decide whether the item or issue is significant, the examiner compares the size of the item against the entire return. That is, the examiner may categorize a $3,000 questionable expense item in a return reporting total expenses of $20,000 as significant, but would likely categorize a $3,000 questionable expense items in a return reporting total expenses of $200,000 as not being significant in a return. The IRS is attempting to identify those items where it will receive the biggest return on investment of its resources. Another factor is evidence of intent to mislead or conceal, such as a missing or incomplete schedule, which may make an item significant even though it may have been inadvertent on the part of the taxpayer. The way an item is reported may also make the item significant if it gives the taxpayer a beneficial result (e.g., an expense item is reported on a business schedule rather than reported as an itemized deduction thereby foregoing the 2% floor limitation). Finally, the examiners will likely consider the relationship of a questionable item to the other items on the return, such as a return that reports business expenses but no business income.
Tax returns are also checked for: (i) correction of mathematical and clerical errors; (ii) unallowable items; and (iii) matching of income and deductions claimed on the Form 1040 against the information reported to it by third parties, such as interest income reflected on a Form 1099-INT. A return may also be audited because the taxpayer initiated the process, as when the taxpayer requests audit reconsideration, files an offer in compromise based upon doubt as to liability, or files a refund claim.
Finally, it is important to note that there are tax returns selected for examination for a myriad of other reasons not covered in the above discussion.
ANSWER: There are generally four types of audits or examinations conducted by the examination function of the IRS.
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Compliance Center Examinations. The examinations are conducted primarily by tax examiners located in the examination branch of the local area office Service Center. By letter, the Taxpayer is asked to mail the IRS an explanation or supporting documentation with regard to certain designated matters. The audit usually consists entirely of telephone calls and correspondence between the taxpayer and the Compliance Center computer or a technician unless an interview is requested. The issues raised usually involve (i) mathematical or technical errors: (ii) incomplete returns; (iii) missing schedules; or (iv) required substantiation.
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Office Audit. Office audits are conducted by tax auditors and not by revenue agents. Tax auditors generally have less training and experience than revenue agents. These office audits are conducted at the local IRS offices and usually involve somewhat more complex issues than those presented in the correspondence audit. The office audit usually includes an interview or discussion with the Taxpayer or the Taxpayer's representative. This usually involves several information exchanges before the audit is resolved. Typical subjects of the office audits include itemized deductions, medical expenses, contributions to an IRA, and the child care credit.
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Field Examinations. Field examinations are conducted by revenue agents. Generally, revenue agents are better trained and have greater skill than their counterparts who handle office audits. They alone determine the scope and depth of the review of the Taxpayer's books and records. The examination can be extended to earlier and subsequent years and to related tax returns or related taxpayers, provide the statute of limitations for assessment remains open. They involve a more detailed review of the books and records of the Taxpayer and may involve repeat interviews or discussions with the Taxpayer or Taxpayer's representative. This usually takes place at the Taxpayer's place of business. The Taxpayers who do not run businesses are not likely to experience a field audits.
- Target Audits. The IRS also has a number of targeted audit programs including but not limited to:
- Verification audits – where the revenue agent attempts to confirm the items reported on the tax return.
- Financial status audit – an investigative audit in which the revenue agent is expected to investigate how a taxpayer can maintain his lifestyle on the basis of the income reported in the tax returns.
- Limited issue focused examination (LIFE Audits) – this audit technique involves an agreement between the taxpayer and the IRS that limits the issues to be addressed in exchange for limits on claims.
- Employment tax audits – as an example the IRS may conduct an audit to determine whether workers reported as independent contractors should be reclassified as employees.
ANSWER: An information document request (“IDR”) is an informal written request by the IRS used during a field examination to request specific information from the taxpayer pursuant to the statutory authority under I.R.C. §§7601 and 7602(a)(1). The IRS, however, does not generally have the authority to enforce an IDR. See CCA 2004-034. But, careful review of the IDR should be made and a good faith attempt to comply with such IDR should be made. It is prudent, however, to communicate with and negotiate with the RA regarding the scope of the IDR especially where the IDRs are overly broad.
ANSWER: The likely result from the audit process is the RA’s issuance of a Notice of Proposed Adjustments (“NOPA’s”). The NOPA sets forth a proposed adjustment with the agent's explanation. Unless the agent is convinced that the adjustment should not be made the same adjustment and explanation will be included in the Revenue Agent's Report and 30-day letter. Usually the NOPA will request a response by the taxpayer within a certain period of time. At this stage it is important to evaluate the likelihood of success in persuading the agent that the adjustment should not be made or that the amounts are incorrect. That determination will dictate the taxpayer’s next step.
It is also important to note that agents do not have "hazards of litigation" settlement authority. With few exceptions, they may only resolve issues on a factual basis. Experienced agents may, however, be more imaginative in interpreting the facts to achieve a resolution and the taxpayer's counsel can help facilitate that result. As to technical issues, if the agent has taken a position that relies upon an interpretation of law, it is important to determine which IRS office is most likely to resolve the issue on a more favorable basis to the taxpayer. The options include: (i) a request for technical advice or technical expedited advice; (ii) advice from the local counsel; or (iii) an administrative conference with the IRS Appeals Office. Technical advice may be requested during the audit or later after the case is in appeals. It is not, however, a speedy process and it may require up to 18 months for a decision.
In an unagreed upon case there are a number of issue resolution initiatives including Comprehensive Case Resolution, Early Appeals Referral, as well as Fast-Track Mediation and LMSB Fast-Track settlement.
Finally, if you are lucky the audit could end with a no change.
ANSWER: The Commissioner is authorized to send this notice per I.R.C. §6212(a). The issuance of a statutory notice of deficiency begins the process. A taxpayer that does not agree with the adjustments may file a petition with the Tax Court within 90 days from the notice date (150 days if the notice is addressed to a person outside the United States). See Levy v. Commissioner, 76 T.C. 228 (1981). Generally, notices addressed to APO (signifying military mailing) addresses are considered outside the United States. See Brown v. Commissioner, 78 T.C. 215 (1982), acq. 1982-2 C.B. 1. See also 4.14.1.6.2.10, below.
ANSWER: If a taxpayer has a concern that the tax years under audit involve an underreporting of income or inflated or fictitious deductions, the taxpayer may be subject to criminal exposure that should not be taken lightly. It is imperative that the taxpayer obtain guidance from an experienced criminal tax attorney as early as possible to work with during the audit process.
ANSWER: Internal Revenue Manual § 25.1.3.2 states that a revenue agent should suspend the civil examination and prepare Form 2797 (Referral Report for Potential Fraud Case) for CI to consider once he discovers firm indications of fraud. This may also involve the case being referred to a fraud specialist within the examination department. The clearest indication that the case is being reviewed for fraud is the inability to reach the revenue agent despite the taxpayer's repeated attempts. However, the fact that a revenue agent continues to work with you does not mean this has not been referred for criminal fraud review. In fact, the Internal Revenue Manual instructs the agent to proceed with the examination for as long as it is necessary to make the file complete enough for a CI to adequately consider the matter. This means that the revenue agent will continue to gather evidence sufficient to support the criminal referral. Consequently, a taxpayer should be on the alert for early warning signs even before the agent's disappearance from the scene, such as:
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The RA has been asking an unusual large number of questions that focus on specific items of income that appear to have been omitted;
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The RA has been examining bank deposits or records that would be necessary to establish one's net worth and expenditures during the examination;
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The RA has been copying lots of basic financial documents;
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The audit appears to be going on too long considering the complexity of the taxpayer's return;
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The IRS or a grand jury is asking questions of friends, suppliers, customers, or others;
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The IRS is issuing summonses to third-parties;
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The client is a high profile individual;
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The client had a recent confrontation with an ex-employee or ex-spouse who is familiar with his financial situation;
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The client was investigated for criminal activity unrelated to tax but from which one could derive income such as embezzlement; or
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The client was the subject of a newspaper article suggesting that he was involved in an activity that could generate illegal income.
Usually, where CI gets involved in a case, a special agent arrives at the Taxpayer's home or business without any warning given to the Taxpayer. The element of surprise is intentional. Thus, upon receiving such visit from a special agent, it is imperative that the taxpayer politely advise the special agent that he/she would like to consult their attorney and subsequently contacts an experienced criminal tax attorney who can properly advise the taxpayer as how to respond or ultimately not respond.
ANSWER: Another way to defer your tax payments is to request IRS to enter into an installment payment agreement with you. This request is made on Form 9465. IRS charges a $43 fee for installment agreements, which will be deducted from your first payment after your request is approved. Form 9465 requires less information than the hardship extension application. If the liability is under $25,000, you will not be required to submit financial statements. Even if your request to pay in installments is granted, you will be charged interest on any tax not paid by its due date. But the late payment penalty will be half the usual rate (1/4% instead of 1/2%), if you file your return by the due date (including extensions).
ANSWER: IRS prefers a partial payment to no payment at all. Thus, IRS is sometimes willing to settle a tax liability for less than the full amount if (a) the taxpayer is unable to pay the full amount, (b) there is doubt as to how much the tax liability is, (c) collection of the liability would create economic hardship for the taxpayer (such as where the taxpayer is out of work due to health problems, or where sale of assets to pay the tax would leave the taxpayer without enough money to meet basic living expenses), or (d) compelling public policy or equity considerations exist, and due to the exceptional circumstances IRS's collection of the full liability would undermine public confidence that the tax laws are being fairly and equitably administered. Exceptional circumstances for this purpose might include situations where a taxpayer relies on erroneous advice from IRS, or a medical condition prevents a taxpayer from managing his financial affairs.
The taxpayer starts the settlement process by making an offer-in-compromise. If the offer is grounded on any reason other than doubt as to how much the tax liability is, financial information must be submitted along with the offer. If it is grounded on doubt as to the liability, IRS is not permitted to request a financial statement.
Except where the offer is based only on doubt as to liability, the taxpayer must agree to comply with all tax law rules on filing returns and paying taxes for five years or until the offered amount is paid, whichever period is longer. If these requirements are not met, the compromise terminates and IRS can seek collection of the original liability amount.
It is also important to note that notwithstanding the unwieldy amount of paper required to process a successful OIC, the odds of acceptance are weighted against the taxpayer from the beginning. The IRS will reject an OIC if: (1) all of the documents are not properly submitted; (2) the taxpayer fails to submit any additional requested documents; (3) the amount offered is less than what could be expected to be collected; or (4) if there is a public policy reason to reject
It is important to note that many less scrupulous practitioners that will market that they can solve your tax liabilities pennies on the dollar, but after spending x amount of dollars the taxpayer learns that the company was being less than truthful. Taxpayers should contact an experienced tax practitioner to properly advise them as to whether an offer-in-compromise is a viable option based upon the taxpayer’s specific facts and circumstances.
ANSWER: According to many commentators, bankruptcy is a commonly overlooked tool when attempting to resolve a taxpayer’s tax liabilities. In fact, a taxpayer’s filing of a petition in bankruptcy may result in the elimination or significant reduction in taxes owed to federal, state, and local taxing authorities. It can also be used as leverage when negotiating offer-in-compromises and installment agreements with the IRS, as well as with state and local taxing authorities. So yes, bankruptcy may play a big role in resolving a taxpayer’s liabilities.
Under limited circumstances, a taxpayer can discharge income taxes in bankruptcy. In general, income taxes may be discharged in a bankruptcy if the initial due date of the tax return was at least three years ago, the tax return was filed at least two years, ago and there have been no assessments within the past 240 days. Also, payroll taxes are generally not dischargeable in a bankruptcy. The bankruptcy rules are very complex; if a taxpayer is considering bankruptcy, a bankruptcy attorney should be consulted immediately.
ANSWER: If, after considering the taxpayer's income and allowable expenses, there is no excess monthly income, the IRS can place the account in "currently not collectible" status. This means that the taxpayer does not need to currently repay the IRS. The IRS, however, will periodically review the taxpayer's financial situation for an increase in income, which will then allow for monthly payments to the IRS.
ANSWER: The Internal Revenue code imposes upon taxpayers a variety of deadlines for filing tax returns and paying tax. Although such deadlines are straightforward, many taxpayers fail to meet them and, as a result, face a daunting array of potential monetary sanctions. In addition to interest discussed below, the most significant of the sanctions include penalties for (i) late or non-filing (referred to herein as the “late filing penalty”), (ii) for late or nonpayment (referred to herein as the “late payment penalty”), and (iii) for not depositing the correct amount of tax in a timely manner (referred to herein as the “failure to deposit penalty”). These, and other penalties not listed, pose an additional burden on a taxpayer who already may be in difficult financial circumstances.
According to the IRS, penalties exist to encourage voluntary compliance by supporting the standards of behavior expected by the Internal Revenue Code. For most taxpayers, voluntary compliance consists of preparing an accurate return, filing it timely, and paying any tax due. Efforts made to fulfill these obligations constitute compliant behavior. Most penalties apply to behavior that fails to meet any or all of these obligations. Penalties encourage voluntary compliance by: (i) Defining standards of compliant behavior, (ii) Defining remedial consequences for noncompliance, and (iii) Providing monetary sanctions against taxpayers who do not meet the standard. These three factors support the public conviction that the tax system is fair and the penalty is in proportion to the severity of the noncompliance.
To learn more about the penalties, please refer to the IRS’ Consolidated Penalty Handbook located in the Internal Revenue Manual. It contains extensive guidance for Service personnel regarding civil penalties. The Penalty Handbook is on the IRS’ website at http://www.irs.gov/irm/part20/index.html.
ANSWER: Interest begins to accrue on an underpayment the day after payment is due. 6601(a). Interest continues to accrue on the underpayment until the IRS receives full payment. Interest also accrues on penalties that are not paid within 21 days of notice and demand for payment. But, there are certain penalties where the interest accrues on the tax return due date rather than 21 days after notice and demand for payment. Recognizing that interest accrues on both the underlying tax liability and the penalties assessed by the IRS, it is easy to see why the interest in some instances may exceed the underlying tax liability. The rules on interest and the interest calculations, however, are complex and cumbersome. Thus, it is important to understand the law related to the assessment and calculation of interest and ensuring that the tax attorney scrutinizes the IRS’ calculation of interest due and owing.
ANSWER:
IRS Publication 5 Your Appeal Rights and How to Prepare a Protest
If You Don't Agree
IRS Publication 556 Examination of Returns, Appeal Rights, and Claims
For Refund
ANSWER: Any person who willfully aids or assists in the preparation or filing of a return or other document that is false as to any material matter, arising under the internal revenue laws, is guilty of violating I.R.C. § 7206(2). The statute provides as follows:
Any person who…willfully aids or assists in, or procures, counsels or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim or other document which is fraudulent or is false to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim or document…shall be guilty of a felony.
Violation of this statute is punishable by up to three years' imprisonment, a fine of up to $250,000 ($500,000 for a corporation), or both, plus the costs of prosecution. The essential elements of the offense are as follows: (1) the defendant aided or assisted in, or procured, counseled, or advised the preparation or presentation of a return or document in connection with a matter arising under the internal revenue laws; (2) the return or document was false as to a material matter; and (3) the defendant acted willfully.
Many tax return preparers fall victim to wanting to satisfy clients that they later find out are less than honest. Thus, it is very important that as a tax return preparer you complete the necessary due diligence as part of representing that client and preparing their returns. You should also ensure that as part of representing your clients you did not arguably become a co-conspirator in their civil or criminal tax controversies. Third, if there is any indication that the client is not honest in the preparation of his tax returns, that you remove yourself from representation consistent with your ethical obligations as a tax return preparer.
ANSWER: Fraud will generally involve one or more of the following elements:
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Deception,
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Misrepresentation of material facts,
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False or altered documents,
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Evasion (i.e., diversion or omission), or
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Conspiracy.
Some common "badges of fraud" include:
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Understatement of income (e.g., by omissions of specific items or entire sources of income, failure to report substantial amounts of income received);
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Fictitious or improper deductions (e.g., overstatement of deductions, personal items deducted as business expenses);
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Accounting irregularities (e.g., two sets of books, false entries on documents);
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Acts of the taxpayer evidencing an intention to evade tax (e.g., false statements, destruction of records, transfer of assets);
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A consistent pattern over several years of underreporting taxable income;
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Implausible or inconsistent explanations of behavior;
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Failure to cooperate with the examining agent;
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Concealment of assets;
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Engaging in illegal activities (e.g., drug dealing), or attempting to conceal illegal activities;
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Inadequate records; or
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Dealing in cash.
ANSWER: Criminal Investigation (CI) is the law enforcement arm of the IRS. See CI’s website at www. ustreas.gov/irs/ci. The primary objective of CI is the prosecution, conviction, and incarceration of individuals who violate criminal tax laws and related offenses. According to its website, CI is comprised of approximately 4,400 employees worldwide, approximately 2,800 of which are special agents whose investigative jurisdiction includes tax, money laundering and Bank Secrecy Act laws. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code.
ANSWER: Congress has created a comprehensive statutory system of criminal sanctions to prohibit and punish tax fraud. The general aim of this system of penalties is to deter noncompliance with the filing and payment provisions of the Internal Revenue Code thereby protecting the proper administration of the tax system and the revenue that the system is intended to produce. Congress has imposed a variety of sanctions for the protection of the system and the revenues. The willful attempt to evade or defeat tax is the capstone of a system of sanctions, which singly or in combination were calculated to induce prompt and forthright fulfillment of every duty under the income tax law and to provide a penalty suitable to every degree of delinquency. Spies v. United States, 317 US 492, 495, 497 (1943); Lee v. Ashcroft, 368 F3d 218, 224 (3d Cir. 2004). The most common criminal offenses are:
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Attempt to evade or defeat tax
I.R.C. § 7201, the statute that covers an attempt to evade or defeat the assessment or payment of tax, provides as follows:
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof, shall [be guilty of a felony].
The elements of the offense of tax evasion are “willfulness, the existence of a tax deficiency…and an affirmative act constituting an evasion or attempted evasion of the tax."
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False Statements
I.R.C. §7206(1), the false-statement statute, which is also sometimes referred to as the tax perjury or fraud statute, is one of the most potent weapons for prosecuting tax offenses. The statute, in relevant part, provides as follows:
Any person who…willfully makes and subscribes any return, statement or document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter…shall be guilty of a felony.
Violation of this statute is punishable by up to three years' imprisonment, a fine of up to $250,000 ($500,000 for a corporation), or both, plus the costs of prosecution. The essential elements of the offense proscribed by I.R.C. §7206(1) are as follows:
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The defendant made and signed a return, statement, or other document that contained a written declaration that it was being signed subject to the penalties of perjury.
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The return, statement, or other document contained false information with respect to a material matter.
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The defendant did not believe that the material matter was true and correct; and
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The defendant acted willfully.
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Failure to file returns or pay tax
I.R.C. §7203, the statute covering failure to file returns or pay tax, in relevant part, provides as follows:
Any person required under this title to pay any estimated tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall [be guilty of a misdemeanor].
I.R.C. §7203 sets forth five misdemeanor offenses: (1) willful failure to make (i.e., file) a return; (2) willful failure to pay tax; (3) willful failure to pay estimated tax; (4) willful failure to keep records; and (5) willful failure to supply information. Violation of the statute with respect to these offenses is punishable by up to one year of imprisonment, a fine of up to $100,000 for individuals ($200,000 for corporations), or both, plus the costs of prosecution.
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Willful Failure to Collect or Pay over tax
I.R.C. §7202, a rarely used statute, is designed to secure compliance by employers with their obligation to account for and pay over certain amounts withheld from employee wages and certain matching amounts from the employer. The withheld amounts are commonly referred to as “trust fund taxes.” The statute provides as follows:
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall…be guilty of a felony.
Violation of this statute is punishable by up to five years' imprisonment, a fine of up to $250,000 ($500,000 for a corporation), or both, plus the costs of prosecution. The statute essentially creates two offenses: (1) willful failure to collect tax and (2) willful failure to account for and pay over tax.
ANSWER: It is important to remember the primary objective of CI is the prosecution, conviction, and incarceration of individuals who violate criminal tax laws and related offenses. Thus, when the IRS shows up at your door you must recognize that they are at your door for a certain and specific reason. Although generally the agent will likely be very professional and courteous, the agent is not your friend. That is, they are there to elicit the necessary information from you, as they need to establish their case. Agents are trained and skilled in eliciting incriminating information needed to support the case they are investigating. Therefore, it is very important to obtain the necessary legal advice from an experienced criminal tax attorney prior to talking with the government.
ANSWER: In addition to gathering the necessary background factual information, one of the first things the experienced criminal tax attorney will want to determine is you are a witness, subject, or a target of the CI investigation. This designation will dictate what response, if any, you or the attorney are your behalf will have with the agent. Thus, understanding the consequences of being designated a witness, subject, or a target of a CI investigation is of up most importance.
The government defines a witness as one who has information relevant to the inquiry. This designation is applied to one who the prosecutor does not believe faces criminal liability. Unfortunately, the witness designation does not confer any substantive rights, nor is it necessarily permanent. And while it signals that the government is not currently considering indicting the witness, it also means the prosecutor does not believe that the witness has a Fifth Amendment privilege to refuse to testify. And any incriminating statements a witness makes can be used against the witness if the government later decides to indict.
The government defines a “subject” as a person whose conduct is within the scope of the Grand Jury's investigation. USAM §9-11.150. Frequently, subjects become targets, and may eventually become defendants. And even for those who remain subjects, their involvement in the case may not end with their grand jury testimony. Depending on that testimony and the facts developed in the investigation, subjects can also become uncharged government witnesses at trial. Subjects of grand jury investigations can be the most challenging clients, as their representation often involves the most difficult strategic choices.
The government defines a “target” as a person [natural or corporate] as to whom the prosecutor or the grand jury has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a putative Defendant. Criminal Resource Manual §9-11.151. The manual goes on to explain that an officer or employee is not automatically considered a target even if that individual’s conduct contributed to the commission of the crime by the corporation. Conversely, not all organizations become targets when they employ, or employed, an individual who is a target. Criminal Resource Manual §9-11.151.
At the end of the day, whether you are a witness, subject, or target of a CI investigation, a person who receives a visit from CI should politely excuse himself, not invite them in, and contact their experienced criminal tax attorney to properly advise them on how to respond. It is that simple.
ANSWER: The required response depends upon the facts and circumstances of your particular matter.
Internal Investigation Services –As a former FBI agent, white-collar crime investigator, and FBI interrogation instructor, Vince Nardone is uniquely positioned to handle any internal investigation. Not only does Vince have the experience in conducting investigations of companies and company personnel from the government’s perspective, he also has conducted and defended internal investigations in the private sector in a number of circumstances. These include:
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Hired by company personnel to conduct internal/parallel investigation of its own business activities in the midst of a government health care fraud investigation;
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Hired by company personnel to conduct internal/parallel investigation regarding proper structure and tax treatment of various business transactions as part of IRS CI investigation;
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Hired by company personnel to ferret out potential embezzlement and other wrongdoing conducted by the company’s own employees;
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Hired by company personnel to identify whether the company’s clients had defrauded the company as part of a larger mortgage fraud investigation;
Many legal issues arise in internal investigations including matters such as (i) protecting the attorney-client privilege; (ii) knowing when it may be helpful to waive such privilege; (iii) eliciting admissions of potentially criminal information from company employees; and (iv) protecting the business interests and minimizing the impact of the investigation on the business itself, if possible. Vince works with in-house attorneys and executives, professionals in other specialty areas such as forensic accounting, as well as retired/former FBI and IRS CI agents to ensure that the issues above are addressed and to ensure the client is receiving the best possible representation.
ANSWER: Section 7623(a) and Section 7623(b) of the Internal Revenue Code provide that the Internal Revenue Service (“IRS”) may issue an award to individuals who “blow the whistle,” or in other words, informs the IRS about taxpayers that have failed to pay taxes that are due and owing to the IRS.
Sections 7623(a) and 7623(b) define two different types of individuals that qualify as “whistleblowers.” Section 7623(a) provides that a whistleblower may receive an award from the IRS if the whistleblower provides information leading to the collection of unpaid taxes. Alternatively, 7623(b) provides that a whistleblower may receive an award when the information provided involves a dispute with a taxpayer where the amount due to the IRS is in excess of $2,000,000. In such a case, the IRS must provide an award if the $2,000,000 threshold and other requirements are met. In addition, if the 7623(b) whistleblower does not agree with the amount of the award paid to them, they have the right to appeal; a right not afforded to the 7623(a) whistleblower. Depending on the gravity of the taxpayer’s conduct and the quality of the information provided, a whistleblower can receive an award ranging from 15% up to 30% of the amount collected by the IRS. This amount includes the amount of unpaid taxes, assessed penalties, interest, and any additional amounts collected by the IRS.
If an individual is aware of any illegal conduct by other taxpayers, the IRS encourages prospective whistleblowers to file a claim with the IRS. To file a claim and participate in the award program, the individual must complete IRS Form 211, Application for Award for Original Information (“Form”). Moreover, it should be noted that this information is provided under the penalty of perjury, thus frivolous and unsubstantiated claims will not be accepted.
After the Form has been completed, the individual is required to mail the application to the IRS’ Whistleblower office located at:
Internal Revenue Service
Whistleblower Office
SE:WO
1111 Constitution Ave., NW
Washington, D.C. 20224
The Form and other information regarding the program can be found on the IRS website at www.irs.gov. Should an individual decide to participate in this program, they may want to consider competent tax counsel to protect their interests while participating in IRS’ investigation of the claim.
As experienced IRS legal counsel, we can work with prospective whistleblowers to ensure the proper documentation is provided and that the necessary tests are met to ensure you, as the whistleblower, have a good opportunity to recover under this program.
ANSWER:The IRS has had a voluntary disclosure practice in its Criminal Manual for many years. Once IRS Criminal Investigation has determined preliminary acceptance into the voluntary disclosure program, the case is referred to the civil side of IRS for examination and resolution of taxes and penalties. Recent IRS enforcement efforts in the offshore area have led to an increased number of voluntary disclosures. Additional taxpayers are considering making voluntary disclosures but are reportedly reluctant to come forward because of uncertainty about the amount of their liability for potentially onerous civil penalties. To resolve these cases in an organized, coordinated manner and to make exposure to civil penalties more predictable, the IRS has decided to centralize the civil processing of offshore voluntary disclosures and to offer a uniform penalty structure for taxpayers who voluntarily come forward. These steps were taken to ensure that taxpayers are treated consistently and predictably. The objective is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. In sum, the Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account when deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.
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What is the difference between IRS Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ( FBAR ), and Form 8938, Statement of Specified Foreign Financial Assets?
ANSWER: Taxpayers and the IRS alike recognize that there are areas of duplication and overlap with the FBAR and the Form 8938, and that certain foreign financial assets are reported on both forms; however, the filing of the FBAR does not relieve taxpayers of the filing requirement of the Form 8938, and vice versa. It is important to understand these Forms’ filing requirements, so as to avoid penalties.
These two forms were developed to meet two different governmental needs, by two different bodies of law:
- The FBAR is required by Title 31, United States Code; and
- Form 8938 is required by the Internal Revenue Code.
The FBAR is a form used to assist in law enforcement needs, while the Form 8938 meets the needs of tax administration. These two forms are filed at different times of the year, and have different monetary value reporting thresholds. Further, the assets that are required to be reported on the Form 8938 are not limited to bank and financial accounts as they are on the FBAR. In addition to bank and financial accounts, examples of other specified foreign financial assets that may need to be reported on a Form 8938 include:
- Stock issued by a foreign corporation;
- Notes, bonds, debenture or other form of indebtedness issued by a foreign person; and
- Interest in a foreign trust or foreign trust or foreign estate.
For additional information and clarification on this issue, please see our article by clicking here. Also, the IRS addresses taxpayers’ questions in the Q&As related to this issue and has provided a chart detailing the differences in filing requirements for the Form 8938 and the FBAR, which can be viewed by clicking here.