Monday, September 30, 2013

Tax Evasion Is Not One of the Better Crimes to Think About Committing


The Justice Department will keep working to better deter tax crimes perpetrated by small businesses, according to Kathryn Keneally, assistant attorney general for the DOJ Tax Division.
The small business owner who complies with all of his tax obligations can have a difficult time competing with business owners who do not, Keneally said September 27 during a panel on criminal tax sentencing at the Villanova Law Review Norman J. Shachoy Symposium. To level the playing field between the honest business owner and the individual who is cheating, it is important to prosecute those crimes, she said, adding that it is a priority for the Tax Division. "I felt strongly about this when I was in private practice, and I feel strongly about this now," Keneally said.
Keneally said the division is also focusing on so-called gatekeepers, the fraudulent return preparers and the promoters of abusive schemes who lead others into criminal activity. It is vitally important that the DOJ, through both its criminal enforcement and civil injunction operations, shut down those activities and communicate a consistent message that they will not be tolerated, she said. Keneally said, "We do have tools, and we are actively using those tools to go after fraudulent return preparers."
Addressing the department's budget constraints under sequestration, Keneally said the Tax Division is committed to using the money it has to find and prosecute the cases that would have a strong deterrent effect. Noting that the division's conviction rate is over 95 percent, she said, "Tax evasion is not one of the better crimes to think about committing."

Tuesday, September 24, 2013

The Department of Justice Considers Personal Benefit an Important Factor in Prosecuting Employment Tax Cases


Since 2008 the US economy has struggled and employers faced with the dilemma of paying employees and vendors or paying employment taxes often chose the former.  The belief is that they can always catch up.  Unfortunately I have seen many employer incur substantial tax liability for employment taxes, interst and penalties and have found themselves personally liable.
At the recent ABA meeting the Department of Justice said it will now consider whether an individual personally benefited from employment taxes that were not properly withheld or paid as a key factor in considering whether it will criminally prosecute a case.
Using the money to keep a business afloat is not a defense against criminal liability for an employer, but the DOJ is less likely to prosecute in that case than when the employer is using the funds to purchase homes, cars, and other luxury items, said Margaret Leigh Kessler, assistant chief (western criminal enforcement section), DOJ Tax Division.
Speaking during the Civil and Criminal Tax Penalties session of the American Bar Association Section of Taxation meeting in San Francisco, Kessler pointed out that no one factor is dispositive as to whether a case will become criminal. She said there are many different factors that may cause the IRS to refer a case to the DOJ for criminal prosecution, including engaging in a course of illegal conduct over a long period; taking aggressive measures to actively hide assets once the Service has determined noncompliance; and lying to the IRS agents reviewing the case.
The size of the business is not a driving factor, Kessler said. While a case involving large amounts of money may be more attractive to the DOJ, officials wouldn't be eager to prosecute it criminally if they didn't have evidence that the money was being used for personal benefit, she said. 
Those employer who use employment taxes for cars, vacation homes and the like now face not only personal liability but criminal prosecution.

Monday, September 23, 2013

Improvements Are Needed in Assessing and Enforcing Internal Revenue Code Section 6694 Paid Preparer Penalties


The Internal Revenue Code has many penalties which can be imposed on taxpayer and prepares. Section 6694  provides for Understatement of taxpayer's liability by tax return preparer. The code section has a varying degree of penalties. For an unreasonable position the penalty is the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

For willful or reckless conduct the penalty is the greater of $5,000, or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

Recently the Treasury Inspector General for Tax Administration has review the level of enforcement of these penalties and has issued a report and has determined that improvements are needed in assessing and enforcing IRC section 6694
Here are the highlights
IMPACT ON TAXPAYERS
 
More than half of all taxpayers pay someone else to prepare their Federal income tax returns.  When paid preparers take an unreasonable position or intentionally prepare inaccurate tax returns, Internal Revenue Code (I.R.C.) Section (§) 6694 provides penalty standards for paid preparers to discourage further fraudulent or unscrupulous behavior.
WHY TIGTA DID THE AUDIT
The IRS Oversight Board requested that TIGTA determine how effective the IRS is in using the existing requirements and penalty regime that applies to unenrolled paid tax return preparers.  Our overall objective was to determine whether controls are in place to ensure that the IRS effectively enforces and applies penalties to paid preparers as required by I.R.C. § 6694.
WHAT TIGTA FOUND
TIGTA reviewed a statistical sample of 98 closed I.R.C. § 6694 preparer penalty cases from a population of 2,345 cases with penalties totaling $9.35 million that were closed during Fiscal Years 2009 through 2011.  Our results showed that in eight cases the immediate managers did not properly approve $19,000 in preparer penalty assessments as required.  I.R.C. § 6751(b) requires that the initial determination of a penalty assessment be personally approved in writing by the immediate supervisor.  Lack of proper approval could hinder the IRS’s ability to successfully litigate these penalty assessments in court if necessary.
When this issue was brought to their attention, IRS officials took immediate corrective actions by emphasizing the importance of properly approving, in writing, preparer penalty assessments.
TIGTA also analyzed the IRS’s quality reviews for civil penalty determinations to evaluate whether preparer penalties were properly considered and documented.  IRS quality reviewers found that examiners did not always adequately document the examination case files with the facts that supported whether or not they considered paid preparer penalties.  This appeared to be attributable to management’s interpretation of procedures regarding proper documentation in the examined cases.
In addition, TIGTA analyzed the Master File to determine whether the IRS is effectively enforcing paid preparer penalties.  Our results showed that current enforcement practices do not treat paid preparers with unpaid penalties as a priority, which could impact whether penalties achieve their intent of changing preparer behavior and increasing voluntary compliance.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS update the Internal Revenue Manual and implement improvements to ensure that managers and employees adhere to internal procedures for documenting actions and results in preparer penalty case files.  TIGTA also recommended that the IRS develop procedures to expedite assigning I.R.C. § 6694 preparer penalty tax accounts to a revenue officer as well as to give more consideration before suspending collection actions on these types of accounts.
IRS officials agreed with all of the recommendations and plan to take appropriate corrective actions.


Friday, September 20, 2013

Report: Rising Number of Americans Relinquish Citizenship to Avoid High Taxes



A growing number of Americans are renouncing their U.S. citizenship and handing in their passports at faster rates in an effort to avoid rising high tax rates and complicated tax law, according to a newly-published government report.

The Internal Revenue Service released its Quarterly Publication of Individuals who have chosen to Expatriate in the Federal Register. The findings reveal that during the fourth quarter of 2012 - ending on December 31 - 45 Americans renounced their U.S. citizenship. This number increased to 679 during the first quarter of the year, ending on March 31, and jumped by 1,130 during the second quarter alone.

The spike in the number of people renouncing their citizenship has largely been attributed to the upcoming implementation of the Foreign Account Tax Compliance Act (FATCA), which will require foreign financial institutions to disclose more account information on assets and investments held by U.S. taxpayers. The new tax law is expected to provide for more transparency, build an international network of institutions combating tax evasion, and lower the prevalence of tax law violations. New penalties recently announced by the government revealed that Swiss banks that want to avoid criminal lawsuits may be required to pay as much as 50 percent in penalties for hiding foreign accounts held by Americans. This move is expected to greatly diminish the viability of Swiss tax havens.

As these penalties and further pressure on foreign institutions continues, some Americans who can no longer gain favorable tax treatment by hiding assets overseas have opted to renounce their citizenship to legally avoid American income tax. However, some analysts agree that the FATCA is not the sole driver of the spike in renounced citizenships recently. An increase in capital gains and income tax rates in 2013 may also be a component in the high number of renunciations, the San Francisco Gate reports.

Wednesday, September 18, 2013

Abused Spouse Can Seek Relief from Income Taxes


In Rev. Proc. 2013-34, 2013-42 IRB the Internal Revenue Service has issued new guidance and streamlined procedures for spouses who are seeking equitable relief from joint income tax liability especially where the spouse has been abuse.

Background

Section 6013(d)(3) provides that married taxpayers who file a joint return under section 6013 will be jointly and severally liable for the income tax, penalties and interest arising from that joint return. Section 6015, provides relief in certain circumstances from the joint and several liability imposed by section 6013(d)(3). Section 6015(b) and (c) specify two sets of circumstances under which relief from joint and several liability is available in cases involving understatements of tax. Section 6015(b) is modeled after former section 6013(e), the prior innocent spouse statute, and section 6015(c) provides for separation of liability for taxpayers who are no longer married to, are legally separated from, or not living together with the person with whom they filed a joint return.

If relief is not available under section 6015(b) or (c), section 6015(f) authorizes the Secretary to grant equitable relief if, taking into account all the facts and circumstances, the Secretary determines that it is inequitable to hold a requesting spouse liable for any unpaid tax or any deficiency (or any portion of either).

Section 66(c) provides relief from income tax liability resulting from the operation of community property law to taxpayers domiciled in a community property state who do not file a joint return. Section 3201(b) of the RRA amended section 66(c) to add an equitable relief provision similar to section 6015(f).

Section 6015 provides relief only from joint and several liability arising from a joint return. If an individual signs a joint return under duress, the election to file jointly is not valid and there is no valid return with respect to the requesting spouse.

Under section 6015(b) and (c), relief is available only from an understatement or a deficiency. Section 6015(b) and (c) do not authorize relief from an underpayment of income tax reported on a joint return. Section 66(c) and section 6015(f) permit equitable relief from an underpayment of income tax or from a deficiency. The legislative history of section 6015 provides that Congress intended for the Secretary to exercise discretion in granting equitable relief from an underpayment of income tax if a requesting spouse “does not know, and had no reason to know, that funds intended for the payment of tax were instead taken by the other spouse for such other spouse's benefit.” Congress also intended for the Secretary to exercise the equitable relief authority under section 6015(f) in other situations if, “taking into account all the facts and circumstances, it is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return.”


Significant Changes

Rev. Proc. 2013-34 gives greater deference to the presence of spousal abuse. The Service recognizes that the issue of spousal abuse can be relevant with respect to the analysis of other factors and can negate the presence of certain factors. This change is intended to give greater weight to the presence of spousal abuse when its presence impacts the analysis of other factors.

The timeliness threshold condition provides that a request for equitable relief under section 6015(f) or section 66(c) must be filed before the expiration of the period of limitation for collection under section 6502 to the extent the taxpayer seeks relief from an outstanding liability, or before the expiration of the period of limitation for credit or refund under section 6511 to the extent the taxpayer seeks a refund of taxes paid. This is a significant change from prior requirements. The attribution threshold condition adds a new exception in paragraph (e) to the requirement that the income tax liability must be attributable to an item of the nonrequesting spouse. Under the Rev. Proc. relief would not be precluded for an item attributable to the requesting spouse if the nonrequesting spouse's fraud gave rise to the understatement of tax or deficiency.

Streamlined determinations will now apply to understatements of income tax instead of only underpayments and also now applies to claims for equitable relief under section 66(c).

The Rev. Proc. clarifies that no one factor or a majority of factors necessarily controls the determination.

The economic hardship factor now provides minimum standards based on income, expenses, and assets, for determining whether the requesting spouse would suffer economic hardship if relief is not granted. The Rev. Proc. also now provides that the lack of a finding of economic hardship does not weigh against relief.

The knowledge factor for understatement cases clarifies how the factor works in cases involving equitable relief under section 66(c), in addition to cases involving equitable relief under section 6015(f). Further, the Rev. Proc. clarifies that, for purposes of this factor, if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the nonrequesting spouse's retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency.


The knowledge factor for underpayment cases now provides that, in determining whether the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the tax reported as due on the return, the Service will consider whether the requesting spouse reasonably expected that the nonrequesting spouse would pay the tax liability at the time the return was filed or within a reasonable period of time after the filing of the return. The Rev. Proc. provides that a requesting spouse may be presumed to have reasonably expected that the nonrequesting spouse would pay the liability if a request for an installment agreement to pay the tax was filed by the later of 90 days after the due date for payment of the tax, or 90 days after the return was filed. Further, the Rev. Proc. clarifies that for purposes of this factor, if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and because of the abuse or financial control, the requesting spouse was not able to question the payment of the taxes reported as due on the return or challenge the nonrequesting spouse's assurance regarding payment of the taxes for fear of the nonrequesting spouse's retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the tax liability. Finally, the Rev. Proc. provides that if the requesting spouse did not reasonably expect that the nonrequesting spouse would pay the tax liability reported on an amended return that was based on items not properly reported on the original return, the Service will also consider whether the requesting spouse knew or had reason to know of the understatement on the original return.

The legal obligation factor clarifies that a requesting spouse's legal obligation to pay outstanding tax liabilities is a factor to consider in determining whether equitable relief should be granted, in addition to whether the nonrequesting spouse has a legal obligation to pay the tax liabilities.

The significant benefit factor provides that any significant benefit a requesting spouse may have received from the unpaid tax or understatement will not weigh against relief (will be neutral) if the nonrequesting spouse abused the requesting spouse or maintained financial control and made the decisions regarding living a more lavish lifestyle. Further, the Rev Proc. provides that if only the nonrequesting spouse significantly benefitted from the unpaid tax or understatement, and the requesting spouse had little or no benefit, or the nonrequesting spouse enjoyed the benefit to the requesting spouse's detriment, this factor will weigh in favor of relief. The Rev. Proc. also provides that if the amount of unpaid tax or understatement of tax was small such that neither spouse received a significant benefit, then this factor is neutral.

The compliance with the income tax laws factor now provides that a requesting spouse's subsequent compliance with all Federal income tax laws is a factor that may weigh in favor of relief, instead of always being neutral.

Rev. Proc. 2013-34 broadens the availability of refunds in cases involving deficiencies by eliminating the rule that limited refunds in cases involving deficiencies to payments made by the requesting spouse pursuant to an installment agreement.

 General Conditions for Relief

Eligibility for equitable relief. A requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under section 6015(f). With the exception of conditions (1) and (2), a requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under section 66(c). The Service may relieve a requesting spouse who satisfies all the applicable threshold conditions set forth below of all or part of the income tax liability under section 66(c) or section 6015(f) if, taking into account all the facts and circumstances, the Service determines that it would be inequitable to hold the requesting spouse liable for the income tax liability. The threshold conditions are as follows:


(1) The requesting spouse filed a joint return for the taxable year for which he or she seeks relief.

(2) Relief is not available to the requesting spouse under section 6015(b) or (c).

(3) The claim for relief is timely filed:

(4) No assets were transferred between the spouses as part of a fraudulent scheme by the spouses.

(5) The nonrequesting spouse did not transfer disqualified assets to the requesting spouse. For this purpose,

(6) The requesting spouse did not knowingly participate in the filing of a fraudulent joint return.

(7) The income tax liability from which the requesting spouse seeks relief is attributable (either in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse's income. If the liability is partially attributable to the requesting spouse, then relief can only be considered for the portion of the liability attributable to the nonrequesting spouse.

(a) Attribution solely due to the operation of community property law. If an item is attributable or partially attributable to the requesting spouse solely due to the operation of community property law, then that item (or portion thereof) will be considered to be attributable to the nonrequesting spouse.

(b) Nominal ownership. If the item is titled in the name of the requesting spouse, the item is presumptively attributable to the requesting spouse.

(c) Misappropriation of funds. If the requesting spouse did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by the nonrequesting spouse for the nonrequesting spouse's benefit, the Service will consider granting equitable relief although the underpayment may be attributable in part or in full to an item of the requesting spouse. The Service will consider granting relief in this case only to the extent that the funds intended for the payment of tax were taken by the nonrequesting spouse.

(d) Abuse. If the requesting spouse establishes that he or she was the victim of abuse prior to the time the return was filed, and that, as a result of the prior abuse, the requesting spouse was not able to challenge the treatment of any items on the return, or was not able to question the payment of any balance due reported on the return, for fear of the nonrequesting spouse's retaliation, the Service will consider granting equitable relief even though the deficiency or underpayment may be attributable in part or in full to an item of the requesting spouse.

(e) Fraud committed by nonrequesting spouse. The Service will consider granting relief notwithstanding that the item giving rise to the understatement or deficiency is attributable to the requesting spouse, if the requesting spouse establishes that the nonrequesting spouse's fraud is the reason for the erroneous item.

Streamlined Determinations

Under Rev. Proc. 2013-34 there are circumstances under which the Service will make streamlined determinations granting equitable relief under sections 66(c) and 6015(f).

If a requesting spouse who filed a joint return, or a requesting spouse who did not file a joint return in a community property state, satisfies the threshold conditions the Service will consider whether the requesting spouse is entitled to a streamlined determination of equitable relief under section 66(c) or section 6015(f). If a requesting spouse is not entitled to a streamlined determination because the requesting spouse does not satisfy all the elements the requesting spouse is still entitled to be considered for relief under the equitable factors. The Service will make streamlined determinations granting equitable relief under section 66(c) or section 6015(f), in cases in which the requesting spouse establishes that the requesting spouse:

(1) Marital status. The requesting spouse is no longer married to the nonrequesting spouse.

(2) Economic hardship. The requesting spouse would suffer economic hardship if relief were not granted.

(3) Knowledge or reason to know.

(a)  Did the requesting spouse not know or have reason to know that there was an understatement or deficiency on the joint income tax return, or did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return, If the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return, or to question the payment of the taxes reported as due on the joint return or challenge the nonrequesting spouse's assurance regarding payment of the taxes, for fear of the nonrequesting spouse's retaliation, then the abuse or financial control will result in this factor being satisfied even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency or knew or had reason to know that the nonrequesting spouse would not pay the tax liability.

(b)  Section 66(c) cases. Did the requesting spouse not know or have reason to know of an item of community income properly includible in gross income, which, under the rules contained in section 879(a), would be treated as the income of the nonrequesting spouse.

Factors for determining whether to grant equitable relief.

Applicability. Rev. Proc. 2013-34 applies to a requesting spouse who requests relief under section 66(c) or section 6015(f), and who satisfies the threshold conditions, but does not qualify for streamlined determinations granting relief.

Factors. In determining whether it is inequitable to hold the requesting spouse liable for all or part of the unpaid income tax liability or deficiency, and whether full or partial equitable relief under section 66(c) or section 6015(f) should be granted, all the facts and circumstances of the case are to be taken into account. The factors listed below are designed as guides and not intended to comprise an exclusive list. Other factors relevant to a specific claim for relief may also be taken into account in making the determination. In evaluating a claim for relief, no one factor or a majority of factors necessarily determines the outcome. The degree of importance of each factor varies depending on the requesting spouse's facts and circumstances. Abuse or the exercise of financial control by the nonrequesting spouse is a factor that may impact the other factors, as described below. Factors to consider include the following:

(a) Marital status. Whether the requesting spouse is no longer married to the nonrequesting spouse as of the date the Service makes its determination. If the requesting spouse is still married to the nonrequesting spouse, this factor is neutral. If the requesting spouse is no longer married to the nonrequesting spouse, this factor will weigh in favor of relief. For purposes of this section, a requesting spouse will be treated as being no longer married to the nonrequesting spouse only in the following situations:

(i) The requesting spouse is divorced from the nonrequesting spouse,
(ii) The requesting spouse is legally separated from the nonrequesting spouse under applicable state law,
(iii) The requesting spouse is a widow or widower and is not an heir to the nonrequesting spouse's estate that would have sufficient assets to pay the tax liability, or
(iv) The requesting spouse has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date the Service makes its determination.

(b) Economic hardship. Whether the requesting spouse will suffer economic hardship if relief is not granted. The Service will take into consideration a requesting spouse's current income and expenses and the requesting spouse's assets.

In determining whether the requesting spouse would suffer economic hardship if relief is not granted, the Service will compare the requesting spouse's income to the Federal poverty guidelines for the requesting spouse's family size and will determine by how much, if at all, the requesting spouse's monthly income exceeds the spouse's reasonable basic monthly living expenses.

(c) Knowledge or reason to know.
(i) Understatement cases.
(A) Section 6015(f) cases. Whether the requesting spouse knew or had reason to know of the item giving rise to the understatement or deficiency as of the date the joint return (including a joint amended return) was filed, or the date the requesting spouse reasonably believed the joint return was filed. If the requesting spouse did not know and had no reason to know of the item giving rise to the understatement, this factor will weigh in favor of relief. If the requesting spouse knew or had reason to know of the item giving rise to the understatement, this factor will weigh against relief.
(B) Section 66(c) cases. Whether the requesting spouse knew or had reason to know of an item of community income properly includible in gross income would be treated as the income of the nonrequesting spouse.

(ii) Underpayment cases. In the case of an income tax liability that was properly reported but not paid, whether, as of the date the return was filed or the date the requesting spouse reasonably believed the return was filed, the requesting spouse knew or had reason to know that the nonrequesting spouse would not or could not pay the tax liability at that time or within a reasonable period of time after the filing of the return.

Depending on the facts and circumstances, if the requesting spouse was abused by the nonrequesting spouse or the nonrequesting spouse maintained control of the household finances by restricting the requesting spouse's access to financial information, and because of the abuse or financial control, the requesting spouse was not able to question the payment of the taxes reported as due on the return or challenge the nonrequesting spouse's assurance regarding payment of the taxes for fear of the nonrequesting spouse's retaliation, this factor will weigh in favor of relief even if the requesting spouse knew or had reason to know about the nonrequesting spouse's intent or ability to pay the taxes due.

With respect to an underpayment of tax on an amended return that reports a liability based on items not properly reported on the original return, the initial inquiry is whether, as of the date the amended return was filed, or the date the requesting spouse reasonably believed the amended return was filed, the requesting spouse reasonably expected that the nonrequesting spouse would pay the tax within a reasonable period of time.

(iii) Reason to know. The facts and circumstances that are considered in determining whether the requesting spouse had reason to know of an understatement, or reason to know whether the nonrequesting spouse could or would pay the reported tax liability, include, but are not limited to, the requesting spouse's level of education, any deceit or evasiveness of the nonrequesting spouse, the requesting spouse's degree of involvement in the activity generating the income tax liability, the requesting spouse's involvement in business or household financial matters, the requesting spouse's business or financial expertise, and any lavish or unusual expenditures compared with past spending levels.

(iv) Abuse by the nonrequesting spouse. For purposes of this revenue procedure, if the requesting spouse establishes that he or she was the victim of abuse then depending on the facts and circumstances of the requesting spouse's situation, the abuse may result in certain factors weighing in favor of relief when otherwise the factor may have weighed against relief. Abuse comes in many forms and can include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate the requesting spouse, or to undermine the requesting spouse's ability to reason independently and be able to do what is required under the tax laws. All the facts and circumstances are considered in determining whether a requesting spouse was abused. The impact of a nonrequesting spouse's alcohol or drug abuse is also considered in determining whether a requesting spouse was abused. Depending on the facts and circumstances, abuse of the requesting spouse's child or other family member living in the household may constitute abuse of the requesting spouse.

(d) Legal obligation. Whether the requesting spouse or the nonrequesting spouse has a legal obligation to pay the outstanding Federal income tax liability. For purposes of this factor, a legal obligation is an obligation arising from a divorce decree or other legally binding agreement. This factor will weigh in favor of relief if the nonrequesting spouse has the sole legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. This factor, however, will be neutral if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the nonrequesting spouse would not pay the income tax liability. This factor will weigh against relief if the requesting spouse has the sole legal obligation. The fact that the nonrequesting spouse has been relieved of liability for the taxes at issue as a result of a discharge in bankruptcy is disregarded in determining whether the requesting spouse has the sole legal obligation. This factor will be neutral if, based on an agreement or consent order, both spouses have a legal obligation to pay the outstanding income tax liability, the spouses are not separated or divorced, or the divorce decree or agreement is silent as to any obligation to pay the outstanding income tax liability.

(e) Significant benefit. Whether the requesting spouse significantly benefited from the unpaid income tax liability or understatement.

(f) Compliance with income tax laws. Whether the requesting spouse has made a good faith effort to comply with the income tax laws in the taxable years following the taxable year or years to which the request for relief relates.

Refunds. In both understatement and underpayment cases, a requesting spouse is eligible for a refund of separate payments made by the requesting spouse after July 22, 1998, if the requesting spouse establishes that the funds used to make the payment for which a refund is sought were provided by the requesting spouse. A requesting spouse is not eligible for refunds of payments made with the joint return, joint payments, or payments that the nonrequesting spouse made. A requesting spouse, however, may be eligible for a refund of the requesting spouse's portion of the requesting and nonrequesting spouse's joint overpayment from another tax year that was applied to the joint income tax liability to the extent that the requesting spouse can establish that the requesting spouse provided the funds for the overpayment. The availability of refunds is subject to the refund limitations of section 6511.

Procedure

A requesting spouse seeking equitable relief under section 66(c) or section 6015(f) must file Form 8857, Request for Innocent Spouse Relief (and Separation of Liability, and Equitable Relief), or other similar statement signed under penalties of perjury, within the applicable period of limitation.

Thursday, September 12, 2013

The IRS is Directed to Strengthen Its Correspondence Audits




The Internal Revenue Service needs to strengthen its correspondence audit selection process by auditing more of the prior- and subsequent-year tax returns of noncompliant income tax filers, according to a new government report.

The report by the Treasury Inspector General for Tax Administration, noted that the IRS relies heavily on the correspondence audit process to examine individuals who are suspected of underreporting their tax liabilities. 

Correspondence audits result in significant additional tax assessments and are more economical than other types of audits.  IRS statistics show that in Fiscal Year 2012, the IRS conducted 1.1 million correspondence audits and recommended approximately $9.2 billion in additional taxes.

The audit was initiated to determine the effectiveness of filing checks made during the correspondence audit process in the Small Business/Self-Employed Division.
Filing checks are used, in part, to determine whether the same pattern of noncompliance identified on an audited tax return is present on the prior and/or subsequent year tax returns, and if those tax returns warrant an audit.  When properly completed, filing checks leverage IRS audit resources by increasing the overall compliance coverage of every audit.
TIGTA evaluated a statistical sample of 102 of 7,470 single-year correspondence audits in which the taxpayers involved agreed that they understated their tax liabilities by at least $4,000.  Similar tax issues also existed on the prior and/or subsequent year tax returns for 43 of the 102 taxpayers.  TIGTA found that 32 of the 43 individuals did not have those tax returns audited and, as a consequence, may have avoided additional assessments ranging from $2,343 to $18,874.
A factor that contributed to the limited number of prior and/or subsequent year tax audits is the emphasis the IRS places on keeping its audit inventories free of older tax years so there is sufficient time to complete audits and assess any resulting taxes within the three-year assessment statute of limitations.  Control issues also exist over how current year audit results are used in deciding whether to audit the prior and/or subsequent year returns.
TIGTA recommended that the IRS develop and implement procedures that instruct how current year correspondence audit results are to be used in deciding whether the prior and/or subsequent year tax returns warrant an audit.  To ensure that the instructions are followed, the procedures should include instructions for monitoring how well current year correspondence audit results are used in deciding to audit prior and/or subsequent year returns.
The IRS agreed with TIGTA’s recommendation and plans to develop an Internal Revenue Manual section to address the case selection and delivery process and the duties and roles of analysts and examiners.

Tuesday, September 10, 2013

Man’s Best Friend-Subject to Sales Tax?



In a recent letter ruling form the New Jersey Division of Taxation (LR: 2013-1-SUT) the Division ruled that inn some situations the sale or training of a dog may be subject to sale s tax.
Facts
The Taxpayer is a certified master dog trainer that offered the following services:

1. Professional dog training. Services are offered in a group setting, in which a dog owner will receive instruction from Taxpayer on how to properly handle their dog to achieve certain results. Taxpayer will occasionally handle the dog herself to demonstrate the proper methods of training. These services are offered both at a client's house and at Taxpayer's facility.
2. Dog sitting services. Taxpayer will watch client's dogs, allow them to interact with other dogs, and train them while in her care. These services are offered both at a client's house and at Taxpayer's facility.
3. Purchase dogs, train them, and sell client a fully trained dog.

Issues
1. Whether Taxpayer's charges for professional dog training are subject to tax.
2. Whether Taxpayer's charges for dog sitting services are subject to tax.
3. Whether Taxpayer's charges for the sale of a dog which has been professionally trained, are subject to tax.
Discussion
The ruling discussed the Sales and Use Tax Act imposed tax on the retail sale of tangible personal property and enumerated services under N.J.S.A. 54:32B-3.
The Act exempts personal and professional services from sales tax, so long as any property transferred is inconsequential and not separately charged for. N.J.S.A. 54:32B-2(e)(4)(A).
However charges for "[s]toring all tangible personal property not held for sale in the regular course of business…”are subject to tax. N.J.S.A. 54:32B-3(b)(3).
Taxpayers who are registered in New Jersey may issue a fully completed resale certificate to purchase tangible personal property intended for resale or which will be incorporated into other property intended for sale. N.J.S.A . 54:32B-2(e)(1). Sales tax is collected from the ultimate consumer when these items are sold at retail.
"Sales price" is the "measure subject to sales tax and means the total amount of consideration, including cash, credit, property, and services, for which personal property or services are sold, leased, or rented, valued in money, whether received in money or otherwise, without any deduction for the following: (A) The seller's cost of the property sold; (B) The cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller, and any other expense of the seller; . . ." N.J.S.A. 54:32B-2(oo).
Conclusions
The Division concluded:
1. Taxpayer's charges for teaching a professional dog training class are not subject to tax whether the service occurs at a client's house or at Taxpayer's facility. N.J.S.A. 54:32B-2(e)(4)(A).
2. Taxpayer's charges for dog sitting services that take place at the client's home are considered an exempt personal service transaction so long as any property that is transferred is inconsequential and not separately charged for. N.J.S.A. 54:32B-2(e)(4)(A). However, Taxpayer must charge sales tax on charges for animal boarding or "day care" when such services occur at the Taxpayer's facility because Taxpayer is charging for the safekeeping of the dog. N.J.S.A. 54:32B-3(b)(3).
3. Taxpayer may purchase dogs which will be resold without the payment of tax by issuing a fully completed resale certificate to the seller. Taxpayer must charge tax when selling the trained dog to a client. N.J.S.A. 54:32B-3(a). Although separately stated charges for training services are generally not subject to tax, Taxpayer is not selling training services under these facts. Rather, Taxpayer is selling a trained dog. Thus, tax is due on the charge for training services whether or not this amount is separately stated from the price of the dog because the training services are part of the sales price of the dog. N.J.S.A. 54:32B-2(oo).