Late Filed Returns and Discharging Back Taxes
A State of Uncertainty
On December 29, 2014, the Court of Appeals for the Tenth Circuit, (In re Mallo, 2014 WL 7360130 (10th Cir. 2014)), followed the Fifth Circuit (In re McCoy, (CA 5 2012) 666 F.3d 924) and several other tax bankruptcy court cases which held that late-filed tax returns cannot be discharged in bankruptcy. Unfortunately, this draconian result known as the One-Day-Late Rule could preclude the taxpayer’s goal of eliminating back taxes in bankruptcy and obtaining a fresh start.
How do I eliminate taxes in bankruptcy?
In bankruptcy, back taxes are either secured or unsecured claims. If the IRS or state taxing authority files a tax lien, then the tax claim is secured and paid first from the taxpayer’s assets. If the tax claim is unsecured, then its treatment will be contingent upon whether the IRS’s claim is classified as a priority or a general claim.Continue Reading...
Through the 2015 Consolidated Further Continuing Appropriations Act, Congress cut the IRS’s budget for the fifth consecutive year. Congress reduced the IRS budget by $346 million from the 2014 fiscal budget which was $526 million below the IRS’s 2013 funding level. The IRS budget is cause for concern when the tax season starts on January 20, 2015.
Where is my tax refund? I cannot get through to the IRS.
IRS Commissioner, John Koskinen estimated that approximately 50% of calls will be answered during the 2015 filing season. Koskinen stated that “those who do get through could easily wait 30 minutes more.”
In June 2013, Nina Olsen, head of the Taxpayer Advocate, an independent unit of the IRS whose mission is to protect the taxpayer said “the IRS is an institution in crisis”. . . as a consequence of this crisis, the IRS gives limited consideration to taxpayer rights or fundamental tax administration principles as it struggles to get its job done.” As a tax attorney whose focus is exclusively on taxpayer representation, I would agree. The IRS is not functioning well. Some of the problems that I am encountering in my tax practice are as follows:Continue Reading...
Mistakenly, many believe that filing a tax extension is an extension of time to pay your taxes. While a tax extension provides an extension to file your tax return, it does not provide an extension of time to pay taxes owed.
The federal income tax is a pay-as-you-go tax system. If you’re an employee, then your employer will withhold income tax during each pay period in your name and social security number. If you are self-employed, then you would make estimated tax payments throughout the year based on earnings and, generally speaking, have to pay self-employment tax. If you are an employer, then you may have to make federal tax deposits for payroll taxes throughout the year as you are paying your employees.
While you should always aim at timely filing and timely paying your taxes, the good news is that interest rates, which are tied to federal short-term rates, are at historic lows. The IRS recently announced that the interest rates for the calendar quarter beginning Jan. 1, 2015, and ending March 31, 2015 are as follows:
- 3 percent for overpayments, in cases other than corporations
- 2 percent for overpayments in the case of a corporation (except 0.5 percent for the portion of a corporate overpayment exceeding $10,000)
- 3 percent for underpayments (including estimated tax underpayments)
- 5 percent for large corporate underpayments
To put the current interest rates in perspective, at the start of the financial crisis in 2007, rates on tax underpayments were as high as 7%.
Despite rates remaining unchanged since October 1, 2011, they won’t stay low forever. On December 17, 2014, the Federal Reserve indicated that it’s closer to an interest rate hike. Therefore, if you’re in an IRS installment agreement, it could make sense to make voluntary payments above your monthly payment to curb interest rate and future interest rate, hike risk.
Tax interest and penalties is the biggest complaint that I hear from clients. When you do not pay your taxes timely, the IRS, under IRC 6601(a), is required to charge interest on the unpaid taxes from the due date of the return until the date the tax debt is satisfied. To make matters worse, failing to pay your taxes timely will result in the IRS charging a penalty of .5% on the unpaid amount due per month up to 25% of the amount due. The .5% penalty will increase to 1% beginning 10 days after the IRS issues a Notice of Intent to Levy. On top of the tax penalties, IRC 6601(e) directs the IRS to impose interest on penalties. Therefore, owing a back tax can be a difficult debt to extinguish. You have to juggle interest on, not only the tax, but the penalties too.
While tax penalties are discretionary and thus can be negotiated by proving reasonable cause or your prior tax compliance history, interest is not discretionary. Accordingly, the IRS has limited authority to waive interest on a tax deficiency.
IRC 6404 discusses the limited circumstances in which the IRS is permitted to abate tax interest. The IRS may abate interest in the following circumstances:
- A determination is made that the unpaid cost of the tax assessment, including interest, does not warrant administrative and collection costs.
- The IRS made a math error on a return prepared by an IRS employee.
- The IRS provided erroneous written advice that caused interest accruals on a tax due,
- An IRS employee caused an unreasonable delay or error and the taxpayer did not in any way contribute to the delay or error
Because it is rare to abate interest, it is always in the taxpayer’s financial interest to reduce the amount of taxes owed as early and aggressively as possible if you cannot qualify for an offer in compromise or other tax resolution, i.e. Chapter 7 bankruptcy or doubt as to liability offer, that would settle your back taxes owed. In light of the 2015 IRS budget reduction, many of the IRS’s functions such as executing an installment agreement are taking months to complete. Often times, I tell my clients to make voluntary payments or work on current year compliance while waiting for the IRS. Both voluntary payments and current compliance have the effect of curbing IRS interest rate accruals.
Should you have any questions regarding IRS interest assessments, contact the Law Offices of Todd S. Unger, Esq. LLC. Todd S. Unger, Esq. LLC is a boutique tax controversy practice that handles tax collection, audits, tax whistleblower claims, tax preparer representation, and criminal tax investigations. To resolve your tax matter, call Todd S. Unger today (877) 544-4743.Continue Reading...
Through a practice known as civil forfeiture, the IRS can seize property that it believes is tied to a crime even if no criminal charges are filed. The problem is that the IRS has been abusing its power by seizing bank accounts where there is no indication of a crime committed.
The New York Times reported that the IRS has been seizing bank accounts of small business owners and individuals who deposit cash transactions in less than $10,000 increments. The Bank Secrecy Act requires a bank to report to the government when an individual or business deposits more than $10,000 in cash. The Act was designed to catch drug traffickers, racketeers, and terrorists by tracking their cash. The Act was not designed to catch people and businesses who are not trying to break the law.
Structuring, also known as Smurfing, is a crime whereby a person intentionally tries to avoid the banks reporting of income by depositing the cash in increments smaller than $10,000. The problem is there could be legitimate reasons for businesses and individuals to deposit less than $10,000 increments. Unfortunately, the IRS has seized peoples bank accounts who are innocent. Owners are then left to either try to prove their innocence to win back funds, or lose the money that’s been taken.Continue Reading...
Reality television star Giuseppe “Joe” Giudice, 43, of The Real Housewives of New Jersey was sentenced to 3 years and 5 months in prison on Thursday, October 2, according to NorthJersey.com. The verdict comes after Giudice and his wife Teresa, 42, pleaded guilty in March to federal fraud charges involving bankruptcy fraud, wire fraud, conspiracy to commit mail fraud and failure to pay taxes. Teresa was sentenced to 15 months in prison and two years probation compared to Joe’s 41 months, but each were ordered to pay $414,588 in restitution in addition to their jail sentences.
“Both Giudices pleaded guilty to conspiracy to commit mail and wire fraud and three types of bankruptcy fraud,” the article said. “Joe also pleaded guilty to failing to file a tax return for 2004, though he acknowledged that he didn’t file taxes on income of approximately $1 million from 2004 to 2008.”Continue Reading...
Over the past few months, I have been receiving calls from clients and prospects regarding an IRS phone scam. The callers have informed me that they received a call from someone at the IRS threatening to throw them in jail, revoke their driver’s license, or seize all of their belongings if they do not pay over a sum of money. The Treasury Inspector General for Taxpayer Administration (TIGTA) is aware of this scam and has issued a warning to taxpayers.
The callers claim to be from the Internal Revenue Service tell intended victims they owe back taxes and must pay by wire transfer or a pre-paid debit card. Dealing with the IRS on a day to day basis, I can tell you this is not how the IRS contacts people who owe money. Generally, the IRS will notify people with a series of letters, not by phone, regarding unpaid taxes. The IRS will never ask for payment by wire transfer or a pre-paid debit card.
TIGTA advised that if you receive a threatening call from someone claiming to be from the IRS, then hang up the phone and call the IRS directly at (800) 829-1040. A list of IRS contact numbers is on the following website: http://www.irs.gov/uac/Telephone-Assistance. When you speak to the IRS, inform them of the phone call and ask if your account is in good standing.
If you have been a victim of this scam, then you should, at a minimum, complete the following steps:
- File a local police report
- Go to the IRS Treasury Inspector website (http://www.treasury.gov/tigta/contact_report_scam.shtml). Complete the form and retain a copy of the pin number;
- Contact the Federal Trade Commission (use their “FTC Complaint Assistant” at FTC.gov. and add “IRS Telephone Scam” to the comments of your complaint in the “Other” Section. (https://www.ftccomplaintassistant.gov/#crnt&panel1-1) ;
- Contact the FBI
- Contact the Attorney General’s Office in the state you reside.
If you have been a victim of the IRS impersonation scam, IRS identity theft, or another tax scam, then contact the Law Offices of Todd S. Unger, Esq. for help.Continue Reading...
In a recent US Tax Court decision, Renald Eichler v. IRS (“Eichler”), Docket Number 725-12L, the Tax Court affirmed that IRC 6331(k)(2) does not preclude the IRS from issuing the Final Notice of Intent to Levy after the taxpayer submitted an installment agreement request. The Tax Court further held that the IRS did not abuse its discretion under the Internal Revenue Manual, an IRS employee handbook, when it decided to sustain the Final Notice of Intent to Levy.
The Taxpayer’s Partial Payment Proposal to Resolve a Payroll Tax Matter Did Not Stop the IRS Threat to Levy
In Eichler, the IRS utilized IRC 6672 to assess the Trust Fund Recovery Penalty (TFRP). The TFRP is a weapon the IRS uses to collect delinquent payroll taxes from responsible and willful individuals who do not remit an employee’s wages (income tax, social security, and Medicare taxes). The IRS found that the taxpayer was a responsible and willful party and assessed $189,374 in back payroll taxes.
The taxpayer proposed a partial payment installment agreement (“PPIA”) of $350 per month to resolve the delinquent payroll taxes. A PPIA is a proposal to pay less than what is owed through a payment plan. If the IRS approves the partial pay installment agreement, it will monitor the taxpayer’s ability to pay throughout the 10 year collection statute. Generally speaking, the IRS has 10 years to collect back taxes unless it seeks a judgment which can extend the statute based on a time prescribed by state law.Continue Reading...
On June 18, 2013, the IRS announced major changes to the voluntary offshore disclosure program (“OVDP”). OVDP had been criticized by the Taxpayer Advocate and tax attorneys as being too draconian on its participants who failed to disclose their foreign accounts, but were not willful evading their foreign tax obligations.
The 2012 OVDP Terms
Simply stated, the 2012 OVDP deal offered no criminal exposure if you got to the government before it found out about you in exchange for the following:
- You paid a 27.5 percent penalty on the undisclosed offshore accounts with the highest aggregate account balance on the period covered by OVDP (8 years);
- You filed all delinquent FBAR(s) for the period covered by OVDP (8 years); and
- You filed all original and amended tax returns for the period covered by OVDP (8 years)
- You paid all back taxes, interest, and a 20% penalty on the taxes owed (the accuracy related penalty)
The 2012 OVDP offered reduced penalty calculations of 12.5% and 5% of the highest aggregate balance, but these reduced OVDP penalties were based on precise requirements. If you did not satisfy the requirements, OVDP tax agents did not have the discretion to negotiate. If you did not like the program, you could opt out of OVDP.Continue Reading...
If you cannot pay your taxes, then by law the IRS must charge interest on the underpayment of tax. The IRS computes its interest rate on the federal short-term rate and adjusts the rate every quarter. The IRS interest rates are compounded daily.
Recently, the IRS has announced that the interest rates on overpayments and underpayments of tax for the 2014 second quarter will remain unchanged. The IRS has announced the following rates:
- - 3 percent for overpayments, in cases other than corporations;
- - 2 percent for overpayments in the case of a corporation (except 0.5 percent for the portion of a corporate overpayment exceeding $10,000); and
- - 3 percent for underpayments (except 5 percent for large corporate underpayments).
When the 2014 tax season ends, you may lose your tax refund. Often times, I receive calls from prospects claiming that the IRS is keeping their “return.” The correct terminology when speaking IRS parlance is that they’re keeping your “refund”.
There could be numerous causes of why the IRS is keeping your money or disbursing it elsewhere. You may be in arrears of your child support obligations or owe back taxes, but the biggest reason for the IRS keeping your refund is because you’re too late.
Generally, a refund claim must be filed within three years from the due date of the return plus extensions or two years from the time the tax was paid either voluntarily or by garnishment or levy. The exception to this general rule is if you’re “financially disabled” defined as unable to manage your financial affairs due to a serious medical impairment. The above refund statute is approaching its limitation period for the 2010 tax year.
The IRS reported that it owes more than $760 million in unclaimed 2010 tax refunds. If you have not filed a tax return in years, you should immediately file the 2010 tax year no later than April 15, 2014 or October 15, 2014, the latter date if you filed an extension.
Todd S. Unger, Esq. is a tax attorney focusing on assisting taxpayers who have not filed in years or are experiencing a tax dispute with the IRS. If you haven’t filed your 2010 tax return, there is no time to delay. Don’t lose your 2010 tax refund; Call or Contact Todd S. Unger today (877) 544-4743.Continue Reading...