In addition to our Estate Planning, Probate, Business Law, Asset Protection and Captive practices, we are tax attorneys with offices in North Carolina and Virginia and represent taxpayers nationwide and abroad. We help taxpayers with a variety of tax issues, including, but not limited to:
- Understanding IRS Notices
- Negotiating Offers in Compromise
- Defending tax audits
- Negotiating penalty abatements and waivers
- Defend against civil penalties and tax fraud
- Defend against Trust Fund Recovery Penalties (Form 4180)
- Represent taxpayers before IRS Appeals (Form 12153) and US Tax Court
- Handle withdrawals and releases of IRS tax liens and IRS tax levies
- Prepare/negotiate Innocent Spouse claims (Form 8857)
- Prepare/negotiate Injured Spouse claims (Form 8379)
- Ensure Foreign Tax compliance
- Foreign Bank Account Reporting (Filing FBARs)
- File delinquent IRS Form 8938, 1040 Statement of Foreign Accounts
- Defend against FBAR penalties
- Help with Unfiled Tax Returns
- Respond to IRS Notices of Deficiency (CP3219N Notice)
- Assist with State tax audits, sales and use tax problems and State income tax issues
The IRS Fresh Start Initiative, or Fresh Start program, is almost 10 years old. It focuses primarily on collection policies and procedures and offers a variety of flexible payment options, streamlined payment and penalty abatement procedures and flexibility in withdrawing IRS tax liens. It includes streamlined procedures for accepting Offers in Compromise, establishing automatic installment agreements, allowing for first-time penalty abatements, and more lenient lien releases. If you meet the criteria and you’re struggling to manage your tax debt, the IRS Fresh Start Initiative is something to take advantage of.
Not all IRS installment agreements or IRS payment plans are treated equally. There are various types of “guaranteed” and “streamlined” payment plans with the IRS. A “guaranteed” installment agreement is available if you owe $10,000 or less and it is easy to apply online. You must have a previous compliance history, have filed all past-due tax returns, not used an installment agreement plan within the previous five years, and must pay the tax amount due within three years or less. If you meet these criteria, your installment agreement is “guaranteed”.
For tax debts up to $50,000, you may be eligible for a “streamlined” installment agreement. The biggest difference with “streamlined” installment agreements is that they offer a longer payment term, up to 72 months or six years.
If you owe over $50,000, your installment agreement options become a little bit more difficult to obtain. You must submit financials to the IRS so they can determine the proper installment agreement terms. This is where your negotiation becomes more difficult and it is advisable that you seek professional legal assistance.
Finally, there is an opportunity for a “Partial Pay” installment agreement. This is basically a “tiered” approach to paying your tax debt over time. It involves paying less on the front end and increasing tiered payments in later years. The IRS CSED becomes particularly important in “partial pay” in installment plans. The “partial pay” installment option requires careful negotiation and it is advisable that you seek professional legal assistance. “Currently Not Collectible” is also an option if you cannot currently pay your tax debt at all. Also, expect the IRS to file a federal tax lien to guarantee its debt collection and protect its interests.
We have all heard of the Offer in Compromise program, where the taxpayer pays less than he or she owes in full settlement of their tax debt. There are three different types of Offers in Compromise. One is “Doubt as to Liability”, which involves a situation where there is doubt as to whether the taxpayer is liable for the underlying tax liability. The most common Offer in Compromise is “Doubt as to Collectability”. This type of Offer in Compromise is by far the most common; however, there is a third type. It is called an “Effective Tax Administration” Offer in Compromise. This is a situation where a taxpayer may have the means to full-pay the tax debt, but compelling public policy or equity considerations provide a basis for accepting less than the full amount of tax owed. A situation where, due to exceptional circumstances, collecting the tax in-full would undermine the public’s confidence that the tax laws are being administered in a fair and equitable manner.
For example, despite the ability to full-pay, a bedridden elderly grandmother living primarily off Social Security and a modest retirement pension may be a good candidate for an “Effective Tax Administration” Offer in Compromise. Her retirement pension could pay the tax owed, but it would be inequitable to expect her to deplete her modest pension to pay the tax in-full. In this situation, the IRS might find that there are compelling reasons and an inherent inequity to make her pay the tax liability in-full – given her life circumstances. This is by far the most delicate Offer in Compromise negotiation. It can be very difficult to convince the IRS that public policy and compelling equity factors exist. It sometimes involves using technical analysis, like life expectancy actuarial tables and economic forecasts.
If you are under investigation for, or have been assessed, a civil penalty for your company’s nonpayment of employment tax, you know how devastating the Trust Fund Recovery Penalty can be. If the IRS determines you are a “Responsible Person” for the nonpayment of employment tax, you will be assessed a Trust Fund Recovery Penalty under IRC 6672. The penalty is assessed against any person required to collect, account for, and pay over employment taxes held in trust for the benefit of the IRS. You must have “willfully” failed to perform those duties. The penalty is equal to the total amount of employment or excise tax evaded, not collected, or not accounted for and paid over.
The Trust Fund Recovery Penalty, or 6672 penalty, is a matter of status, duty, and authority. It can apply to officers or employees of a corporation, partners or employees of a partnership, corporate directors or shareholders, employees of a sole proprietorship, limited liability company (LLC) members, managers or employees, and others.
There are multiple factors in determining “responsibility”, including: the ability to exercise independent judgment over financial affairs of the business, owning stock or membership interests in the business, the authority to sign checks, and many other “responsibility” factors.
The IRS must also establish “willfulness” however. Willfulness means intentional, deliberate, voluntary, reckless, knowing acts, as opposed to accidental. No evil intent or bad motive is required. To show willfulness, the IRS generally must demonstrate that a Responsible Person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. The defense of the Trust Fund Recovery Penalty is a delicate noneegotiation, often times involving legal research and witness preparation. An inadvertent admission can easily destroy a defense.
Notices of Deficiency (CP3219N Notice), as explained by the IRS: With Notice of Deficiencies, the IRS has calculated your tax, penalty and interest based on wages and other income reported to it by employers, financial institutions and others. The CP3219N is a Notice of Deficiency (90-day letter). Once you receive your notice, you have 90 days from the date of the Notice to file a Petition with the U.S. Tax Court, if you want to challenge the tax we proposed. The 90 days is a hard deadline. If you fail to respond, the tax, penalty and interest become final with no ability to re-challenge. Filing a Tax Court petition is your key to the door of the U.S. Tax Court.
CAP Requests generally apply to challenging the actual collection action taken (lien, levy, seizure) only, not to the underlying penalty associated with the collection action. In contrast, with CDP Requests, you can also argue against the underlying penalty using, for example, a reasonable cause waiver argument. CAP Requests are filed on Form 9423. CAP Hearing Requests are available much sooner than CDP Hearing Requests because you do not have to wait to receive a “Final Notice” before requesting a CAP Hearing. There are several important characteristics of CAP Hearing Requests to be aware of: CAP does not stop all IRS collection action in its tracks like CDP Hearing Requests; the statute of limitations continues to click in a CAP scenario (statute of limitations is not tolled); CAP Hearings are processed much sooner that CDPs; if you request a CAP Hearing, you cannot then later request a CDP Hearing (in effect, by requesting CAP, you are giving up your CDP Hearing rights; and finally, CAP findings, if favorable or not, are binding on you and the IRS – there are no further remedies, like review by the Tax Court (until CAP, there is no higher level of review).
With CDP Hearing Requests the protections are firmer. All collection stops in its tracks once a CDP Hearing Request is filed – but it also tolls the running of the statute of limitations. In CDP hearings, unlike CAP, you can challenge all penalties and liabilities and offer a variety of solutions: you can challenge the enforced collection action against you, you can request waiver of penalties, and you can offer alternative collection methods (installment agreements or Offers in Compromise). However, CDP rights do not mature until after you have received a Final Notice from the IRS (of proposed collection action). If you miss the 30-day deadline to file your CDP Hearing (30 days from the Final Notice), you can still file for an “Equivalent Hearing”; note, the IRS treats all late-filed CDP Hearings Requests as Equivalent Hearings. The key difference between a timely-filed CDP Hearing Request and an Equivalent Hearing is that the former’s administrative ruling can be challenged at the Tax Court, while the latter’s administrative ruling cannot. There are reasons why it is advantageous to file for an Equivalent Hearing over a CDP however, for example, the statute of limitations continues to run with Equivalent Hearing Requests.
Whether you file a CAP Hearing Request, CDP Hearing Request, or even an intentionally-defective Equivalent Hearing Request, it is entirely dependent upon your specific facts and circumstances and the overall strategy of your case. If you have questions about what is the best course of action, you should seek professional assistance in making that decision.
When you file a joint tax return, both you and your spouse are jointly and individually responsible for any tax, interest, and penalties due. However, in some instances you can be relieved of your responsibility if your spouse (or former spouse) improperly reported items on the tax return or omitted them entirely (without your knowledge). To start the process, you need to file an IRS Form 8857, Request for Innocent Spouse Relief. The Form will ask you a series of questions including your marital status, your level of education, whether you are a victim of spousal abuse or domestic violence, and whether you have any mental or physical health problems. You will need to explain your involvement with the household finances and the preparation of the tax returns in question. It will also ask you a series of questions about yours and your spouse’s lifestyle choices, your expenditures on automobiles and jewelry for example. Finally, you will be asked about your current financial situation. Innocent Spouse Relief is a facts and circumstances examination. It is important that you describe the circumstances specifically and clearly. For more information, see: IRS Innocent Spouse.
Understanding the Innocent Spouse legal landscape is important in deciding whether your facts and circumstances warrant relief from a joint tax lability with your spouse or ex-spouse. Here are some important considerations:
Innocent Spouse Relief Qualifications
To qualify for Innocent Spouse Relief, you must meet ALL of the following five requirements:
- A joint return was filed for the year in which relief is requested;
- There is an understatement of tax, not attributable to you;
- You did not know and had no reason to know (knowledge) of the understatement of tax at the time the tax return was signed;
- Considering all the facts and circumstances, it would be inequitable (unfair) to hold you liable for the understatement of tax;
- Your request is made within two years from the date of the first collection activity, unless an exception applies.
Actual and Constructive Knowledge
The critical question is whether you knew or had reason to know of the understatement of tax at the time the tax return was signed. Under this requirement, you must establish: (1) a lack of actual knowledge (did not know), or (2) a lack of constructive knowledge (had no reason to know). If you are a victim of spousal abuse, special rules apply.
Facts and Circumstances
The following factors, in part, are used to determine whether a reasonable person in similar circumstances would have known of the understated tax:
- Yours and your spouse’s financial situation;
- Your educational background and business experience;
- Whether you failed to inquire, at or before the time the return was filed, about items on the return, or omitted from the return, that a reasonable person would inquire about;
- Whether the tax item in question was unlike your previous tax year filings; it was unusual.
Considerations in determining whether it is unfair to hold you liable for the tax:
- Whether you received a significant economic benefit;
- Your education and experience level;
- Your level of involvement in household finances;
- Abandonment by your spouse;
- Your health at the time the return was signed;
- Your health at the time relief is requested;
- Any economic hardship you are experiencing;
- Any alleged abuse;
- Financial control of your spouse;
- Deceit by your spouse.
The IRS takes very seriously Innocent Spouse Claims. They do not easily relieve a taxpayer of his or her obligation to pay taxes due. However, if it would be unfair to hold you, the taxpayer, liable for the tax
due under your particular facts and circumstances, then yes, the IRS can be empathic to your situation – and provide you relief. Consider the above factors as you contemplate your Innocent Spouse Claim.
Foreign Bank Account Reporting, or FBARs, have been a priority for the IRS for over 10 years. It requires certain U.S. Persons to disclose their foreign bank accounts if those accounts meet certain threshold requirements. The disclosures must occur annually and be filed electronically. The penalties for nondisclosures are harsh. They are $10,000 per account* (not disclosed), or go as high as $100,000 if the nondisclosures were willful. *(there is current litigation on per account penalty assessments)
The IRS is very serious about FBAR enforcement. It is not an area of tax law to be taken lightly. In fact, the IRS takes it so seriously that each year there are high profile criminal cases resulting from FBAR violations. The IRS even developed an Offshore Voluntary Disclosure Program (“OVDP”). Under it, a taxpayer may voluntarily come-forward, after a period of noncompliance, and may be relieved of penalties associated with his or her nondisclosures. The OVDP program was in place for about 10 years and was very successful. Nearly 50,000 taxpayers came forward voluntarily and the IRS netted over $10B in tax dollars. FBAR compliance continues to be an area of focus for the IRS.
Typically, but not always, a taxpayer – having an FBAR obligation – will also have an obligation to file an IRS Form 8938 with his or her Form 1040. The foreign bank account thresholds are different but a failure to disclosure is just as serious as FBAR violations.
In recent and past IRS guidance, the IRS has made clear its treatment of cryptocurrency as “property”, and not true currency. This has significant tax consequences for taxpayers engaging in cryptocurrency transactions. It means that taxpayers must now track their adjusted “basis” and calculate their gains and losses, just as they would any other stock transaction. It also means that taxpayers receiving cryptocurrency for services performed now have reportable income, just as Schedule C taxpayers have reportable income.
Taxpayers using cryptocurrency to purchase products may also have a capital gain or loss depending on the fair market value of the product received (and your basis in the cryptocurrency exchanged for that product). Tracking adjusted “basis” with multiple transactions across multiple exchanges can be overly burdensome, especially with exchanges that do not third-party report your transactional activities (you must do it yourself). Tax reporting of cryptocurrency transactions is now very difficult. The IRS also ramped up its cryptocurrency task forces to assist in compliance and enforcement efforts; taxpayers and crypto users should be prepared to face IRS scrutiny.
Cryptocurrency and Estate Planning are not normally used in the same sentence. But given the popularity of cryptocurrency, it is becoming necessary to account for digital assets within estate planning documents. There are several key reasons why “traditional” estate planning documents fail to adequately address cryptocurrencies. It is a new asset class and old “boilerplate” language just doesn’t capture the nuances of cryptocurrency.
The biggest failing is the drafting itself. Assuming the Trustee or Executor (“Fiduciary”) even knows of the existence of the Decedent’s cryptocurrency, he or she must be able to access it and administer it. Estate planning documents should explicitly permit Fiduciaries to “access” the Decedent’s digital devices, such as laptops, cell phones and digital storage devices. These devices may have information about cryptocurrencies owned by the Decedent at death. Even if the Fiduciary has access to “private” keys, without the properly drafted permissions a search through digital devices, online platforms and even the “use” of the private keys may violate federal or state privacy laws, terms of service agreements, or computer fraud and data protection laws. Digital permission clauses should be drafted with precision.
Another drafting concern involves competent administration. Many corporate Fiduciaries may not administer cryptocurrency and may not have the ability to be a custodian. To prevent responsibilities from falling into the lap of an inept Fiduciary, “carve-outs”, or bifurcation, are important drafting considerations. For example, a corporate Fiduciary may be designated to administer the Trust generally; but a drafter might carve-out authority for a “Special” Trustee to administer cryptocurrency investment decisions and digital storage. The same could be true inside Trusts that do not utilize corporate Fiduciaries. The key is to bifurcate competent Fiduciaries to handle specific tasks. One to manage general administration and another, “Special” Fiduciary, to handle digital duties – one who is preferably digitally savvy.
Yet another drafting concern involves Fiduciary limitations. Cryptocurrencies are generally volatile, and many investors take “hold” positions despite that volatility. Because of this, a well-drafted Trust should indemnify Fiduciaries and release them from any duty to diversify investments. If not, non-diversification may run afoul of the Uniform Prudent Investor Act. Failure to draft around it may result in a Fiduciary administrating the Trust inconsistent with the Grantor’s desires – out of fear of legal exposure. Another idea is to draft a provision granting the Fiduciary the authority to retain (or “hold”).
Successor Trusteeship is also problematic and quite frankly, dangerous. It is not good practice to pass cryptocurrency from one “former” Fiduciary to a new “Successor” Fiduciary in soft wallets or on exchanges. This is because once the “former” Fiduciary knows the private keys, he or she can, if accessed, fully use the cryptocurrency and fears of theft arise. If a theft were to occur, there is no backing by a centralized authority to help rectify a loss. In a sense, it is just hard cash. One solution is to pass down the cryptocurrency – from one Fiduciary to the other – through “cold” storage.
On the cold storage device, Fiduciaries can create multiple wallets with different passphrases. Upon a change in Fiduciaries, the “Successor” Fiduciary can create an empty wallet and transfer the cryptocurrency to it with a new passphrase wallet. This is a way to transfer ownership from a “Former” Fiduciary to a “Successor” Fiduciary without the “Former” Fiduciary retaining the passcode and full access to the cryptocurrency. In effect, there is a changing of wallets with different passphrases to protect the cryptocurrency and the private keys. A memorandum memorializing the transfer of the cold storage device is also advisable – just as one might memorialize the transfer of a work of art.
Finally, all the above presupposes “knowledge” of the cryptocurrency’s existence. It is advisable to alert Fiduciaries now that crypto assets are owned. It is possible for a Fiduciary to discover ownership – for example, cryptocurrency apps on a cell phone – but it is much more difficult. There is no centralized bank to send as inquiry to. Plus, disclosure of ownership alone is not enough. A Fiduciary must know where to find the private keys. Without the private key, transferability, management, and true ownership of the crypto assets is not possible. This is where choosing a trusted person to act as a “digital” Fiduciary is critically important. It is akin to giving someone the code to your safe.
Some other practice points:
When funding an Irrevocable Trust with cryptocurrency, it is important to prepare a contemporaneous memorandum recording the transfer. That memorandum should record amounts, dates, times, digital transaction codes and FMV. It should also ensure that the Donor has not retained any control over the transferred cryptocurrency – for example, allowing only the Fiduciary access to the cold storage device and private keys. The memorandum is important because – to date – there is no authoritative guidance on funding Trusts with cryptocurrency, nor any direction on how such transfers should be memorialized for tax and asset protection purposes. The memorandum should be signed and dated with two witnesses present.
When gifting crypto assets, best practice includes getting an appraisal of the FMV of the cryptocurrency being gifted and executing a contemporaneous memorandum that includes details of the gift. In fact, two memorandums are recommended. One is prepared by the Donor. His or her memorandum might include the date and time of the transfer, digital transaction codes, the Donor’s basis in the gift, the FMV of the gift at the time of the transfer and the recipient’s information. The second memorandum should be a memorandum of acceptance of the gift by the Donee. The import is to evidence the Donor’s intent to give up control or dominion over the cryptocurrency and to identify that the gift is complete. If the gift is being made to a charitable organization, ensure the gift meets the requirements of IRC § 170(f) (to it qualify for an income tax charitable deduction).
These are just a few practice points and drafting considerations when dealing with crypto assets. Drafters should not assume dealing with cryptocurrency is just like dealing with other financial assets inside an estate plan. They simply are not. It is an entirely new asset class with distinct characteristics much different than other financial assets. Competent estate planning drafting should accommodate those differences.
The U.S. Department of Justice recently published its Cryptocurrency Enforcement Framework report describing its view of the types of threats cryptocurrencies pose, the tools the government will use to confront those threats, and some of the challenges with cryptocurrency enforcement. Here is a listing of some of the federal statutes that may be used in the cryptocurrency world:
- Wire Fraud – scheme to defraud by electronic means
- Money Laundering – scheme to conceal the origin of funds used for criminal activities
- Bank Secrecy Act – most commonly, failure to conduct “Know Your Customer” due diligence, which is a failure to implement proper anti-money laundering procedures
- Operating an Unlicensed Money Service Business – where a company fails to comply with the registration, licensing, and regulatory requirements for engaging in the money transmission services business
- Securities and Commodities Fraud – knowingly executing, or attempting to execute, a scheme to defraud any person in connection with any commodity or any option on a commodity for future delivery
- Tax Evasion – willful attempt to evade or defeat any tax imposed by the Internal Revenue Code
In addition to the Department of Justice, here are a list of government agencies who may also investigate and prosecute cryptocurrency crimes:
- FinCEN, Financial Crimes Enforcement Network, U.S. Department of the Treasury
- OFAC, Office of Foreign Assets Control (OFAC), U.S. Department of the Treasury
- OCC, Office of the Comptroller of the Currency (OCC), U.S. Department of the Treasury
- SEC, Securities and Exchange Commission
- CFTC, The Commodity Futures Trading Commission
- IRS, Internal Revenue Service
- Other state agencies and international consortiums
The enforcement arm of the U.S. Government is far-reaching. And given the new crypto focus, we can anticipate enforcement activity now and for years to come.
We all know The Bill of Rights: Congress shall make no law abridging the freedom of speech and so on. But there is another kind of federal Bill of Rights, first introduced in 2014. It is the “Taxpayer” Bill of Rights or also known as TABOR. Yes, these rights really exist, and what they are might surprise you.
Like “The” Bill of Rights, there are ten. The Right to Be Informed, The Right to Quality Service, The Right to Pay No More than the Correct Amount of Tax, The Right to Challenge the IRS’s Position and Be Heard, The Right to Appeal an IRS Decision in an Independent Forum, The Right to Finality, The Right to Privacy, The Right to Confidentiality, The Right to Retain Representation, and The Right to a Fair and Just Tax System. There are some semblances to the “The” Bill of Rights, like the right to privacy over our affairs and the right to representation. But differently, TABOR gives taxpayers a real voice within the IRS.
TABOR are not shallow ideals; rather, they are law. Because of the efforts of former National Taxpayer Advocate, Nina Olson, TABOR was codified and became law in 2016. Now, the IRS instructs its personnel (Collection Officers and Auditors) that they have an ongoing responsibility to ensure all taxpayer rights are protected and observed throughout their dealings with taxpayers. And TABOR touches some of the most common (and stressful) IRS interactions.
With IRS Examinations, TABOR is present throughout. Examiners must now advise taxpayers of all their rights under TABOR at the initial audit interview. All examination papers must be concise and easy to understand. Examiners should consider unilaterally – even if unprompted – whether a taxpayer qualifies for penalty relief. And in more contemporary fashion, because of the Right to Privacy, IRS personnel are not permitted to log in to any social media sites while conducting official research. Taxpayers can thank TABOR for these protections.
With IRS Collections, TABOR again lends a hand. In fact, some of the protections may surprise you. A taxpayer has the right to make an audio recording of in-person IRS interviews, and taxpayers may request transfers of their cases to other IRS offices. At all times during IRS Collections, a taxpayer – thanks to TABOR – has a right to stop the proceeding and contact the Taxpayer Advocate Service at any time they are experiencing hardship. And IRS Revenue Officers cannot silent TABOR; rather, they are directed to clearly explain the IRS Appeals process to taxpayers and answer any questions regarding their right to appeal IRS collection actions. Finally, if a taxpayer is unlawfully bullied into a corner, he or she can always contact The Treasury Inspector General for Tax Administration and make a TIGTA referral for IRS misconduct.
TABOR opened many doors for taxpayers and IRS personnel, on the whole, respect those rights. But taxpayers are well-served to know their rights and exercise them where appropriate. TABOR is not just fluff. Make it part of your tax vocabulary and your IRS journey may be a bit more pleasant.
The filing of a Federal Tax Lien is a disruptive event in a taxpayer’s life. It can affect your credit, cause hardship with employment and make it difficult to sell your property to third-parties. But under certain circumstances, a taxpayer may request a withdrawal of a Federal Tax Lien. First, it is important to understand that a Withdrawal of a Federal Tax Lien differs from a Certificate of Release of Federal Tax Lien. They are not interchangeable and cannot be used for one another. A Withdrawal only removes the effect of the Federal Tax Lien whereas the Certificate of Release releases both the lien and extinguishes fully its legal effect. To request a withdrawal, a taxpayer generally files a Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. By statute, the IRS has the authority to withdraw a Federal Tax Lien under the following conditions:
- The filing of the Notice of Federal Tax Lien (NFTL) was premature.
- The taxpayer entered into an installment agreement (under certain conditions, discussed below).
- Withdrawal of the Federal Tax Lien will facilitate the collection of the tax liability.
- By consent of the National Taxpayer Advocate, the withdrawal would be in the best interests of the taxpayer and the Government.
Withdrawal using a Direct Debit Installment Agreement.
When certain conditions are met, a taxpayer may request Withdrawal of a Federal Tax Lien while in compliance with the terms of a “direct debit” installment agreement. A taxpayer may qualify for a withdrawal if:
- The aggregate unpaid balance of tax assessments are $25,000 or less at the time of the request.
- The total tax liability will be paid in-full in 60 months or the agreement will be fully paid prior to the Collection Statute Expiration Date (meet the statue of limitations for collections).
- The taxpayer must request the Withdrawal in writing, preferably using Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.
- The taxpayer is in compliance with other filing and payment requirements.
- The installment agreement is active, current and at least three consecutive electronic payments (generally received on a monthly basis) have been processed. Also, there have been no defaults in payment under this, or any previous, installment agreements.
- The taxpayer did not previously have a Withdrawal of Federal Tax Lien.
Withdrawal That Facilitates Collection.
A Withdrawal facilitates collection if withdrawing the Federal Tax Lien will result, either immediately or in the future, in a greater amount being collected by the IRS than had the Federal Tax Lien been maintained. To determine if Withdrawal of the Federal Tax Lien will facilitate collection of the tax liability, the IRS will consider all relevant case factors. One example provided in the Internal Revenue Manual is as follows:
A taxpayer has been making installment payments for the past year and has two years of payments remaining. The taxpayer is a salesman and needs to purchase a new automobile in order to continue to generate the income that is being used to make the installment payments. The taxpayer verifies that he cannot obtain a new car loan or a lease because of the Federal Tax Lien. The Federal Tax Lien may be withdrawn, with the provision that it will be filed again in case of default, because doing so will facilitate collection of the tax liability.
All requests for Withdrawal of the Notice of Federal Tax Lien must be in writing. Preferably, taxpayers should use Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien; however, any written request that contains the necessary information may be used. Note: A faxed request qualifies as a written request. Written requests for Withdrawal must contain the following information: taxpayer’s name and current address; taxpayer’s identification number; a copy of the Federal Tax Lien affecting the property; a statement explaining the basis for the Withdrawal request; and authorization for disclosure of information to creditors, credit reporting agencies and financial institutions.
If you have a Notice of Federal Tax Lien filed against you, you have options, not all is lost. If we can be of assistance, please do not hesitate to contact us.
Remember 3 things: (1) the IRS statute of limitations for the collection of tax is 10 years; (2) the IRS statute of limitations can be extended for a number of reasons; and (3) the IRS statute of limitations “clock” never starts to “tick” if you never file a tax return; with unfiled tax returns, there is no statute of limitations. The 10-year statute of limitations begins on the “assessment” date, or typically the date you file a tax return. The IRS calls this date the “CSED” date or the “Collection Statute Expiration Date”.
There are many ways the 10-year CSED can be extended (beyond 10 years). Think of it this way – anytime some “event” prohibits the IRS from collecting tax for a given period of time, then the statute of limitations is extended for that time period and added to the back-end (plus, generally 30 days extra). Here are a few examples: filing bankruptcy, the IRS files a lawsuit against you, a timely-filed Collection Due Process (CDP) Appeals hearing request, anytime your tax case is in IRS Appeals, while your Offer in Compromise is pending, filing an IRS Innocent Spouse Claim and more.
The 10-year statute of limitations is not extended while you are in an installment agreement and current with it. The statute of limitations is extended while your installment agreement request is pending and for 30 days immediately following a rejection or a termination of an installment agreement.
This list is not meant to be exhaustive but should give you an idea of how statute of limitations work.
Can I dispute IRS penalties?
Yes, the IRS may waive penalties on the following grounds:
- Reasonable Cause;
- Administrative Waiver; or
- Statutory Exception.
What do the different grounds mean?
Reasonable Cause can mean a number of things:
- You exercised ordinary business care and prudence but were nonetheless unable to file or pay on time;
- You had matters beyond your control that left you unable to file or to determine the amount of deposit or tax due;
- You didn't receive the necessary financial information;
- You didn’t know you needed to file a tax return even though you made efforts to find out;
- You had a death in your immediate family;
- You or a member of your immediate family suffered a serious illness that kept you from handling your financial matters;
- You lost your tax documents in a fire or some other disaster.
This list is not exhaustive, but it gives you an idea of some the situations the IRS will consider. Other situations may also qualify for reasonable cause relief, however. The crux of any inquiry is: you did what any reasonable taxpayer would do, but because of some event or circumstances beyond your control you were unable to comply. If your situation fits that scenario, then you ask for a penalty abatement and be sure to request it in writing.
An Administrative Waiver is basically the IRS offering you a one-time forgiveness. First-time abatement procedure is just one example. The IRS may remove penalties under its First-Time Abatement policy if:
- You have no penalties for the 3 tax years prior to the tax year in which you received a penalty;
- You are filing compliant; and
- You have paid, or arranged to pay, any tax due (you are paying compliant).
Less common, but another example of an administrative waiver involves a taxpayer’s reliance on advice from the IRS. If you received incorrect verbal advice from the IRS, you may qualify for administrative relief of penalties. If you received incorrect written advice from the IRS, you may qualify for a statutory exception to the failure to file and/or the failure to pay penalties. If you feel you were charged a penalty because of erroneous written advice you received from the IRS, you would typically file a Form 843, Claim for Refund and Request for Abatement, to request penalty relief based on incorrect written advice from the IRS.
What if the IRS denies my Penalty Abatement Request?
You generally have appeals rights with penalty waiver denials and can request a conference or hearing before the IRS Office of Appeals. You typically have 30 days from the date of the penalty rejection letter to file your request for an appeal. IRS Appeals has greater latitude and wider discretion in granting penalty abatements. If you have grounds, you should always appeal a penalty denial to IRS Appeals.
How much are IRS penalties?
IRS penalties are high. Here is an overview of the penalty regime: IRS Penalties.
Simply put, I will initially give you the “typical” lawyer answer – “it depends…”. The statute of limitations for IRS audits varies depending on the nature of the tax issue. It is important to remember that the statute of limitations does not begin to “tick” until after a tax return has been filed.
So, remember, there is – in effect – no statute of limitations on an unfiled tax return (or a tax return filed fraudulently). In regard to an unfiled tax return or a fraudulent tax return, it can be audited at any time: three years or ten years or any period of time.
With filed returns, the basic rule is that the IRS can audit for 3 years after you file your return or the due date of the tax return, the later of those two dates. For example, if you filed early on say, February 15, the 3-year statute of limitations begins to “tick” on April 15 – the due date of the tax return (not the earlier filing date). So, you do not shorten the statute of limitations by filing early. If you filed late however, say November 15 (7-months late after April 15), the statute of limitation begins to “tick” on November 15 – the date you filed your tax return late.
But there are exceptions that give the IRS 6 years or longer to initiate a audit. For example, the IRS can audit for up to 6 years if you omitted more than 25% of your income. This 25% rule can apply to tax basis too – if an erroneous basis is used to underreport your income tax. The IRS also gets 6 years to audit if you omitted more than $5,000 of foreign income.
Also, if you omit a required IRS Form within your tax return, the statute of limitation remains open as to that omitted Form. Suspected criminality can also extend the statute of limitation to 6 years.
The proper application of the statute of limitations for audits “depends” on the facts and circumstances surrounding your particular situation. There is no hard and fast rule that applies to ALL situations.
The National Taxpayer Advocate Service (TAS) recently presented its 2020 Annual Report to Congress. Each year, the National Taxpayer Advocate give a report to Congress discussing various aspects of taxpayer rights and the effective and fair administration of the tax laws. The TAS 2020 Annual Report to Congress Executive Summary can be found here. TAS also released the National Taxpayer Advocate 2021 Purple Book. In it, it presents a concise summary of 66 legislative recommendations that it believes will strengthen taxpayer rights and improve tax administration. It can be found here.
There are certain IRS requirements when closing your Corporation. It does not matter how long your business operated – from a few months to many years. Here is a list of the most required IRS Forms and Schedules when closing your operations.
- Your Corporate Income Tax Returns – 1120 or 1120-S, including Schedule D, capital gains or losses
- Make sure you selected the “Final Return” box at the top of the Corporate Income Tax Form
- If you adopted a resolution or plan to dissolve the corporation or liquidate its stock, you must file IRS Form 966, Corporate Dissolution or Liquidation
- If you sell your Corporation, you may need to file IRS Form 8594, Asset Acquisition Statement
- All outstanding employment tax returns, 941s (Quarterly Employment Tax Returns) and 940s (Annual Federal Unemployment (FUTA) Tax Return)
- For Form 941s, file it for the calendar quarter in which you made your final wage payments and enter the date final wages were paid on line 17
- On your final Form 941, you must attach a statement naming the person keeping the payroll records and the address where those records will be kept
- Be sure and make your final federal tax deposits for your employees or you could be liable for the Trust Fund Recovery Penalty if you are a person responsible for making such deposits
- For Form 940s, file for the calendar year in which final wages were paid and check the Box “d.” in the “Type of Return” section to show that it is the final form
- If you sell or exchange property used in their business, you must file an IRS Form 4797, Sales of Business Property
- You also need to file an IRS Form 4797 if your use of certain business property, Section 179 or listed property, drops to 50% or less
- Furnish your employees with their final W-2s and transmit them to the Social Security Administration; failure to do so could subject you to stiff non-reporting penalties
- If your employees received tips, an IRS Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, is required to report final tip income and allocated tips
- If your Corporation provides employees with a pension or benefit plan, you need to file a final IRS Form 5500, Annual Return/Report of Employee Benefit Plan
- If you paid contract workers (exceeding $600 in payments) during the calendar year in which you go out of business, you must file an IRS Form 1099-NEC, Nonemployee Compensation
There are still other good practice points to follow: the IRS recommends that business owners should keep all records of employment taxes for at least four years; and that businesses should keep records relating to property until the period of limitations expires for the year in which they dispose of the property in a taxable disposition.
Finally, remember that once the IRS has assigned you an EIN to your Corporation, it becomes the “permanent” EIN for that business. To close your business account, Corporations need to send the IRS a Letter that includes (1) the complete legal name of their business, (2) the EIN, (3) the business address, (4) the reason they wish to close their account and (5), if you have it, a copy of the notice that the IRS issued with the initial EIN assignment. The letter should be written to the IRS at: Internal Revenue Service, Cincinnati, Ohio 45999
As you can see, there is must to do in addition to closing your doors. This checklist provides you a path to full compliance when shutting down your corporate operations.
Summary of Tax Code Changes
Better Tax Code Changes?
Full New Tax Provision 199A and Final Regulations
2018 National Taxpayer Advocate Annual Report to Congress
Trump Loves Depreciation – So Should Real Estate Investors
CRS Report – Indexing Capitals Gains Increases Your Basis and Lowers Your Tax Bill
Trade or Business Versus Investment – Investment Loss Loses
1031 Exchange – Its Mechanisms and Limitations
It’s Good to be a Fortune 500 Company – 0% Tax Rate?
That Low-Cost or Free Tax Software – CAREFUL, It Makes Costly Mistakes
IRS Free Tax Software – Soon To Be No More?
IRS Tax Private Collection Agencies and Taxpayer Rights
Where Tax Audits Occur
Distinguishing Between Business and Personal Expenses – Lesson from Tax Court
Tax Court – Indirect Partnership Interest Limits CDP Notice Rights
IRS is Coming for your Bitcoin
Look at IRS Activities: Tax Collected, Tax Audits and Enforcement and More
Partnerships Selection over S Corp? Your Decision Considerations
Tax Snitches Bank $312 Millions
Uber’s $6.1M Tax Deduction
IRS Appeals is Still Very Important
Deduct Work Away from Home? Not so Fast
Investing in Qualified Opportunity Zones
Innocent Spouse Claims
The New Taxpayer First Act
State Sales Tax – Life after Wayfair
LOW Risk Approach to Foreign Account Reporting Obligations
Full Payment of Your OIC is Not the End of your Tax Obligations
New Tax Code Changes to Code Sec 1031 Like-Kind Exchanges
Special Excise Tax on Government Contractors
A Lesson in IRS Penalties and Interest
Amazon Shows that Shifting Profits Offshore is Alive and Well
Understand the Difference between IRAs and 401ks
Estate Planning and Administration Links
NC Probate Manual and Procedures
Basics of Wills, Trusts and Estate Administration
North Carolina Limited in What Trust Income It can Tax
Apply for Refund after Kaestner?
How To Deal with Heir Property after Death
Die Without a Will – Everything to My Spouse – Not so Fast
Special Needs Trusts Primer – What You should Know
American College of Trust and Estate Counsel
Asset Protection/Captive Links
Ultimate Guide to LLCs as Asset Protection Tools
Background on Captives
NC Dept of Insurance: Captives
Self-Insurance Institute of America
Captives 101: What Are They, Why Do I Want One?
National Association of Insurance Commissioners
CPA Journal: Captive Insurance Companies
Small Captives Concepts