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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.

Inequitable/Unfairness

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.

Injured Spouse Relief and Innocent Spouse Relief are not the same thing. Injured Spouse Relief is essentially a “refund” claim, or a claim for part of your refund used to pay the debts of your spouse. You might be an injured spouse if you filed a joint return with your spouse and all or part of your refund was applied (or offset) to meet an obligation of solely your spouse’s; an obligation you are not liable for. Examples of offsets are child support, past-due state income tax or delinquent federal student loan debt. To request Injured Spouse Relief, you file an IRS Form 8379. IRS Form 8379 is not as comprehensive as IRS Form 8857, Innocent Spouse Relief form. It basically asks questions about the type of tax return filed, whether you are legally obligated for the past due debts of your spouse and the types of income you have and the types of credits you claimed. Do not file for Injured Spouse Relief and Innocent Spouse Relief simultaneously.

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.

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.

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.

This is an easy one. You must be filing compliant to take advantage of all IRS payment alternatives available. Filing your tax returns is mandatory and non-negotiable in the eyes of the IRS.

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.

What you say to your attorney is protected; it cannot be disclosed to the IRS. The crime-fraud exception only applies in situations where the taxpayer made a statement with the intentions of committing a crime or in furtherance of it. Otherwise the seal of secrecy between a taxpayer and his or her attorney cannot be broken; it can even survive death. The same cannot be said with accountants or CPAs. Communications to them are not protected. In fact, an accountant or CPA can be forced to testify against a taxpayer-client. If you want the strongest protection of privacy, the attorney client-privilege gives you that protection.

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.

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.

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.

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.

Given the boom in popularity of cryptocurrency, and its increasing value – especially Bitcoin (8 cents in 2010 to around $13,000 today), it is becoming necessary to account for digital assets within estate planning documents. Cryptocurrency is becoming more prevalent and mainstream, as large brokerage firms like Morgan Stanley and Fidelity create crypto divisions and payment conduits like PayPal offer crypto storage and third-party payments (starting in 2021). There are several key reasons why “traditional” estate plans fail to properly address cryptocurrencies. It is a new asset class and old boilerplate Will’s and Trust language just does not 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 assets, such as laptops and cell phones, which may have information about any cryptocurrencies owned by the decedent at death. Even if the decedent provides the Fiduciary with his or her “private” keys while alive, without properly drafted permissions, a search through digital devices, online platforms and the Fiduciary’s use of the private keys (after death) may violate federal or state privacy laws, terms of service agreements, or computer fraud and data protection laws. Permissions should be drafted with precision.

Another drafting concern involves expertise. Many corporate Fiduciaries may not administer cryptocurrency and they may not have the ability to be a custodian. Expressly carving out Fiduciary duties is an important drafting consideration. For example, a designated corporate Fiduciary could administer the Trust generally, but there is a carve-out as it relates to cryptocurrency investment decisions and storage. The same could be true in Trusts that do not use corporate Fiduciaries; where one named Fiduciary handles the general administration of the Trust, but cryptocurrency duties are assigned to a “Special” Trustee (or Fiduciary) – someone who is digitally savvy.

Yet another drafting concern involves Fiduciary duties. Because of the volatile nature of cryptocurrency and many investors desires to take “hold” positions, a well-drafted Trust should indemnify a Fiduciary and release him or her from any duty to diversify or act in a traditional manner consistent with the Uniform Prudent Investor Act. Failure to do so may result in a Fiduciary administrating the Trust inconsistent with the Grantor’s desires out of fear of legal exposure. Another idea is a simple provision on the Fiduciary’s authority to retain.

Successor Trusteeship is also problematic. Knowledge of a user’s private key should not be passed down from one “former” Fiduciary to a Successor Fiduciary. This is because once the “former” Fiduciary knows the private key, he or she can still fully access the cryptocurrency and fears of theft arise. If a theft were to occur, there is no remedy to regain stolen cryptocurrency from an intermediary because it is not backed by any centralized authority (in a sense, it is just cash). One solution is to hold cryptocurrency in “cold” storage – an offline USB device for example (Trezor is a popular one). On the cold storage device, you can create multiple wallets with different passphrases (different than your private key). But you need the specific passphrase to access specific wallets within the device. Upon the change of a Fiduciary, the Successor Fiduciary could create an empty wallet within the device and transfer the Bitcoin 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 without either Fiduciary directly knowing the private keys themselves. In effect, you are changing wallets with a different passphrase.

Finally, all the above has presupposes “knowledge” of the cryptocurrency’s existence. You should advise now as to whether you own crypto assets. It is possible for a Fiduciary to discover ownership – if for example, you have a cryptocurrency exchange apps on your cell phone – but it is certainly much more difficult. Also, disclosure of ownership is not enough. A Fiduciary must know where to find your private keys. Without your private key, transferability, management, and true ownership of your crypto assets is not possible. This is where choosing a trusted person as a Fiduciary is critically important.

Some other practice notes:

If you were funding an Irrevocable Trust with cryptocurrency, it is imperative to prepare a contemporaneous memorandum recording the transfer – its amounts, date, time, transaction codes and FMV – ensuring that the donor has not retained any control over the transferred cryptocurrency (for example, allowing the Trustee access to your private keys). This is important because currently there is no authority preventing the funding of any Trust with cryptocurrency nor directing how such transfers should be memorialized for tax purposes.

If you are gifting crypto assets, best practices include getting an appraisal of the FMV of the cryptocurrency being gifted and executing a contemporaneous memorandum that includes details of the gift, such as the date of the transfer, the donor’s basis in the gift, and the fair market value of the gift at the time of the transfer. Doing so is important because of the anonymity of blockchain transactions. The memorandum should also include that the donor has given up control or dominion over the donee’s cryptocurrency address to verify that the gift is complete and, if the gift is being made to a charitable organization, that the gift meets the requirements of IRC § 170(f), to record that it qualifies for an income tax charitable deduction.

We prepared an extensive catalog of links for you to research a variety of tax issues, estate planning matters, asset protection and captive insurance companies resources. We hope you find the links helpful and informative.