Monday, May 3, 2021

IRS To Receive $80 Billion For Enforcement: Time to Get Right with the IRS?

IRS To Receive $80 Billion For Enforcement: Time to Get Right with the IRS?

The Administration’s recent announcement that it wants to spend $80 billion on the IRS to beef-up enforcement should make some folks wonder if now is a good time or bad time to pay attention to their own long-neglected IRS issues. For many, these are issues which may have been dormant because the government hasn’t had the time or money to chase them down.

In addition to ongoing audits and collection action, many people have unresolved IRS matters which the IRS doesn’t even know about.

The idea behind a tax system based on self-reporting and self-assessment comes from the days of the Founders. Even though there was no income tax then, they gave us the idea that an enlightened citizenry (think Tom Jefferson and Ben Franklin) could be relied upon to truthfully disclose all their taxable income on a sworn annual tax return when Congress enacted the income tax about a hundred years ago.

That said, most people try to file a substantially correct tax return out of fear of the humiliation and cost they will suffer if they fail to file or submit false returns. Eighty billion is a number even IRS advocate and former Commissioner John Koskinen said was more than the agency could handle.

The IRS, an integral part of the process of governance, has been so hobbled by a decade of under-funding and staffing shortages, now finds itself on the ropes, unable to manage even the simple function of timely responding to taxpayers’ phone calls looking for help in understanding a system which to date, has yet to undergo anything close to “tax reform” since perhaps 1986.  That said, the agency has argued in the past that it doesn’t need new laws to help it do its job but rather, enough people to do it. 

For example, it has been more than a decade since Congress enacted FATCA[1]  with a reporting regime so extensive and duplicative, it has ushered in a new area of “information returns” which stands the principle of “self-reporting” on its head.  Some wonder what the IRS has been doing with all the information it has been receiving from FBARs and disclosures of foreign accounts and investments. Is the intel gained from the Panama Papers[2] being processed by the very same 1960s-era computer infra-structure we hear about?

And don’t forget that the Tax Gap[3] continues to grow and the underground economy continues to thrive.

Now comes the wreckage caused by a once-in-a-century plague on an already muscle-bound government agency of close to 100,000 people and leaves tax administration in the leading country in the free world, barely holding on, seemingly making it up as they go along largely  ineffective and on the brink.

To give the IRS unlimited resources for tax enforcement means their capacity to match up their computer data will be greatly enhanced. Query whether the vast trove of data the IRS has been receiving from FBARs and other information returns is sitting in some FBAR Cloud somewhere waiting to be matched up to IRS forms 1040?

Under the new proposal, there will more agents and special agents in the field to open audits on high dollar individuals, large corporations, partnerships and joint ventures and international businesses.

Requesting Congress to give the IRS $80 billion is surely an opening bargaining position for the Administration; but it is clear that some very large infusion of cash is likely going to be added to the IRS budget over the next several years.

Top level IRS advisors and managers will be defining  new “program areas” of focus in the Large Business and International Division and start new “audit projects” and “initiatives” which until now, were unthinkable to top level managers of an agency which has been forced for years to do its job with one hand tied behind its back while tax scofflaws laugh when they hear about the low audit rates.

This added muscle power could be a chance for the IRS to dispel the widely held notion that it is overly attentive to auditing the little guy, the small businesses, checking to see if they were overstating their allowable expenses for meals and lodging.

The IRS will also revisit not only their accounts receivable but also cases until now classified as “uncollectible.” It may also be the chance to end the odd-ball practice of out-sourcing IRS collection work to private bill collectors to do the intrinsically governmental function of protecting the fisc.

Is now a good time to contact the IRS?

The answer is usually, “it depends.” In almost every instance it might be a good idea to find out what is really at stake.

For those who lose sleep wondering what to do about unfiled returns, unreported foreign-sourced income, an unreported cash flow “on the side,” long-standing use of fake deductions, gross employee misclassification to avoid payroll taxes---their demon is the  uncertainty of knowing what will actually happen to them with a recharged IRS?

Are we talking about actual criminal conduct? What about large civil penalties? Is there a risk the IRS will start seizing bank accounts? Will more people start going to jail?

The IRS will now have the money to recruit, train, and put to work qualified people to do their jobs with laws which have been on the books for decades.

It may take a few years before we see the effects of a massive infusion of money into the operations of the IRS. That said, it is still true that if a taxpayer comes forward with a compliance issue before the IRS comes to them, they can usually count on significantly more favorable treatment than if they had waited.

In my next blog, I will describe a new and very significant shift in the IRS position on how it feels about “quiet disclosures.”  It can be a very nuanced analysis and it may not be for everyone but in some situations after a careful risk assessment, the best course is to simply file delinquent or amended returns and forget about it. The IRS may not send you a thank you letter but they are far more likely to inquire after non-compliant taxpayers who haven’t even bothered.

 

 

 



[1] The Foreign Account Tax Compliance Act (FATCA),, generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The  Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.

[2] The Panama Papers (Spanish: Papeles de Panam√°) are 2.6TB of data or 11.5 million leaked documents that detail financial and attorney–client information for more than 214,488 offshore entities leaked beginning on 3 April 2016. The documents, some dating back to the 1970s, were created by, and taken from, former Panamanian law firm and corporate service provider Mossack Fonseca.

[3] The gross tax gap is the difference between total taxes owed and taxes paid on time. The most recent IRS tax gap report was released in 2019 and covered tax years 2011–13 (IRS Research, 2019). For those years, the IRS reported an average annual gross tax gap of $441 billion (slightly over 16 percent of total tax liability). Of this, the IRS eventually recovered $60 billion through voluntary late payments and enforcement activities. That left an average annual net tax gap of about $381 billion (or about 14 percent of total tax liability).

Friday, March 5, 2021

PRESSURE GROWS TO EXTEND THE 2020 FILING DEADLINE WHILE IRS STRUGGLES TO COMPLETE ITS WORK ON 2019

In a letter to the Commissioner and Treasury dated March 4, 2021, the prestigious AICPA has urged the government to move the upcoming filing date of April 15, 2021, back two months to June 15.

The reasons for the requested extension are compelling:


·        Many IRS forms are still not available for electronic filing which has also caused a state delay in releasing forms.

·        A second round of Paycheck Protection Program (PPP) loans that required a significant amount of assistance to small business clients…. Tax professionals continue to assist clients with the PPP first draw loan forgiveness process.

·        Changes to the Employee Retention Credit (ERC), which required possible amendment of 2020 payroll tax returns prior to filing 2020 income tax returns, so that the gross income accurately reflects the ERC amount.

·        A delayed processing by the IRS of 2019 returns that resulted in a rash of erroneous notices.

·        Effects on IRS’s staffing, due to the Coronavirus, that affects its ability to respond to questions and notices and generally to provide taxpayer assistance.

Additionally, there is still confusion in understanding why some taxpayers are eligible or not to receive a stimulus payment or if it is taxable.

The current tax journals and group forums are filled with stories about the IRS’ failure to finish up its work for 2019.

The tax magazine CPA Practice Advisor tells us,

The COVID-19 pandemic turned the tax season upside down last year, and even now millions of people are still dealing with the aftermath in 2021. The Internal Revenue Service said in mid-February that it had yet to process 6.7 million individual income tax returns for 2019, based on data through Jan. 30.

Getting those returns processed — and any refunds involved in hand — may require additional review, dealing with corrections and addressing some ID theft-related problems where the IRS will need to work with taxpayers, according to the IRS.

Most 2019 federal income tax returns have been processed. But the lingering problems are significant, enough that the House Ways and Means Committee is asking the IRS for answers and calling for the IRS to extend the tax return deadline for 2020 tax returns beyond April 15.

In response to the growing public outcry about extending the filing date, the IRS could easily take the position that those people who can’t get their returns prepared before April 15, should simply file timely for an extension to October 15. But that does not address the problem of unavailable forms and a lack of staffing to respond to questions and notices and generally provide taxpayer assistance.

Another good reason to extend the filing date is concern over the amount time it will take to advertise, hire,  train, and integrate thousands of newly-anticipated personnel which is now part of the Covid relief plan currently under consideration by the Senate.

Add to this mix,  the multitude of new roles the IRS is expected to play in the actual physical distribution of relief checks and the implementation of  the new relief plan which is certain  to take the IRS away from its normal focus of assessing and collecting taxes.

A move of the filing date to June 15 is probably a good idea. The IRS may not be able to catch its breath before June 15, but the stakes have never been higher as the country seeks to recover from the pandemic.

Thursday, March 4, 2021

NATIONAL TAXPAYER ADVOCATE: IRS ASSESSMENT OF SOME INTERNATIONAL INFORMATION RETURN PENALTIES MAY BE ILLEGAL

It has been a year since Erin Collins’ appointment as Nina Olsen’s replacement as the National Taxpayer Advocate. The NTA reports directly to the Commissioner and reports to Congress on areas of the tax law that impose significant burdens on taxpayers or the IRS, including recommending potential legislative changes.

In taking the position as NTA, Ms. Collins returned from retirement after a long and distinguished career which started with the IRS Office of Chief Counsel and included the directorship of KPMG’s Tax Controversy Services practice for the Western area.

In her second Annual Report to Congress, Ms. Collins has identified several issues as The Most Serious Problems Encountered by Taxpayers.  Number 8 is titled,

 The IRS’s Assessment of International Penalties Under IRC §§ 6038 and 6038A Is Not Supported by Statute, and Systemic Assessments Burden Both Taxpayers and the IRS.

IRC section 6038 is of course the legislative authorization inter. alia., for IRS Form No. 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, one of the most challenging and time-intensive IRS forms for any practitioner/preparer with clients holding an interest in an offshore corporation.

In describing the problem, the Report does not mince words:

The IRS’s treatment of IRC §§ 6038 and 6038A foreign information reporting penalties as systemically assessable is legally unsupportable, administratively problematic, and imposes costs, delays, and stress for taxpayers. Because the penalties are immediately assessed, taxpayers’ only recourse is to rely on IRS discretion and request a reasonable cause abatement of the penalties or pay them and seek a refund in federal court.

You can find the executive summary of this issue here. You can find the full report on this issue here.

IRC §§ 6038 and 6038A impose harsh penalties for failure to file certain required international information returns.

The NTA argues the IRS’s treatment of the penalties as summarily assessable is burdensome for taxpayers. She argues that there is nothing in the Code or case law to support this treatment.

The National Taxpayer Advocate recommends that the IRS stop erroneously assessing Chapter 61 (information and returns) penalties, including the IRC §§ 6038 and 6038A penalties, and that Congress expand deficiency procedures to cover Chapter 61, including the IRC §§ 6038 and 6038A penalties.

In other words, she recommends that taxpayers who are confronted by the IRS with non-compliance issues regarding some foreign information reporting penalties should be allowed to receive a statutory notice of deficiency, have the right to meet with Appeals before assessment,  and ultimately litigate these issues in the United States Tax Court in pre-assessment status.

The NTA’s full report on this issue is worth reading. Her proposed solution to the problem of having to challenge international reporting and related issues in two forums is a logical one: permit the taxpayer to resolve the problem in a single Tax Court proceeding. 

Friday, June 19, 2020

Tax Court Moves Quickly to Make Virtual Proceedings a Reality

On May 29, 2020, Chief Judge Maurice Foley announced new procedures for conducting Tax Court proceedings remotely, in light of the COVID-19 national emergency. In so doing, Judge Foley noted that with trial sessions held in 74 cities throughout the country, the sessions typically involve a great number of people in the courtroom which include not only the litigants themselves, but also people representing clinics, pro bono programs, as well as Court personnel.

Along with the announcement, the Court published newly-amended standard forms to guide Tax Court litigants through the way in which trials and hearing will be held, effective immediately until further notice.

The Notice Setting Case for Trial will now include, under the place of trial, the city chosen by the taxpayer, with the legend, “THIS TRIAL SESSION WILL BE CONDUCTED REMOTELY.” Parties are directed to be prepared to try the case “at a proceeding to be held using Zoomgov…”  Under a new heading called “ACCESS REMOTE PROCEEDING,” all notices setting case for trial will now provide instructions on how to access the remote proceeding including dial-in information. The Court’s Notice itself will also include the meeting ID and a password.

The Court’s detailed Standing Pretrial Order will now contain a new section, “Technology,” which provides:
Technology. For remote proceedings, you must appear before the Judge as instructed in the Notice Setting Case for Trial. That may be by telephone or by video. Information on how to use Zoomgov, including tips, can be found on the Court’s website, www.ustaxcourt.gov. A personal Zoom account is not required, and there is no cost to you. If you have any concerns about your ability to fully participate in a remote Court proceeding, you should immediately let the Judge know. 
 Another new section added to the Standing Pretrial Order provides,
Remote Proceeding Access. Parties shall be responsible for ensuring, to the best of their abilities, that they and their witnesses have adequate technology and internet resources to participate in a remote proceeding. The parties should log on and test their connections at least 30 minutes before the proceedings scheduled time.
The Court’s recommended format for Pretrial Memoranda has been amended with the addition of the phrase, “Remote Proceedings” at the top of the page.

A few weeks ago, we published in Tax Notes Federal, “COVID-19 and the Tax Court: Time for Virtual Trials?” [republished below] where we described how difficult it is now for Tax Court judges to do their jobs.

Even before COVID-19, a judge living in the Washington, D.C. metropolitan area  has  to take two flights to get to most of  the 74 metropolitan areas it serves  and live out of a hotel room for anywhere from a day or so or up to two weeks.  Now with the safety protocols of the pandemic it would seem for their own safety, the judges on the Court will surely welcome a switch to video conferencing and trials.

The entire government is in the process of reinventing itself in the face of the new normal.  As a court of nationwide jurisdiction where the Court comes to the people, the Tax Court is in a unique position now to transition to virtual litigation.  Considering the fact that we are only within a few months of the onset of the pandemic, its seems as though the Tax Court under Judge Foley’s leadership is at the forefront of setting the stage to play its enormous role in tax administration in the 2020s and beyond.

COVID-19 and The Tax Court: Time for Virtual Trials? by Steven J. Mopsick; originally published in TaxNotes Federal, May 18, 2020 p. 1209

As the world moves ever so slowly out of the emergency phase of the coronavirus pandemic to some middle ground of new rules before a vaccine is widely available, government agencies and the judiciary will reinvent themselves to carry out their missions effectively.

Tax professionals throughout the United States are trying to visualize the immediate future and how they will serve their clients vis-à-vis the IRS examination and collection process. It would seem natural for the Tax Court to now migrate to a fully efficient virtual system and completely do away with the need for live calendars and court appearances.

The Tax Court is unique in the world of specialty courts and has its own proud history. The court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, which gives it the power to “constitute tribunals inferior to the Supreme Court.”

Although taxpayers may choose to challenge the IRS in a variety of legal settings, the Tax Court is the only forum in which taxpayers may do so without having first paid the disputed tax in full. Parties who wish to challenge the assertion of taxes may also bring an action in any U.S. district court, or in the U.S. Court of Federal Claims; however, these venues require that the tax be paid first, and that the party then file a lawsuit to recover the contested amount. Tax Court judges are appointed by the president for a term of 15 years, subject to presidential removal for “inefficiency, neglect of duty, or malfeasance in office.”

The first iteration of the Tax Court was the “U.S. Board of Tax Appeals,” established by Congress in 1924 “in order to address the increasing complexity of tax-related litigation.” The board was initially established as an “independent agency in the executive branch of the government.” It was first housed in the IRS building on Constitution Avenue in Washington.

In 1942 it was renamed the “Tax Court of the United States.” However, funding limitations brought on by the Vietnam War delayed the start of construction of its own building until 1972.

Social Distancing at Calendar Call

Most courts in the United States, both federal and local, have jurisdiction over a geographical area. In the Tax Court, taxpayers bring suit against the IRS by filing a simple petition in Washington, but the rules allow them to designate where they want their trials to be held.

The taxpayer can choose (even if he doesn’t live there) from a long list of cities spread throughout the United States, which Tax Court judges visit for as little as a day or so, to two full weeks, to conduct hearings and try cases.

Travel as a Tax Court Judge During the Pandemic

In these extraordinary times, it would seem, simply for their own safety, that the judges on the Tax Court would welcome a post-COVID-19 emergency switch to video conferencing and trials.

Almost all the judges have a home in the Washington, D.C. area. The weekend before a calendar is scheduled to begin, a judge and a trial clerk will fly to the city designated for trial. In most cases, because there are few direct flights from Washington to the many smaller cities, that means at least two full travel days involving two separate flights, airports, two planes to get on and off, and multiple hours of possible exposure on each flight. Then it’s a cab to a hotel, checking in, and a room that the judge hopes has been sanitized.

All this is before the judge even begins to think about where he or she will eat for the next two weeks. Are there restaurants that are open? Fresh on Monday morning, there is a taxi to a local federal building where a full-blown regular courtroom is available to the judge. If it were not for the risks incurred solely during a judge’s travels, the calendar call itself can be one of the most daunting “people to people” experiences for any judge in the best of times.

At 10 a.m., the clerk begins to read from a list of all the cases that have not yet settled or need to be heard for whatever reason. It usually takes the full morning to get through the entire list, after which the judge retires briefly and then comes back into the courtroom to announce the schedule of trials or hearings for the next two weeks.

The problem today is that when the court is first called to order, the courtroom is usually crowded and the people there waiting to be heard, are quite animated. Most people are unrepresented by counsel and are either nervous or confused about what they are supposed to do. Some are impatient and angry. Almost all of them know the Tax Court is a unique place in our government where, without first having to pay the tax the government is trying to collect, the most humble American is free to stand up and say to the whole world, “I have had it with the IRS; I want to speak to a judge.”

Conclusion

Rightly so, Congress’s approach to the pandemic is to get money into the hands of the people. One of the ways it does that is by passing new tax laws. Today, once again, the IRS is charged with figuring out what Congress meant when it rushed the disaster relief changes through.

In the years ahead, taxpayers will challenge the IRS’s interpretation of the new COVID-19 relief provisions -- from wanting to know why their economic impact payment was so small, to how the new net operating loss provisions or credits and refunds work. It is likely that the Tax Court will continue to be active throughout the entire decade.

The Tax Court is a taxpayer-friendly venue that is good at what it does and was not broken before the pandemic. As it is currently structured, the transition to virtual Tax Court trials should be easy, to usher in the new normal in tax administration.

Thursday, April 23, 2020

Living in the World of COVID-19: You May Want to Check in with the IRS to Make Sure They Know Where to Find You!

IRS (Finally!) Launches Registration Tool For Stimulus ChecksNo one can predict the future, but it is possible there will be another round of direct payments to American households. One legislative proposal is for a $2,000 per month payment for each household for a six month period. It’s not possible to say what additional relief will be made available, but the easiest way for the government to do its job here is by using the existing infrastructure of the IRS and the Social Security Administration since their computers already know where you live.

But this is not simply about collecting $2,000. In addition to getting in the right line for the next round of Economic Impact Payments, there is a much bigger reason to get square with your taxes. The IRS’ People First Initiative provides for relief on certain enforcement procedures, but there are also pitfalls for the unwary which I wrote about in more detail here.

In three weeks in March and April, Congress passed more tax legislation than it usually does in a year and a half. The impact and the details of how the new legislation affects businesses and family matters is almost too complex to enumerate here, but see the Resources Page of our website at mopsickcarrere.com for a work-in-progress listing.

Clearly, because the new COVID-19 tax laws so extensively impact almost every family and business in the country, checking-in right now with a competent tax person is essential. It is very possible that the new law may cause you to amend your already filed 2019 or prior year’s returns, or learn of a new tax benefit to which you are entitled, or even change your tax preparer if you inquire and find they are not up to the job of both reviewing your business situation and being conversant in every single tax aspect of the new legislation.

We work closely with a number of very good accounting firms and solo practitioners with whom we sometimes join up with to serve a single client.

In these uncertain times, people are looking inwardly, defensively, and are reevaluating every aspect of their financial status. How much money is coming in to the household, and how long can the family continue to depend on a particular source of income?  A good accountant will be able to help you analyze your financial affairs and control your costs.

Your ability to survive the crisis and rebuild your business as we learn about the permanent changes affecting our lives going forward, depends in part on "being current” with the IRS. Sadly, that is big problem for millions of Americans.

Those who meet the filing threshold and continue to keep their head in the sand without consulting with a tax professional now may be setting themselves up for problems in the future with the IRS. While it is true that the current IRS guidelines do not require the filing of delinquent returns in order to receive future Economic Impact Payments, taxpayers would be well-advised to work with a tax professional now to avoid almost certain future IRS scrutiny including, the possibility that the IRS may want to see if there are criminal tax issues surrounding past delinquencies.

But what happens at the IRS when you suddenly start filing after years of non-filing? Will the IRS send a special agent to your door? Not likely. They may want to talk to you after things settle down, but IRS resources are now stretched very thinly, for how long we do not know.

Prior criminal conduct may be a different matter; but for the most part, the IRS will engage you about “getting current” and work with you or your representative.

Everyone knows the IRS has extended the duty to file and pay until July 15 and that it relaxed the rules on installment payments and other collection remedies (see Ryan Carrere’s blog here). However, no one in Washington has announced there will be a general amnesty and your tax debts forgiven. That said, for those who already owe the IRS money and have liens filed against their names, now may be a time to consider an Offer in Compromise.

There are multiple issues as we move forward. As with other hastily enacted tax legislation, practitioners are noting inconsistencies and confusion as these new provisions are being analyzed. When will IRS regulations be written for further guidance on the new net operating loss rules, tax credits and refunds? Another issue is, will there be procedures to appeal government decisions on how much direct payments should be from family to family?

We at Mopsick Carrere, LLP are working hard, as are tax professionals around the country, to read, study, publish, and talk about the new legislation. Please keep up with our website for new developments which we are adding almost every day.

Tuesday, April 14, 2020

COVID-19--THE PEOPLE FIRST INITIATIVE-- AND DELINQUENT TAXPAYERS: A CHANCE TO JOIN THE IRS FRESH START PROGRAM?

There is a subtle hint in one of the recent press releases from the IRS which might be of interest to people
who are seriously delinquent in filing their federal tax returns.

In a news release about the People First Initiative,  the Internal Revenue Service announced a sweeping series of steps to assist taxpayers by providing a temporary break from a variety of enforcement activity. During this period, to the maximum extent possible, the IRS will avoid in-person contacts. However, the IRS will continue to take steps where necessary to protect the government’s interests.

In the middle of the four page announcement, the IRS says:

Non-Filers –The IRS reminds people who have not filed their return for tax years before 2019 that they should file their delinquent returns. More than 1 million households that haven't filed tax returns during the last three years are actually owed refunds; they still have time to claim these refunds. Many should consider contacting a tax professional to consider various available options since the time to receive such refunds is limited by statute. Once delinquent returns have been filed, taxpayers with a tax liability should consider taking the opportunity to resolve any outstanding liabilities by entering into an Installment Agreement or an Offer in Compromise with the IRS to obtain a "Fresh Start." See IRS.gov for further information.

Wait! What?! Yes, the IRS still has tax compliance in mind. The IRS is reaching out to everyone with a reminder to file their tax returns and to use this period of eased enforcement as an opportunity to come current.

In the March 25, 2020, People First Initiative press release is this startling statement:

During this period, the IRS will generally not start new field, office and correspondence examinations. We will continue to work refund claims where possible, without in-person contact.

The IRS Fresh Start Initiative

The Fresh Start Initiative referenced in the March 25 news release is nothing new. Nine years ago in IR-2011-20 , the IRS trumpeted a “New Effort to Help Struggling Taxpayers Get a Fresh Start.” That initiative in 2011, introduced a number of new measures which provided for increasing the dollar threshold when liens are generally issued resulting in fewer tax liens, making it easier for taxpayers to obtain lien withdrawals after paying a tax bill, withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement, and creating easier access to Installment Agreements for more struggling small businesses. It also expanded a streamlined Offer in Compromise program to cover more taxpayers.

The former Commissioner was reported as saying “[w]e are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start.”

For those delinquent filers who are reading this blog, the “subtle hint” referred to above should be clear: join the ranks of compliant Americans who dutifully file and pay their taxes each year as the IRS isn’t forgetting about the non-compliant.

Could things go a lot better for you if you do it now as opposed to waiting to see what will happen?

Here are some facts:

  1. IRS has made clear that it is easing enforcement through July 15. It has not stated that non-compliant taxpayers will get a free pass;
  2. Revenue officers, revenue agents, appeal officers, special agents, and attorneys are still working. We know this because they are actively working cases and communicating with our office. The IRS will not ignore a key part of its mission to enforce compliance even if we see a period of relaxed enforcement; and
  3. The IRS appreciates voluntary compliance and actually does work with taxpayers who engage in the process to resolve problems.

Generally compliant American taxpayers might be surprised to learn that a large number of taxpayers:

  1. who have high-paying jobs never bother to file at all;
  2. file every year but regularly omit from  reporting, large amounts of money from rental properties, moon-lighting jobs, and cash transactions;
  3. have been knowingly taking overly-aggressive legal positions which report items as capital gains when they should be reported as ordinary income, bonus depreciation to which they are not entitled,  and greatly inflated amounts for business expenses;
  4. derive a significant amount of money from illegal sources such as sale of contraband, gambling, or kickbacks;
  5. thousands of Millennials who completed college and graduate school and went on to get great jobs but who were never hard-wired to consider paying taxes as something they had to do; and
  6. have been lying to their return preparers for years about income and deductions and thereby causing them to file returns they know are false.

Be reminded that the IRS eventually catches up with a large number of these non-compliant taxpayers and it always costs a lot more than if they had just filed timely and correctly to begin with. In my many years of experience working both in the IRS and in private practice, I have found that for the taxpayers with delinquencies, most are in a state of constant low level anxiety and fear about their years of neglecting their taxes. They wonder when the IRS will show-up. While most people never see a Special Agent, the IRS is good at rooting out the non-compliant taxpayer. They don’t catch up with everyone, but they do catch up with many eventually. Skirting the tax system is a gamble that is simply not worth it.

Welcome to Tax Administration During the Pandemic and the Age of the “Touchless” Economy

Despite the pandemic, the likely economic downturn, and the permanent change in the way Americans live their lives, there are still people who go to bed at night thinking about the fact that they haven’t filed tax returns in five or ten years.

These people now see the government handing out Economic Impact Payments, but the real issue here is not whether you are going to get $1,200 within the next few weeks but whether this might be a chance to reset your relationship with the IRS.

In our practice over the years, one of the most common situations on which we are asked to help is where a non-filer comes to us and wants to come clean. They have no idea whether their past delinquencies are serious enough to cause an IRS audit of past years, or worse, launch a criminal investigation if it ever finds out a taxpayer’s past.

Why file delinquent returns now during the extreme emergency?

It is a good question to ask why now? To some, they look out and see chaos in government and a serious impending economic decline. Some have even predicted social unrest during the next 18 months and the potential for violence.

Here are a number of reasons why people who are seriously delinquent with the IRS should think seriously about acting now while the IRS is temporarily distracted:

  1. What we see today in America is not likely to be the way things will be 18 months from now or later. Social behavior may never be the same again but the IRS will be back in the near future, possibly better staffed and better at its job.
  2. In the event there is a change in administrations in Washington in November, the new leadership is likely to have an entirely different view of government and the proper role of the IRS.
  3. It is highly likely that delinquent or amended returns filed now to address prior defalcations are more likely to be accepted as filed now than ever before and certainly when the IRS is renewed and empowered in the near future.
  4. If you die, a heightened concern amid the COVID-19 crisis, and never get right with Uncle Sam, it is highly likely you will saddle your children and heirs with a far more complex task of cleaning up after you by having to file  your delinquent returns to close out your estate, scrambling to locate books and records which they will need to wrap up your affairs, and it is likely your heirs will have far more lawyer and accounting fees which will diminish your estate and the amount of money your heirs could be enjoying.
  5. Filing now starts the running of the statute of limitations, if there is one (i.e., there is no fraud) which could be three or six years. The IRS could take three years to recover from the damage which has already begun, some irreparable, to government, our lifestyles, our country and our economy. Once delinquent returns are filed, the next move belongs to the government to ask questions, and in most cases if they don’t, the taxpayer can be at ease about correcting his bad behavior.
  6. At some point in life, you may want to know just how much you owe for any number of reasons. Remember during the emergency, no one is talking about forgiveness of indebtedness. When it comes to taxes, the accumulation of interest and penalties can often exceed the total amount of the tax when there are a lot of years involved.
  7.  You might be able to start sleeping through the night again and not worry about your taxes.

Clearly it remains in the best interests of the non-filer or delinquent taxpayers to move promptly to correct their tax delinquencies.

Here is what needs to be done. The delinquent taxpayer needs to contact an experienced tax attorney, not just a qualified CPA, to disclose everything relevant about their filing history or lack thereof.

A tax attorney needs to determine whether the threshold for a criminal inquiry exists before returns are filed.  In most cases, taxpayers have an outsized fear about what the government is likely to do to them.

A qualified tax attorney will need to consider each legal issue, for example, whether a transaction should have been reported as ordinary income as opposed to capital gain, whether there exists a proper method of accounting, or depreciation, or whether an amount is even reportable as income, and whether related corporations and partnerships are also delinquent in their filings.

One of the issues will be how many years will you have to go back to file? After the review, the tax attorney and client must find a capable CPA or other qualified return preparer and work closely with them with guidance on how to prepare the delinquent returns. In some cases, the attorney might have to engage the preparer in a confidential arrangement to preserve the attorney/client privilege throughout the process.

One big issue is whether the Voluntary Disclosure Program should be considered as the mechanism for a taxpayer to come back into filing compliance. A voluntary disclosure in accord with longstanding IRS policy may be appropriate in some egregious cases to minimize the chance of criminal investigation.

For the non-filer or delinquent taxpayer, now is not the time to think that the IRS and the rest of the law enforcement community have gone away and will never come back. We will survive this awful pandemic and there will be a new paradigm in place. The smart move is to get ready now before it becomes too late.

Thursday, April 9, 2020

COVID-19 ECONOMIC IMPACT PAYMENT: WHAT IF YOU ARE A DELINQUENT NON FILER?

On March 30, 2020, the IRS announced that distribution of economic impact payments will begin in the next three weeks and will be distributed automatically, with no action required for most people.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples and up to $500 for each qualifying child, according to the announcement.

According to the announcement, tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible. Social Security recipients and railroad retirees who are otherwise not required to file a tax return are also eligible and will not be required to file a return.

In an effort to make obtaining the relief payment as seamless and quick as possible, in the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to waiting for checks to arrive in the mail.

The vast majority of people do not need to take any action, the IRS advises. The Service will calculate and automatically send the economic impact payment to those eligible.

The IRS release continues, for people who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The economic impact payment will be deposited directly into the same banking account reflected on the return filed. This may pose a problem for those who filed a joint return with a spouse, but have since divorced as one spouse ends up with the entire economic impact payment.

In a statement issued the day after the IRS announcement, the Treasury Department clarified that Social Security beneficiaries who are not typically required to file tax returns will not have to file. Instead, payments will be automatically deposited into their bank accounts.

Economic Impact Payments, part of the recently enacted  COVID-19 relief legislation, is clearly a logical way for the  government to get cash quickly into the hands of people who are just trying to survive, as well as to keep the economy alive during these troubled times.

What about Tax Filing Delinquents: A Trap for the Unwary?

One of the underlying assumptions of the EIP Program is that in large part, it assumes most people have been dutifully filing tax returns every year. Again, the IRS announcement offers guidance for those who have yet to file 2019 returns, and even those who haven’t even filed for 2018, but what if a taxpayer hasn’t filed for years?

The announcement urges people who have yet to file for 2018 or 2019, “to file as soon as they can.” Easy to say, but for some, there may be cause to consult with a tax professional before jumping in.  What the announcement does not say is “just go ahead and file something.” Taxpayers should take care to ensure tax returns are complete and accurate when presented to the IRS for filing. For those that sloppily file to get the economic impact payment can expect normal audit selections procedures to apply. For those that haven’t fulfilled the filing requirement for multiple years, the IRS may rightfully query why prior years are unfiled. Was it willful? Was there illegal source income?

Obviously, for some, participating in the EIP Program is not risk free. Nowhere has the Service indicated that filing for 2018 or 2019 will not lead to an audit. In some cases, a taxpayer may be well-advised to consult with tax counsel before a hastily made move results in an unwary taxpayer getting a lot more than he asks for.