Tax Problem Attorney Blog

Criminal Tax: Tax Fraud and Tax Evasion vs. Failure to File Tax Returns

Mon, 14 May 2012 12:00:55 -0800

A physician in Kentucky was arrested and charged last month with four counts of tax fraud pursuant to Internal Revenue Code Section 7201, and two counts of failure to file tax returns in violation of IRC section 7203. According to the indictment Dr. Werner Grentz had failed to file income tax returns since 1999. There is a common myth that it is better not to file a tax return at all than to file a false tax return. Like most myths there is some truth to this one. The willful failure to file a tax return is a misdemeanor punishable by "only" one year in jail, and a fine of not more than $100,000. IRC Section 7203. On the other hand tax evasion a/k/a/ tax fraud is a felony, and the resulting imprisonment can run up to 5 years, plus a fine of not more than $100,000. IRC Section 7201.

One advantage of a misdemeanor over a felony conviction is that it won't result in possible deportation for green card holders. We talked about this tax problem in a past blog post. Still, as Wesley Snipes found out, three years of failing to file a tax return can result in three years in prison.

Any "advantages" should not be used as an excuse not to file a tax return when there is some uncertainty about the correct position to take on a return. It is much better to file a return with missing or even incorrect information (provided that appropriate disclosures are made) than not to file a return.

In addition, in some instances the failure to file a tax return can be charged as tax evasion. That's what happened to Dr. Grentz. The indictments spells out that he was being charged with failure to file for two of the years, but tax evasion for four different years. In order to be convicted of tax evasion it is necessary for the IRS to show an "affirmative act", not merely an omission to do something like the failure to file a tax return. According to the indictment in addition to not filing his tax returns he engaged in the following affirmative acts:

He filed Form W-4 claiming that he was exempt from income tax; and

He set up bank accounts in the name of two corporations (which the IRS referred to by the pejorative term "nominees"), and deposited some of his compensation into bank accounts set up in the corporate names.

Those two actions were enough to cause a shift from charges of not filing a tax return to tax evasion.

Tax Fraud: Criminal Tax Conviction For Failure to Pay Payroll Taxes Upheld

Tue, 08 May 2012 10:57:33 -0800

The criminal tax conviction of a New Jersey couple (the DeMuros) for failure to pay payroll taxes to the IRS was affirmed by the Third Circuit Court of Appeals, United States v. DeMuro (3d Cir. 2012). The willful failure to pay payroll taxes is a violation Internal Revenue Code (IRC) Section 7202, and is punishable by up to five years in prison. Of course the willful failure by a responsible officer to pay trust fund taxes is also a violation of IRC Section 6672, and will result in a trust fund recovery penalty (TFRP) being assessed against the responsible officers. Obviously the criminal tax conviction is much more serious than the assessment of the trust fund recovery penalty.

The DeMuros failed to pay trust fund taxes for their business of more than $546,000 over 21 calendar quarters from 2002 to 2008, resulting in a 21 count indictment. While that is a lot of money it is easy to see how a failing business could wind up in that situation since it amounts to about $25,000 per quarter, and was spread over a seven year period. A large sum, but not shocking, at least not to tax lawyers, and other tax professionals who see this type of underpayment on a semi-regular basis.

The DeMuros tried to argue that their failure to pay wasn't willful, but to no avail. The IRS pointed to evidence that during the same time period the DeMuros spent over $5 million dollars from their personal and corporate bank accounts. Apparently several witnesses testified at trial about the DeMuros "luxury vacations, nice homes, and [Mrs. DeMuros] substantial home shopping network expenditures," and the DeMuros argued on appeal that the admission of this evidence was "prejudicial." The response from the Third Circuit was: "[w]hile we are sensitive to the effect that evidence of a defendant's liberal spending habits can have on a jury, particularly in these lean economic times, the evidence admitted in this case, i.e. evidence of vacations, jewelry, cars and parties, was not so inflammatory as to carry a great risk of prejudice."

Mrs. DeMuro argued at trial that she was not responsible for paying the payroll taxes. The IRS response was to show that that Mrs. DeMuro had the authority to fire employees and signatory authority over corporate bank accounts.

Interestingly the IRS also called as a witness the Enrolled Agent that represented the DeMuros before the IRS with regard to the payroll tax problems. The Enrolled Agent testified that he had reviewed two appeals that the DeMuros had filed, and that in his opinion they were meritless, and therefore should have been withdrawn. Advice which apparently the DeMuros didn't follow, and the IRS relied on this as evidence of bad faith on the part of the DeMuros.

Tax Fraud: Even a Small Tax Deficiency Can Result in a Civil Tax Fraud Penalty

Mon, 02 Apr 2012 09:54:07 -0800

Our tax litigation attorneys are often asked whether failing to report income is tax fraud. We explain that there are various "badges of tax fraud," and a simple omission of income may not be tax fraud. A recent Tax Court case illustrates that when coupled with other badges of tax fraud even a small tax due can result in a 75% civil tax fraud penalty.

In the case of Porch v. Commissioner (March 2012) Porch underwent a tax audit by the IRS for the years 2005 and 2006. At the audit Mr. Porch produced a Form 1099 and 13 unnumbered invoices which roughly totaled the gross receipts reported on the 2005 tax return. Porch did not provide his bank statements to the auditor at that point even though they had been requested. At the second meeting he furnished some, but not all of the requested bank statements. Ultimately the IRS summonsed the statements from the bank, at which point the auditor figured out that business income had been underreported by about $36,000 and $48,000 for 2005 and 2006, respectively. In addition, it turned out that Porch failed to report the gain on the sale of a house, and capital gains from the sale of securities. The tax due, however, was relatively small; $8,392 and $4,471 for 2005 and 2006, respectively.

In determining that the IRS had proven that Porch had committed tax fraud the Tax Court found the following badges of tax fraud:

• Understated Income
• Inadequate Records
• Implausible or Inconsistent Explanations of Behavior
• Failure to Cooperate with IRS
• Dealing in Cash
• Engaging in a Pattern of Behavior That Indicates an Intent to Mislead

A few of these badges of tax fraud were the most egregious. When Porch went to the tax audit he attempted to mislead the agent by presenting documentation which suggested the amount reported was accurate when in fact he knew that was not the case. The Tax Court was also not pleased with Porch's testimony at trial. On their 2005 tax return Porch and his wife reported adjusted gross income of around $11,000, and they deducted a similar amount for mortgage interest and taxes Porch answered in the affirmative when asked if he was the primary breadwinner in his family. Then, however, when asked how they supported themselves on the amounts set forth on the tax return he testified: "I mean it was rough. My wife, my friends, Lomax. You know, people helped me out. I mean, when I couldn't make ends meet, you know, I prayed about it." The judge referred to this under the heading of Implausible or Inconsistent Explanations of Behavior.

In the view of our tax litigation attorneys had Porch not been caught in several apparently dishonest statements perhaps he could have avoided the tax fraud penalty.

Failure to File FBAR (Foreign Bank Account Report) for Offshore Funds Leads to Seizure of Over 4.6 Million Dollars From Alaska Plastic Surgeon

Fri, 23 Mar 2012 06:00:00 -0800

The failure to file a Foreign Bank Account Report TD F 90-22.1 (FBAR) for an offshore bank account has led to the seizure of an Alaska plastic surgeon's $4.6 million dollar account at a Seattle branch of Bank of America. According to the complaint filed in District Court Alaska plastic surgeon Michael Brandner was involved in a contested divorce proceeding with his wife, and decided to hide around $4.6 million from her by depositing the funds in a foreign bank account in Panama held in the name of a nominee offshore company. The complaint alleges that he drove the money from Alaska to Panama in the form of several cashier's checks. He was assisted in the transaction by an individual he met in Panama.

As luck would have it the person who Brandner sought assistance from got caught up in an investigation into a totally unrelated stock fraud scheme, and began cooperating with the government. Reading between the lines here it seems that the so-called cooperating witness spilled the beans on Brandner in order to try and get some leniency in whatever mess he was involved in. The cooperating witness told the government that he had advised Brandner of the obligation to file an FBAR reporting for the offshore Panamanian account on at least two occasions.

The cooperating witness also advised Brandner that a new tax treaty with Panama might compromise the secrecy of his offshore account. Brandner then inquired if there was any other place he could hide the Panamanian funds. With the assistance of the cooperating witness created an offshore entity which then opened up an account at Bank of America held in the name of the foreign LLC. Homeland Security Investigations (HSI) then promptly seized the account in a civil in rem forfeiture action.

There are a number of lessons to be learned other than don't try and cheat your wife in a divorce action. Clients always ask our tax litigation attorneys variations of the question: "How is the IRS going to find out about my offshore bank account." The truth is that the IRS may not find out, but the consequences can be dire if they do. In Brandner's case he had the bad luck to trust someone who later came to have his own problems (which were not even tax problems) with the authorities. Always keep in mind that if two people know a secret it's not a secret.

The case is also interesting since this is the first time to my knowledge the government has attempted to use the civil forfeiture statute to seize 100% of the proceeds of offshore funds for failure to file an FBAR. It certainly significantly ups the stakes; especially since there is nothing to stop the IRS from criminally prosecuting Brandner for willfully failing to file an FBAR, or criminal tax fraud and that may be the next episode in this drama.

As a technical matter it is not clear to our tax litigation lawyers that the IRS has the right to seize the proceeds of an account simply because no FBAR was filed. For more about the technicalities our tax attorneys plan on posting a separate item next week.

Tax Fraud Penalties Upheld First By Tax Court, Then by Ninth Circuit

Thu, 15 Mar 2012 06:00:00 -0800

Tax fraud penalties were recently upheld against Miguel Robleto of Oregon by the 9th circuit. These were civil tax fraud penalties pursuant to IRC Section 6663, not criminal tax evasion charges under IRC Section 7201. The difference is that although you can wind up paying a lot of money if civil tax fraud penalties are imposed at least you won't go to jail. In some cases the IRS brings criminal tax evasion charges, and then goes after you for the taxes, plus a civil tax fraud penalty. Although Mr. Robleto probably doesn't think so he may have been lucky that the IRS didn't bring criminal tax evasion charges.

The civil tax fraud penalty under IRC Section 6663 is 75% of the tax that is owed. The process of imposing the civil tax fraud penalty is a lengthy one. Generally the first step is a tax audit, sometimes followed by an appeal to the Internal Revenue Service's Appeals Division. Next the IRS will issue a notice of deficiency, after which the taxpayer may petition the United States Tax Court to decide his case. In order for the Tax Court to uphold the fraud penalty it must find clear and convincing evidence of tax fraud. That's just what happened in Mr. Robleto's case.

Mr. Robleto was a small business owner, and under the auspices of the Oregon DMV charged non-English speakers a fee for administering Oregon drivers' license exams. Although the Tax Court determined, and Mr. Robleto pretty much admitted, that he failed to report over $300,000 spread over four years his excuse was that he had never operated a business before, that he was overwhelmed by all of the customers he had, that he was totally inept in handling the financial aspects of his business, that he couldn't even pay his utility bills on time, that he had unopened envelopes of cash lying around his home, and that the filing of his incorrect income tax returns was at worst grossly negligent, but not fraudulent.

The Tax Court didn't buy it. Instead the Tax Court looked at various so-called badges of fraud including inadequate books and records, concealment of ownership of assets, cash transactions and cash hoarding. As the Tax Court so subtly put it:

Dealing in large amounts of cash and not keeping any records thereof often go hand in hand with intentional underreporting of income and taxes. Noteworthy are [Robleto's] placement of assets in nominee names and [his] lack of cooperation.

Robleto probably wasn't helped by the fact that he had a safe in his house with almost $200,000 of cash contained in it, or that he had a side business of preparing tax returns. He hired an accountant to prepare his own tax returns, but neglected to tell the accountant about the income from the preparation of the tax returns.

FBAR Non-Filers Beware: Either Tax Fraud OR Filing a False Tax Return Can Result in Deportation

Fri, 02 Mar 2012 06:00:00 -0800

Recently the Supreme Court held in Kawashima v. Holder (Feb. 21, 2012) that filing a false tax return in violation of IRC Section 7206(1) as well as other criminal tax offenses are aggravated felonies which can result in deportation of a resident alien. Just over two years ago we blogged about the 9th Circuit decision in Kawashima which came to the same conclusion. The Supreme Court has now upheld that decision.

To review the background, Mr. and Mrs. Kawashima were legal residents of the United States having moved to Los Angeles from Japan in 1984. According to an article in the Los Angeles Times they opened several sushi restaurants in the West San Fernando Valley area of Southern California. They were accused of violating various criminal tax laws, and in 1997 Mr. Kawashima pled guilty to a single count of violating Internal Revenue Code (IRC) Section 7206(1) (filing a false tax return). Mrs. Kawashima pled guilty to IRC Section 7206(2) (aiding and assisting in the filing of a false tax return). The tax loss was around $245,000. This would have included interest and penalties so the actual tax would have been much lower. It is possible that the Kawashimas pled guilty to charges under IRC Section 7206 to avoid the IRS bringing tax evasion charges under IRC Section 7201. Tax evasion carries a maximum penalty of 5 years, and a $250,000 fine; whereas filing a false tax return "only" has a penalty of $100,000 and 3 years in prison.

Neither the 9th Circuit opinion, nor the Supreme Court opinion stated whether they served any jail time, but according to the Los Angeles Times they repaid the full amount due to the IRS. The Kawashimas probably assumed that their tax problems ended there, but in 2001 the Immigration and Naturalization Service (INS), as it was then known, brought removal proceedings, against the Kawashimas seeking their deportation alleging that they had committed an "aggravated felony." These proceedings were brought pursuant to 8 USC § 1227(a)(2)(A)(iii) (stating that "[a]ny alien who is convicted of an aggravated felony at any time after admission is deportable"). An aggravated felony is defined in 8 USC Section 1101(a)(43)M)(i) as any offense that "involves fraud or deceit in which the loss to the victim or victims exceeds $10,000."

The Kawashimas argued that filing a false tax return was not an aggravated felony. They relied on a related section of the law which specifically states that the commission of tax fraud pursuant to IRC Section 7201 is an offense which may lead to deportation. From that the Kawashimas criminal tax lawyers concluded that Congress intended that the only tax crime which would qualify for deportation is tax fraud, and not any other lesser tax crime.

Unfortunately for the Kawashimas in a divided 6-3 opinion the Supreme Court disagreed, clearing the way for the Kawashimas deportation. In her dissent, Justice Ginsburg pointed out that as a policy matter the majority made a bad choice because it would discourage immigrants from pleading guilty to tax crimes since in addition to any jail time they would be exposed to being deported.

In our view Justice Ginsburg hit the nail on the head, and criminal tax lawyers will need to advise their alien clients of this distinct possibility as one of the many factors to take into account when deciding whether or not to plead guilty to any tax crime. The concern for FBAR (foreign bank account report) non-filers is that without regard to whether or not failure to file an FBAR is a deportable offense individuals who do not file FBARs generally have filed false tax returns by checking the "no box" on Schedule B signifying they don't have a foreign bank account when in fact they do.

Quick Tips on Offshore Bank and Financial Accounts

Mon, 06 Feb 2012 06:00:00 -0800

In January I appeared on a panel with several other tax lawyers at the 2012 University of Southern California Tax Institute. One of the topics was Quick Tips on Offshore Bank and Financial Accounts. The presentation was intended for tax attorneys, CPAs, and other tax professionals. However, anyone who has FBAR issues including the non-filing of the Foreign Bank Account Report, TDF 90-22.1 may find the outline that I distributed at the meeting to be helpful. For that reason I have posted a copy of the outline on our website.

The outline includes a look at the various options open to taxpayers who have failed to file FBARs, and some of the factors that our tax lawyers consider in advising clients on how to proceed.

Failure to Pay Payroll Taxes Leads to Criminal Tax Charges

Wed, 01 Feb 2012 06:00:00 -0800

Last month, while most people were preparing their Christmas lists, Louis Alba, a New York contractor, plead guilty to criminal tax charges of failing to pay over to IRS employment taxes withheld from employee wages in the amount of almost $780,000 over approximately six years. Failure to pay over payroll taxes is considered a felony under Internal Revenue Code (IRC) Section 7202. It is punishable by up to five years in jail, and a fine of up to $250,000.

In the current economic environment business owners who are strapped for cash sometimes decide to "borrow" from the IRS by not paying the payroll taxes. The theory is that if cash is tight, and the vendors aren't paid there will be no more merchandise to sell, and therefore the business will go under quickly. The same with the landlord; don't pay the rent, and one can expect an eviction notice in short order. The IRS on the other hand moves slowly, and the temptation is to believe that if you have another 6 months or so business will turn around, and the IRS can be paid back.

Unfortunately in many cases that doesn't happen. The IRS doesn't look on this as borrowing; it views the failure to pay payroll taxes as stealing. Even if criminal tax charges are not brought, so-called responsible officers who fail to pay over corporate payroll taxes can be held personally liable under IRC Section 6671. More and more, however, the IRS is bringing criminal tax fraud charges. For the record persons convicted of tax crimes still must pay the taxes. It's not one or the other.

Swiss Bank Clariden Leu to Turn in Its U.S. Clients

Thu, 26 Jan 2012 05:59:32 -0800

In a little noticed development, Switzerland's oldest private bank Clariden Leu has informed some of its U.S. clients that it has been ordered to turn over their names, and offshore bank account information to the IRS. Clariden Leu posted a notice on its website dated Nov. 29, 2011 to that effect. This is bad news for U.S. offshore account owners who have not previously made a voluntary disclosure to the IRS. Such individuals run the risk of the IRS filing criminal tax fraud charges against them, or criminal charges related to willful FBAR violations. Alternatively, only civil tax fraud or other penalties may be involved, but the FBAR penalties alone could far exceed the balances in the offshore accounts.

The notice refers to a U.S. treaty request apparently covering U.S. beneficial owners of beneficial accounts at Credit Suisse AG, Neue Aargauer Bank AG, and Clariden Leu. Also in November Credit Suisse announced that it is in the process of integrating Clariden Leu's operations into Credit Suisse. The treaty request appears to be limited to U.S. account holders who hold their accounts through "domiciliary companies."

The notice also points out that although the account holders have appeal rights to the SFTA (Swiss Federal Tax Authority) attempts to block the turnover of information to the IRS may require compliance with 18 USC Section 3506. That section provides that:

"...any national or resident of the United States who submits, or causes to be submitted, a pleading or other document to a court or other authority in a foreign country in opposition to an official request for evidence of an offense shall serve such pleading or other document on the Attorney General at the time such pleading or other document is submitted."

The notice correctly observes that anyone in this situation should consult with a qualified attorney concerning any obligations under Section 3506.

Obviously serving the Attorney General would defeat the whole purpose of filing an appeal with the SFTA since the owner of the account would then become known to the IRS. Interestingly 18 USC section 3506 does not on its face appear to provide any sanctions for failure to obey its terms. However, at least one federal prosecutor has publicly stated that he would seek to charge anyone violating 18 USC section 3506 with obstruction of justice.

California State Board of Equalization (BOE) Continues Offensive Against Medical Marijuana Dispensaries

Fri, 20 Jan 2012 06:00:00 -0800

The California State Board of Equalization (BOE or SBE) announced almost one year ago that medical marijuana dispensaries are not exempt from collecting and paying California sales tax. The announcement resulted from a hearing before the BOE involving Berkeley Patients Group. In that case the BOE decided that medical marijuana was not exempt from sales tax as a medicine. The decision was not surprising in light of a previous notice issued by the BOE that medical marijuana dispensaries were not exempt from collecting and paying sales tax.

Fast forward one year later. Our tax attorneys are fielding inquiries from a number of medical marijuana dispensaries who are undergoing sales tax audits by the BOE. The M.O. of the BOE seems to be to stand at a discrete location outside of the clinic, and count the number of people coming in the door per hour. The Board then compares that to the clinic's records of the number of patients, and if there is any discrepancy it calculates the value of an average "sale," multiplies that by the number of alleged unrecorded patients per day, and projects that amount over a (generally) three year audit period.

Of course this projection by the SBE is rarely accurate, and fails to take into account a number of reasons that the dispensary's records don't match. For example, discrepancies can exist because:

1. Not everyone who comes into the clinic is a member, or actually fills his prescription
2. The number of patients entering the clinic on the particular day that the BOE is counting may be higher than average because the clinic was having a good day
3. The BOE may be using an inaccurate sale price which results in an overstatement of receipts.

There are many other reasons why the BOE estimates can be inaccurate. Luckily there are many avenues for appeal of a BOE determination. However, an ounce of prevention is worth a pound of cure, and proper tax representation during the initial sales tax audit may prevent problems from arising. Information on sales tax audits and sales tax appeals in general is available on our website, click here to view. Managers of medical marijuana cooperatives and collectives should also be aware that if the BOE determines that sales tax is due and the dispensary fails to pay they could be personally liable pursuant to California Revenue and Taxation Code Section 6829.

Innocent Spouse Relief Gets A Bit Easier in IRS Notice IR 2012-8

Fri, 13 Jan 2012 10:30:00 -0800

In IRS Notice IR 2012-3 the IRS announced that innocent spouse defenses pursuant to IRC Section 6015(f) will become a little easier. Generally there are three different kinds of innocent spouse defenses, each with its own rules and exceptions. IRS Notice 2012-8, which somewhat confusingly was announced in IRS Notice IR 2012-3, sets out a proposed new Revenue Procedure which will supersede Revenue Procedure (Rev. Proc.) 2003-61. IRS Notice 20012-8 addresses the criteria used in making innocent spouse relief determinations under the equitable relief criteria of Internal Revenue Code Section 6015(f). The IRS Notice covers several topics. It provides for certain streamlined determinations; it creates new guidance on the potential impact of economic hardship, and the weight to be accorded to certain facts in determining equitable innocent spouse relief. Importantly it also expands how the IRS takes into account abuse and financial control by the nonrequesting spouse in deciding whether to grant equitable relief.

The IRS is inviting comments on the forthcoming proposed Revenue Procedure. The comments must be submitted by February 21, 2012.

One important change is that under Rev. Procedure 2003-61, which previously provided guidelines for equitable innocent spouse determinations, lack of economic hardship was treated as a factor which weighed against granting equitable innocent spouse relief. Now if economic hardship exists that is still a factor which weighs in favor of granting innocent spouse relief. However, the lack of economic hardship will no longer be counted against a requesting spouse. Instead it will be treated as neutral.

Another significant change is that the proposed revenue procedure provides that abuse or lack of financial control may mitigate other factors that might weigh against granting equitable relief under IRC Section 6015(f). For example, even though a requesting innocent spouse has knowledge or reason to know of omitted income on a tax return if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and, therefore, because of the abuse or financial control the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the nonrequesting spouse's retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse had knowledge or reason to know of the items giving rise to the understatement or deficiency.

In the end, however, the granting of innocent spouse relief is based upon all of the facts and circumstances. Only by discussing your case with a knowledgeable tax litigation attorney can you determine if you are likely to prevail.

More Swiss Banks to Turn Over Offshore Bank Account Information to IRS?

Fri, 23 Dec 2011 06:00:00 -0800

According to press reports Credit Suisse, Basler Kantonalbank, Julius Baer, HSBC Switzerland and seven other Swiss banks are poised to turnover data related to U.S. persons suspected of tax evasion or Foreign Bank Account Reporting (FBAR) violations. The story was published on December 18th in SonntagsZeitung, a Swiss newspaper. Supposedly the banks had until Dec. 20th to accept the offer, and that three of the banks have been given until Dec. 31st to turn over the information. Those Swiss banks who accept the deal would be assured immunity from criminal prosecution, and would pay a fine. According to "one insider" the banks are unlikely to turn down the deal.

Since there has been no confirmation from either the Swiss banks or the IRS it is unclear whether the story is true. The deadlines don't seem realistic, however. In the view of our tax attorneys it would be unlikely that the Swiss banks could comply with turning over documents that quickly, and there would have to be notification of the clients, and an opportunity to appeal if past experience with the UBS settlement is any guide.

Still it is a reminder that in all likelihood that at least the larger Swiss banks will be turning over the names of their U.S. account holders to the IRS sometime in the not too distant future. Those U.S. persons who still have undisclosed Swiss bank accounts, or for that matter any offshore financial accounts would do well to consider whether to make a voluntary disclosure before the choice is made for them.

Felony Criminal Tax Charges Filed Against New York CPA for Non-Payment of Trust Fund Taxes

Wed, 21 Dec 2011 06:00:00 -0800

The IRS has filed felony criminal tax charges pursuant to Internal Revenue Code Section 7202 for willful failure to collect, truthfully account for and pay over trust fund taxes. This is yet another in a series of criminal tax charges being brought against responsible officers who haven't paid over corporate trust fund taxes. In most situations the IRS proceeds against responsible officers who willfully fail to pay corporate trust fund taxes, by assessing the tax directly against the individual under Internal Revenue Code Section 6672. This is generally referred to as the trust fund recovery penalty. Sometimes the IRS goes further and brings criminal tax charges.

In this case the defendant is a New York CPA who, according to the information filed in U.S. District Court, failed to pay payroll taxes to the IRS for three years running. Our tax lawyers found this case interesting because the amount of unpaid trust fund taxes was not terribly large. The total the IRS alleged as unpaid was approximately $108,000, fairly small potatoes, as payroll tax cases tend to go.

I thought it was important to blog about this case because clients sometimes assume that the relatively small size of their tax problem will insulate them against criminal tax liability. While that is generally accurate, as this case illustrates, not always.

Felony Criminal Tax Prosecution Goes Forward

Tue, 20 Dec 2011 06:00:00 -0800

United States v. Quinn (D. KS 2011) is one of several recent felony tax prosecutions, not for tax evasion, but for violation of Internal Revenue Code Section 7202. IRC Section 7202 makes it a felony to willfully fail to collect, account for, or pay over any tax due. In this case Ms. Quinn failed to pay payroll taxes for 7 quarters between 2003 and 2005. She finally got around to paying them in 2010, apparently after the IRS had filed criminal tax charges against her. Ms. Quinn challenged the finding that she failed to pay employment and individual tax and argued that since she had subsequently paid the tax due the charges should be dismissed.

The court wrote in its opinion that a person has failed to pay taxes if they have not paid the amount due as of the due date, regardless of whether the taxpayer has subsequently paid. In Ms. Quinn's case, she had recently paid the amounts due but this was not sufficient for the court to find her not guilty.

This does not mean that late payment of taxes will never prevent a criminal tax prosecution, and those who have not paid their taxes should seriously consider taking care of a tax problem before it turns into a criminal tax problem. Had Ms. Quinn gotten around to making full payment, or indeed even made good faith installment payments much earlier there is a chance that the case would never have gotten as far as it did.

IRS Fact Sheet 2011-13 (FS -2011-13) Much Less FBAR Relief Than Reported

Wed, 14 Dec 2011 12:40:00 -0800

IRS Fact Sheet 2011-13 (FS -2011-13) has been heavily touted (mostly in the Canadian Press) as providing FBAR (Foreign Bank Account Report) relief for dual U.S. citizens abroad. However, in the view of our tax attorneys it simply reiterates existing law. As readers of the Tax Problem Attorney Blog are aware, U.S. persons with offshore bank accounts with a balance of greater than $10,000 are required to file a Foreign Bank Account Report (aka FBAR) with the Internal Revenue Service annually. Penalties for failure to file the FBAR can be draconian. In addition U.S. citizens living in foreign countries are required to file U.S. tax returns reporting their worldwide income. Penalties for failure to file a tax return may also be imposed.

FS-2011-13 states that no penalties will be imposed for failure to file a tax return or failure to pay tax if no tax is owed. Well big deal! If you don't owe taxes then there is no failure to pay penalty. Since both the failure to pay tax penalty, and the failure to file penalty are based upon a percentage of the taxes owed this is not a concession by the IRS. FS-2011-13 does not state that if no taxes are owed no FBAR penalty will be applied!

Instead FS-2011-13 points out that if "reasonable cause" is determined to exist by the IRS then there will be no penalty. Again this is no change from the IRS' current position. The devil is of course is in the details. The IRS lists various factors that might go into to the determination. Here we quote:

Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.

Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer's background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause. No single factor is determinative.

Let's break this down a bit. In virtually all cases the tax preparer was not informed of the existence of the offshore bank account. As to a small tax deficiency, in the context of the Offshore Voluntary Disclosure Program (OVDP), the IRS routinely took the position that even a zero tax deficiency did not mean it would impose no penalty. If the IRS is changing its tune that is good news, but what does it mean for those persons who signed binding closing agreements with the IRS because they were threatened with penalties in excess of the balance in the account?

Example 4 is interesting. Here it is:

Taxpayer is a United States citizen who lives and works in Country B as a computer programmer. Taxpayer has checking and savings accounts with a bank that is located in the city where he lives. The aggregate balance of the checking and savings accounts is $50,000 during the tax year. Taxpayer complied with Country B's tax laws and properly reported all his income on Country B tax returns. Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts. After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR. Taxpayer also filed federal income tax returns properly reporting all income and no tax was due. The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances. Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due. Taxpayer's explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.

First this Taxpayer has no tax liability. This will not generally be the case unless the foreign jurisdiction tax rates are higher than the U.S., or the Taxpayer has no income for which the foreign earned income exclusion is not available. Also this Taxpayer had a relatively small account balance. What about the more successful taxpayer who had $200,000 or $1,000,000 in his account? This Taxpayer had his accounts in the "same city" as the city where he lived. What about the UK citizen who has an account in the Isle of Mann to legally avoid income tax in the UK? Will she fare as well, or will that be seen by the IRS as an indication of intent to conceal the existence of the account? What about the occupation of computer programmer? What if the Taxpayer were an attorney, but not a tax attorney? Will that person be assumed to have an education and background so that he "should have known" about the FBAR filing requirements?

Only time will tell, but the point is that news reports stating that the IRS is providing FBAR relief for dual citizens is premature.