Mike Sorrentino, aka “The Situation,” who gained fame as a star on the reality show Jersey Shore, now has some real problems.  Mike and his brother have pleaded not guilty to a seven-count indictment which includes filing false documents, failure to file tax returns, and conspiracy to defraud the United States.  According to the charges, The Situation filed false documents to under report income through his business, claimed personal expenses as business deductions and failed to file a return for 2011 when he earned nearly $2 million.  The unfortunate part for The Situation is now that the case is public the IRS is going to have to pursue it vigorously.  With limited resources and an extremely large tax constituency to govern, the IRS has to make sure that when it takes on a case such as this one that they have a favorable outcome.  If a high profile case was ever to come out unfavorable for the IRS it would set a devastating precedent – just ask Wesley Snipes.

Although higher profile cases may receive more attention and resources, that does not mean the IRS wouldn’t pursue the everyday person for transgressions such as this.  If you have questions, are currently under investigation or have issues you want to fix before they become a serious problem contact us at Hone Maxwell LLP.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

When a tax return is filed and taxes are paid it can appear to be one process.  However, the rules of the IRS dictate that these are actually two, very distinct obligations that have to be fulfilled.  First, taxes are due to be paid on April 15th.  There is NO EXTENSION FOR PAYING TAXES.  An extension is only an extension of time to file the return.  Additionally, a tax return is required on the due date regardless if there is an amount owed, refund, or no tax due.  Even S corporations and partnerships, which usually do not pay taxes, can have penalties assessed for not timely filing a tax return.   Therefore, the penalty structure and requirement are completely independent.  You can have a penalty for not paying taxes by April 15th even if you file an extension, and even if no tax is due or you have a refund you can have a penalty for not filing a return.

The practical application of this is to make sure you pay your taxes by April 15th, or have a tax professional calculate if you have paid a sufficient amount to meet one of the IRS safe harbors.  The IRS does allow safe harbor payments by April 15th based on prior year taxes for taxpayers that don’t yet have an accurate estimate of what they will owe.  Next, April 15th is a hard deadline for an extension and October 15th is a hard deadline for the return (3/15 and 9/15 for corporations and 4/15 and 9/15 for partnerships).  Your return/extension has to be filed by these deadlines no matter what the underlying tax situation.

If you have penalties or issues with tax balances contact us at Hone Maxwell LLP today for an assessment of your options.  The key is to not simply provide a quick fix to get the IRS off your back, but to find a long-term remedy that is manageable based on your finances, and also address the underlying issue so that it does not happen again.  For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.

 

Last year we posted about an IRS warning regarding phone scams against taxpayers (click here for that article).  The IRS has recently put out new information to continue these warnings.  The newest literature includes 5 easy ways to spot a scam:

  1. Receiving a phone call without first receiving an official notice in the mail.
  2. Demanding taxes are paid immediately without giving you a chance to question or appeal the amount.
  3. Requiring a specific method for payment, such as a prepaid debit card.
  4. Asking for credit or debit card numbers over the phone.
  5. Threatening to get local authorities or law enforcement involved to arrest you if you do not comply immediately.

Taxpayers have to be vigilant to avoid these scams.  The perpetrators can talk very fast and be very convincing.  You don’t want to be in the middle of providing your social security number or credit card number when you realize it is a scam.  Therefore, it is good to review this list and be prepared.  If you have questions about your taxes or are unsure if you have any unknown issues, contact us at Hone Maxwell LLP today for a complete and comprehensive review of your case.  It is always better to be proactive than to be susceptible to scams or wait for the IRS to use its methods to find you.  For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.

After more than a year of tax issues, a Spanish judge has ruled that the tax case against Lionel Messi and his father will proceed.  The case stems from allegations that Messi was running funds through multiple countries and business entities in an attempt to evade taxes.  Messi has denied any wrongdoing but has also made statements that his former agent handled these types of matters.  Also, it appears Messi’s father may have had a larger role in the transactions.

Besides being an interesting story for the sports world and gossip columns, this also points out the global movement towards transparency.  Through FBAR reporting, FATCA, and the offshore voluntary disclosure program, the IRS has made it clear it will no longer stand for secrecy when it comes to foreign accounts and businesses.  The case against Messi shows that other countries, Spain in this case, are taking the lead to join the IRS.  This is very bad news for tax evaders.  With the new reporting of FATCA it was going to be difficult enough to avoid the IRS.  If other countries are going to tighten down on tax abuse as well, not only will it become even more difficult to hide funds, but it also may eliminate some of the incentive.  If taxpayers cannot enjoy lenient tax enforcement in foreign jurisdictions, perhaps they would rather come clean with their situation instead of waiting for the IRS to find them and drop the hammer.

What this all means for the average taxpayer is that in the future it appears the rules will apply and be enforced on everyone.  It also means that all global tax strategies taken should be compliant and transparent.  With so much attention and enforcement, even an honest mistake or just the appearance of impropriety could create a world of headaches.  If you have questions about your global tax structure or reporting of foreign accounts and income contact us at Hone Maxwell LLP today.  We have the experience to help you navigate the extensive new regulations and laws.   As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

The Mortgage Forgiveness Debt Relief Act originally enacted by the IRS gave taxpayers relief on short sales.  Without this relief, when taxpayers had a short sale they could be responsible for tax on the forgiven debt as it was considered taxable income reported on a Form 1099.  However, under certain conditions and with limitations, taxpayers could exclude the forgiven debt on a short sale so that it would not be taxed as income.  Through 2012, California conformed to this exemption but initially did not renew it for the 2013 tax year.

When 2013 tax returns started getting prepared this year, taxpayers were surprised when their short sale was resulting in large income amounts on the California tax return.  Many taxpayers had assumed the extension of the federal provision would also apply to California.  With taxpayers not able to afford the tax on this unsuspected income, tax professionals scrambled for a resolution.  There was a letter from Senator Barbara Boxer, a Board of Equalization statement on the matter, an IRS response to the Boxer letter, and a long discussion of recourse vs. nonrecourse debt.  However, on July 25, 2014, California finally ended the discussion and speculation and extended the provision to apply retroactively to the period of January 1, 2013 through December 31, 2013.  Taxpayers who have already filed their 2013 return can file an amended return to claim the exemption and have to write “Mortgage Debt Relief” in red at the top of the Form 540X.  Taxpayers on extension who have not yet filed, can claim the exemption using normal procedures including attaching the federal tax return and Form 982.  As for taxpayers with short sales in 2014, we may be having this discussion again next year so it is important to be aware of the tax consequences of a short sale.

Buying and selling property as well as dealing with debt can have many different tax implications.  Before undertaking a major transaction taxpayers should always consult a tax professional to make sure the finances match the intended goals.  If you have questions about selling a home, cancellation of debt income or a short sale, contact us at Hone Maxwell LLP.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news

As discussed in our post on June 24, 2014, the IRS has announced important changes to its offshore voluntary account programs. These changes were announces as FATCA took hold worldwide on July 1, 2014.

One of the biggest changes announced by the IRS was the changes made to the main disclosure program knows as the Offshore Voluntary Disclosure Program, OVDP.  More than 45,000 taxpayers have participated in the IRS programs so far and as FATCA kicks in, the IRS can expect even more.

The IRS and Department of Justice (DOJ) have warned that they have even more resources at their disposal. Over 100 Swiss banks took a DOJ deal that means full disclosure of American accounts and tiers of fines depending on how the banks behaved. Notably, this deal was not offered to the 14 Swiss banks under U.S. investigation.

The changes announced by the IRS in June to the existing OVDP include:

  • Requiring additional information from taxpayers applying to the program;
  • Eliminating the existing reduced penalty percentage for certain non-willful taxpayers;
  • Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
  • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.

This last change is the most worrisome.  The increase in penalty is substantial and may catch many off guard as investigations become public.  The IRS has published a list of the financial institutions and proprietors that are under investigation publicly here.  Currently there are ten (10) financial institutions and proprietors on the list.

Under U.S. tax law you must report your worldwide income on your U.S. income tax return.  You may also need to file an IRS Form 8938 to report foreign accounts and assets with your tax return.  Additionally, if you have foreign bank accounts exceeding $10,000 in the aggregate at any time during the year you must file an FBAR by each June 30.

If you haven’t been doing this it is vital you speak with a tax attorney immediately to discuss your options.  Can you start filing complete tax returns and FBARs prospectively, but not try to fix the past?  The risk is that past non-compliance will be noticed and it will then be too late to make a voluntary disclosure.  Although criminal cases are rare, FBAR violations and tax violations can result in criminal prosecution.  Furthermore, even civil penalty cases for the failure to file an FBAR can be disastrous. The non-willful FBAR penalty is $10,000 per account per year. Willful violations are hit with $100,000 or 50% of the amount in the account for each violation.

If you have undisclosed foreign financial assets, income or bank accounts contact Hone Maxwell LLP today.

The IRS has announced that beginning in January 2015, only 3 direct deposit refunds will be able to go into any single financial account.  The fourth and following refunds will automatically convert to a paper check that is mailed to the taxpayer.  This change is an attempt to prevent fraud and identity theft issues.  Frequently, this type of fraud comes from tax preparers taking advantage of their clients.  The tax preparer can either file faulty returns for the client in order to share the benefit, or a scarier situation is where a return is filed without the taxpayer’s knowledge.  In some cases, the tax preparer shows the taxpayer a tax return for signature that includes a refund.  The tax preparer may then offer to pay the refund to the taxpayer immediately, in return for the taxpayer having the refund deposited in the tax preparer’s account.  Then, the tax preparer fraudulently changes the tax return and files a return showing a larger refund, and pockets the difference.  Unfortunately, this is a common case.  When there is tax preparer misconduct, one of the first steps for a taxpayer should be to review IRS records to make sure the returns they have signed are actually what was filed under their social security number.   In fact, the situation is so common the IRS even has a reporting procedure in place using Forms 14157 and 14157_A to report these incidents.

Despite these changes, the IRS encourages taxpayers to continue to use the direct deposit method for refunds.  Most taxpayers will not be affected by the changes.  Hopefully, these changes will help limit the possibility that the taxpayer is ever affected by the fraud and misconduct they are designed to prevent.  If you have received IRS notices that don’t match what you believe should be on file for your account, or other questions regarding your tax return, contact us at Hone Maxwell LLP today for a complete analysis of your tax situation.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

Amid heavy pressure from tax professionals and taxpayers alike, the IRS has finally made changes to the Offshore Voluntary Disclosure Program (OVDP).  The pressure to change the program came from the clear impression by many that the former programs were too severe for taxpayers who were not attempting to evade taxes or hide assets offshore.  Therefore, the unintended consequences were that non-willful offenders were sometimes left with the choice of entering the program and paying a very high penalty, or risking the unknown by making a quiet disclosure.  While the new program offers additional disclosure options for the non-willful offender, the IRS has increased the penalties on taxpayers they catch before the taxpayer makes a voluntary disclosure and broadened the definition of what this means.  Further complicating the matter are new procedures for making a disclosure as well as transitional rules for participants already involved in the program.

The Good News:

Taxpayers whose failure to file a foreign financial report was non-willful, and who meet certain other requirements, have a new streamlined process to make a disclosure.  For people qualifying under this new streamlined procedure the penalty will only be 5% of the highest aggregate balance of offshore accounts for taxpayers falling under the resident category, and the penalty will be waived in its entirety for participants falling under the non-resident category.  This is in heavy contrast to the prior OVDP standard penalty of 27.5%.  The previous OVDP did allow for reduced penalty amounts of 5% – 12.5% but these options came with heavy restrictions and requirements that ruled out many taxpayers.  The streamlined process also does not include the other penalties included in the OVDP such as the accuracy related penalty, and for non-resident filers also the failure to file penalty and failure to pay penalty.  Other than the residency requirement and applicable penalty of 5%, the other major difference between the resident and non-resident procedures is that residents must have filed tax returns for the three previous years.  Furthermore, in addition to the lesser penalty, the reporting required under the streamlined process, including returns, forms and documents, is much less onerous than the standard OVDP.  Before entering the new streamlined process taxpayers should have a tax professional analyze their specific facts and circumstances to determine if they qualify for this process.

The Bad News:

For taxpayers that were already planning to make a standard disclosure under the previous terms of the OVDP, the changes are less drastic.  The major items to note are that the pre-clearance submission now requires additional information and the penalty payment and bank statements relating to the disclosure are due at the time of filing regardless of the size of the accounts.  The big hammer comes in the form of an increased penalty on the aggregate account balances to 50% if the taxpayer enters the program after “either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.”  The program goes into some detail about what this means but of most concern is the inclusion of banks that are cooperating with the IRS to give information about U.S. account holders.  As FATCA compliance becomes more widespread, many taxpayers are getting letters from foreign financial institutions stating that they are in the process of or preparing to submit the taxpayer’s information to the IRS.  It is not completely clear if this means the threshold has been hit to push a taxpayer’s penalty into the 50% threshold; however, if the taxpayer has decided to make a disclosure the best option is to enter the program immediately to give the best chance of being considered under the original penalty structure of 27.5%. The IRS does not want taxpayers waiting until they are forced into the program, they are asking for voluntary disclosure now.

Other Concerns:

Quiet Disclosure?

Quiet disclosure is an option some taxpayers had previously made when faced with the options before these recent changes.  A typical quiet disclosure is where a taxpayer files all late forms and amended returns outside of the OVDP and hope they are processed without further inquiry.  The IRS has previously stated that they do not want taxpayers to make quiet disclosures and with the new streamlined process for taxpayers that unintentionally violated IRS filing requirements; we expect the IRS will not view any quiet disclosures favorably and will likely assess all potential penalties against those that are caught attempting quiet disclosure.  Furthermore, with the electronic filing of the foreign financial account statements (previous FBAR) it will also be easier for the IRS to identify those attempting quiet disclosure.

Additionally, the IRS has given further insight into their position on quiet disclosure by stating in the most recent FAQ to the updated OVDP that they encourage anyone who has made a quiet disclosure to enter the new streamlined process.  As you can imagine, in order for this recommendation to carry any weight, the IRS will have to be vigilant in assessing penalties against quiet disclosures. Could this be the end of quiet disclosure?  Possibly.

Opting-Out

The new OVDP also may be the end of opting out for many taxpayers.  Under the prior OVDP, at the end of the process the taxpayer had the option to opt out of the program if they felt the penalty was not appropriate for the facts and circumstances of their case.  In most cases, this only made sense if the taxpayer was a non-willful violator.  Now, a non-willful violator should use the streamlined approach to pay the lesser penalty or no penalty if they qualify as a non-resident and therefore will essentially eliminate the benefit of opting out of the OVDP for most taxpayers.  Of course for those taxpayers that are non-willful, but ineligible for the streamlined process (e.g. a resident who has not filed their last 3 years of tax returns) they may still choose to enter the OVDP and consider opting out.

Conclusion:

Any taxpayer with unreported foreign financial accounts or earnings needs to have a comprehensive analysis done of the new procedures and processes versus their particular facts.  This is true whether the taxpayer is considering making a disclosure or in the middle of one already.  For taxpayers who have not yet made a disclosure, delaying the process could result in severe consequences if the matter is not addressed soon.  The IRS appears to be making it clear that they are working towards a fair and reasonable resolution for the people that voluntarily come forward and will be relentless in pursuing those who choose not to disclose.

If you have any questions about your foreign accounts, assets, or earnings, contact us at Hone Maxwell LLP today for a full analysis of your case.  At Hone Maxwell LLP we have experience to guide you through the web of disclosure options, potential penalties, and filing requirements.  Whether you choose us or another representative, make sure you choose someone with experience, technical skills, knowledge of the various programs and the customer service you need to make your experience as comfortable, efficient and effective as possible.

 

When preparing your IRS tax return it has to be complete and accurate based on the information of the current year.  Mistakes in past years cannot be “fixed” in the current year.  Phrases such as “at the end of the day,” “it all works out,” or “it nets to zero” should not be used when preparing tax returns.  Each year standing alone is a principle the IRS frequently uses when auditing tax returns.  Therefore, for example, if you incorrectly recognize income in a past year you cannot simply recognize less income in the current year.  Another common example is that a missed deduction in a prior year cannot be “caught up” or used in the current year.  If you notice a mistake or something was done incorrectly you have to file an amended tax return to fix the prior year.  In some cases you may be past the deadline to file an amended return; however, even in this scenario adjusting the problem in the current year is not an option.  This principle even goes so far as to sometimes cause you to continue a mistake.  If you choose an improper accounting method in a prior year you may have to continue using the incorrect method.  In order to change to the correct method you will likely have to file for an accounting method change or possibly amend the prior year returns.

Overall, when preparing your tax returns you have to make sure you are consistent with prior years methodologies and carryovers, while at the same time only reporting the current year information.  If you have questions about changing your accounting method, past return mistakes, or if the IRS is using this principle against you in an audit, contact us at Hone Maxwell LLP today.  Although, the principle of “each year standing alone” cannot be changed there are ways to mitigate the consequences.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

A federal jury has found an 87 year old man guilty of willfully failing to file FBARs (Foreign Bank  and Financial Account Reports) for tax years 2004, 2005, and 2006.  The result is a civil penalty of 50% of the entire account balance PER YEAR.  This means, the total penalty will roughly equate to 150% of the account balance.  This is a landmark and eye-opening case for several reasons.  This was the first time the 50% willful penalty has been applied to multiple years in a civil case.  Furthermore, it has sometimes been believed that the IRS would pursue elder individuals less vigorously.  Possibly the IRS did not pursue criminal charges because of age, but it appears to have had no effect on the civil side.  Lastly, many people ask the question about why should they enter the OVDI program and pay 27.5% of the account balance  if the FBAR penalty is only $10,000/year.  This decision is a loud statement of why one cannot assume only the $10,000/year penalty will apply.  If the IRS did not pursue more harsh penalties for the people who did not come forward the Offshore Voluntary Disclosure Program would offer no incentive for taxpayers.  As such, the available penalties for the IRS to assess on people who do not comply has to have real teeth in order to push people into the program.  With this decision the IRS is making it clear that you are playing with fire if you do not come forward on your own.

If you have unreported foreign bank accounts you should talk with a tax professional immediately.  As more countries become FATCA compliant this issue is only going to continue growing.  At some point down the road, people with offshore accounts are likely going to have to come to the IRS or let the IRS find them.  Based on this decision you may want to choose the first option.  If you have questions about your offshore accounts contact us at Hone Maxwell LLP today.  We can give you a detailed review of your situation including the risks, costs, and benefits of all available options.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.