Any US taxpayer with an interest in, or signatory authority over, a foreign financial account must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) where the aggregate value of all foreign financial accounts exceeds $10,000 during a tax year. FBARs must be submitted to the IRS by June 30th of each tax year. This filing deadline cannot be extended, unlike filing of federal income tax returns.

Both civil and criminal penalties may be imposed on FBAR violations. The civil penalty for willfully failing to file the FBAR can be up to the greater of $100,000 or 50% of the account balance at time of violation. The civil penalty for a non-willful violation can be up to $10,000 per year. Non-willful penalties may be avoided where “reasonable cause” exists for the failure to timely file the FBAR. There have been two recent updates regarding non-willful civil FBAR penalties:

“Maximum” Non-willful FBAR Penalty

Based on recent case law, the imposition of penalties for non-willful failures to file the FBAR may require more information from the IRS. Previously, the IRS had discretion in imposing a penalty of up to $10,000 based on the facts and circumstances of the taxpayer’s late FBAR submission.  However, in many cases this penalty was enforced as a standard penalty rather than the maximum penalty for the most egregious non-willful violations.  The recent court decisions imply that the IRS has broad discretion in assessing penalties against taxpayers as long as an explanation is provided regarding the penalty amount. This means taxpayers may be able to take measures to ensure that penalties are not arbitrarily assessed by requesting for explanations behind the penalty amounts.  Once the reasoning for the penalty amount is disclosed taxpayers will have a better understanding of how to dispute the amount.

Multiple FBAR Penalties in a Tax Year

The IRS recently issued new guidance regarding the number of FBAR penalties that can be assessed against a taxpayer each year. Previously, the $10,000 penalty could be imposed each year on each bank account required to be reported on the taxpayer’s FBAR. The new guidance states that the IRS will now assess only one $10,000 penalty per FBAR per year, as opposed to $10,000 per bank account per year. Taxpayers should be cautioned that while this is a very favorable development and likely the correct reading of the tax law, the IRS still has the right to pursue the $10,000 penalty per account even if they are not choosing to at this time.

If you have questions about FBAR requirements, filings, or penalties, contact Hone Maxwell LLP today for a comprehensive review of your case.

Generally, a person is responsible for paying his or her own taxes directly to the Internal Revenue Service. However, sometimes the law requires one party to collect and pay tax on behalf of a taxpayer, such as an employer’s obligation to collect payroll taxes (“trust fund taxes”) on behalf of its employees. These taxes include income, social security and Medicare taxes, which are withheld from an employee’s paycheck, as well as excise taxes. Whether the employer pays the taxes directly or uses a third party payroll service, these taxes must be paid directly to the IRS on behalf of the employees.

When the trust fund taxes are not collected and paid, or are collected but not paid, the IRS may assess a Trust Fund Recovery Penalty (“TFRP”) against any person who is responsible for collecting or paying withheld taxes and willfully fails to collect and / or pay them. Unlike most penalties, the TFRP allows the IRS to collect unpaid taxes from a person other than the taxpayer.  In this case, the corporation would be the taxpayer but the IRS could go after the individuals.  This is different than income tax where the IRS can generally only collect from the corporation.  The level of responsibility depends upon whether the responsible person exercised independent judgment over the employer’s financial affairs; however, in practice that definition is read much more broad. No bad motive is required for the TRFP to be assessed. Liability extends to any person with authority or control of taxes collected who was or should have been aware of the taxes due, and either intentionally disregarded or was “plainly indifferent” to the law requiring payment.   This can include officers, employees, shareholders, members and / or directors of a corporation.

Because the TRFP imposes personal liability against a responsible party, the IRS is authorized to take collection action against that party’s personal assets. This action includes filing a federal tax lien, levying bank accounts, and seizing assets.  In order to avoid the TFRP, employment taxes must be collected, accounted for, and paid when required. If the TFRP has been assessed against you or if you need assistance complying with your trust fund tax obligations, contact Hone Maxwell LLP today.

While the Affordable Care Act, or “ACA,” makes obtaining health care coverage accessible for many Americans, the law imposes additional obligations on many taxpayers who benefit from its provisions.

As of July 1, 2014 most taxpayers are required to report qualified health care coverage on their federal income tax returns pursuant to the ACA. Certain taxpayers are exempt from having minimal essential coverage for the entire tax year, and claim or report the exemption on an attachment to their tax returns. Most taxpayers who are not covered by an employer health insurance, Medicare or Medicaid must purchase their own coverage from a private insurance provider or through the Health Insurance Marketplace established by the ACA. The Health Insurance Marketplace created by the ACA is a resource for uninsured taxpayers to obtain information about insurance options and purchase health care insurance. Taxpayers will either be directed to a state-based marketplace or the federally-facilitated marketplace depending on where they live. Where a taxpayer is not exempt and was uncovered during any part of the year, that taxpayer must pay a penalty known as the “Individual Shared Responsibility Payment” along with his or her income tax return for that tax year.

The ACA also impact employers by requiring the provision of health care coverage based on the size and structure of an organization. Businesses with fewer than 50 full-time employees are not required to offer health care coverage and as such are not subject to the ACA reporting and penalty rules. Businesses with more than 50 employees are required to either offer health care coverage or pay the IRS Employer Shared Responsibility payments. Beginning with the 2015 tax year all employers offering coverage, regardless of size, must file an annual information return reporting information for covered employees.

Complete and accurate reporting of coverage, exemptions, and related credits is complicated. Contact Hone Maxwell LLP for reporting assistance related to your ACA tax obligations.

Between full time jobs, children, and pets many people pay others to help them with household chores and related tasks. If you pay an individual to run errands for you, babysit your children, walk your dog, or do other types of work for your home, you may have additional tax obligations as a “household employer.” The IRS considers you to be a household employer if you pay someone to do work for you and control the work that is done and how it is performed. The person working for you is considered to be your “household employee” unless he or she is your parent, child, spouse, or an unrelated person under the age of 18.

Under federal law you are required to withhold and report taxes on the amounts paid to your household employee if either of the following are true: (1) you paid a household employee more than $1,900 in cash wages during the 2014 calendar year; or (2) you paid a household employee more than $1,000 in cash wages during any quarter in 2013 or 2014. If you fall within either scenario you are required to withhold and report Medicare and social security taxes from future amounts you pay to that person, and may be obligated pay federal unemployment tax to the IRS. If you live in California and have paid more than $750 to during the calendar year, you may have additional state tax withholding and reporting requirements with the Employment Development Department (“EDD”).

In order to correctly withhold, pay, and report federal employer taxes correctly you will need to obtain a Federal Employer Identification Number (FEIN), issue a W-2 to your household employee in early 2015, and report the amounts due along with your 2015 personal income tax return. To comply with the state requirements you may be obligated to register yourself and your household employee in addition to withholding and/or reporting taxes including payroll tax, state disability and state unemployment.

The household employer rules can be complicated and burdensome. If you have questions about the household employer rules or have been audited by the IRS or EDD, contact us at Hone Maxwell LLP.

According to a report from a collective of journalists, HSBC helped taxpayers evade taxes.  Furthermore, these taxpayers are alleged to be criminals including international businessmen, warlords, traffickers of blood diamonds, and politicians.  In addition to aiding these taxpayers setup accounts, the International Consortium of Investigative Journalists has issued a report stating that HSBC employees went one step further and assured taxpayers they would not disclose their information to authorities.

The big picture in this story is that the U.S. is only a small piece of the puzzle. There are many interested countries, both in terms of breaking the story and taking enforcement action.  No longer is the U.S. the only country making a real effort to crack down on tax evaders and the people who help them.  As FATCA gains strength, and other countries take an interest in fighting tax evasion, it is more imperative than ever that taxpayers review their international tax reporting to make sure they are in compliance.

There are a variety of programs under the heading of the IRS’s Offshore Voluntary Disclosure Program for taxpayers to gain compliance.  Taxpayers should be sure to have a tax professional review their facts carefully to discuss the options and processes for using these programs.  If you have questions about your international tax reporting contact us at Hone Maxwell LLP today for a complete analysis of your case.

The Internal Revenue Service (IRS) continues to remind taxpayers of the danger of hiding money or assets in unreported offshore accounts. The IRS has been very focused on this issue now for over 5 years. Violations of U.S. global tax reporting and FBAR filing laws can be criminal and there are severe civil penalties even for those that are not prosecuted.  This is just one reason the IRS offshore voluntary disclosure programs have processed over 50,000 cases raking in over $7 billion. This is expected to increase because the chances of being caught with undisclosed accounts are only going up.

The IRS now has FATCA, the U.S.’s global tax enforcement law that applies virtually everywhere. As a result, it is easier for the IRS to find taxpayer’s with assets hidden offshore because banks worldwide are handing over American account details to the IRS. Some banks are sending disclosure letters warning client’s that their information will be supplied to the IRS, but other are supplying this information with no warning.

The IRS and Department of Justice are still aggressively hunting tax evaders through John Doe summonses. The IRS is also relying on data mined from previous disclosures. Now that they have added FATCA, their arsenal is virtually complete. On June 18, 2014, the IRS announced additional options for taxpayer’s who wish to come forward regarding undisclosed foreign accounts in addition to the already existing Offshore Voluntary Disclosure Program (OVDP).  These programs include:  OVDP, Domestic Streamlined, Foreign Streamlined, Transitional Relief, and Delinquent FBAR Submission.

It is extremely important to understand what IRS offshore program is right for you.  For example, the OVDP protects from prosecution, while the Streamlined program does not. The OVDP costs more, but you get more – this program may absolve bad facts. The Streamlined program requires certifying under penalties of perjury that your failure to disclose was not willful, the OVDP does not.

For assistance with the disclosure of your offshore accounts or assets contact Hone Maxwell LLP today for a complete analysis of your case.

Starting January 1, 2015, for any taxable year that began on January 1, 2014 or later (or in less technical terms for 2014 tax returns), any business entity filing an original or amended return using tax preparation software will be required to e-file the return.  There are exceptions to the rule if there are technology constrains, e-filing would cause an undue financial burden, or if there is reasonable cause (an innocent mistake).  Taxpayers can also request a waiver to not have to e-file the return.  The IRS has stated that a wealth of information should be released soon to help taxpayers with this change.

California taxpayers may have noticed their tax preparer is asking them about something called “use tax.” What is this tax?  Why do they have to pay it?  Everyone is familiar with sales tax, where the retailer collects the sales tax from the buyer and includes the tax in the total charge.  California imposes sales tax at a state rate of 7.5%, with local sales rates ranging from 0% to 2.5%. By combining the state and local rates, the amount of sales tax collected on a retail sale may be as much as 9.0% depending on where in California a sale is made.

On the other hand, not all taxpayers are familiar with use taxes.  A California resident who buys merchandise from an out-of-state retailer that does not collect California sales tax is responsible for paying the would-be sales tax if this purchase was made in California – this is the use tax. This commonly occurs when items are purchased in states that do not have a sales tax and brought back to California, or when items are purchased online from out-of-state companies that do not collect California sales tax. In both of these situations the buyer does not pay sales tax at the time of purchase, but will have to pay the use tax to have the product in California.  The amount of use tax due is the same as the sales tax that would have been collected if the merchandise were purchased from a California retailer, which is 7.5% to 9% depending on where a buyer uses the purchased item(s).

Now that the dream is crushed of buying large items out-of-state to save money by avoiding sales taxes, how does a California resident pay the use tax?  The use tax can be paid on the taxpayer’s California tax return.  The problem then becomes, who actually keeps track of these purchase amounts?  California realized such recordkeeping would be onerous for the taxpayer and difficult for California to verify.  To solve the problem, California created “safe harbor” amounts that can be paid without calculating the precise use tax due.  Taxpayers can simply pay this set safe harbor amount based on their income and do not have to calculate the actual use tax that they would owe.  In order to qualify for safe harbor reporting the following requirements must be met:

  • The buyer is an individual
  • The buyer is not required to hold a California Seller’s Permit or Consumer Use Tax account
  • The items purchased are for personal use
  • The price of each individual item is less than $1,000

The safe harbor amounts range from $2 – $61 for taxpayers earning less than $200,000/year and .033% of income for taxpayers above $200,000/year.

As you can imagine, for most taxpayers this information is interesting and can help understand the question from the tax preparer, but a $2 – $61 additional tax is not a major deal.  However, for taxpayers making many purchases, the safe harbor could potentially offer tax savings, as long as these purchases are less than $1,000 each.  In general, use tax probably won’t drastically change your taxes, but it is something to be aware of, in case there is a unique situation, and to make sure you properly address it on your tax return. If you have questions about use tax or are having a Board of Equalization audit (the group that collects and enforces use tax), contact us at Hone Maxwell LLP.  As always,  you can follow us on twitter @HMLLPTax or facebook at for more tax tips and the latest updates on tax news.

Despite claims that it was stepping up international tax enforcement, based on a recent report from the Treasury Inspector General for Tax Administration (TIGTA) the IRS is falling short on international tax compliance.  TIGTA’s report found that ineffective management oversight, control weaknesses, and unreliable statistics have hampered the efforts to crack down on taxpayers who are not compliant with international tax reporting.  Furthermore, despite having tools such as the customs hold, there is not clear information showing how effective or utilized these tools are  in enforcement.  Even as TIGTA was making its recommendations for action, the IRS was at work to try to improve the processes and procedures.  The biggest aid to the IRS has been the Offshore Voluntary Disclosure Program (OVDP) and FATCA.  Through the OVDP program many taxpayers have engaged in self-enforcement in order to avoid criminal prosecution and severe penalties.  Nevertheless, TIGTA feels the IRS needs to take further action to make sure overall enforcement is bolstered.

Taxpayers should not take any comfort in these weaknesses when it comes to international compliance enforcement.  The IRS has made it very clear that this is a priority, and through FATCA, they are slowly gaining the support of the rest of the world.  It is only a matter of time before the IRS is functioning at a very high level with international tax enforcement.  At that time, it is likely that many amnesty programs such as the OVDP will no longer be available, and it can be assumed the IRS would not be sympathetic to the people who didn’t come forward when they had the chance.  If you have international tax questions or issues, time is of the essence to come forward now and take advantage of the options the IRS has given to become compliant.  Contact us at Hone Maxwell LLP today to discuss your options for compliance or how to make sure you are meeting your obligations on an on-going basis.

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 for more tax tips and the latest updates on tax news.