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Category Archives: criminal tax law

TAS Report to Congress That IRS Faces 35 Million Unprocessed Tax Returns As Backlog Swells

The Internal Revenue Service closed the most recent filing season with more than 35 million in unprocessed tax returns, as the agency’s backlog grew markedly amid a 
crush of challenges related to the pandemic and economic relief efforts, a government watchdog said Wednesday.


Erin Collins, the National Taxpayer Advocate, said in her report that about 17 million paper tax returns are still waiting to be processed and approximately 16 million additional returns have been placed on hold because they require further review manually. Another 2.7 million amended tax returns have not been processed.

This backlog represents a fourfold increase from 2019, the most recent year before the coronavirus pandemic, when the IRS closed its filing season with 7.4 million unprocessed returns, according to the report. These numbers reflect the IRS backlog as of May, and the agency may have made progress reducing it since then. The IRS backlog amounted to 11 million at the end of the 2020 filing season, fewer than a third of the current number of unprocessed returns.

As a result of the backlog, millions of taxpayers have to wait much longer for their tax refunds. In the current filing season, 70 percent of individual income tax returns included refunds, with the average refund amounting to about $2,800. Refunds are also important for delivering tax credits to low-income Americans, while some other taxpayers need their returns to be processed to proceed with things such as mortgage applications.


The agency’s struggles come as President Biden and Democrats in Congress prepare to give the IRS even more major responsibilities, including implementing a new paid family leave benefit, a clean-energy tax credit program and new child-care subsidies.

“Processing delays matter greatly because most taxpayers overpay their tax during the year via wage withholding or quarterly payments and are entitled to receive refunds,” Collins, the taxpayer advocate, said in her report.

An IRS statement released late Wednesday disputed the taxpayer advocate’s methodology, arguing it does “not reflect the current situation at the IRS.” The statement said many of the returns will require further correction, but are on track to be sent. The statement also said some of the returns counted by the advocate “does not necessarily reflect unprocessed tax returns,” citing as many as 2.1 million individual and business tax returns are related to identity theft cases. Those “may or may not be legitimate tax returns,” the statement said.

IRS Commissioner Charles P. Rettig also told the Senate Finance Committee earlier this month that the agency had processed more than 137 million individual income returns and sent refunds totaling more than $281 billion.

The Overwhelming Majority of the 35 Million Unprocessed Returns are for the 2020 Filing Season That Were Filed in 2021.

The taxpayer advocate chronicled a “perfect storm” of challenges facing the IRS as it struggles to recover from the pandemic and implement a wide array of changes related to President Biden’s economic relief efforts.

Despite severe cuts over the last decade, the IRS was tasked with sending a third round of economic relief payments, changing rules around unemployment benefits, and new guidelines for eligibility around other tax credits. Many of these changes were ordered in the middle of the filing season, compounding the challenge. 

Republicans led the cuts to the IRS budget, but Biden has pushed to increase the agency’s funding by as much as $80 billion to crack down on tax cheats. A bipartisan infrastructure deal reached with the White House earlier this month includes as much as $40 billion in additional funding for the agency, although it is unclear when that may pass.

Calling for quick change, the taxpayer advocate report also stresses that the IRS took unusually long to process Americans’ 2019 income tax returns.

“We can understand and articulate the challenges the IRS faced over the past year, but for individuals and businesses that waited nine months, 12 months, or longer to receive their refunds, the reality of the long delays was incomprehensible and in many cases, financially distressing,” 

Collins writes in the report. “Taxpayers cannot experience similar challenges in future filing seasons. We cannot allow the agency to face the staffing and technology limitations it has experienced this past year.”

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The Washing Post

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Increased Willful FBAR Statutory Penalty Overrides Prior Regulations Maximum $100,000 Per Account Penalty

On August 12, 2019 we posted DC Magistrate Ruled That Willful FBAR Regulations are Invalid, where we discussed that on
 July 31, 2018 in Norman v. United States, Ct. Fed. Cl. Dkt 15-872, the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty and that another DC court has also rejected Colliot & Wadhan and concluded that the Willful FBAR Penalty Not Limited to $100,000 in Rum, (DC FL 8/2/2019) 124 AFTR 2d ¶2019-5113

Here again the Second Circuit in Kahn, (CA 2 7/13/2021) 128 AFTR 2d ¶2021-5043, affirmed a district court decision and has held that statutory changes that increased the penalty for willful failure to file an FBAR applied, and prior regs which are still codified in the Code of Federal Regulations, imposing a smaller penalty did not.

In general, a U.S. person that has a financial interest in or signature authority over foreign financial accounts must file a FinCEN Form 114 - Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. 

Under 31 USC § 5321(a)(5)(C), as amended in 2004, the maximum penalty for the willful failure to failure to file an FBAR is the greater of $100,000 (adjusted for inflation) or 50% of the aggregate balance in the accounts that should have been reported in the FBAR at the time of that failure.

But a final reg, reflecting the statutory penalty amount in effect prior to the 2004 amendment, issued by the Treasury in 1987, says that the maximum penalty was merely $100,000 per account. (31 CFR §1010.820(g)(2)) This reg is still codified in the Code of Federal Regulations.

District courts in Texas and Colorado have held that, in view of the Treasury's failure to update the regs, penalties couldn't be imposed in excess of the amounts provided for in regs issued before the 2004 law change authorizing higher penalties. (U.S. v. Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834; U.S. v. Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208)

The Court of Appeals for the Federal Circuit has disagreed and held that the amendment to the statute superseded the regs which were thus no longer valid. (Norman, (CA Fed Cir 2019) 124 AFTR 2d 2019-6595) Connecticut and Pennsylvania district courts have also held that the penalty cap in the 2004 amended statute is the correct limitation. (U.S. v. Garrity, (DC CT 2019) 123 AFTR 2d 2019-941; U.S. v. Collins, (DC PA 2021) 127 AFTR 2d 2021-854)

A district court ruled that the penalty limitation provided in the 1987 reg was superseded by the 2004 statutory amendment increasing the penalty maximum.

The Court of Appeals for the Second Circuit affirmed the district court's decision. The Circuit Court said that the language of the 2004 amended statute was clear and thus the 1987 reg was not in harmony with the statute. Thus the reg does not apply any more. It cited Iglesias, (CA 2 1988) 61 AFTR 2d 88-1264 ("[a] regulation which does not" implement "the will of Congress as expressed by the statute" and instead "operates to create a rule out of harmony with the statute, is a mere nullity.").

Have Undeclared Income from an Offshore Bank Account?
Been Assessed a 50% Willful FBAR Penalty?
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Bankruptcy Court Has Jurisdiction to Hear Innocent Spouse Cases

According to Procedurally Taxing, in the case of In re Bowman, No. 20-11512 (E.D. La. 2021) the Bankruptcy Court determined that it has jurisdiction to Hear Innocent Spouse Cases. The court denied the debtor’s motion for summary judgement that Ms. Bowman deserves innocent spouse relief. 

On its own, the court reviews the issue of its jurisdiction to hear an innocent spouse issue as part of her chapter 13 bankruptcy case and decides that it has jurisdiction to make such a decision.  The parties did not raise the jurisdiction issue, which is not surprising from the perspective of the plaintiff but may signal a shift in the government’s position since it had previously opposed the jurisdiction of courts, other than the Tax Court, to hear innocent spouse cases.

The court addresses the issue of its jurisdiction at the outset of the opinion.  It first cites 28 U.S.C. § 1334 and the Order of Reference from the district court before stating that this is a core proceeding.  This part of the opinion addresses the basic issue of bankruptcy courts’ jurisdiction in all issues, stemming from the litigation in the Marathon Oil case from 40 years ago (challenging the basic authority of bankruptcy courts under the then-newly-created bankruptcy code).

Moving past the bankruptcy court’s basic basis for jurisdiction, the court hones in on its ability to hear an innocent spouse case.  It first states:

Although it is true that “Section 6015(f) does not allow a bankruptcy court to exercise initial subject matter jurisdiction over an innocent spouse defense because only the Secretary [of the IRS] receives the equitable power to grant innocent spouse relief under that Section,” here, it is undisputed that the Debtor sought such relief from the Secretary in July 2019 and the Secretary denied the request.  

This aspect of jurisdiction would apply to any court hearing an innocent spouse case.  In essence, the statute requires a taxpayer claiming this relief to exhaust their administrative remedies before seeking to have a court determine relief.

Next, the court turns to its specific ability to hear an innocent spouse case and cites heavily from an earlier case from Texas:

     Section 6015(e)(1) states that, in a case where an individual requests equitable relief under Section         6015(f), “[i]n addition to any other remedy by law, the individual may petition the Tax Court to             determine the appropriate relief available to the individual under this section . . . .” 26 U.S.C. §             6015(e)(1)(A). It is unambiguous that a Tax Court—and not just the Secretary—may grant relief to         an individual. Moreover, the remedy available in the Tax Court is “[i]n addition to any other remedy     provided by law.” 26 U.S.C. § 6015(e)(1)(A).

11 U.S.C. § 505 is another “remedy provided by law.” Section 505(a)(1) specifically provides bankruptcy courts with remedial power over tax liabilities and penalties . . . . This statutory language provides a bankruptcy court with the power to determine the legality of taxes and tax penalties. Pendergraft v. United States Dep’t of the Treasury IRS (In re Pendergraft), 119 A.F.T.R.2d (RIA) 2017-1229 (Bankr. S.D. Tex. Mar. 22, 2017)b

Because it determines that the tax liability directly impacts the administration of the bankruptcy case and because the IRS has filed a proof of claim seeking to have Ms. Bowman pay the liability for which she seeks relief, the court finds that it has jurisdiction while also noting that the IRS has not objected to its jurisdiction.

The opinion is important for being only the second court to deal with the issue of whether a bankruptcy court has jurisdiction to decide § 6015 relief.  The court says that it does have such jurisdiction because 6015(e)(1)(A) (giving the Tax Court jurisdiction) is only “in addition to any other remedy provided by law” and that the bankruptcy court is another such remedy.  The court cites the Pendergraft case, which is the only other opinion from a bankruptcy court on this matter.  The court conveniently doesn’t mention all the district court opinions holding that 6015 relief jurisdiction does not exist in collection suits or (in one opinion) in refund suits, but resides only in the Tax Court.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
Toll Free at 888 8TAXAID (888-882-9243) 

Read more at: Tax Times blog

Taxpayer Objects to $4.1M FBAR Penalty

According to Law360, ample proof exists that a woman willfully failed to report her multimillion-dollar Swiss bank accounts to the Internal Revenue Service, justifying a $4.1 million penalty against her, the U.S. government told a New York federal court, in U.S. v. Marika Katholos, case number 1:17-cv-00531.

Marika Maraghkis Katholos disregarded tax form instructions, failed to seek professional advice and set up the bank accounts to skirt federal law requiring her to file a report of a foreign bank account, the government said Friday. Her actions justify the higher penalty ascribed for willful failure to file, the government said, moving for summary judgment.

Katholos set up two UBS bank accounts in Switzerland in 2003 and 2005 and took steps to conceal them, the government said. On bank forms, Katholos checked boxes indicating she was not a U.S. or dual citizen, according to the U.S. government. She arranged to identify the accounts by number, not name, and agreed for the bank to hold her correspondence instead of mailing it to her, the government said.

She then formed a foundation in Liechtenstein and transferred the account funds into it, according to the government. Katholos said the account was set up for her father, whom she consulted. Despite this, she presented no evidence that the bank or foundation needed her father's signature or verbal approval to act on the account, the government said.

Katholos Was The One With Control,
According To The U.S. Government.

She was the first beneficial owner, had signature authority, directed bank officials as to investing the assets and on several occasions transferred money out of them, the government said. Katholos tried hiding the accounts by using copies of her siblings' passports without their knowledge when creating them, and she never informed them about the accounts, the motion said.

These actions establish a pattern of concealment and or reckless indifference toward FBAR obligations, the U.S. government said. That is sufficient for the court to grant summary judgment as to her willfulness, it said.

The government also asked the court to dismiss the affirmative defenses Katholos raised. She claimed that the maximum FBAR penalty is $100,000, but failed to mention Congress in 2004 increased it for willful failure to half the amount in a bank account, the U.S. government said. The IRS may not have updated its regulations to reflect this, but numerous courts have held that they have been superseded by the 2004 action, according to the government.

Katholos also claimed that the IRS did not follow the Internal Revenue Manual when penalizing her, exceeded the statute of limitations and violated the Eighth Amendment restrictions on excessive fines. Katholos does not identify specific violations of the manual, voluntarily signed an agreement extending the statute and contradicts legal precedent upholding the constitutionality of FBAR penalties, the government argued.

Last month the U.S. opposed a motion by Katholos to dismiss the case on the grounds that the U.S. Tax Court had already ruled that she owed no taxes on her 2007 and 2008 returns. The issues in the Tax Court case are distinct from those in the FBAR case, the government said, objecting to a witness for Katholos on the grounds that the testimony would be inadmissible.

Do You Have Undeclared Offshore Income?

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