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Category Archives: IRS Audits and Litigation

IRS Audits of Quiet Filers Have Begun.

I recently attended an ABA conference where multiple representatives from the IRS including, Senior Litigation Counsel Kevin M. Downing, were speakers and they all reiterated that the IRS has a program in place to audit Quiet Filers, who chose not to make a voluntary disclosure but rather chose solely to amend their tax returns to include their previously unreported income from their foreign bank accounts.

Issues that were not answered include:

1.     What FBAR penalty will apply?

o   the civil penalty for willfully failing to file an FBAR, greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).

o   the civil penalty for non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. See 31 U.S.C. § 5321(a)(5)(B) or

o   the penalty of 25% (or more) of the total balance of the foreign account in conformity with OVCI #2?

2.     How will the IRS collect these FBAR penalties under title 31? (File in FDC to reduce them to an enforceable judgment?)

3.     Is the Quite Filer only subject to a 3 year statute limitations for income tax assessments, where the understatement of income is less and 25% of the taxpayers AGI?

4.     Does the fraud provision stop the Statute of Limitations from running?

We are sure there's are even more issues. Stay tuned as these issues and more get developed, during the various IRS audits of Quiet Filers, which has already begun.

Read more at: Tax Times blog

The New Gift Tax Audits – IRS Identifies Non-Filers Using State Property Records

A new IRS gift tax compliance initiative responds to suspicions of widespread failure to file gift tax returns. According to Josephine Bonaffini, the Federal/State Coordinator for the IRS Estate and Gift Tax Program, between sixty percent and ninety percent of taxpayers fail to file a gift tax return despite having engaged in a transaction requiring a return.

Although gift tax audits are historically rare, the IRS has examined hundreds of taxpayers in the last two years whom the IRS suspects made large gifts, yet failed to file the appropriate returns. Borrowing from techniques long employed to identify noncompliant taxpayers in the income tax context, the IRS is using records obtained from third parties—namely, land records maintained in state and county offices—to root out intra-family land transfers for little or no consideration.

Land records maintained at local state offices are publicly available. However, the suspect transfers make up a small percentage of these voluminous and decentralized records. Thus, the IRS has asked state and county agencies that compile the relevant records to provide the IRS with those records. For instance, the California constitution contains cap on property tax increases following certain intra-family transfers, which inadvertently results in the California Board of Equalization (“BOE”) segregating the records of interest to the IRS—those on intra-family transfers—from the mass of irrelevant property records.

State or county agencies in fifteen states, including New York and Texas, have voluntarily agreed to provide records similar to those maintained by the California BOE. There is no reason to believe that the IRS has not made similar requests to agencies within many more, if not all, states, and more voluntary compliance from individual states may be forthcoming.

The recent flurry of gift tax compliance activity took many in the tax community by surprise. The compliance initiative received no appreciable public attention until the recent dispute in California federal court (discussed in more detail below), and the IRS has declined to comment on the initiative beyond the information provided in documents filed in that case. This mysterious quality gives the IRS’s recent activity the aura of a “stealth” program.

As with any federal tax law violation, the government may impose severe consequences for violating the gift tax provisions. But one curious aspect of the new gift tax compliance initiative is that the majority of examinations likely result in zero assessed tax or penalties.

According to Bonaffini, in the past two years, 323 taxpayers have been audited for failure to file gift tax returns relating to gifts of real property, 217 cases were still under examination, and another 250 cases were being researched to determine whether to conduct gift tax audits. At the time, the IRS had determined that ninety-seven taxpayers had violated gift tax reporting requirements by failing to file, and just twelve cases resulted in assessment of tax and penalties.

Although several states apparently complied voluntarily with the IRS’s requests for records, California did not. Rather, when the IRS requested the California BOE produce the neatly segregated records of intra-family transfers discussed above, the BOE refused, citing a state statute which forbids disclosure of personal information absent a court order.

On May 23, 2011, the court issued an order whereby it disagreed with the government and refused to issue the summons.

The IRS may heed the court’s suggestion and simply attempt to seek the relevant records directly from the counties. Alternatively, the government may resubmit its petition in federal court, in which case the tax community will await another court order. In any event, the court’s denial of the government’s petition may embolden additional states to refuse the IRS’s request for records.

For more information go to: http://www.forbes.com/sites/irswatch/2011/10/19/the-new-gift-tax-audits-irs-identifies-non-filers-

Read more at: Tax Times blog

IRS Audits Will Focus on High-Income, High-Wealth Taxpayers, SB/SE Official Says

The Internal Revenue Service's examination team will focus on high-income, high-wealth taxpayers, paying close attention to those with a tax liability that is significantly reduced through the use of multiple entities, an official said Sept. 15.

The agency is paying attention to individuals with an income level that is not “huge,” but has wealth and a lower tax liability because of flow-throughs, trusts, and other similar entities, said Linda Franke, a senior level adviser with the Small Business/Self Employed Division, at an American Law Institute-American Bar Association tax controversy conference.

IRS will focus on individuals with an income of $250,000 or more and total positive income of at least $1 million, she said. This process will mostly be done corporately with field offices doing the examinations, supplemented by office examinations, Franke said.

IRS also is interested in bringing nonfilers into compliance, so it will pay close attention to taxpayers with multiple years of nonfiling.

Read more at: Tax Times blog