Texas Tax Talk

Texas Tax Talk

IRS Telephone Fraud By “Mr. F-#-@-K Y-O-U”

Posted in Criminal Tax

Every year the IRS sends out its “Dirty Dozen” list.  This is a compilation of the most prevalent tax scams, with the intent to inform and warn taxpayers of tax related rip-offs.

The very first on the list involves phone scams.  The IRS warning reads as follows:

Phone Scams: Aggressive and threatening phone calls by criminals impersonating IRS agents remains an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent months as scam artists threaten police arrest, deportation, license revocation and other things. The IRS reminds taxpayers to guard against all sorts of con games that arise during any filing season.

Just last week a client of mine received a call from such a potential scammer.  Fortunately, the client was not home when the call came in and the person left a message.  The message stated that they were about to institute a law suit to collect taxes and foreclose on their home.

All of this is a complete fraud – the IRS will never make such a call.  They operate by sending such documents via mail.

After the client told me about the message, I called the area code 202 (Washington, DC) number that was left for my client.  The phone rang about eight times before a person answered.  The person had a very thick foreign accent and the call quality was not good.  It gave me the impression this person was not in the United States.  Here is the play by play:

  1. What IRS office are you calling from? Answer – the main IRS office in Washington DC.
  2. What address is that? Answer – 1111 Constitutional Ave (which actually is an IRS address)
  3. What is your employee ID number? Answer – IRM2076 (IRS employee IDs do not have letters)
  4. Sorry didn’t get your name? Answer – hard to spell foreign sounding name.
  5. Can you spell that for me? Answer – first name is spelled “F-#-@-K” and last name is “Y-O-U” (real letters were used)

Then the man starts to laugh and quickly hangs up.

This type of criminal fraud is unfortunately rampant this tax season.  CBS This Morning had a news piece on this issue a few days ago.

Not Paying Your Employment Taxes? Prison Time Could Be In Your Future

Posted in Criminal Tax

It is a very common story for small businesses to get behind on paying employment taxes.  Federal employment taxes are largely made up of FICA and withholding taxes.  The IRS is especially keen on businesses who fail to pay these taxes.  Not only is the government out the money it should be receiving, but it also has to pay out refunds and provide benefits.  In many ways it is a double loss.

The Department of Justice issued a press release regarding the wireless technology company Distributive Networks LLC.  Its owner, Kevin Bertram, pleaded guilty in federal court to willfully failing to pay more than $900,000 in employment taxes.

According to the press release, Bertram neither accounted for nor paid employment taxes due and owed to the IRS.  Over a two year period Bertram failed to file IRS Forms 941 and failed to pay $927,922 in employment taxes that he had withheld from his employees’ wages.

He is now looking at spending up to 5 years in “Club Fed” and a fine of up to $250,000.  He will still likely be on the hook for paying back the tax bill as well.

Failing to take care of employment taxes is probably the worst decision a small business owner can make.  It is very enticing to take a “short term” loan on the back of the Federal Government – but this will lead to personal liability and potential criminal problems.

There are remedies for this problem, but quick action is needed.

IRS Computer Technology is Woefully Inadequate

Posted in Tax Practice

CNN recently released a fascinating look at the computers the IRS uses in “IRS Says It’s Using Technology From JFK’s Time.” IRS Commissioner John Koskinen states that the IRS computer system is “like driving a Model T that now has a great GPS System and wonderful sound system.”

It is common knowledge that the Internal Revenue Code and related rules and regulations are antiquated.  The complexity is difficult and necessitates professional tax assistance.  This can be true for even simple tax returns.

Congress loves to legislate through the tax code – so I doubt this will change anytime soon.

What does need to change – and change soon is the need for good “customer service” at the IRS. Tax practitioners are growing more and more frustrated with the inability to get simple issues resolved in a timely manner. Much of this is due to the dysfunction with the IRS’ computer system.

As someone who calls the IRS on a near daily basis, the chances are very high that when you finally get to a live person – that their computer will not work correctly.  So you will have to repeat the process another day. That costs time and money.

The cost to our economy by having a ridiculously slow and business unfriendly IRS has got to be astronomical.

How to get the IRS to pay your legal fees

Posted in Tax Practice

What can you do when the IRS is misbehaving and it directly affects you?

You will have to fight them, but the law allows you to recover your litigation costs if you win.

As many know, the IRS has had a very troubled recent past (i.e. Lois Lerner).  Those problems keep getting worse, especially with IRS budget cuts.  Anecdotal stories lead me to believe that IRS employee morale is at all time low.

The new U.S. v. Baker case out of New Hampshire came out in the taxpayer’s favor because the IRS tried to foreclose on a property which they had no rights to do so.

The gist of the case is that the district court granted an ex-wife’s request for an award of litigation costs because it found that IRS’s argument—that it had a lien against her ex-husband with respect to real property that he had transferred to her pursuant to the couple’s divorce—was based on an untenable reading of First Circuit precedent and New Hampshire law.

So what do you need to provide to get your fees paid?

Section 7430 of the Internal Revenue Code provides that a taxpayer who is the “prevailing party” in any administrative or court proceeding regarding the:

  • determination of any tax, penalty, or interest under the Internal Revenue Code.
  • collection of any tax, penalty, or interest under the Internal Revenue Code.
  • refund of any tax, penalty, or interest under the Internal Revenue Code.

Recovery of such costs is subject to limitations:

  • the taxpayer must have “exhausted administrative remedies
  • the taxpayer must not have “unreasonably protracted” the proceedings
  • the taxpayer must meet financial eligibility requirements.
  • the taxpayer will not be treated as a prevailing party where IRS proves its position in the proceeding was “substantially justified.”

Want to get paid like Darryl Strawberry?

Posted in IRS Collection

The IRS is auctioning off a deferred compensation arrangement Darryl Strawberry had with the Mets.  Minimum bid is $550,000 for a payment stream that is estimated to be well over $1 million.  Get your bid in by January 20th if you really want it.  See the IRS Notice for more details.

According to an Article by Darren Rovell of ESPN, Mr. Strawberry’s tax problems stem from as far back as 1987 and as current as 2004.

As most can imagine, the IRS’ ability to seize assets to pay back taxes is very broad.

The basic rule is the IRS can get all your property and your rights to property. 

To make determinations about what your property or rights to property is – courts first look to state law.

Once a determination has been made that you have property then the IRS can take it.  This is pretty much without regard to restrictions that may be placed on the property as is often the case with retirement plans.

Mr. Strawberry’s legal and personal struggles have been well documented over the years.  It is truly sad to see such a talent have some many problems.

It is very unusual for the IRS to have taken these steps to collect the taxes owed.  In my experience, it does not happen unless the IRS has no other resort.

Like with most problems, IRS problems are best met head on.  Ignoring the IRS is not a good solution.

What You Need To Prove – Deducting Travel Expenses

Posted in Tax Court, Tax Planning

All too often, people don’t keep adequate records to demonstrate they are entitled to deduct travel expenses.

The general rule from the Supreme Court is that deductions are a matter of legislative grace, and taxpayers must maintain sufficient records to substantiate the amounts of their income and entitlement to any deductions or credits claimed.

So how can you improve your chances of deducting your business expenses?

To prove entitlement to travel expense deductions you need to present sufficient evidence supporting:

  1. The amount of the expense
  2. The time and place of the travel; and
  3. The business purpose of the expense.

The degree of substantiation necessary to establish business purpose depends upon the facts and circumstances of each case.

Contemporaneous documentation is deemed more believable than after-the-fact reconstructions.

  • If you are going to a business conference – keep records of your matriculation at the conference.
  • If you are traveling to meet a client, keep a log or calendar of who you went to visit, and the general nature of what business discussions took place.

Also, know that the IRS will scrutinize trips that have a “personal fun” flair to them.  As you might imagine, trips to Las Vegas are tops on the list.

“The Situtation” for Sorrentinos Getting Worse With Social Media

Posted in Criminal Tax

Courtesy – Mike Sorrentino, Instagram

As many have heard recently, Michael Sorrentino (of MTV’s “Jersey Shore” fame) and his brother Marc were indicted for tax crimes in New Jersey and made their initial appearance in court last week.

At this point, no one but the Sorrentinos, their lawyers and maybe the government really know what happened.  In my opinion some of the charges look a bit questionable.  For instance, there was a single charge of failure to file a tax return.  Clearly, it is a crime to fail to file a tax return.  However, with just a single instance of failing to file there is no pattern.  There are probably very legitimate and innocent reasons why the failure occurred.

The focus of this blog, however, is on the dangers of social media.  Social media like Facebook, Twitter and Instagram are powerful tools and can be great for marketing.  However, they are also great ways for a person to incriminate themselves.

One of Mike’s recent Instagram posts was “To Be Old And Wise You Must First Be Young And Dumb.”  This post may be completely innocent – but why do it?

The IRS is no fool – they love to research their targets’ social media posts.  Oftentimes, this can be a central component of their case.

There is a reason why attorneys tell their clients to clam up – nothing good generally can come from talking.  Any statements that are made need to be well thought out.

My advice is to stop posting anything if you are under investigation.

Does Filing for Bankruptcy Really Give You Tax Relief?

Posted in Criminal Tax, Tax Court, Tax Planning

When times get desperate and tax liabilities pile up – filing for bankruptcy is an option many people consider.  Taxes are “dischargable” in bankruptcy, but there are important rules you need to know.

TIMING

Taxes are only dischargable if they have reached a certain vintage.  Here are the basic rules:

  1. More than three years must have elapsed since the tax return was due.
  2. Taxpayer must have filed his/her tax return  more than two years earlier than the bankruptcy petition.
  3. At least 240 days must have elapsed since the date of an IRS assessment.

Lots of things can extend these time periods including various administrative remedies with the IRS – like filing an offer in compromise.

Bottom line – you need to get IRS Account Transcripts and carefully calculate each time frame to make sure you qualify.

FRAUD EXCEPTION

Taxpayers must also beware of the fraud exception to dischargability in bankruptcy.  Taxes are not dischargeable if the person “willfully attempted to evade the tax.”  This doesn’t mean that you have to be a criminal to lose your ability to discharge the tax.

An example of this came recently out of the 10th Circuit in the Vaughn case (114 AFTR 2d 2014-5191).    Apparently, James Vaughn was a successful businessman who made millions from the sale of his company.  Instead of paying the tax owed, he got into a “BLIPS” tax shelter that was marketed by KPMG.

The Court thought, in my words:

  • He was a sophisticated guy and he should have known that the BLIPS transaction was not legitimate.
  • The IRS put him on notice that the transaction was not legitimate through IRS Notice 2000-44.
  • He depleted his assets through extravagant purchases (expensive homes, cars, jewelry, etc).

These things were enough to push him from the negligent category to the “willful” category.  I’m not sure I agree with the entirety of what the court decided, however.  The taxpayer did seek advice of a highly regarded accounting firm in KPMG.  Additionally, he also went through a divorce and much of his wealth went to his ex-wife.

The bottom line is you cannot purposefully avoid a tax, spend like crazy to dissipate your assets, then file for bankruptcy.  If you do so, not only will you not get your taxes discharged in bankruptcy, but you will likely be looking at going to jail.

Requirements for Alimony – Can it be a good thing?

Posted in Tax Planning

Divorce is messy, divorce is costly – and it should be avoided wherever possible.  Spouses should always attempt to mitigate their losses and one way to do this is to consider designing the divorce settlement to include alimony.

To many people, the idea of alimony can cause your blood to boil.  This negative attitude generally comes from stories about celebrity divorces that require outrageous sums of money to be paid on a monthly basis.

Additionally, alimony causes spouses to have a constant reminder of the divorce every month when the alimony check comes due.

In Texas, the concept of alimony was frowned upon and in fact permanent alimony was banned for quite some time.  Now Texas courts are allowed to order “Spousal Maintenance” in certain circumstances:

  1. Requesting spouse is victim of family violence, or
  2. Spouses have been married for at least 10 years and the requesting spouse lacks funds or ability to earn to meet his/her “minimum reasonable needs.”

Spouses in Texas, however, can agree to “contractual alimony” if spousal maintenance is not available or acceptable to the parties.

Alimony can help shift some of the cost of the divorce to Uncle Sam.  This is because you are shifting income from a higher earning spouse to a lower earning spouse.

In order to qualify for alimony a four-pronged inquiry must be satisfied:

  1. The alimony payment is received under a divorce or separation instrument
  2. The instrument does not designate the payment not categorized as alimony (rather a property settlement)
  3. Persons are not members of same household when payment is made, and
  4. Requirement to make payments terminates on death of payee spouse.

There is a lot more to alimony and each situation needs special consideration.  Nevertheless, it should be considered!

IRS Takes Money From Dead Mom to Pay For Son’s Tax Debt

Posted in Tax Planning

Most people have some strong feelings about how they want their assets to be distributed upon their death.  Some want to give their money to their kids, others are charitably inclined.  However, I would guess that very few would like to see their money go to the IRS to pay the debts of their children.

Imagine working a lifetime, being a careful saver and then when you die it all goes to the IRS.

The famous saying is “you give your children enough money to do something but not enough to do nothing.”

In a recent case out of Kentucky (In RE: The Estate of Audrey Deinlein v. US) the IRS has insured that an heir will not be allowed to “do nothing.”

The basic facts of the case are:

Mom died and left her assets to her three sons in equal shares.  At her death one of the sons owed the IRS close to $500,000.  Mom’s estate was not large, but his share was going to be seized by the IRS.  He tried several different arguments to release his claim to his share.  One argument was that he had already received an “advancement” and the other was to “disclaim” the share.

He probably thought that it would be better for the money to go his other family members.  But the argument failed.

Two comments:

  1. An IRS tax lien attached to all “property” or “rights to property” that a taxpayer has.  The first step is to determine if there is a property right.  Courts will look initially at what state-delineated rights the person has, but the determination is ultimately a question of Federal law.  The advancement and disclaimer arguments failed in this case.
  2. This problem could have been avoided if mom would have had a more thoughtful estate plan.  Her estate could have provided that her assets would have gone into trust for her heirs, although this is not a cure-all.

The bottom line is a thoughtful estate plan is necessary for big and small estates so that a seizure like this does not happen.