The IRS, like the rest of society, has faced several challenges as a result of the pandemic. Some of those challenges are still lingering, such as funding, backlog, lack of guidance and inexperienced auditors. Efforts to fix these problems are underway but will take time. As taxpayer advisors, it’s important to recognize the limitations in
IRS Continues to Hunt for Cryptocurrency Investors with John Doe Summonses
UPDATE: On August 15, 2022, Judge Otis D. Write II in the Central District of California entered an order approving service of the summons by the IRS on sFOX for account and transaction records. The Department of Justice entered a press release the following day with Commissioner Chuck Rettig quoted as saying “the John Doe Summons remains a highly valuable enforcement tool that the U.S. government will use again and again to catch tax cheats and this is yet one more example of that.” Deputy Assistant Attorney General David A. Hubbert of the Department of Justice Tax Division was also quoted as well saying “taxpayers who transact with cryptocurrency should understand that income and gains from cryptocurrency transactions are taxable.”
The IRS knows it has a problem, in that it knows there are far more cryptocurrency transactions than are being reported on tax returns. The IRS may also get an $80 billion increase in funding for enforcement that will help solve that problem. What can taxpayers and cryptocurrency service providers expect? More John Doe Summonses. If there was any doubt, the IRS filed two new John Doe Summons requests (here and here) this week on cryptocurrency service provider sFOX. sFOX is the full-service crypto prime dealer for institutional investors, providing brokerage services for digital assets. It’s also now a target for information by the IRS and the Department of Justice Tax Division.
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Taxpayer’s Informal Claim for Refund of Taxes Paid and Offset by the IRS Denied on a Technicality
Properly navigating the IRS labyrinth of rules and regulations is difficult and sometimes taxpayers fail to dot every “i” and cross every “t”. The results can sometimes be devastating for both individuals and small businesses. Especially if the IRS chooses to assess penalties for the unknown failures and then pay those penalties from other funds the taxpayer submits through its offset power. The recent case of Special Touch Home Care Services v. United States, provides an example of how this can sometimes occur.
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Taxpayer’s Testimony on Businesses Losses Defeats IRS Arguments and Penalties
Starting any business has risk, and most businesses take time to become profitable. Unfortunately, the IRS sees multiple years of losses from a business as a red-flag that usually results in further scrutiny. That scrutiny can result in disallowance of legitimate business losses and potential penalties for the underreporting. However, with the proper documentation and testimony, legitimate losses over multiple years can be taken and upheld. A recent Tax Court case on a miniature donkey businesses, Huff v. Comm’r, T.C. Memo 2021-140, outlines the factors needed to defend multiple years of losses in a business.
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Asking the IRS to Abate Penalties
All kinds of penalties are being assessed by the Internal Revenue Service (IRS) against taxpayers, and more can be expected in the future. In 1954 there were 13 penalties in the Internal Revenue Code, and now there are more than 150. Taxpayers should not overlook the opportunity to request the IRS to abate penalties. The IRS abates many penalties for reasonable cause.
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Negotiating with the IRS Collection Division
Once the IRS makes an assessment against a taxpayer, the taxpayer will receive several notices before the IRS takes enforced collection action.
Notice of Intent to Levy
This is the notice that is required before the IRS can levy and seize a taxpayer’s assets.
Some form of response should be sent with respect to these notices. The response, along with a copy of the notice, should be sent by certified mail, return receipt requested, using the envelope provided by the IRS. The purpose in sending a response is so that it will show that the taxpayer is concerned about the taxes and is not ignoring them.
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Obtaining Information from the IRS
There is a wealth of information available from the IRS that is not generally made available to the public. Most of this information can be obtained by asking. This information includes files the IRS assembles about a taxpayer, and various training manuals used by the IRS to train its employees. In addition to training given to its employees, the IRS, like most professional organizations, conducts continuing education on an annual basis for its various divisions. Most of the training manuals and annual training materials are available to the practitioner pursuant to the Freedom of Information Act (FOIA).
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Compromising with the IRS
Many people end up owing the IRS for many reasons and there are various options to resolve your tax debt. Some of the options include an offer in compromise, installment agreement, or currently non-collectible status.
What is an Offer in Compromise?
An offer is when a taxpayer and the Internal Revenue Service settle a taxpayer’s tax liabilities for less than the full amount owed.
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The Basics of IRS Assessments
An assessment results when the liability of a taxpayer is recorded in the office of the Secretary of the Treasury. The assessment establishes the right of the IRS to collect the tax. No lien or levy can be made without an assessment. Assessments are authorized by the Internal Code.
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Claims for Refund
Once a taxpayer overpays a tax, it is necessary to file a claim for refund before any action can be undertaken to seek a refund of such tax from the government. The purpose of the claim for refund is to place the IRS on notice of an alleged overpayment. A taxpayer cannot require the IRS to make a credit or refund without filing the claim. In addition, a claim for refund is a prerequisite for suing in the U.S. District Court or the U.S. Court of Federal Claims. It also protects the overpayment of taxes if the statute of limitations expires. Claims for refund take many forms, but most typically are Forms 1040X and 1120X, amended returns for individual and corporate income taxes. Refund of other taxes requires regular forms which should be marked “amended” and show an overpayment. The courts have recognized many forms of claims for refund, including informal letters from taxpayers to the IRS. Form 843 should be used when filing claims for refunds for any taxes other than income taxes.
The preparing and filing of a claim for refund should be handled with care. Only one taxable period and one type of tax should be set forth on any claim. The claim may cover several different issues for the same taxable period and type of tax. The claim must be in writing under the penalties of perjury, and each and every ground upon which the taxpayer relies must be set forth in detail, plus sufficient facts to place the IRS on notice as to the taxpayer’s claim. The claim should demand the dollar amount sought as a refund, plus any other amounts which are legally refundable – including interest. In addition, the claim must be signed by the person who signed the return or, if a corporate return, by an officer of the corporation. To file a claim for refund there must have been an overpayment of tax, which could include:
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