IRS Makes Changes To Its First-Time Abate Penalty Waiver

This is an update to my previous article: IRS First-Time Abate Penalty Waiver and the Report from the Treasury Inspector General for Tax Administration, published on October 26, 2012. 

The IRS has updated its First Time Abate program for penalty relief. This program allows taxpayers a one-time waiver the first time a failure to file, failure to pay or failure to deposit penalty is charged. The waiver is available for only one tax period. 

According to the update, in order to qualify for relief the taxpayer must have 

1. Filed all tax returns
2. Paid or arranged to pay all tax currently due (for example, the taxpayer has set up an installment agreement and is current with his or her payments). 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

Last Minute Filing: How To Guarantee Timely Filing With The IRS

There are many reasons for waiting until the last minute to meet an IRS deadline.  You may be having trouble getting your documents together or you may be searching for an attorney to represent you in Tax Court. No matter if you are running late out of necessity or out of procrastination, the consequences for missing an IRS deadline range from minor to drastic depending on the type of filing. 

For example, if you miss the deadline to file a tax return, a late filing means a late filing penalty. On the other hand, the consequences for missing the deadline to file a petition in Tax Court in order to contest an IRS notice of deficiency are severe. Taxpayers only have 90 days to file a Tax Court petition and if the deadline is missed, the Tax Court will not have jurisdiction to hear your case. Your only remaining option is to pay the tax owed and file suit in either the United State District Court or the Court of Claims. 

In order to determine whether a filing is timely, the IRS follows the "timely mailing treated as timely filing/paying rule" (26 USC Section 7502). This rule states that a tax return (or other document) required to be filed (or payment to be made) with the IRS (or Tax Court) is timely filed if:

1. The date of the U.S. Postal Service postmark is no later than the due date (or the date of its extension), 
2. The return is properly addressed and 
3. Has proper postage. 

If, on the other hand, the filing has a postmark after the due date, it is considered filed on the date that it is received by the IRS. 

According to 26 USC Section 7502 (c), if a return or other document is sent by United States registered mail, registration shall be prima facie evidence (accepted as correct) that the return or other document was delivered and the date of registration shall be deemed the postmark date. 

Furthermore, the IRS has only a handful of approved private-delivery services which will meet the "timely mailing as timely filing/paying" rule (see Internal Revenue Bulletin: 2004-83). 

• DHL Express (DHL): DHL Same Day Service.
• Federal Express (FedEx): 
• FedEx Priority Overnight
• FedEx Standard Overnight
• FedEx 2Day
• FedEx International Priority
• FedEx International First
• United Parcel Service (UPS): 
• UPS Next Day Air
• UPS Next Day Air Saver
• UPS 2nd Day Air
• UPS 2nd Day Air A.M.
• UPS Worldwide Express Plus 
• UPS Worldwide Express

If your private-delivery service provider is not on this list, neither the IRS nor the Tax Court will make an exception for you. This point can be illustrated by a recent Tax Court case, Scaggs v.s Commissioner of Internal Revenue. In this case the taxpayers used FedEx Airbill "Express Saver Third business day" to mail their Tax Court petition. The court held that since the private-delivery service used was not on the approved list, the petition was not filed within the requisite period prescribed by section 6213(a) and their case was dismissed for lack of jurisdiction. 

It is important to note that if you file your tax return online (e-file) it is not considered filed until you receive an IRS acknowledgement of acceptance. Since this could take up to two days, don't rely on electronic filing if you are filing your tax return last minute.  If your return was e filed on time but was rejected after the deadline, your return will be considered timely if it is corrected and re-e filed again within 5 business days or printed and mailed to the IRS within 10 days. 

Update 6/7/13: the "timely mailing as timely filing/paying" rule does not apply to FBARs which must be received by June 30th (see instructions to form TD F 90-22.1). Likewise, when dealing directly with an IRS officer or agent, clarify beforehand whether they expect the document mailed by or received by the deadline they set (thank you to tax attorney Michael A. Lampert for bringing these exception to my attention). 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

IRS to Pursue "Quiet" Disclosure of Foreign Income

US taxpayers have different reasons for not disclosing their foreign bank accounts (by filing FBARs). While some taxpayers are intentionally hiding foreign income to avoid paying US taxes, many just don't know that they are required to disclose their account and pay taxes on the interest income. Some of these individuals are foreign born US citizens maintaining a bank account in their country of origin. Others are US citizen living overseas. Uninformed or not, during the last few years the US government has made it a priority to crack down on offshore tax evasion. 

As part of this effort, the US enacted the Foreign Account Tax Compliance Act which requires foreign financial institutes to report to the IRS information about financial accounts held by U.S. taxpayers. As a result of this enactment, the risk of an audit for individuals with foreign bank accounts increased substantially. 

In 2009, the IRS introduced its first Offshore Voluntary Disclosure Program (OVDP) to encourage individuals to voluntarily disclose their foreign bank accounts. As part of the deal offered by the program, the IRS agreed not to audit or criminally prosecute these individuals in exchange for the payment of taxes, penalties and interest on any undisclosed income and a one time 20% penalty on the highest balance in the foreign bank account (lower penalties are available if special circumstances are met). Due to the success of the first OVDP, the IRS reintroduced the OVDP in 2010 with a 25% highest balance penalty and in 2011 with a 27.5% penalty. 

As the penalties under the OVDP increase each year, more taxpayers are opting to instead come clean through a "quiet" disclosure. A "quiet" disclosure" means that taxpayers amend their past tax returns and FBARS without actually coming forward under the OVDP and paying the penalty on the highest balance. As a result, the government misses out on billions of dollars in revenue. 

This month, the Government Accountability Office (GAO), the "congressional watchdog," issued a report urging the IRS to pursue those taxpayers making "quiet" disclosures. The report, titled Offshore Tax Evasion. IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, found that as of December 2012, the OVDP programs have resulted in over 39,000 disclosure and over $5.5 billion in revenue. Furthermore,while the IRS has also detected some taxpayers trying to avoid paying taxes, interest and penalties, many attempts have been missed. The GAO found many more potential "quiet" disclosures than the IRS detected by analyzing amended returns from 2003-2008 and matching them to available information about taxpayer offshore activities. The GAO concluded that the act of "amending past returns or reporting on current returns previously unreported offshore accounts, results in lost revenue and undermines the programs' effectiveness." 

The GAO recommended that in addition to identifying and educating taxpayers about their reporting requirements, the IRS should "explore options for employing a methodology to more effectively detect and pursue 'quiet' disclosures." The IRS has agreed to adopt these recommendations.  

Currently, in the OVDP question and answer section, the IRS urges taxpayers who have already made a "quiet" disclosure to take advantage of the penalty framework provided by the OVDP. The IRS warns that those taxpayers making a "quiet" disclosure should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years (question #15). 

Although it is uncertain what methodology the IRS will adopt to ferret out "quiet" disclosures, it is likely that the risks may no longer be worth taking. 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Notes From The Trenches (The IRS Offer In Compromise Process)

Has the IRS Fresh Start Program really made it easier to get an Offer in Compromise ("Offer") accepted? In my experience, IRS Offer Specialists are still reluctant no matter how badly the taxpayer needs a fresh start.

After recently finalizing several Offers, I would like to share some important notes that taxpayers need to be aware of when submitting offers. These issues tend to come up often and being aware of them ahead of time will make the process smoother.  If you are unaware of how the Offer process works and would like summary, please take a look at my previous post, The IRS Makes Substantial Changes to the Offer In Compromise Process, before reviewing these notes.

1. Sole Proprietors: If you are a sole proprietor, it helps if you keep your business and personal finances separate. That entails having a separate business account in which you deposit gross receipts and from which you pay business expenses. If you need to pay personal expenses (mortgage, car payment, etc.) don't pay these expenses directly from your business account. Transfer enough funds to your personal account in order to meet these expenses. Your profit and loss statement needs to match your business bank statements. If something is unclear, the Offer Specialist will ask questions and thereby delay the process. If there are a lot of co-mingling issues, the Offer Specialist may even refuse to deal with a reconciliation and reject your offer. As a result you will have to go through appeals which will delay and complicate the process further. 
2. Medical Condition: If you have a medical condition which you plan to discuss in your Offer or include as a reason for your Offer (page 2 of 4 of the Offer Application), submit a letter from your doctor explaining your condition with the Offer application. This substantiation will be requested by the Offer Specialist and they will most likely want to know how your medical condition affects your current and future earning ability. 
3. Retirement Account: Be aware of the terms of your retirement account. The IRS will consider the funds in your retirement account an asset. If you plan to liquidate your retirement in order to fund the offer, the IRS will allow penalties and tax consequence to offset the amount of this asset. If you have little or no vested interest in the retirement account (you neither can liquidate nor borrow against the fund), submit a copy of your retirement plan substantiating this fact with your Offer application. If you cannot touch your retirement, neither can the IRS. For more information, take a look at IRM (Internal Revenue Manual) 5.8.5.9 (Retirement or Profit Sharing Plans) in order to assist you in valuing your retirement account for Offer purposes. 
4. Deposits: Explain non-income deposits made into your personal bank account. The Offer Specialist will go through your deposits thoroughly and check them against your pay stubs  If you have additional deposits which are not income (such as loans or gifts) the Offer Specialist will consider these deposits income unless you can prove otherwise. It may help to submit a letter explaining non-income deposits with the Offer application. 
5. Estimated Tax Payments: If the last tax return you filed showed a tax liability, the IRS will require that you make estimated tax payments before it will consider your Offer. This step may be avoided if you can prove to the Offer Specialist that you will have no tax liability when your next tax return is due. For example, you can show that your employer is withholding the maximum amount from your wages. 
6. Offer Terms: Finally, don't let the Offer terms (page 3 of 4 of the Offer Application) catch you by surprise. Review the terms carefully and know what you are agreeing to. Two terms that often catch taxpayers by surprise are
1. You are agreeing to stay current: you must "file tax returns and pay the required taxes for the five year period beginning with the date of acceptance" of your offer. If you do not stay current, you will be in default and the IRS will reinstate your liability. 
2. You are agreeing to give up your refund: "The IRS will keep any refund, including interest, that might be due [to you] for tax periods extending through the calendar year in which the IRS accepts [the offer]". For example, if the IRS accepts your offer on January 1, 2013, and you are due a refund for 2012 and 2013 the IRS will keep both refunds.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

IRS First-Time Abate Penalty Waiver and the Report from the Treasury Inspector General for Tax Administration

Update: IRS Makes Changes To Its First-Time Abate Penalty Waiver (6/17/13)

Have you heard of the IRS's First-Time Abate penalty waiver program (FTA)? If you haven’t you’re not alone.  Few taxpayers and tax professionals were aware of this program until a report from the Treasury Inspector General for Tax Administration (“TIGTA”) came out on October 17, 2012 auditing it.  This is because this program is not publicized by the IRS.  The only IRS overview of the program is in its Internal Revenue Manual (“IRM”) guidelines (20.1.1.3.6.1), which is a manual for IRS employees.  In its report, TIGTA points out that there is no mention of the FTA in the 1040 instructions, on the IRS’s website, “Eight Facts on Penalties,” or on balance due notices sent to taxpayers. 

The FTA is an administrative waiver which began for the 2001 tax year.  Ordinarily, taxpayers must show reasonable cause, a statutory exception or IRS error before the IRS will abate penalties.  A showing of reasonable cause requires an explanation that the taxpayer exercised ordinary business care and prudence in determining his tax obligation but nevertheless failed to comply with his obligation due to some specific circumstances.  Instead, the purpose of the FTA is to reward past tax compliance and promote future tax compliance.  Therefore, no showing of reasonable cause is required before relief is granted. 

As part of this program, the IRS will waive failure to timely file and timely pay penalties for a specific tax year as long as the taxpayer has demonstrated full compliance over the prior three years.  This relief is not automatically granted since in order to obtain the FTA waiver, the taxpayer must request it. 

TIGTA’s report analyzes the FTA program and provides several recommendations for improvement.  The IRS is currently in agreement with many aspects of these recommendations and is working to implement them.  If these recommendations are incorporated, the FTA will undergo substantial changes.

• TIGTA Recommends That The FTA Waiver Be Better Used to Promote Tax Compliance

Currently, in order to obtain an FTA waiver, taxpayers are not required to demonstrate full compliance by paying their current tax liability.  This feature of the program was criticized by TIGTA’s report and will likely be modified by the IRS.  TIGTA argues that allowing taxpayers relief before the liability is paid in full goes against the purpose of FTA.  Instead, FTA relief should be contingent upon the payment of the liability.

• TIGTA Recommends That The IRS Develop A Process To Address The Negative Impact To Taxpayers Who Qualify for Both FTA And Reasonable Cause Relief.

Current IRS procedures provide that when taxpayers qualify for both an FTA waiver and penalty relief based on reasonable cause, they are to be granted FTA waivers.  The reason for this policy is that it simplifies the abatement process, thereby conserving IRS resources.  TIGTA’s report determined that this process hurts certain taxpayers because they will be prevented from receiving FTA waivers in the future and the portion of their penalties abated may be reduced.  

For example, according to TIGTA's report, If a taxpayer’s penalties are abated due to reasonable cause in 2010, he may qualify for an FTA waiver for 2011.  Instead, when the taxpayer is granted an FTA waiver despite his reasonable cause in 2010, he is precluded from using the waiver in 2011.  If he has no reasonable cause excuse in 2011, he is left with no recourse. 

Furthermore, according to TIGTA's report, under the FTA waiver, abatement of the failure to timely pay penalty includes the assessed amount of the penalty but not the accrued amounts.  An abatement of the failure to timely pay penalty due to reasonable cause includes both the assessed and the accrued amounts.  The failure to timely pay penalty can reach 25% of the unpaid tax liability if it is left to accrue indefinitely.  Furthermore, while the penalty continues to accrue, it is only assessed periodically and most of the penalty is never officially assessed until there are funds in the taxpayer’s account to pay all or part of the penalty.  Therefore, a taxpayer seeking to abate the accrued amount of the penalty after an FTA waiver will have to submit an abatement request based on reasonable cause.  

As evident from TIGTA's report, the FTA has a lot of room for improvement.  Nevertheless, it's an important program of which taxpayers and their representatives must be made aware.  Over a million taxpayers are missing out every year on obtaining relief from penalties which they do not have to pay.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

What Should You Know If Your Case Has Been Assigned To An IRS Revenue Officer

Who Is An IRS Revenue Officer 

An IRS revenue officer ("RO") is a highly trained employee of the IRS collection division.  ROs are granted total collection authority by the IRS and are therefore able to make phone calls and visit you at home or at your place of business.  If you are not at home or work when the RO comes to visit, he or she will leave a request that you contact them by a specific date.  This request should not be ignored.  If you do not voluntarily comply with this request, the RO has the power to summons you to a mandatory meeting.  The RO also has the power to garnish wages and bank accounts, seize accounts receivables and seize property.  It is very common for an RO to use these collections techniques against an uncooperative taxpayer.

Every RO is different.  I have personally worked with many ROs who care deeply about a taxpayer's situation and do everything in their power to find the best solution possible.  I have also worked with unreasonable ROs who don't have patience for excuses and are quick to garnish wages and seize bank accounts.

The bottom line is that ROs are people with a very difficult and dangerous job. Although they do not carry weapons or make arrests, they do work long hours and make face-to-face contact with many unreasonable and desperate people.  It is not uncommon for an RO to be threatened on the job.  Dealing with a reasonable and responsive taxpayer is often a welcome opportunity for an RO.

Why Is An RO Assigned To Your Case?

If you owe the IRS money, the IRS may assign your case to an RO for a number of reasons.  These include: (1) you owe a large debt (2)  you owe payroll taxes (3) you have unfiled tax returns and/or (4) the regular IRS collection division has been unsuccessful in collecting from you.

What Should You Do?

If you receive a call or visit from an RO, do not ignore the RO.  Whether or not you should hire a tax controversy attorney to represent you depends on how comfortable you are dealing with the RO and the complexity of your tax situation.  If you decide to handle communications with the RO on your own, consider the following:

1. You should obtain a complete snapshot of your account with the IRS.  In order to do this, contact the IRS in order to gather the following information:
• Confirm that all necessary tax returns have been filed 
• If any tax returns have not been filed, these need to be prepared and filed immediately.  In order to get these prepared, request that the IRS send you your Wage and Income Transcripts for the tax years that have not been filed.  Wage and Income Transcripts show your W2s, 1099s, mortgage interest information, etc.  
• Request that the IRS send you an Account Transcript for each year that you have a balance.  This transcript will show you each year's balance due and the interest and penalties that have been added on.  
2. Keep in contact with the RO and comply with his or her requests.  As mentioned above, ROs have complete collection authority and will use it against you if you are unresponsive. 
3. The RO will want to resolve your account by reviewing your finances in order to determine whether you can (1) pay your balance in full, (2) pay on an installment agreement or (3) cannot pay at all. If you need more time than the RO initially allows to gather your financial information, request an extension.  Do not ignore deadlines.  
4. The documentation and information that the RO will request varies depending on your specific circumstances.  If you feel that the RO's request is burdensome or unreasonable, it may be best to contact a tax controversy attorney.
5. The RO has the power to abate delinquency penalties.  Therefore, if you have a good reason for failing to file your returns on time or failing to pay your liability in full, bring the issue up with the RO.

Finally, understand that ROs are often out of the office (making personal contact with other taxpayers) or are in training.  Therefore, it is common that an RO will take his or her time responding to your or your attorney's calls.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Notice of Federal Tax Lien: Understanding IRS Tax Liens

A Notice of Federal Tax Lien ("Notice") from the IRS is a public document meant to alert creditors that the government has a legal right to your property, all your rights to property and to property that you acquire after the lien is filed.  This Notice is issued because you have not paid your tax debt.  The purpose of the lien is to protect the government's interest in your property.  Nevertheless, the mere existence of this lien does not transfer title or constructive possession of your property to the government.  Instead, the IRS must either levy against the property or bring a civil action to collect the tax.

The IRS will only file a tax lien against you if (1) the IRS assesses your liability (2) sends you a bill that explains how much you owe and (3) you do not pay the debt in time.

When this Notice is filed, it is important to know your rights and options.  Many people intend to borrow funds to pay off their tax debts and the filing of the Notice may harm their ability to obtain these funds.  Also, people with tax liens on their credit records also may have a harder time getting a job, a car loan or finding a place to live.

Currently, as part of its Fresh Start Program, the IRS will not issue a tax lien unless you owe at least $10,000 in taxes.  Nevertheless, the IRS warns that a tax lien may still be filed on amounts less than $10,000 when circumstances warrant.

Appeal Rights 
The IRS is required to send you the Notice by certified mail under I.R.C. section 6320 within five days of the lien being filed.  The Notice also provides you with information about your appeal rights.  If you believe that this Notice is filed in error, you have 30 days to appeal.  The Notice is filed in error if any of the following apply:

• You satisfied your liability before the lien was filed
• Assessment of the tax liability violated either the notice of deficiency procedures (i.e. the notice of deficiency was mailed to the wrong address or you have already filed a timely petition with the Tax Court) or the bankruptcy code. 
• The statute of limitations for collection ended before the IRS filed the notice of lien 

If you request a hearing, the hearing will be conducted by an Appeals officer who was not previously involved with your case.  If the Appeals officer reaches a decision that you do not agree with, you may seek judicial review by filing a tax court petition within 30 days of the Appeals officers' decision.  

Release Of Lien
Per I.R.C. section 6325(a), The IRS will issue a Certificate of Release of Notice of Federal Tax Lien within 30 day after either:

• You pay the full amount of your debt, penalties, interest or the IRS adjusts the amount due 
• The IRS accepts a bond guaranteeing payment of the debt 
• A decision is made to adjust your account during an Appeals hearing or 
• The period during which the IRS can collect the tax ends.  

If the IRS has not released the lien within 30 days, you can request a Certificate of Release of Federal Tax Lien.

Withdrawal Of Lien 

Even if the IRS agrees to release a lien, it will remain on your credit report as "released" for up to seven years.  Therefore, you must request that the IRS also withdraw the lien in order for the IRS to remove the public notice.  This is not automatic.  In order to request that the Notice be withdrawn, you must complete Form 12277.  

General Instruction four on the form also states that you must request in writing that the IRS notify other interested parties of the withdrawal notice. You must provide the names and addresses of the credit reporting agencies, financial institutions and or other creditors that you want notified.  

In order to qualify for a withdrawal,

• Your tax liability must be satisfied and your lien must be released
• You must have filed all individual, business and information returns for the bast three years.  
• You must be current on your estimated tax payments and federal tax deposits 

Withdrawal Of Lien After Entering Into An Installment Agreement

If you meet the eligibility requirements, the IRS may withdraw your Notice after you enter into a direct debit installment agreement.  You will still need to complete and send the IRS Form 12277 to obtain the withdrawal. In order to be eligible, you must meet the following requirements: 

• The amount you owe must be $25,000 or less
• Your installment agreement must full pay the amount you owe within 60 months or before the collection statute expires (whichever is earlier)
• You must be in full compliance with other filing and payment requirements 
• You must have made three consecutive direct debit payments 
• You cannot have previously received a lien withdrawal for the same taxes (unless the withdrawal was for an improper filing of the lien)
• You cannot have defaulted on you current or any previous direct debit installment agreement.  

The IRS certainly does not make it easy or obvious for you to take the necessary steps to repair your credit.  Nevertheless, you do have options and is very important to be aware of your rights and obligations when resolving your tax liability with the IRS.

For a great overview and more information about the IRS Lien Process, please see this article by Attorney Anthony E. Parent.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.