Sequester and Weight Gain

  I have managed to gain 5 pounds. Don't give me this business about it to being the result of the holidays or cavorting in cafés in Miami Beach. While some of that may be true, my recent weight gain is much more serious. It is the fault of those damn Republicans in Congress. I have done the research. You may be comforted to know that your expanding middle may be the result of a minor bout with depression. Scientists say that in this part of the country the simple loss of sunshine can bring it about. Those who know me realize that I can hardly claim that defense. But there is something to this depression stuff. If you have been diligent in reading these tax blurbs of mine from this blog you know that the end of last year brought about the fiscal cliff scare. Congressman then batting around their party’s ideology certainly cost me a few pounds. But as that issue appeared to get resolved and just when it seemed weight loss was in the cards for me the new March 1 “sequester” darkened my bathroom scale. The New York Times stated that "House Republicans are resolutely opposing new tax increases to head off $85 billion in across-the-board spending reductions all but ensuring the cuts will go into force March 1 and probably remain in place for months, if not longer". This raises the potential of widespread disruption in government services and even military operations in the weeks and months ahead. There you have it. Depressing news and five extra pounds and counting. As the GOP continues to resist tax increases, my pants will no longer fit. By the way, there is a threat that the entire government will have to close down on March 1 although Congress appears ready to extend that deadline until September 30, the end of the fiscal year. The sequester cuts will be both arbitrary and deep to defense and domestic programs and to borrow a term from our own now beloved NJ governor “stupid”. Why not just call this silly sequester off if for no other reason so people like me can shed a pound or two.

Tax Crimes and Littering?

Where should tax crimes fall in the spectrum of criminal activity? In “Alice's Restaurant” a ‘60’s Vietnam protest movie, Arlo Guthrie tells the story of his avoiding the draft by having been arrested for littering in Vermont. The military was unwilling to take him into the Army knowing he had such a sordid past. In one famous scene, Guthrie is shunned by other inductees waiting psychoanalysis for their past criminal actions when they learn his only crime is littering. They welcome him back however, when he reveals a further charge of disorderly conduct. Now the people at the Immigration and Naturalization Service are permitted to deport aliens under United States Code Section 1227 if they have been convicted of an “aggravated felony”. That seems sensible. I can picture all types of terrible crimes that would fit that definition. But in Kawashima vs. Holder, the United States Supreme Court had to confront the important issue of whether filing a false income tax return with the Internal Revenue Service is such an “aggravated felony” as to require deportation of two natives and citizens of Japan who have been lawful permanent residents of the United States since 1984.The taxpayers went through hearings within INS and through the courts. After an exhaustive study of what the term aggravated felony means in the INS law, the Supreme Court in a 6 to 3 decision determined that such a tax crime was in fact an aggravated felony which can result in deportation. Lawyers should note that tax evasion is sometimes called the piggyback crime, at least by me, because it can be added to most financial crimes where income has been gained. The Internal Revenue Code makes income taxable from any source legal or not. So the thief is pursued by the police as well as by IRS agents. The mere non filing of returns can also result in a charge of tax evasion and taxpayers so situated should consider taking advantage of the IRS’ voluntary disclosure policy.

Who Are the IRS Agents?

No one likes contact from the IRS.  Which IRS agent is planning to visit? All IRS agents are not the same. It helps to understand the essential differences and what it means to the taxpayer or an attorney representing his client's interests.

The IRS Revenue Agent

 The most common contact will be the Revenue Agent. This person works in the examination branch. He often holds a CPA certificate or at least a solid background in accounting. Trained by IRS in substantive tax matters, he is the soldier in the trenches in the exam division of IRS. He will use predetermined audit guidelines to check tax compliance. Revenue agents are known for being thorough, documenting each step in the audit process. They will be fact centered and have sufficient knowledge of the tax laws or the backup to discover it, if need be, assistance being provided by IRS lawyers called Area Council.

Revenue agents will request information from the taxpayer and will issue information document requests (IDR) for information setting forth due dates to move the audit forward. Revenue agents like all IRS agents can issue administrative summons to obtain both testimony and documents from less than forthcoming taxpayers. This administrative action is not self enforcing and requires district court action brought by the Internal Revenue Service to enforce the demands made in the summons.

The IRS Revenue Officer

Possibly the most difficult and dangerous job at IRS is that of the IRS revenue officer. When we hear of IRS agents killed in the line of duty it is often from this unarmed tax agent’s ranks. He is the IRS collection expert in the field assigned to local IRS offices with a likely background in finance or perhaps a former business owner himself. He is primarily charged with collecting back taxes that are owed. His demand to tax debtors is simple: When are you going to pay the taxes you owe?

Revenue officers are also assigned taxpayer delinquent accounts where the taxpayer is a non-filer. This is the IRS civil attempt to obtain tax returns from the taxpayer. In all cases, revenue officers will check for current filing status and request that any open tax returns be filed directly with them.

Like revenue agents, revenue officers may issue administrative summons for information and like their examination brethren, if need be, they can make referrals to the criminal investigation division (CID) for possible criminal violations disclosed or suspected along the way.

The IRS Special Agent.

No practitioner or taxpayer should ever confuse the IRS special agent with either the revenue agent or revenue officer. The special agent has but one role in tax administration and that is to determine whether a criminal violation of the Internal Revenue Code has occurred. These violations may be found in Internal Revenue Code. section 7201 and following, the most popular of which is tax evasion and the filing of false and fraudulent tax returns. Special agents may have backgrounds in law enforcement and are the only IRS personnel authorized to carry guns. They take their work very seriously and are extremely good at it. IRS conviction and incarceration rates border on 100% in most criminal tax cases owing to the thoroughness of the special agent investigation. No lawyer or accountant unfamiliar with the work of the special agent should endanger his client by taking representation for a CID investigation which may go on typically 2 to 4 years. The statute of limitations for criminal violations is generally six years. Taxpayers who insist on representing themselves are simply arranging for “a vacation in New England” at a federal penitentiary.

IRS agents will identify themselves and Special Agents will display an unmistakable gold badge. Taxpayers and lawyers are well advised to appreciate the difference in the work they do for IRS.                                                               

TMD, Esq.

The IRS Dirty Dozen Tax Scams

 Every year, the Internal Revenue Service announces its “Dirty Dozen” ranking of tax scams. While the Service says many of these arise during the year, there is a scheme peak during tax filing season. IRS warns that “scam artists will tempt people in person, online and by e-mail with misleading promises about lost refunds and free money”. I am sure as a lawyer you have received notification from a Nigerian bank which desperately needs to wire transfer huge sums of money to your attorney trust account. All that is asked in return is the account and routing numbers to get in the game. Needless to say, this is not the most sophisticated scam in the world.

So here goes the rest from the most to least significant tax scams:

The winner, which has made the list for the last several years, is none other than identity theft. IRS sees identity thieves filing what appear to be legitimate tax returns requesting fraudulent refunds. In this case, IRS will notify a taxpayer that more than one return was filed in the taxpayer's name. That notice may be the first tip-off that the individual has been victimized. According to IRS in 2011 it stopped more than $1.4 billion of taxpayer refunds going into the wrong hands due to identity theft. IRS maintains a special identity theft page on its website IRS.gov/identity theft.

According to IRS, tax return preparer fraud comes in second on the list as tax return preparers have been known to skim off their clients’ refunds, charge inflated fees and attract new clients by promising guaranteed or extravagant refunds. In 2012 every preparer must have a preparer tax identification number which is entered on the tax return he or she prepares. Taxpayers should be alert to preparers who do not provide a copy of the tax return or charge a percentage of the refund amount as a preparation fee or add bogus forms to the tax return never before filed.

Rounding out the trifecta is Phishing. Here fake emails and websites request both personal and financial  information. IRS urges taxpayers to report any such contact to pfishing@irs.gov. There are a few fake IRS websites that truly look like the real McCoy.

Coming in just behind the leaders is hiding income offshore. The IRS is wising up to this technique which involves offshore banks, brokerage accounts, debit and credit cards or wire transfers to access funds. Taxpayers involved in undisclosed or illegal offshore accounts face both civil penalties and criminal prosecution. IRS does maintain come-clean disclosure rules. See IRS.gov for any current version.

In fifth position sweeping up the rear, is free money from the IRS or rebates from Social Security. You have to love this one. Among the pile of mostly useless e-mails all of us receive every day is often an urgent message that IRS is holding your money. IRS says scammers here prey on low income individuals and the elderly.The“elderly”now includes most of my friends.

False income and expenses. While once considered being the next Milton Bradley board game, the IRS does take a dim view of claiming deductions and expenses to which you are not entitled. Popular scam deductions and credits include the earned income tax credit, which by virtue of Congressional magic can result in a refund even when no tax payments have even been made.

Frivolous arguments. Now that is a catchy phrase. The IRS maintains a list of arguments it considers to be frivolous, which are unreasonable and outlandish claims to avoid paying the taxes owed. Take a look at the IRS website for help here.

Falsely claiming zero wages. Here the taxpayer is urged to file a substitute form W-2 or a corrected form 1099, thereby throwing the IRS computers into a tizzy and sending refunds out of nowhere.

Abuse of charitable organizations and deductions. IRS continues to examine intentional abuse of 501(c)(3) organizations using highly overvalued contributions by donors.

Disguised corporate ownership. In this scam third parties are used to request employer identification numbers and create corporations that obscure true ownership of a business. The new business may be used to claim false deductions and facilitate money laundering and other financial crimes.

The improper use of trusts. Promoters here urge taxpayers to transfer assets into trusts promising the reduction of income tax, deductions for otherwise personal expenses as well as reduced estate or gift taxes. According to IRS there has been an increase in the improper use of private annuity trust and foreign trusts.

There you have it. Happy Tax Season.