If you maintain or have maintained an offshore bank account without disclosure on your federal tax return and have also failed to properly file the Report of Foreign Bank and Financial Accounts, also known as the FBAR, you may face significant civil and criminal sanctions. The failure to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. If your violation is found to be willful, the penalty could be the greater of $100,000 or fifty percent of the amount in the account for each violation. A taxpayer convicted of tax evasion can face a prison term of up to five years and a fine of up to $250,000.

Fortunately, for those taxpayers whose noncompliance was non-willful, the Streamlined Offshore Compliance Procedures (“Streamlined Procedures”) offer substantially reduced penalties and the avoidance of criminal prosecution. On June 18, 2014, the Internal Revenue Service announced Streamlined Procedures. There are two sets of Streamlined Procedures, one for U.S. taxpayers residing in the United States, and the other for U.S. taxpayers residing outside the United States.

Streamlined Procedures For Taxpayers Residing In The United States

Central to the Streamlined Procedures is the requirement that the taxpayer’s noncompliance be non-willful.  The Internal Revenue Manual defines willfulness as a “voluntary, intentional violation of a known legal duty.” The Internal Revenue Manual further states “a good faith misunderstanding of the law or good faith belief that one is not violating the law negates willfulness.” Before applying for the Streamlined Procedures as careful analysis with competent tax counsel must be performed in regards to the element of willfulness. If the taxpayer is nonwillful in his conduct he may proceed with the Streamlined Procedures if he is not currently under a civil or criminal investigation.

Under the Streamlined Procedures the taxpayer must:

  1. Filed Amended Tax Returns. For each of the most recent three years for the U.S. tax return due date has passed, file amended tax returns, together with all required information returns.
  2. FBARs. File FBARs for each of the most recent six years for which the due date has passed.
  3. Certification. Submit a statement signed by the taxpayer certifying (1) that the taxpayer is eligible for Streamlined Procedures; (2) that all required FBARs have been filed; (3) the failure to report all income, pay all tax, and submit all required information returns, including FBARS, was the result of nonwillful conduct; and (4) that the miscellaneous offshore penalty amount included with the filing is correct.
  4. Pay the Offshore Penalty. The taxpayer must pay the Title 26 miscellaneous offshore penalty equal to five percent of the highest aggregate value of the taxpayer’s foreign financial assets at any time during the covered tax return period and the covered FBAR period.
  5. Pay Tax and Interest. Pay all tax due on the tax returns plus statutory interest for each of the late payment amounts.Under the Streamlined Procedures the taxpayer will avoid the accuracy-related penalties, information return penalties, failure to file penalties, failure to pay penalties, and FBAR penalties.

Streamlined Foreign Offshore Procedures For U.S. Taxpayers Outside The United States

Under the Streamlined Procedures for U.S. taxpayers residing outside the United States the miscellaneous offshore penalty is not assessed. However, payment of all tax due on the most recent three years of U.S. tax returns must be made in addition to the associated statutory interest. The taxpayer will not be subject to the same penalties avoided by taxpayers residing in the United States.

The gold rush is on!  The rush for sales tax gold, that is.  For those involved in the mining of natural gas, a significant opportunity exists for a sales tax refund under the Pennsylvania Sales Tax Mining Exemption.  The Mining Exemption provides an exemption to Pennsylvania’s sales tax for certain equipment and services used in the extraction of natural gas.  Because many vendors are wrongly applying sales tax to items covered by the Mining Exemption, it is important for companies that mine the Marcellus Shale region in Pennsylvania to closely examine their purchases for possible refunds under the Mining Exemption.

What Is Exempt?

The Pennsylvania Department of Revenue has defined the extraction of natural gas as an excluded mining activity.  Pennsylvania law defines mining to include exploration, drilling, extracting and refining of natural resources such as natural gas.  The actual mining process is considered to begin with the drilling of the wellbore and ending with last physical change of the gas prior to being sold and transferred. Continue reading →

So, you’ve just received a letter from the IRS informing you that you are being audited.  Stay calm, and don’t panic!  IRS audits aren’t as bad as you might think.  That is, if your’re properly prepared and ready for the challenge that awaits you.  An important consideration will be the decision of whether or not to retain counsel for representation in the audit.

Why Me?

The Internal Revenue Service utilizes several examination techniques to determine the accuracy of tax returns.  Computers are utilized to verify computations shown on each return.  If it is determined that the computations are incorrect on a return, a notice is issued to the Taxpayer adjusting the amount of taxes on the return.  Correspondence audits are initiated by the issuance of letters to the Taxpayer requiring verification of deductions and/or examinations shown on a return.  Office audits are conducted in local Internal Revenue Service offices.  Field examinations are conducted by Revenue Agents of more complex returns.

Correspondence Audits

The use of correspondence audits by the IRS has increased substantially over the past ten years.  Correspondence audits are used by the IRS to obtain additional information from the Taxpayer about a few limited issues on a return.  The correspondence audit is most often focused on narrower issues than a traditional office audit and is conducted by mail or other written communications, making them less expensive for the IRS.  Some examples of the kinds of items that can which can be verified by a correspondence audit are itemized deductions such as interest, taxes, charitable contributions, medical expenses, and simple miscellaneous deductions.  Issues other than itemized deductions may be examined if they are a single matter which would not be appropriate for an office audit or field examination.

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Many Taxpayers have the mistaken belief that taxes cannot be discharged through bankruptcy.  Fortunately, this is not true!  In fact, bankruptcy can be one of the easiest and most effective methods of eliminating overwhelming tax debt.  For the individual Taxpayer, Chapter 7 & 13 of the Bankruptcy Code provide the opportunity to discharge tax liabilities.

Income taxes are generally dischargeable if the Taxpayer meets all of the following conditions:

  • A nonfraudulent tax return was filed for the year(s) in question.  If the Internal Revenue Service filed a Substitute For Return which the Taxpayer neither signed nor consented to the return is not considered filed.
  • The tax liability in question is for a tax return filed at least two years before the bankruptcy filing date.
  • The tax return for the tax liability in question was due at least three years before the bankruptcy filing date.
  • The Internal Revenue Service has not assessed the liability in question within 240 days of the bankruptcy filing date.  The aforementioned 240 day period is extended by the period of time collection activity was suspended by matters including an Offer In Comprise or another bankruptcy case.

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The new Offer In Compromise (OIC) program offers exciting opportunities for Taxpayers in distress that did not exist under the old OIC regime. On May 21, 2012 the Internal Revenue Service (IRS) announced that it is expanding its Fresh Start program to include more favorable terms for the OIC program.  Often times the OIC is promoted by unscrupulous practitioners as a way to settle a tax debt for “Pennies On The Dollar!”  Unfortunately, this is not true for most Taxpayers.  Historically, the IRS has accepted roughly one-third of the OIC’s submitted.  However, because of the changes to the OIC program, the chances of a successful OIC have increased substantially.

The OIC is used to settle generally large tax debts for a reduced amount.  Typically, an OIC is not accepted where the IRS believes that full payment can be made in a lump sum or in an installment agreement.  In order to determine the settlement amount under an OIC or reasonable collection potential, the IRS follows established guidelines and procedure.  In the past the reasonable collection potential generally consisted of the fair market value of the Taxpayer’s assets plus forty-eight to sixty months of disposable income.  Under the new OIC rules, the Taxpayer must pay twelve months of disposable income for an OIC paid in five or fewer payments and twenty-four months of disposable income for an OIC paid in six to twenty-four months.  The new OIC rules still require that the reasonable collection potential include the fair market value of the Taxpayer’s assets.  Because of the reduction in the computation of disposable income in determining the reasonable collection potential, the new OIC can be used successfully by many Taxpayers where in the past the OIC would not have been an option. Continue reading →