When a married couple files a joint tax return, they are jointly and severally liable for any tax debt. The result is that the IRS can come after either spouse for the total amount of tax owed, even if one spouse was primarily responsible for earning the income and preparing the return.  Notably, this also includes any amount of tax that arises due to an error in the preparation of the return. Thus, if a couple files a return and subsequently divorces, it is possible for the spouse who had nothing to do with filing the return to receive a letter from the IRS demanding they settle the tax debt from years earlier.  However, the IRS will relieve a spouse of their tax obligations in certain circumstances.  This is referred to as the “innocent spouse” rule.

Earlier this year in Farmer v. Commissioner of Internal Revenue, the U.S. Tax Court ruled on a husband’s request for innocent spouse relief after his wife obtained relief years earlier.  According to the court’s opinion, the petitioner and his wife filed a joint tax return in 2015 and 2016. Subsequently, the IRS identified deficiencies related to unreported income that were attributable to the petitioner.

By 2018, the petitioner and his wife had divorced in what appears to be a rather messy ordeal.  The petitioner’s wife sought innocent spouse relief from the couple’s tax obligations from 2015 and 2016, which she received.

Tax Court Rejects Proposed Offer in Compromise to Settle Possible Federal Tax Lien

Suddenly receiving a surprise tax bill in the mail is not something anyone looks forward to. However, taxpayers who face financial difficulties paying their back taxes may be able to settle the total amount due for less than the amount owed through the Offer in Compromise (OIC) program.

To be eligible for an OIC, a taxpayer must have filed all previous years’ tax returns and made all necessary estimated tax payments for the most recent tax year. Taxpayers who are currently involved in a bankruptcy proceeding are also ineligible for an OIC.

Federal tax law gives the IRS multiple tools for collecting unpaid taxes. Several of these do not require the IRS to file anything with a court before acting. A federal tax lien makes the tax debt a matter of public record and can have a substantial effect on a taxpayer’s financial interests. The IRS may also levy a taxpayer’s property in many cases, meaning it can seize any property not exempted under federal law. In the early days of the COVID-19 pandemic, the IRS offered taxpayers a respite from collection activities. While that respite ended last summer, some forms of relief may still be available for Pennsylvania taxpayers who owe the IRS.

Tax Liens vs. Tax Levies

The terms “lien” and “levy” sound somewhat similar, and people sometimes get them confused with one another. The two processes are related, but they are also very different from one another. Understanding the difference is very important.

Federal Tax Liens

A lien is a type of legal right over someone’s property, which creates a security interest for a creditor. In order to acquire a lien over a taxpayer’s property, the IRS must send a notice to the taxpayer informing them of the amount of tax they owe and making a demand for payment. Ten days after the IRS demands payment, the lien attaches to the taxpayer’s property if they have not paid the amount demanded.

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Federal tax law requires employers to withhold certain taxes from their employees’ wages, and to remit those amounts to the IRS. These are known as “trust fund” taxes, since the employer holds them in trust for the employee. In the event an employer fails to withhold these taxes, or fails to remit them, the consequences can be significant, so a conversation with a Pennsylvania tax attorney can be beneficial for all involved. The Trust Fund Recovery Penalty (TFRP) is one of the largest penalties authorized by the Internal Revenue Code (IRC). The COVID-19 pandemic has harmed businesses in Pennsylvania and all over the country. Despite the difficulties many employers are facing, the IRS is unlikely to offer any latitude in the payment of trust fund taxes.

What Is the Trust Fund Recovery Penalty?

Section 6672 of the IRC allows the IRS to assess and collect a penalty from anyone who is obligated to collect and pay trust fund taxes when they “willfully” do the following:
– Fail to collect the required tax;
– Fail to “truthfully account for and pay over such tax”; or
– Try “to evade or defeat any such tax or the payment thereof.”
The penalty is equal to the total amount of tax that the person failed to collect, failed to account for and pay, or attempted to evade.

What Taxes Are Covered by the Trust Fund Recovery Penalty?

Trust fund taxes commonly include personal income tax and the taxes that go towards Social Security and Medicare under the Federal Insurance Contributions Act (FICA). Employers must withhold an estimated amount of each employee’s wages for federal income tax, based on information provided on Form W-4. FICA requires employers to withhold 7.65 percent of an employee’s wages from each paycheck — 6.2 percent for Social Security and 1.45 percent for Medicare. Most employers must submit withheld amounts every month, and file quarterly returns with the IRS.

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There is good news for those taxpayers with Philadelphia Tax Problems.  Currently, the City of Philadelphia maintains an option for tax debtors known as the Voluntary Disclosure Program.  Taxpayers with Philadelphia tax debt can apply for Voluntary Disclosure once they are ready to make full payment for the taxes owed. For businesses, a common example of tax owed is the Business Income and Receipts Tax previously known as the Business Privilege Tax. The Voluntary Disclosure Program includes businesses not registered with the City of Philadelphia for a business tax account or Commercial Activity License.

For individuals, some common examples of taxes owed are: Wage Tax, Earnings Tax, Net Profits Tax, School Income Tax, and Real Estate Taxes. In order to be accepted into the Department of Revenue Voluntary Disclosure Program the following requirements must be satisfied:

  • The taxpayer cannot have been contacted by the City of Philadelphia Revenue or Law Departments, or any collection agency engaged by the City regarding the unpaid taxes.
  • The taxpayer must make a full disclosure of all Philadelphia taxes owed for the past six years.
  • Taxpayers that require an installment agreement to pay off their tax debt are not eligible for the Voluntary Disclosure Program.
  • The taxpayer must pay one hundred percent of the tax and interest owed within 60 days of receiving billing from the Department of Revenue.

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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

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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