BVI Accounts Under Scrutiny in 2014

bvi bank accountsA new law will reveal more details about United States taxpayers who maintain accounts in the British Virgin Islands. Starting in 2014, the BVI will need to provide account information about US taxpayers in order to comply with the new legislation.

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IRS Eases Up on Offer in Compromise Requirements

The IRS has recently announced changes to its "Fresh Start" initiative that are aimed at helping struggling taxpayers. Part of the "Fresh Start" initiative, the Offer in Compromise (OIC) program was designed to alleviate the difficulties facing some financially distressed taxpayers by providing for an agreement between a taxpayer and the IRS to settle tax liabilities for less than the full amount owed if the taxpayer meets certain conditions.

Recent revisions to the OIC program focus on the financial analysis used to determine taxpayer OIC qualification. In order to decide if a taxpayer qualifies for an OIC, the IRS analyses the taxpayer's income and assets to determine reasonable collection potential. The announced changes will decrease the number of years of future income the IRS looks at in making its determination. The IRS now will look at only one year of future income for offers paid in five or fewer months (down from four years) and two years of future income for offers paid in six to twenty-four months (down from five years).

Another major change regards the calculation of Allowable Living Standards, which aid in financial analysis to determine a taxpayer's ability to pay. The standards, which incorporate average expenditures for basic necessities for citizens in similar geographic areas, have been expanded to include additional items. Taxpayers can now use these miscellaneous allowances for credit card payments and bank fees and charges. Additional guidance has also been provided for payment of student loans and delinquent state and local taxes.

The John Edwards Case - What About Gift Taxes?

Yesterday I blogged about North Carolina's controversial Amendment One, which ended up passing by a large margin.  I also have some thoughts about another matter in the headlines - the John Edwards trial.  I have not been following the case closely, but I do know that central to the case is the money received in 2007 from wealthy donors Fred Baron and Bunny Mellon, Edward's knowledge of the donations, and whether they constituted campaign funds or simply gifts.  Edwards former speechwriter Wendy Button testified that Edwards told her that the money was legal because the donors had paid gift taxes. 

However, the matter of the gift taxes is not so simple.  In 2007, the federal gift tax exemption was $2 million, meaning the Baron and Mellon could have each given someone that amount without paying any tax, provided they had not previously used up the exemption.  In any event, a federal gift tax return would be required to report the gift to the donees since it exceeded $12,000 per person.  But exactly who were the donees?  John Edwards?  He certainly benefited from the gifts, since they helped hide Hunter's pregnancy, even if he didn't receive anything himself.  Rielle Hunter was certainly a donee, as she received. at least, free rent and a BMW.  Andrew and Cheri Young?  They apparently kept most of the money to build themselves a house.

So, if Baron and Mellon filed gift tax returns as required, whom did they list as donees?  Somehow I doubt the correct names and amount were on the returns.  Were the returns later amended to correct the information?

And what about subsequent gifts of the same money?  Did Edwards effectively make a gift to Hunter?  To the Youngs?  Was there a gift from the Youngs to Hunter?  Any such gifts in excess of $12,000 would also required to be reported, and the estate tax exemption of the donors would be reduced by the amount of the gifts.. 

Edwards and anyone else considered to be a North Carolina resident would also be required to report the gift to the North Carolina Department of Revenue, as North Carolina still had a gift tax in 2007 and 2008.  In fact, North Carolina's lifetime exemption was just $100,000, and that only applied to close relatives.  That means North Carolina gift tax would have been due.

Only a tax lawyer would think about such things - but, the tax laws are laws too, and they should be enforced.  I would like to see how this would all unravel if the IRS and NCDOR conducted audits of those involved.

How to Report Tax Scams

Promoters of tax avoidance scams are not only acting illegally, but they can put unknowing participants at risk of penalties and even jail time.  The old saying "if it seems to good to be true, it probably is" certainly applies here, but plenty of celebrities have fallen prey to such schemes, including Wesley Snipes.

There are plenty of legitimate tax reduction techniques available, but when someone tells you he can help you avoid taxes altogether, I recommend running for the hills.  You can also report the scam and its promoters to the IRS.  Think of it this way - the less tax cheats out there, the more money our government gets, and theoretically, anyway, the less likely it is to raise taxes on the rest of us.

IRS Extends Deadline for Offshore Voluntary Disclosure

Due to Hurricane Fran, the IRS has extended the deadline for the Offshore Voluntary Disclosure Initiative for foreign accounts to September 9, 2011.  U.S. taxpayers with foreign accounts totaling more than $10,000 at any time during the year must report the accounts to the IRS or face substantial penalties and criminal charges.  Voluntary disclosure and payment can avoid criminal charges. Click here for more information.

For certain professionals, failing to report can end also one's career. An attorney here in North Carolina was recently disbarred for failure to report an offshore account.

IRS Eliminates Innocent Spouse Two Year Limitation

From IR-2011-80, issued on July 25, 2011:

The IRS launched a thorough review of the equitable relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:

  • The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
  • A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.
  • The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

The change to the two-year limit is effective immediately, and details are in Notice 2011-70.

Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.

By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.

Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. Publication 971, Innocent Spouse Relief, has more information about the program.

Today is the Deadline for Foreign Account Reporting

From IR-2011-70:

WASHINGTON — The Internal Revenue Service today reminds everyone who has a bank or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.

Many people in the U.S. have foreign financial accounts. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.

U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.

For 2010, the due date for filing the FBAR is Thursday, June 30, 2011, though some financial professionals will have until June 30, 2012 to file. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.

The FBAR is not an income tax return and should not be mailed with any income tax returns. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 2009 and earlier years, the due date is generally Nov. 1, 2011 for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.

FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621.

Click here for a report of a recent plea bargain by a disbarred lawyer who was charged with hiding asset in UBS accounts in Switzerland.

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4th Circuit Upholds Two-Year Innocent Spouse Limitation Period

The U.S. Fourth Circuit Court of Appeals, under whose jurisdiction North Carolina falls, overruled a Tax Court decision and upheld a Treasury regulation that provides for a two-year statute of limitation on claims for innocent spouse relief (Jones v. Commissioner, docket no. 10-1985 (4th Cir. 6/13/11)). This is the third time a Tax Court ruling on this issue has been overturned by a higher court.

Married couples who sign and file a joint return are both liable for any tax and penalties due with regard to the return.  Innocent spouse relief is often sought by a spouse who claims that he or she did not have any knowledge of the other spouse's fraud against the IRS.

IRS Warns of 12 Current Tax Scams

IR-2011-39:

Video: Dirty Dozen: English  |  Spanish  |  ASL 

WASHINGTON –– Hiding income in offshore accounts, identity theft, return preparer fraud, and filing false or misleading tax forms top the annual list of “dirty dozen” tax scams in 2011, the Internal Revenue Service announced today.

“The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.”

The IRS works with the Justice Department to pursue and shut down perpetrators of these and other illegal scams. Promoters frequently end up facing heavy fines and imprisonment. Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties.

Following is the Dirty Dozen for 2011:

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IRS Says Beware of Frivolous Tax Arguments

From IR-2011-23

WASHINGTON — The Internal Revenue Service today released the 2011 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 84-page document, The Truth About Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

The 2011 version of the IRS document includes numerous recently decided cases that continue to demonstrate that frivolous positions have no legitimacy.

Frivolous arguments include contentions that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.

In addition, the document highlights cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes, and the imposition of criminal and civil penalties on taxpayers who claimed they were not citizens of the United States for federal income tax purposes.

10 Ways to Attract an IRS Audit

With accompanying pictures, this article on Forbes.com gives us 10 things NOT to do with regard to our tax returns.

The 2010 "Dirty Dozen" List of Tax Scams

From IR-2010-32:

WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.

“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”

Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.

The IRS urges taxpayers to avoid these common schemes:

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The Truth about Frivolous Tax Arguments

Have you ever heard a friend, neighbor, or colleague state that they had found a way to get around paying income taxes, or that certain taxes weren't really legal?  Don't believe them - many people, including several wealthy actors, have gotten into trouble with the IRS that way.

The IRS has a comprehensive analysis of frivolous tax arguments on its website.

IRS Extends Deadline on Foreign Account Reporting

From IR-2009-84:

WASHINGTON ─ The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009.  

Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.

IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests. By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.

The IRS also announced that there will be no further extensions.

IRS to Hire 4500 New Revenue Agents

Taxes are going up, and so is the number of revenue agents at the IRS!  This is from the latest GiftLaw eNewsletter:

In the 2010 budget proposed by President Barack Obama, there is an increase of $400 million dollars for the IRS. The IRS plans to increase its enforcement budget to $5.5 billion out of the total $12.12 billion IRS budget.

IRS Commissioner Douglas Shulman has been emphasizing the importance of greater enforcement as a method of closing the "tax gap." Increased IRS funds will enable the hiring of 4,500 new revenue agents. IRS Deputy Commissioner Linda Stiff noted that these new agents are the "largest hiring initiative" in recent years.

Treasury Secretary Tim Geithner indicated, "This budget will also expand job-creating investments in local communities, strengthen our nation's security through financial intelligence, launch new initiatives to enforce the tax code and provide the recourses to address global economic challenges." The new IRS accountants, economists, statisticians and revenue agents are part of an ongoing program by President Barack Obama and Secretary Geithner to close the tax gap.

Editor's Note:

With the record budget deficits, Washington faces three financial options. The first is to increase taxes, the second to reduce spending and the third to increase tax law enforcement. Because the taxpayers of the United States are among the most honest in the entire world and pay 85% to 88% of the total taxes due, it will be difficult to close the budget gap merely through greater enforcement. However, the current administration is clearly going to make an effort to increase tax revenues with 4,500 new IRS agents.