Wednesday, October 8, 2008

Paying the IRS Voluntary?

Last week we discussed whether or not filing your taxes was voluntary. This week we will discuss whether or not paying your taxes is voluntary.

Some argue that they are not required to pay federal taxes because the payment of federal taxes is voluntary. Proponents of this position argue that our system of taxation is based upon voluntary assessment and payment. They frequently claim that there is no provision in the Internal Revenue Code or any other federal statute that requires them to pay or makes them liable for income taxes, and they demand that the IRS show them the law that imposes tax on their income. The stance that is taken is that until the IRS can prove to these taxpayers’ satisfaction, which is effectively impossible because they never will be satisfied, the existence and applicability of the income tax laws, they will not report or pay income taxes. These taxpayers reflexively dismiss any attempt by the IRS to identify the laws, thereby continuing the cycle. The IRS has issued Revenue Ruling 2007-20, 2007-14 I.R.B. 863, discussing this frivolous position at length and warning taxpayers of the consequences of asserting it.

The Law: The requirement to pay taxes is not voluntary and is clearly set forth in section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts as determined by the tables set forth in that section. (Section 11 imposes a tax on the taxable income of corporations.)Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the noncomplying individual to criminal penalties, including fines and imprisonment, as well as civil penalties. We have discussed before the troubles of major celebrities like Helio Castroneves and Wesley Snipes. There are many cases that could be cited, but they all end the same, and that’s on the IRS’ side! Again, please don’t wait around to file your returns or get into a resolution with the IRS; the IRS isn’t waiting for you anymore!

Stimulus Package

This year, the federal government rolled out a stimulus package to U.S. taxpayers that filed a 2007 return and met the standard requirements.

You are eligible for a stimulus package if:

  • You file your tax return prior to October 15, 2008.
  • You or your family has at least $3,000 in qualifying income from, or in combination with, Social Security benefits, Veterans Affairs benefits, Railroad Retirement benefits and earned income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.
  • You and any family members listed on your tax return have valid Social Security numbers.
  • You are not a dependent, or eligible to be a dependent, on someone else’s federal tax return. (The same must be true of any family members claimed on your return.)

There are many people who have filed expecting their refund but are yet to receive their check. I have dealt with many clients who were expecting a check, but instead received a bill from the IRS. The IRS seems to have been able to use the ‘stimulus package’ as a way to get people who haven’t file in YEARS to file. The IRS then takes the stimulus money and applies it to your outstanding debt that you didn’t even know about. We talked before about “SFRs” from the IRS and how they will assess you a tax debt.

So, have you filed and never received your stimulus package? Guess what, you probably have an outstanding tax debt. There are tax professionals available to help you research your tax history and find out exactly what the IRS is stating!

"Dancing with the IRS"

Last week, Helio Castroneves, two-time Indianapolis 500 winner and TV’s "Dancing with the Stars" champion, was indicted on tax evasion charges. This is the 2nd major celebrity this year to be indicted on tax charges with the IRS.

On Thursday, a grand jury indicted Castroneves on charges of conspiracy and six counts of tax evasion for purposely failing to report to the IRS about $5.5 million in income between 1999 and 2004, according to court documents. Each count carries a maximum five-year prison sentence.

I have stated many times before that NOW is the time to get your tax situation fixed; don’t allow the IRS to decide your fate. The IRS itself is saying it's going to ramp up collections and crack down on “tax shelters”.

"This case sends a clear message that the IRS is committed to vigorously enforcing the tax laws and stopping offshore tax evasion," IRS commissioner Doug Shulman said.

Again, do not wait for the IRS to step in, you MUST get into compliance and remove yourself from active collections by getting into a resolution! Why would you want to sit on the IRS collections radar?

Friday, October 3, 2008

Taxes a Voluntary Program?

I have come across a number of clients who are actually unaware that filing your tax returns is required. They have the misconception that taxes are a “voluntary program”. Unfortunately, they are very wrong, and can find themselves in major trouble. To clear up any confusion that you may have about filing your taxes, it is a criminal offense not to file, punishable for up to 1 year for each year unfiled. In addition, un-filed tax returns quickly create quite a debt due to penalties and interests charged by the IRS.

Proponents of the U.S. tax system point to the fact that the IRS itself tells taxpayers in the Form 1040 instruction book that the tax system is voluntary. Additionally, the Supreme Court’s opinion in Flora v. United States, 362 U.S. 145, 176 (1960), is often quoted for the proposition that "[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint."

The word “voluntary,” as used in Flora and in IRS publications, refers to the IRS system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in sections 6011(a), 6012(a), et seq., and 6072(a).

See also Treas. Reg. § 1.6011‑1(a) of the IRM.In August 2005, the Justice Department announced that Royal Lamarr Hardy was sentenced to a 156-month prison term for, among other things, selling a tax evasion scheme called the “Reliance Defense” that incorrectly asserted the income tax laws were voluntary (i.e., the laws imposed no legal obligation to pay tax or file a return). Hardy was also ordered to pay costs of prosecution in the amount of $59,267.88, and restitution to the IRS for $197,555. See 2005 TNT 169-12 (Aug. 31, 2005). In August 2007, a federal court in New York permanently barred Robert L. Schulz of Queensbury, N.Y., and his organizations, We the People Congress and We the People Foundation, from promoting a tax scheme that helped employers and employees improperly stop tax withholding from wages on the false premise that federal income taxation is voluntary. The court concluded that the First Amendment did not protect the two organizations that operate the website, or their founder, because the site incited criminal conduct. The court also ordered that the web site that sold the materials stating that individuals can legally stop paying taxes be shut. See http://www.usdoj/tax/txdv07214.htm, and

Any taxpayer who has received more than a set standard of gross income is required to file a tax return. Even if you have been a “tax protestor” before and now realize that you must file, find some professional assistance to ensure that your returns are done accurately and promptly before it is too late. It is always better to be proactive, rather than reactive, with the IRS!

Wednesday, October 1, 2008

Civil Trust Fund Taxes

I have mentioned Civil Trust Penalties and payroll taxes (941’s) numerous times here on Ask the Tax Wizard. Today I want to dig in deeper and discuss who can be held responsible for these taxes, and how the process works when considering individuals. Below, I’ve included some helpful information regarding this topic from the IRS website. For further information, you will also find this resource helpful.

First of all, it may be helpful to know exactly what a trust fund tax is. To put it simply, it is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.When you pay your employees, you do not pay them all the money they earned. As their employer, you have the added responsibility of withholding taxes from their paychecks. The income tax and employees' share of FICA (social security and Medicare) that you withhold from your employees' paychecks are part of their wages you pay to the Treasury instead of to your employees. Your employees trust that you pay the withholding to the Treasury by making Federal Tax Deposits. That is why they are called trust fund taxes. Employment tax deposits are an expense that should be paid immediately. Postponing paying them is not the same as making a late payment on your phone bill or to a supplier. Congress has established large penalties for delays in turning over your employment taxes to the Treasury. The longer it takes to pay that money, the more it will cost you.If you are unable to make your Federal Tax Deposits for your payroll taxes, the IRS will access what is known as the Trust Fund Recovery Penalty (TFRP). The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.The TFRP may be assessed against any person who:

  • is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
  • willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
an officer or an employee of a corporation,

  • a member or employee of a partnership,
  • a corporate director or shareholder,
  • a member of a board of trustees of a nonprofit organization,
  • another person with authority and control over funds to direct their disbursement, or
  • another corporation.

For willfulness to exist, the responsible person:

  • must have been, or should have been, aware of the outstanding taxes and
  • either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness. You will be summons to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. Once the IRS assesses the penalty, they can take collection action against your personal assets. For instance, we can file a federal tax lien or take levy or seizure action. When you fall behind on your payroll taxes your best options are to contact professional help in order to reach a resolution with the IRS.

The 700 Billion Dollar Bailout and Business Taxes:

As we found out on Monday, the “Bailout” plan was rejected by the House of Representatives. This in turn caused the stock market to plummet. The rejection of this plan could create very serious tax problems for business clients and their taxes. Whether you were in favor of the plan or against it, not being able to borrow money from banks can create 941 or payroll tax issues for companies.

There are many companies in today’s market that borrow from banks to pay their payroll, and to meet other needs, while waiting to receive payments from their accounts receivable. If companies aren’t able to borrow from their banks, they run the risk of not being able to make their withholding tax deposits. The highest collections within the IRS come from payroll taxes. This is due to the fact that the IRS views this as stealing from your employees, and the IRS itself. Typically, you will be assigned a Revenue Officer “RO” like we have discussed in previous blogs. The RO’s can actually asset the tax debt to individuals and force the company to close down if you get behind on your payroll taxes. Obviously closing down a business can only hurt the economy even more via lost jobs and revenue to the IRS. Don’t wait until it’s too late to get into a resolution on your tax debt, hire a professional that can negotiate a fare resolution with the IRS.

Thursday, September 25, 2008

Offer in Compromise: Effective Tax Administration

One of three types of Offer in Compromises (OIC) that we will discuss in the coming weeks is what is known as an ETA (Effective Tax Administration) OIC. Like I have stated many times before on this blog, getting an OIC is the most popular request from clients and looks the most attractive to U.S. taxpayers. When trying to apply for an ETA OIC there are 3 conditions that must exist for you to be a candidate:

  1. You agree that you genuinely owe the tax debt.
  2. The tax liability equals, or is less than, the taxpayer's reasonable collection potential (RCP) which is: Net equity, plus future income potential.
  3. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.

Let’s break this down a little more. When applying for ETA OIC, you have to fully agree you owe the tax debt. I typically deal with clients who don’t believe they owe as much as the IRS says and want an offer because of this. The risk you run when submitting this type of offer is: If your offer is declined, you have accepted that you owe every penny of the assessed tax debt. The second part of this OIC is that you must actually have the capability to pay the tax debt via equity in your home, or liquidating a 401K or IRA plan. This is unusual when dealing with the IRS because typically the IRS is going to want to collect on your tax debt in full if you have the capability. The biggest factor in submitting for an ETA officer is the exceptional circumstances; typically these offers are reserved for people that when collecting on the debt, the IRS would create a Public Relations nightmare to be dealt with.

As an example: A 75 year old couple owes $150,000 in tax debt, the couple has assets that could fully pay the debt via equity on a home, but borrowing against the home would put the couple at risk of losing their home. In this situation the IRS would consider selling to keep from forcing grandma/grandpa out into the streets and would avoid a public relations nightmare that would otherwise be created! A very small amount of these offers are accepted, and only Enrolled Agents or someone with a deep knowledge of the IRM is going to be able to help get yours approved!