Monthly Archives: February 2024

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Mandatory Filing for LLC’s, Corporations- FinCEN

Quite simply, assume your entity must file a transparency report with the Financial Crimes Enforcement Network. This report resembles foreign/international transparency forms that we have been filing for years. It is part of the ongoing effort of the U.S. to reign in secret, unreported transactions.
We are authorized to file this report on your behalf if you choose to engage our firm. We will also consult and advise you as to any wrinkles in the process. Being a dual licensed CPA and Attorney firm, we are without question the best choice for this report. The first filing is the most important as it will set a precedent.
In general, the deadline to file is December 31, 2024.
If you have any concerns about past discrepancies, we can consult you. The attorney-client privilege applies.
This filing requirement was enacted under the Corporate Transparncy Act.
For more in-depth on this filing, click our permanent page dedicated to this filing Corporate/LLC Transparency Filings

Accuracy Related Penalty IRC 6662(a): 5 Tips

5 Tips by Tax Lawyer Philip Falco:

Scan all of your receipts and email the questionable expenses to your CPA for review.
Keep a mileage log and provide the actual log to your CPA. Telling your CPA what your mileage was is not enough to avoid the IRC 6662(a) accuracy related penalty.
Work with a CPA who has integrity and who will be willing to “fall on the knife” if he gave you incorrect tax advice. Everyone makes mistakes, not everyone is willing to own up to them.
Categorize your expenses all year long. If you are not sure if something is a business expense, ask right away and properly categorize it. It is up to the taxpayer to show the IRS you properly categorized an expense. This seems simple but is subtly complex. The IRS will willingly categorize an expense as personal unless taxpayer shows otherwise.
Evidence is the name of the tax game. In the digital age, there is no excuse for not archiving old receipts. These documents can be critically important many years down the road. Keep them, especially those pertaining to rental real estate (purchase, improvements) and business expenses. Really any real estate evidence should be archived since an owner occupied real estate holding can be converted to a rental. If so, adjusted basis (ex depreciation) becomes very important.

Accuracy Related Penalty IRC 6662(a)

Section 6662(a) imposes an accuracy-related penalty equal to 20% of the underpayment to which section 6662 applies. Section 6662 applies to the portion of any underpayment which is attributable to, among other things, negligence or disregard of rules or regulations. Sec. 6662(b)(1). Underpayment of tax is typically attributable to negligence.

IRC Section 6662(c) provides that “[f]or purposes of section 6662, the term ‘negligence’ includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term ‘disregard’ includes any careless, reckless, or intentional disregard.”

Negligence also includes any failure to exercise ordinary and reasonable care in the preparation of a tax return or any failure to keep adequate books and records and to properly substantiate items. Sec. 1.6662-3(b)(1), Income Tax Regs.

Burden of Proof

Section 7491(c) provides that the Commissioner bears the “burden of production” with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets his “burden of production”, however, the “burden of proof” remains with the taxpayer, including the burden of proving that the penalty is inappropriate because of reasonable cause under section 6664. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

Exception: Reasonable Cause for Taxpayer’s Position

Section 6664(c)(1) provides that the penalty under section 6662(a) shall not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer’s position and that the taxpayer acted in good faith with respect to that portion. See Higbee v. Commissioner, 116 T.C. at 448. The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioners have the burden of proving that the penalty is inappropriate because of reasonable cause under section 6664. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

Reasonable cause can be reliance on a CPA’s tax advice. However, For reliance to be reasonable, “the taxpayer must prove by a preponderance of the evidence that the taxpayer meets each requirement of the following three prong test: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on the adviser’s judgment.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 99.

As an example, if a taxpayer tells his CPA about mileage without also giving the CPA a mileage log, this has been held to be not sufficient, and the accuracy related penalty was imposed.

It is up to the taxpayer to show that he provided his CPA with sufficient documentation of a deduction.

Practical Effect: Your CPA will have to write a letter to the IRS, be interviewed by the IRS, or testify in Tax Court (or US District Court) to adequately present this approach.

Meticulous bookkeeping is critical for taxpayers in the 21st Century. Please feel free to ask us about our bookkeeping, accounting, and tax services.

Denver Head Tax a deduction on Colorado State Income Tax Return

Denver Head Tax a deduction on Colorado State Income Tax Return

We do a host of tax return amendments for clients either as part of OVDP, or simply corrected errors spotted by clients of other CPA’s, c.f. IRS Pre-Audit Investigations.

As part of our thorough review we noticed that a different accounting office had added back in full the amount of state and local income tax paid by a taxpayer. Here’s what we gathered based on the tax law.

Colorado State Income Tax return 104 starts with the federal income tax from form 1040. Pursuant to CRS §39-22-104, certain items are added; that is, taxpayer will pay Colorado State tax on those items even though taxpayer did not pay federal income tax on those items.

One such item is State Income Tax. State and local income tax is deductible pursuant to IRC §164(a)(3) on a 1040. It makes sense for Colorado to essentially disallow a deduction for the tax the income of which it is taxing.

Enter local tax, such as the Denver Head Tax. I have good news for you: the Denver Head Tax is deductible on the 1040 and Colorado 104. It is not added in pursuant to CRS §39-22-104. The add-in applies only to state income taxes, not local taxes.

Breaking News: IRS Changes to the Offshore Voluntary Disclosure Program (OVDP)

IRS Reduces OVDP Penalty to 5% in non-willful offshore compliance cases.

For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

Other positive changes for taxpayers living in the United States:

Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
Eliminating the required risk questionnaire;
Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

The IRS increases its effort to make OVDP accessible to everyone. This is a step in the right direction. The goal is to get taxpayers in compliance.

Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Other good news: If you made an OVDP submission prior to July 1, 2014 you may elect to have your case considered under Streamline so long as a closing agreement has not been executed.

We specialize in Offshore Account Compliance. We represent taxpayers entering the 2012 Offshore Voluntary Disclosure Initiative Program (OVDP)

See our page on OVDP / OVDI

Please contact Philip Falco, CPA, Juris Doctor – Honors to discuss these new measures and how they apply to you (303) 626-7000.

Tax Compliance Check-Up

For Individuals, Small Businesses, Corporations, Partnerships, and Limited Liability Companies

Tax Compliance Checkup-Up by Philip Falco, CPA, Juris Doctor – Honors

We have IRS e-services. We can quickly find out what is not making you or your company tax compliant.

For example, an old unfiled tax return, a quarterly filing, or an IRS Form 940 might not have been filed at some point in time. You might not even know that the IRS has the non-compliance flagged until it is too late. We can nip this in the bud and get you in 100% compliance. We also provide tax preparation services so we can actually prepare your unfiled returns for you.

This service can help minimize exposure to an IRS Audit, issues with Unfiled Tax Returns, and Criminal Tax indictment.

Give us a call if you would like us to do a tax check-up for you (303) 626-7000.

Offshore Voluntary Disclosure Initiative (OVDI) (OVDP) Program

The clock is ticking on this tax amnesty program provided by the IRS.

Countries from around the world have disclosed or are in the process of disclosing United States account holder information. If a taxpayer is caught before entering OVDI / OVDP the penalties are draconian. Penalties likely include criminal prosecution.

If the taxpayer has offshore accounts or properties, it is critical that the taxpayer speak with a tax attorney and not an accountant. The accountant privilege does not apply to criminal proceedings. However, the attorney-client privilege does apply to criminal proceedings. The accountant could be subpoenaed to testify against the taxpayer at the criminal trial.

Philip Falco, CPA, Juris Doctor – Honors will work on your case to gain acceptance in OVDI / OVDP.

Quiet disclosures are not the answer. This is where a taxpayer begins to file proper schedules on his or her tax return without entering OVDI / OVDP. The IRS has specifically reserved the right to pursue criminal prosecution in these cases.

Because of the vast disclosures from foreign countries, participation in OVDI / OVDP is becoming more difficult every day.

The disclosures required for OVDI / OVDP are massive and must be done precisely. The worst fear would be accusation of a half-truth facing criminal prosecution.

We can prepare the required amendments to your returns and prepare the complete package to the IRS as required by OVDI / OVDP.

In the opinion of Philip Falco, CPA, Juris Doctor, the offshore initiative is the most significant tax development since the 1986 revisions to the internal revenue code that cracked down on tax shelters (revisions to passive activities and at-risk tax rules).

See our page on OVDP / OVDI

Commonly Overlooked Taxes & Tax Forms

I will keep you compliant!

Denver Head Tax
Unemployment tax assessed by Colorado Department of Labor and Employment. This tax is assessed even on sole proprietors!
Denver ad valorem tax
FBAR Offshore account disclosure
Estimated tax payments

What is a “Willful” Failure to Disclose Offshore Bank Account

Date February 1, 2024

What is a “Willful” Failure to Disclose Offshore Bank Account

This is the central question as to whether a taxpayer enters Offshore Voluntary Disclosure or Streamline. It also fixes potential penalties under 31 U.S.C. §5321.

31 U.S.C. 5314 is the statute that requires reporting of foreign bank accounts. Pursuant to the statute, reporting is required by the following:

a United States Citizen,
a resident of the United States or
a person in, and doing business in the United States.

Incidentally, the term “person” has broad meaning, which includes corporations.

Pursuant to 31 U.S.C. §5321, the amount of penalty shall not exceed $10,000 unless the case is “willful“. In cases of willfulness, the maximum penalty increases to the greater of $100,000 or 50 percent of the account balance. It is also noteworthy that, pursuant to subsection (d), a criminal penalty may be stacked on top of this civil penalty.

A lot is riding on the meaning of “willful” so let’s turn our focus to it. If you would like to read what is required of the Secretary of Treasure to prove an FBAR case, click here to read the 7 elements.

Legal standard and Burden of Proof

To affix the civil penalty under 31 U.S.C. §5321 the Secretary of Treasury must establish willfulness by the preponderance of the evidence. This is a lower standard than beyond a reasonable doubt. The Burden of Proof is on the United States Government.

Meaning of “Willful”

31 U.S.C. §5321 does not define “willful”. In United States of America v. McBride, 908 F. Supp. 1186 (D.Utah 2012), The United State District Court analyzed the meaning of “willful” as it is used in 31 U.S.C. §5321. The Court gave heavy weight to the fact that taxpayer signed the tax return.

Signature alone is sufficient proof of a taxpayer’s knowledge of the instructions contained in the tax return form and in other contexts, the Court stated. This is an inference of “willful” conduct by mere signature alone. The Court went on to analyze the proposition that signature by itself does not prove knowledge, but knowledge may be inferred from the signature and the signature is prima facie evidence that the signer knows the contents of the return.

In either case, taxpayer’s signature shifts the burden of proof to taxpayer to prove non-willfulness. The Court held that knowledge of the law, including knowledge of the FBAR, requirements, is imputed to taxpayer, which is sufficient to inform taxpayer of the requirement to file Form TD F 90-22.1. The Court held that signature alone imputed knowledge to taxpayer of the FBAR requirement.

It is noteworthy that the Court analyzed taxpayer’s credibility in detail. Taxpayer alleged that he did not know he had a legal duty to file FBAR’s, which is common and understandable assertion. Rather than just dismiss this argument on the basis of his signature on tax return, the Court found taxpayer not credible because of prior testimonial inconsistencies.

Implicitly, there is a defense that taxpayer did not know of FBAR requirements despite signature on a tax return. After all a signature is prima facie evidence of willfulness, not the end-all and be-all of willfulness.

In the end, “willfulness” is determined by the facts and circumstances of each case that must be analyzed in the context of that particular time period in question.

Innocent Spouse Relief Even for the Wealthy

Date February 1, 2024

Tax Form 8857: Innocent Spouse Relief

If a taxpayer prevails under the provisions of Innocent Spouse Relief, the taxpayer will be freed of that tax-liability shackle. Philip Falco, CPA, Juris Doctor provides you with Tax Tips based on the Ehrmann case and based on his insight and then discusses the requirements for Innocent Spouse Relief. He discusses a recent tax case drafted by the United States Tax Court, Kathryn D. Ehrmann v. Commissioner of Internal Revenue, T.C. Summary Opinion 2014-96. This is a very recent case, which is dated September 23, 2013. This case may not be relied upon as precedent, but it is still telling of the Court’s view on Innocent Spouse Relief cases.

Tax Tips for those entering or exiting marriage (Divorce) as to Innocent Spouse Relief:

Consider not paying the tax in dispute,
Hire competent tax counsel to draft tax language in divorce decree, stipulation, or settlement agreement,
Consider filing your tax return using a different filing status such as separately or head of household (if qualified).
Before getting married, hire us to do a tax compliance checkup on your fiancé. If you are getting married a bit older in life, this actually makes sense since you really would not know a person’s tax history. Concealment of prior tax history is a common reason for petitions under Innocent Spouse Relief.

Innocent Spouse Relief, Equitable Relief: the catch-all

Generally, married taxpayers who file a joint Federal income tax return are jointly and severally liable for the tax reported or reportable on the return. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000). Section 6015, however, allows a spouse to obtain relief from joint and several liability in certain circumstances.

Section 6015(a)(1) provides that a spouse who has made a joint return may elect to seek relief from joint and several liability under subsection (b) (dealing with relief from liability for an understatement of tax with respect to a joint return). Section 6015(a)(2) provides that an eligible spouse may elect to limit that spouse’s liability for any deficiency with respect to a joint return under subsection (c) (dealing with relief from joint and several liability for taxpayers who are no longer married or who are legally separated or no longer living together). If a taxpayer does not qualify for relief under either subsection (b) or (c), the taxpayer may seek equitable relief under subsection (f).

Equitable Innocent Spouse Relief: Requirements

There are seven threshold conditions that a requesting spouse must satisfy to be eligible for relief under section 6015(f):

the requesting spouse filed a joint Federal income tax return for the tax year or years for which relief is sought;
the requesting spouse does not qualify for relief under section 6015(b) or (c);
the claim for relief is timely filed;
no assets were transferred between the spouses as part of a fraudulent scheme;
the nonrequesting spouse did not transfer disqualified assets to the requesting spouse;
the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and
the liability from which relief is sought is attributable to an item of the nonrequesting spouse.

If a requesting spouse satisfies the threshold conditions of Rev. Proc. 2013-34, sec. 4.01, the Commissioner considers whether the requesting spouse is entitled to a streamlined determination of equitable relief under section 6015(f). If a requesting spouse is not entitled to a streamlined determination because the requesting spouse does not satisfy all the elements in Rev. Proc. 2013-34, sec. 4.02, the requesting spouse’s request for relief may be considered using the equitable relief factors in Rev. Proc. 2013-34, sec. 4.03.

Under Rev. Proc. 2013-34, sec. 4.03, equitable relief under section 6015(f) may be granted if, taking into account all the facts and circumstances, it would be inequitable to hold the requesting spouse responsible for all or part of the liability. In making the decision, the Commissioner weighs a number of factors, including, but not limited to:

Marital status. Whether the requesting spouse is no longer married to the nonrequesting spouse as of the date the Service makes its determination.
Economic hardship. Whether the requesting spouse will suffer economic hardship if relief is not granted.
Knowledge or reason to know. In the case of an income tax liability that was properly reported but not paid, whether, as of the date the return was filed or the date the requesting spouse reasonably believed the return was filed, the requesting spouse knew or had reason to know that the nonrequesting spouse would not or could not pay the tax liability at that time or within a reasonable
period of time after the filing of the return.
Legal obligation. Whether the requesting spouse or the nonrequesting spouse has a legal obligation to pay the outstanding Federal income tax liability.
Significant benefit. Whether the requesting spouse significantly benefitted from the unpaid income tax liability or understatement.
Compliance with income tax laws. Whether the requesting
spouse has made a good faith effort to comply with the income tax
laws in the taxable years following the taxable year or years to which
the request for relief relates.
Mental or physical health. Whether the requesting spouse was in poor physical or mental health.

“Weighs” is highlighted because not ALL of the factors need be present, which is especially true in the Ehrmann case, as discussed below.

Economic Hardship

Kathryn D. Ehrmann v. Commissioner of Internal Revenue, T.C. Summary Opinion 2014-96, September 23, 2014, sheds light on “economic hardship”.

For purposes of this factor, an economic hardship exists if satisfaction of the tax liability, in whole or in part, will cause the requesting spouse to be unable to pay reasonable basic living expenses. Id. sec. 4.03(2)(b), 2013-43 I.R.B. at 401. The facts and circumstances considered in determining whether the requesting spouse will suffer economic hardship include:

the requesting spouse’s age, employment status and history, ability to earn, and number of dependents;
the amount reasonably necessary for food, clothing, housing, medical expenses, transportation, and current tax payments; and
any extraordinary circumstances such as special education expenses, a medical catastrophe, or a natural disaster.
In addition, consideration is given to the requesting spouse’s current income and expenses and the requesting spouse’s assets.

Ms. Ehrmann, the court found, would not suffer economic hardship if relief were denied based on the following facts:

Ms. Ehrmann sought a refund of money that had already been paid. Thus, her current financial circumstances will not be adversely affected if relief is denied. TAX TIP: Consider not paying the disputed tax.
Ms. Ehrmann earned significant income from her position as a senior managing director at CB Richard Ellis. On her Form 8857 petitioner estimated that her 2011 salary and bonus would total over $300,000. In her affidavit filed with the Hennepin County District Court, petitioner disclosed that she earned nearly $340,000 in salary and bonuses for 2011. Moreover, nothing in the record suggests that Ms. Ehrmann’s earning potential has declined since then.
Ms. Ehrmann owned substantial assets, including the Wayzata and Hilton Head residences and a number of luxury vehicles.
Although petitioner had no dependents, her expenses include expenses paid to support her adult children.

In the end, the Court found this factor neutral. It is pointed out and highlighted that the tax court did not find this factor as weighing against Ms. Ehrmann.

The tax court stated, citing Rev. Proc. 2013-34, sec. 4.03(2)(b), “[t]his factor weighs in favor of relief where the requesting spouse would suffer economic hardship if relief is denied and is neutral where the requesting spouse would not suffer economic hardship if relief is denied.”

Implied by the Rev. Proc. and the tax court is that economic hardship either works in favor of the petitioning taxpayer or is a neutral factor, but NOT a factor weighing against Innocent Spouse Relief.

As such, wealth of the taxpayer seeking Innocent Spouse Relief is NOT weighed against the taxpayer.

Innocent Spouse Relief is available to the rich, which is counter intuitive in my view.

Legal Obligation

For purposes of this factor, a legal obligation is an obligation arising from a divorce decree or other legally binding agreement. Rev. Proc. 2013-34, sec. 4.03(2)(d), 2013-43 I.R.B. at 402. This factor weighs in favor of relief if the nonrequesting spouse has the sole legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement and weighs against relief if the requesting spouse has the sole legal obligation. Id. This factor is neutral if both spouses have a legal obligation to pay pursuant to a divorce decree or agreement or if the divorce decree or agreement is silent as to any obligation to pay the outstanding income tax liability.

In a carefully drafted divorce decree, stipulation, or settlement, an ‘Innocent Spouse’ may successfully plead this factor. We provide tax counsel to spouses during the process of divorce. In Ehrmann, the decree was drafted in a way that could have been improved. I won’t shed more light on this issue at this time, but feel free to contact me. As such, the tax court found this factor neutral.

IRS Pre-Audit Investigations

Date February 1, 2024