OIC Mills Make IRS Dirty Dozen List Again!

In IR 2024 – 91 the IRS Includes again in its Dirty Dozen List to Beware of offer in compromise "mills" that falsely claim their services are necessary to resolve IRS debt.

As in past years, companies running OIC mills continue heavily advertising their promises to settle taxpayer debt at steep discounts for pennies on the dollar. While OIC is a legitimate IRS program, many taxpayers do not meet the technical requirements for the tax resolution program, often leaving them facing excessive fees from the promoters for information they could have easily obtained for free by using the IRS's Offer in Compromise Pre-Qualifier tool.

The OIC is a valuable IRS program to help taxpayers who cannot pay their federal tax debts, and some companies offer legitimate services. But the IRS encourages individuals to take a few minutes to assess the information available on IRS.gov to determine if they meet the eligibility criteria for the OIC program and to avoid hiring expensive promoters.

"Taxpayers need to be cautious with aggressive marketing around the Offer in Compromise program that can mislead taxpayers,” said IRS Commissioner Danny Werfel. 

“These Mills Try To Pull In Steep Fees While Raising False Expectations And Exploiting Vulnerable Individuals With Promises That Tax Debt Can Magically Disappear.”

“The program is legitimate, but it’s not for everyone,” Werfel added. “The IRS wants to help taxpayers who qualify for this program, but there are very specific requirements for people to qualify. A good first step is for taxpayers to take a few minutes and explore our free resources on IRS.gov. They can find out if they might qualify for this program – and at the same time avoid paying someone a hefty fee.”

OIC mills are the focus of the fifth news release in the Dirty Dozen series. Started in 2002, the IRS' annual Dirty Dozen campaign lists 12 scams and schemes that put taxpayers and the tax professional community at risk of losing money, personal information, data and more. While the Dirty Dozen is not a legal document or a formal listing of agency enforcement priorities, the education effort is designed to raise awareness and protect taxpayers and tax pros from common tax scams and schemes.

Beware of Offer in Compromise mills

An OIC is a legitimate IRS program that allows qualifying taxpayers to work with the IRS to settle a tax debt for less than the full amount owed. It is an option for those who may be unable to pay their full tax liability, or if doing so creates a financial hardship. In determining eligibility, the IRS considers the taxpayer’s unique situation. 

Taxpayers, however, should be cautious of OIC mills, which make exaggerated claims through radio and TV ads about settling tax debts inexpensively. In reality, these mills often charge excessive fees, and taxpayers end up paying for a service they could have obtained directly from the IRS with The help of a qualified Tax Attorney.

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Status of IRS Funding After The $20 Billion IRS Funding Claw Back in FY 2024

On January 29, 2024 we posted "$20 Billion in IRS Funding Cuts Now Clawed Back in FY 2024" where we discussed that under the latest agreement from the hill, the fiscal 2025 $10 billion would be accelerated, meaning all $20 billion would be clawed back in 2024. 

With government agency appropriations having settled through the remainder of the 2024 fiscal year, the IRS' original funding authorization of $80 billion over 10 years under the Inflation Reduction Act (PL 117-169) is now less than $60 billion, but President Biden hopes to recoup rescinded amounts.

On Saturday, March 23, 2024 President Biden signed into law a $1.2 trillion spending package to avert a government shutdown for the remaining six months of the fiscal year after a series of short-term Continuing Resolutions going back to October as congressional lawmakers grappled over the federal budget.

Of the $80 billion in mandatory funding through 2031, $45.6 was marked for enforcement and $25.3 billion for operations support. The remaining buckets went towards taxpayer services and business systems modernization.

Many Republican lawmakers have proposed clawing back either the entire $80 billion, or all or a portion of the enforcement and operational buckets. However, the IRS' annual funding levels were unchanged from the prior fiscal year at $12.3 billion ($2.8 billion for taxpayer services, $5.4 billion for enforcement, and $4.1 billion for operational support).

Despite just signing the recission into law, Biden's fiscal 2025 budget, also released in late March, calls for the full restoration of the $80 billion provided by the Inflation Reduction Act. Further, Biden is seeking "new funding over the long-term to maintain progress on service enhancements and deficit-reducing tax compliance initiatives." The proposal cites the need to close the tax gap, that is, the difference between taxes owed and taxes paid.

In February, Treasury projected a $20 billion recission would reduce revenues by more than $100 billion. Although the IRS will continue to pursue ramped-up enforcement on large corporations, complex partnerships, and wealthy individuals via targeted campaigns, the remaining $58.4 billion is expected to dry up in 2029, two years earlier than intended. "Extending and maintaining IRS investments" would, according to Treasury, result in collections of $851 billion over the period 2024-2034.

Publishing their own estimates, the Congressional Budget Office in February forecasted a $20 billion rescission would "reduce outlays in 2030 and 2031 and lower revenues from 2030 to 2034 by a total of $43.6 billion, adding a total of $23.6 billion to deficits over the 2024-2034 projection period."

"In addition, the indirect effect of reduced enforcement activities in 2030 and 2031 would result in revenue collections from audited taxpayers that were less than they would otherwise be," the CBO continued.

Tax leaders at Grant Thornton observed that the 2024 elections may determine the fate of any potential future changes to IRS funding, though the agency "will remain a target for future cuts."

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TC - Upholds $11M In Late Filed Form 3520 & 3520-A Foreign Reporting Penalties But Not Late Filed Form 5471 Penalty!

The Tax Court has continued to hold that the IRS lacks authority to assess penalties under Code Sec. 6038(b) (following its decision in Farhy, (2023) 160 TC No. 6) and that penalties imposed under Code Sec. 6677 are not fines and therefore do not implicate the Excessive Fines Clause. 

According to Law360, the U.S. Tax Court on April 8, 2024, upheld  $11 million in foreign reporting penalties against a man who admitted he hid money overseas, but the court declined to overturn its ruling that the IRS lacks authority to assess certain Form 3520 & Form 3520 A foreign reporting penalties in Mukhi v. Commissioner, docket number 4329-22L, in the U.S. Tax Court.

The Internal Revenue Service didn't abuse its authority in assessing $5 million in penalties against Raju J. Mukhi for failing to report foreign trusts for 2005 to 2008 and another $5.9 million for 2005 to 2010, according to the Tax Court, finding that penalties imposed under I.R.C. § 6677 are not fines and therefore do not implicate the Excessive Fines Clause.

But the IRS lacked authority to issue $120,000 in penalties against Mukhi under Internal Revenue Code Section 6038(b) for failing to timely submit a Form 5471, regarding information reporting for foreign corporations, for 2002 through 2013, the Tax Court said.

While Mukhi's challenge to the penalties was still pending in the Tax Court, it decided in April 2023 in Farhy v. Commissioner that the IRS lacked authority to make assessments under IRC Section 6038(b). After the decision, the IRS asked the court in Mukhi's case to overrule its decision in Farhy, saying it was incorrectly decided, according to Monday's ruling.

But the court said it wanted to give the weight of precedent to its previous decision in Farhy. Furthermore, even though Farhy is on appeal in the D.C. Circuit, Mukhi's case, if appealed, would go to the Eighth Circuit, meaning any ruling from the D.C. Circuit wouldn't be binding for Mukhi, the court said.

Mukhi pled guilty to one count each of filing a false return and failure to file a report of a foreign bank account following his indictment in 2014, according to the opinion. The IRS audited him and issued the penalties in 2017.

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A Great Example of How Mishandling an Audit Can Turning Into A Criminal Proceeding!

According to DoJ, A New Jersey man was arrested on April 5, 2024 on an indictment returned by a federal grand jury in Trenton, New Jersey, charging him with tax evasion and obstructing the IRS. 

According to the indictment, in 2015 and 2016, Matthew Tucci, of West Long Branch, received millions of dollars in income from purported refunds by the Customs and Tax Administration of the Kingdom of Denmark. 

Tucci allegedly filed federal tax returns for those years that reported he owed over $2 million in taxes, but included no payment with his returns. 

Instead, Tucci allegedly sought to evade IRS efforts to collect the taxes due. 

• He allegedly purchased more than $7.6 million-worth of real estate and attempted to conceal his ownership of these assets from the IRS by, among other things, transferring title to some of these properties to nominees. 
• He also allegedly made false statements to the IRS and withheld important facts from the IRS concerning his financial resources and his ability and intent to pay.

If convicted, Tucci faces a maximum penalty of five (5) years in prison. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors. IRS Criminal Investigation and the FBI are investigating the case.

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The Trifecta on How Not to Run The Business for Federal Tax Purposes

According to DoJ, federal district court accepted a Texas man’s guilty plea to evading taxes on income he earned from his business, on April 5, 2024.

According to court documents, John L. Petrone owned and operated a business that sold an herbal extract known as “kratom,” along with other related products. 

1. Petrone did not file individual income tax returns for 2014 through 2019, 
2. Nor did he pay income taxes for those years, despite earning hundreds of thousands of dollars from his business. 
3. During that time, Petrone attempted to evade his income taxes by 
• opting not to withhold federal taxes from his paychecks, 
• operating the business under different names, 
• dealing in cash, 
• using business bank accounts to pay for personal expenses and 
• lying to the IRS during an audit. 
• In addition, Petrone did not pay his business’s employment taxes. 

Through his actions, Petrone caused a tax loss to the IRS of over $529,000. 

Petrone is scheduled to be sentenced on June 14. He faces a maximum penalty of five (5) years in prison. 

A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

Have an IRS Tax Problem?

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IRS Enforcement Targets 125K Wealthy Non-Filers - You Think it May Be Time To Get Compliant?

The Internal Revenue Service is ramping up enforcement against 125,000 high-income taxpayers who haven't filed returns since 2017 as a part of its ongoing efforts to increase tax compliance, the agency's chief told reporters Thursday.

The IRS will begin mailing compliance letters this week to more than 125,000 taxpayers who have failed to file a tax return between 2017 and 2021, IRS Commissioner Daniel Werfel said. The notices will be sent to about 25,000 taxpayers with more than $1 million in income, and the remaining will go to taxpayers with incomes between $400,000 and $1 million, the agency said in a statement. The agency expects to send about 20,000 to 40,000 letters each week, beginning with filers in the highest income categories, Werfel said.

The amount of revenue the agency might be able to recover is uncertain, Werfel said, adding that the agency isn't aware of potential credits and deductions the involved taxpayers might be entitled to receive.

"The Third-Party Information on These Taxpayers
Indicates Financial Activity of More Than $100 Billion,"

Werfel told reporters, though he later noted that it's unclear how much of that is taxable income. "But even with a conservative estimate, the IRS believes hundreds of millions of dollars of unpaid taxes are involved in these cases," Werfel said.

The agency will also be taking steps to update nonfilers who are entitled to a refund, Werfel said. Last year, taxpayers, many with lower incomes, were entitled to a potential refund of nearly $900 because they hadn't filed a 2019 tax return, he said, adding that those taxpayers will be updated later in the tax season.

Werfel urged taxpayers who haven't filed to do so voluntarily and as quickly as possible, saying that failure to act can lead to IRS compliance activities, including audits, as well as criminal prosecution. Typically, when taxpayers are issued a letter, there is an eight-week window between the time the letter is received and when taxpayers need to contact the IRS with a filing, he said.

Since 2016, the IRS nonfiler program has only run sporadically because the agency hasn't had the resources to pursue nonfiler cases, Werfel told reporters. The Inflation Reduction Act's major investment has given the agency the capacity to restart the nonfiler program, he added.

The program has been updated, Werfel said, adding that the agency used to identify nonfilers as a global group, send the notices out and get follow-up from taxpayers in the form of phone calls, incoming letters of dispute and incoming tax returns.

The IRS now has the staffing and technology to efficiently follow up on those notices, Werfel said. Another is that the agency is prioritizing high-income taxpayers, he said.

"We are establishing that our resources will be focused first and foremost on those taxpayers that are of higher means," Werfel said. "For taxpayers that are of lower means, our emphasis will be on working with them around making sure that they file because, in many cases, taxpayers at a lower income range are actually owed a refund or owed some type of credit."

It's outrageous that so many high-income individuals have routinely gotten away with failing to file tax returns, Senate Finance Committee Chairman Ron Wyden, D-Ore., said Thursday, adding that it's great that the IRS is going after them.

Have an IRS Tax Problem?

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Estate of Logger Owed Failure To Report $3M In Foreign Banks Penalty

According to Law360,  a logger failed to report more than $3 million he kept in foreign accounts, then fraudulently transferred the bulk of it to his wife when he learned he was being audited by the IRS, a Colorado federal judge said in upholding $1.7 million in penalties. 

George Harrington, who died last year, had argued that he didn't control the accounts and therefore wasn't required to report them, but his argument was undercut by amended tax filings in which he had reported the accounts to the Internal Revenue Service, U.S. District Judge S. Kato Crews said in an order.

"But a signed tax return is an admission," Judge Crews said in an order upholding the government's request for $1.7 million in penalties from Harrington's estate for failing to report foreign bank accounts to the IRS.

Harrington told the court in 2022 that, following an IRS audit in 2012, he had mistakenly allowed his attorney and an IRS examiner to convince him to submit amended returns that included foreign bank account reports for the two accounts in question. One was a type of foundation held in Switzerland and the other contained two life insurance policies held by a company in Lichtenstein, according to court documents.

The attorney advised Harrington that it would be less expensive to disclose the accounts and settle the tax liabilities than to fight the audit, Harrington said in a filing in the case in November 2022. However, Harrington argued, federal rules and regulations pertaining to beneficiaries of foreign annuities applied to his relationships with the foreign accounts and should have excluded him from the reporting requirement.

Harrington's failure to file FBARs for the four-year period was willful because he knew about the filing requirement, Judge Crews determined. During a similar time period, Harrington filed the reports disclosing his interest in accounts at Bank of New Zealand, according to the order. Harrington also used multiple foreign bankers and attorneys to help him manage his investments, the judge said.

Harrington worked as a logger in Washington state before logging as an independent contractor for Eastern Wood Harvesters in Canada, according to the order. Early in his career with EWH, around 1986, Harrington sold his house and gave the $350,000 in proceeds to a company attorney. In 2002, another attorney contacted Harrington and told him to come to the Cayman Islands because the EWH account "was being wound down," according to the order.

In the Caymans, Harrington and his wife became powers of attorney for a UBS AG account in Switzerland, from which Harrington transferred funds to a Liechtenstein entity known as a stiftung. The stiftung, a type of foundation, then opened an account at UBS Switzerland.

When UBS closed the account in 2009, Harrington rolled its contents into $3.1 million in life insurance policies with a Liechtenstein company, ValorLife, according to the order.

Judge Crews agreed with the government's claim that Harrington had cashed out the insurance policies and transferred $2.8 million in proceeds to his wife, saying the timing of the transfer showed evidence of fraud. The proceeds of the policies were transferred into a Swiss account at Vontobel Holding AG in Harrington's wife's name the day after Harrington and his tax attorney had their first interview with the IRS, according to the order.

However, Judge Crews declined to force Harrington's wife to repatriate funds to cover her husband's FBAR penalties on behalf of his estate, instead taking the government's request under advisement and asking for more information about its legality.

The government argued that the $2.8 million deposited into Harrington's wife's account was actually money she shared with her husband by way of the originating life insurance policies, and that the law in Washington state, where the couple lived, determines that co-owned property can satisfy the liability. But the relevant law, U.S. Code Title 28, Section 3010, requires examining the laws of the foreign country where the property is being held, in this case Switzerland or Liechtenstein, to determine whether it can be used to satisfy the liability, Judge Crews said.

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