How the IRS Ensures Compliance with the Tax Laws

The IRS published the latest executive column The IRS published the latest executive column, “A Closer Look,” featuring Sunita Lough, the Deputy Commissioner for Services and Enforcement of the IRS explaining many tools the agency has to support compliance for all income levels. 

“When Deciding Which Tool To Use, We Work To Ensure Fairness While Also Being Conscious of Taxpayer Burden. IRS Employees Work To Minimize The Burden of Our Compliance Actions, Seeking The Right Touch – All With An Eye Toward Enforcing The Nation’s Tax Laws For The Benefit of All Taxpayers.”

If I were to ask you how the IRS ensures that people are complying with tax laws, what immediately comes to mind? I’ll bet that most people think of audits. Audits (or examinations, as we call them) are certainly an important piece of the puzzle – but they are by no means the whole story. The reality is that the IRS has many additional tools to support compliance and fairness in the nation’s tax system.

When deciding which tool to use, we work to ensure fairness while also being conscious of taxpayer burden. IRS employees work to minimize the burden of our compliance actions, seeking the right touch – all with an eye toward enforcing the nation’s tax laws for the benefit of all taxpayers.

The compliance actions described below require different types of resources by the IRS (such as Tax Examiners, Tax Compliance Officers and Revenue Agents). In addition, the time spent in resolving the compliance actions can vary from a few days to a number of years. Therefore, our goal is to use the right resources and minimize taxpayer burden while encouraging voluntary compliance.

To help people understand our work, here’s a closer look at some of our compliance tools.

IRS compliance officers – a brief overview

The IRS has several categories of employees who help enforce the nation’s tax laws, including:

• Tax Examiners (TEs) and Tax Compliance Officers (TCO) conduct audits and related reviews of less complex tax law and account issues.
• Revenue Agents (RA or auditors) audit more complex tax returns and secure payment of taxes owed.
• Revenue Officers (RO) work collection of delinquent taxes due and cases including where taxpayers have not filed required tax returns.
• Criminal Investigation Special Agents investigate criminal tax fraud and other financial crimes.

Types of compliance contacts

There are a number of compliance actions that do not require the IRS to review the books and records of the taxpayer in order to resolve the issue raised by the IRS. These compliance actions described in this section take less time and are less burdensome to the taxpayer.

No Review of Books and Records

With our Automated Underreporter (AUR) Program, our computer systems match the income that a taxpayer reports on their tax return with information returns provided to us by third parties. For example, if an individual taxpayer declares less income on their Form 1040 than their employer says they earned on their Form W-2, the AUR Program will detect this. An IRS Tax Examiner will then send a letter to the taxpayer informing them of the difference and will work with them to resolve the issue.

We also mail math error notices to taxpayers who appear to make a calculation or clerical error on their tax return. For example, many tax forms require adding two lines together or subtracting one line-item from another. If these amounts are miscalculated, it could ultimately affect how much a taxpayer owes or the amount of refund they are to receive. Other examples include not using the correct row and column from the tax table for the filing status claimed and taxable income amount shown, not attaching all required forms and schedules to substantiate entries and missing or incorrect Taxpayer Identification Numbers. When that happens, we send the taxpayer a letter asking them to address the issue.

The Automated Substitute for Return program (ASFR) enforces tax compliance for individual taxpayers who have not filed tax returns, but whose available income information shared with the IRS indicates an income tax liability. As part of the ASFR program, the IRS sends notices to these taxpayers alerting them to their potential liability. In this situation, the IRS may file a substitute return for taxpayers who fail to file. This return might not include credit for deductions and exemptions the taxpayer may be entitled to receive. So, it is still in the taxpayer’s best interest to file their own tax return to take advantage of any exemptions, credits and deductions they are entitled to receive.

Another part of our compliance toolkit is the compliance check. This is a review to determine whether a taxpayer is meeting their information reporting and recordkeeping requirements. To do this, we typically send the taxpayer a letter asking them a few questions. For example, if a tax-exempt organization submits its annual information return and indicates that it has employees, but we did not receive a Form 940 reporting the organization’s payment into the federal unemployment system, we might send the exempt organization a compliance check letter asking it to provide the Form 940 or an explanation for why it did not believe it is required to submit the Form 940. Under some circumstances, the results of a compliance check might warrant us opening an examination of the taxpayer. Typically, compliance checks are carried out by tax examiners. 

Review of Books and Records

Unlike the compliance actions described above, examinations (or audits) require the IRS to review the books and records of the taxpayer. Therefore, they take more time than compliance actions like AUR or compliance checks. Depending upon the complexity of the tax return and the tax issue(s) under exam, the exam time can vary from a few months to a number of years. Examinations are conducted by tax examiners, tax compliance officers, or revenue agents.

Even within the wider category of audits, there are several different varieties. We use correspondence examinations to obtain additional information about limited issues on a taxpayer’s return. For example, we may open a correspondence exam on a taxpayer claiming the Lifetime Learning credit and ask for supporting documentation, such as tuition receipts, to verify they are entitled to the credit.

Such examinations are usually narrower in scope than a traditional examination and are conducted by mail or other written communication. They are usually carried out by Tax Examiners and/or Tax Compliance Officers.

In some cases, we may conduct an in-person examination on a taxpayer. This typically involves reviewing one or more years of a taxpayer’s tax returns in conjunction with their books and records. The taxpayer or representative visits an IRS office, or we visit the taxpayer’s office and interview them – or, depending on the situation, their employees or representatives (such as accountants and attorneys) -- to gather more information. These types of examinations are often performed by either Tax Compliance Officers (office examinations) or Revenue Agents (field examinations). This type of examination could involve income taxes or specialty taxes, which include excise, employment, estate and gift taxes.  When an examination reveals that a taxpayer owes additional taxes, we assess and collect the money owed as required by law. What many people don’t realize is that these exams can actually lead to more money going to the taxpayers. Believe it or not, we pay billions of dollars in refunds when appropriate after examinations – for individuals and businesses.

If tax is assessed at the end of the examination and the taxpayer does not agree with the IRS’ conclusions, the taxpayer generally has the right to request review by the Independent Office of Appeals.

Educational and “Soft” Letters

In addition, we send “soft” letters to taxpayers to provide them an opportunity to address an issue that could avoid the need for further IRS contact or examination. For example, if we have some indication that a foreign corporation has engaged in significant transactions in the United States but has not completed an income tax return, then we could send a letter reminding it of the possible obligation to file a Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. If the taxpayer does not respond, or the explanation is inadequate, the IRS could initiate an examination.

We often send educational letters to let taxpayers know about a change in the law or other circumstance that might affect their tax obligations. For example, we send notices to taxpayers who are potentially eligible for the Earned Income Tax Credit (EITC) or Additional Child Tax Credit.

Our job at the IRS is to help taxpayers. That means doing everything we can to help people understand the tax rules and help them with filing and paying their taxes. At the same time, we are also here to make sure we fairly uphold the nation’s tax laws and do everything we can to ensure everyone pays their fair share.

Criminal Investigations

In the above section, I talked about various ways we encourage taxpayers to meet their tax obligations. After all, the United States believes, and counts on, voluntary compliance by individuals and businesses. Unfortunately, we sometimes need to use more severe tools to deter taxpayers who refuse to comply and intentionally avoid paying their tax. Our Criminal Investigation function investigates taxpayers who intentionally fail to pay their taxes and are suspected of engaging in fraud, money laundering or other illegal behavior. Such behavior, left unchecked, increases the tax burden on honest, law-abiding Americans who try their best to file on time and pay the right amount of tax. If our Criminal Investigation function determines that a tax crime has occurred, they refer the matter for possible prosecution to the Department of Justice.

Exams of Returns of Higher-income Taxpayers

Field Exams of higher-income taxpayers are more complex than correspondence exams like returns with EITC.  These exams are conducted in-person by teams of revenue agents and can take years to resolve. They typically involve numerous complex issues and the examination of multiple tax years and returns of related entities (partnerships, trusts, closely held business interests, etc.) and individuals (business partners and others). These examination teams are comprised of our most highly trained and experienced revenue agents having substantial accounting and investigative skills, and can often include IRS attorneys and economists as well as subject matter experts for issues involving private foundations, international law and foreign tax, estate and gift tax, etc.  Despite the time and resources it takes to examine higher-income taxpayers, the IRS remains fully committed to examining a higher percentage of the returns filed each year. Auditing a meaningful percentage of the highest income taxpayers is critical to maintaining public confidence in the integrity of our tax system.

Have IRS Tax Problems?

 Contact the Tax Lawyers at
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or Toll Free at 888 8TAXAID (888-882-9243) 

Eighth Circuit Reverses Tax Court Case Involving Statute of Limitations and Bona Fide Residency in USVI

According to DoJ, the Eighth Circuit Court of Appeals issued a published opinion on Tuesday, Dec. 15, 2020, holding for the government in a case involving the statute of limitations on assessment in the context of bona fide residency in the U.S. Virgin Islands (USVI).

In Coffey v. Commissioner, No. 18-3256, the Eighth Circuit Court of Appeals reversed the decision of the U.S. Tax Court that the IRS’s determinations were barred by the statute of limitations on assessment. 

Taxpayers owned a profitable publishing enterprise that ostensibly relocated to the USVI, and Judith Coffey claimed to be a USVI resident thereafter. 

The couple filed joint tax returns with the Virgin Islands Bureau of Internal Revenue (VIBIR), but not with the IRS. 

The VIBIR sent the first two pages of the Coffeys’ returns to the IRS as part of its normal process to claim “cover over” funds (i.e., tax revenue) from the U.S. Treasury. Disputing taxpayers’ assertion that they were bona fide residents of the USVI, the IRS conducted an audit and sent them notices of deficiency determining over $2 million in taxes and penalties. 

In an opinion with a concurring and dissenting set of judges, the Tax Court held that the deficiency notices were time-barred because the pages that the VIBIR sent to the IRS constituted filed “returns” that started the limitations period. 

The Eighth Circuit reversed the Tax Court and confirmed the long-standing principle that the statute of limitations begins only when a return is filed. 

Because the taxpayers did not comply with the requirements to file returns with the IRS, the statute of limitations never began to run. 

Although the Eighth Circuit’s opinion is focused on the statute of limitations issue, the Tax Division and the IRS will use all available legal processes to challenge improper attempts to avoid or evade U.S. income tax by unlawfully misrepresenting a taxpayer’s residence, regardless of where such residence is claimed. See e.g., IRS Notice 2004-45.

Have IRS Tax Problems?

 Contact the Tax Lawyers at
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or Toll Free at 888 8TAXAID (888-882-9243) 

Florida Escort Takes Wrong Return Position and Plead Guilty to Underreporting Income

According to the DoJ, a Fort Lauderdale, Florida, escort Jami Kopacz, 46, pleaded guilty to filing a false corporate tax return. Kopacz received payments directly from his escort clients, and also from a private business for whom he worked as an independent contractor. 

From 2015 to 2018, Kopacz used his corporation, JK Training, LLC, to receive income, and then filed false corporate tax returns (Forms 1120S) that substantially underreported the company’s gross receipts and total income. The understatement on JK Training’s corporate tax return was consequently passed through to Kopacz’s individual tax returns, which were also false as they underreported his total income. 

Kopacz caused a total tax loss of $278,325. The amount of unreported income grew higher during the four-year span, resulting in a failure to pay back taxes of $27,208 in 2015, $34,920 in 2016, $101,875 in 2017 and $114,322 in 2018 for a total IRS loss of $278,325, according to federal prosecutor Christopher Browne.

“Specifically, the defendant failed to report large amounts of cash and check payments he had received from clients,” said the factual statement, which was signed by Kopacz and his defense attorney, Richard Lubin, along with Browne and Justice Department tax attorney Grace Albinson.

Magistrate Judge Patrick M. Hunt accepted Kopacz’s plea and sentencing is schedule before U.S. District Judge Roy K. Altman on March 5, 2021. 

Kopacz faces a statutory maximum sentence of three (3) years in prison, as well as a period of supervised release, monetary penalties, and restitution.  

But Kopacz is possibly going to serve a shorter sentence because he accepted responsibility, promised to repay the IRS and is cooperating with the U.S. Attorney’s Office in an ongoing investigation of South Florida’s escort industry, according to his plea agreement.

Have IRS Tax Problems?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

Sources

DoJ

The Miami Herald

IRS Announces That Some Delayed Notices May Give Taxpayers an Extended Due Date

IRS announced on December 11, 2020, in e-News for Tax Professionals 2020-50, that the agency experienced a delay in mailing some notices that were to be issued between Nov. 9 and Nov. 23. As a result, some taxpayers may receive a notice with a due date that has already passed, the agency said. “However, some of these notices will include the Notice 1052-D giving the taxpayer more time to respond to the original notice,” IRS said. I

Notice Update – Notices remain delayed. Extended due dates provided: Due to the volume of notices that needed to be printed and mailed after the IRS restarted issuing notices and due to the ongoing impact of the pandemic, the IRS continues to experience delays mailing backlogged notices to taxpayers. This delay impacts some, but not all, IRS notices dated from November 9 – November 23rd.

The impacted notices are those requesting payment for tax owed or notifying taxpayers of changes made to a tax return resulting in a different refund amount or tax owed. Each impacted notice mailed to taxpayers will include Notice 1052-D Important! You Have More Time to Respond to the Enclosed Notice. Taxpayers are encouraged to read Notice 1052-D carefully. It explains why the notice was delayed and, more importantly, provides a new date by which to pay a balance owed or respond if not in agreement with changes made by the IRS on the tax return.

It is important that taxpayers take the following actions when receiving any correspondence that includes Notice 1052-D:

• Review the last page of the correspondence to determine if there is a new due date for a balance owed or a new response date.
• Disregard the notices if steps have already been taken to resolve the issue.
• Contact the IRS using the number on the notice if you have additional questions. Keep in mind that phone lines remain extremely busy due to the pandemic.

Taxpayers who are unable to pay are encouraged to consider available payment options to minimize penalties as well as interest that will continue to accrue. Those who were assessed a penalty and have been impacted by the pandemic or other circumstances may qualify for relief from penalties due to reasonable cause if they made an effort to comply with the requirements of the law, but were unable to meet their tax obligations, due to facts and circumstances beyond their control. 

Taxpayers now have the option to view their notices electronically through their online account. This new option gives taxpayers immediate access to specific IRS notices instead of waiting for them to arrive by mail. In addition, taxpayers have direct access to payment options and can check their account balance.

Have IRS Tax Problems?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

Congress Passed the Corporate Transparency Act

According to the National Law Review, on December 11, 2020, and by a veto-proof majority, the US Senate joined the House of Representatives in passing the National Defense Authorization Act for Fiscal Year 2021, which includes the Corporate Transparency Act (the Act). 

The Act requires a report be filed with the Financial Crimes Enforcement Network (FinCen) that identifies each beneficial owner of an applicant forming a reporting company. While questions remain as to the full implications of the Act, it represents an important step in the right direction for the United States in the battle against money laundering and terrorist financing.

The current measure, if enacted, brings the United States closer to parity with other developed nations, which have enacted similar mandates.

What is a reporting company?

A reporting company is defined as a corporation, limited liability company or other similar entity that is created by filing a document with the secretary of state (or an equivalent office) of any state, or formed under foreign law and registered to do business in the United States in a like manner. The Act exempts many categories of companies from the reporting requirement, specifically:

• Companies that are already subject to supervision or otherwise closely regulated by the federal government (e.g., banks)
• Dormant companies
• Companies that employ more than 20 people, filed a tax return reporting gross receipts in excess of $5 million, and have a physical presence in the United States
• Any entity owned by an entity otherwise exempt

Who is a beneficial owner and/or an applicant?

A beneficial owner is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over an entity or (ii) owns or controls at least 25% of the ownership interests in an entity. A few notable exceptions from the Act include:

• Minors, provided that information with respect to a parent is otherwise reported
• An individual acting as nominee, intermediary, custodian or agent on behalf of another individual
• Persons who control an entity solely because of their employment
• An individual whose only interest in a reporting company is through a right of inheritance

An applicant is defined broadly as an individual who files an application to form an entity.

What information must be reported and when?

The report shall include the name, date of birth, current address (business or residential) and unique identifying number from an acceptable document for each beneficial owner and/or an applicant, with an option for such individuals to request and use a FinCEN unique identifying number instead. Existing entities will be required to report this information within two years of the effective date, which regulations promulgated within one year of enactment will determine. The report will be required for newly formed entities at the time of formation. Finally, a reporting company will need to update the information provided to FinCEN upon a change in beneficial ownership.

Where is the information stored and who has access to it?

FinCEN will store the information received pursuant to the Act in a private database not accessible to the public. The information will be made available to Federal and state law enforcement agencies pursuant to an appropriate request—state law enforcement requests require court approval. The Department of the Treasury, the custodian of the records through FinCEN, has its own broad and separate authorization to use the information, including for purposes related to tax administration. Foreign law enforcement also may request information from the database through an appropriate agency of the federal government—but the information will not be subject to any automatic reporting or exchange of information. Finally, financial institutions will have access to the database for customer due diligence purposes.

Customer due diligence requirements for financial institutions will be updated to conform to the requirements of the Act and to take into account access by financial institutions to the information compiled under the Act. This means that the establishment of any entity account with a financial institution likely will require compliance, by the entity, with the Act—providing a practical barrier to non-compliance.

What are the penalties for violating the law?

The willful failure to provide complete and/or updated information required under the Act or willfully providing false or fraudulent information carry steep civil and criminal consequences. Violations carry civil penalties of up to $500 per day that the violation continues and criminal fines up to $10,000 and/or imprisonment for up to two years. The obligations under the Act apply to beneficial owners and to applicants. The unauthorized disclosure of information collected under the Act carries the same civil penalty but a higher criminal penalty of up to $250,000 and a higher maximum term of imprisonment of five years. Unauthorized disclosure includes both a disclosure by a government employee and a disclosure by a third-party recipient of information under the Act.

Insights

Unregistered foreign entities. Notably, the Act does not require disclosure of the beneficial owners of a foreign entity if the entity does not register to do business with a state. Presumably, an individual may still be able to access anonymously the US financial or real estate markets using a foreign entity that does not register to do business in a state. It will be interesting to see how the changes to the customer due diligence requirements for financial institutions will affect entities that are not required to file reports under the Act.

Impact. The Act goes a long way in preventing the misuse of entities to hinder the efforts of law enforcement to combat money laundering. The Act includes a provision prohibiting the issuance of any type of certificate evidencing ownership of such entity in bearer form—a longstanding target of anti-money laundering initiatives. The Act captures indirect ownership; for example, a limited liability company formed by a foreign corporation should have to report the information of a non-US person shareholder of the foreign corporation.

It remains to be seen how the regulations promulgated under the Act will deal with ownership of a reporting company by trusts, estates and other complex structures commonly used to meet the multijurisdictional requirements of private clients and their families. For example, if a corporation is wholly owned by a bank (which is exempt) as trustee, does the exception for entities owned by other exempt entities eliminate the disclosure requirements for the corporation? 

How would ownership and/or control be measured with respect to discretionary beneficiaries of trusts? 

Will the relatively new customer due diligence rules with respect to entities be looked to as a model or will the Report of Foreign Bank and Financial Accounts FBAR rules be used as a standard (31 C.F.R. § 1010.230; 31 C.F.R. § 1010.350)? 

Using the customer due diligence regulations as a guide, if a trust owns more than 25% of the equity interest in a company, the trustee would be considered the beneficial owner, regardless of whether the trustee is a natural or legal person (31 C.F.R. § 1010.230(d)(3); see also Fin. Crimes Enf’t. Network, FIN-2018-G001, Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions (2018)). Presumably, the beneficial owner requirements in the Act will go further than the customer due diligence regulations; it will be interesting to see how they approach some of these questions.

Have an International Tax Problem?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

 

Pilot's Bona Fide Resident Assertion Not Fly With Tax Court

The Tax Court has determined in Cutting, TC Memo 2020-158, that a pilot who spent most of his time in Thailand and had a Thai wife was not entitled to the foreign earned income exclusion. He was not a bona fide resident of Thailand and his principal place of business was in the U.S.

Foreign earned income is income an individual receives from sources within a foreign country that is attributable to services performed by the individual. (Code Sec. 911(b)(1)(A)) A “qualified individual” may exclude from gross income foreign earned income. (Code Sec. 911(a))

A qualified individual is an individual whose tax home is in a foreign country and who is either (1) a bona fide resident of that country for an uninterrupted period that includes the entire tax year, or (2) physically present in a foreign country or countries for a certain period. (Code Sec. 911(d)(1))

An individual’s tax home is considered to be his regular place of business (or principal place of business if more than one regular place exists). If the individual has no regular or principal place of business, the individual’s tax home is his or her regular place of abode in a “real and substantial sense.” (Reg §1.911-2(b)) The principal place of business for a pilot is his or her duty station. (Wojciechowski, TC Memo 1991-239)

Douglas Cutting, an American citizen living in Thailand, worked as a pilot for an airline with a contract with the U.S. Department of Defense. He flew mostly international routes transporting military personnel and cargo. Cutting’s income came, primarily, from his piloting work. 

Cutting's employment was governed by a collective bargaining agreement that required him to designate a home base (primary residence for records purposes) and a gateway travel airport. Cutting selected San Jose, California, to be his home base and San Jose Airport (SJC) to be his gateway travel airport. 

Cutting used his father’s address in San Jose as his mailing address because he did not own or lease a residence in the U.S. during the relevant years. 

On His IRS Form 2555, Foreign Earned Income,
He Stated That He Was Not A Resident Of Thailand and
Did Not Live With Any Family Members Abroad.

In Thailand, Cutting held only temporary transit and nonimmigrant visas, which expired after 30 days. These visas were renewed automatically each time he left Thailand to work as a pilot, giving him a fresh 30-day period each time he returned. On at least two occasions the Thai government denied Cutting's requests to extend his visas. He could not own or lease property in Thailand and did not pay any taxes to Thailand.

For 2012, 2013, and 2014, Cutting filed his returns as a single taxpayer and claimed the maximum allowable foreign earned income exclusion under Code Sec. 911. IRS disallowed these exclusions on the basis that Cutting had not established either bona fide residence or physical presence in Thailand for those years.

The Tax Court, After Analyzing The Factors Pertinent To Determining Bona Fide Residency, Found That Cutting Was Not A Bona Fide Resident Of Thailand And, Therefore, Couldn't Claim For Foreign Earned Income Exclusion.

The Court pointed out that most of the determining factors weighed against him: 

1. there was no evidence that Cutting intended to become a bona fide resident of Thailand; 
2. there was no evidence that he established a home in Thailand for an indefinite period; 
3. there was no showing that Cutting made any attempt to assimilate into the Thai culture, although his wife was Thai; 
4. he did not assume any economic burdens of life in Thailand (such as buying or renting a home) or pay taxes to Thailand; 
5. he was not a legal resident of Thailand because he only had temporary transit and nonimmigrant visas and he stated on his Form 2555 that he was not a resident of Thailand.

Further, the Court noted that Cutting choose San Jose, California, as his principal place of business when he designate it as his home base; his employer was based in the U.S. and withheld U.S. taxes from his wages; and he filed his U.S. taxes as a single taxpayer. 

On the other hand, only two factors weighed in his favor: Cutting had a physical presence in Thailand and spent most of his time in Thailand when not working. 

Have IRS Tax Problems?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)