High Incomes pique IRS interest
Take note CPA's and Tax Preparers-
"Congress passed a law in May that increased the disclosure requirements for them.
The law requires tax preparers to report any tax positions taken by their clients that don't meet the Internal Revenue Code's "More Likely Than Not" standard.
If there's any doubt in the tax preparer's mind about whether a certain deduction a client wants to take will pass muster with the IRS or courts, then by law they must bring that to the IRS' attention or face a monetary penalty...The penalties for preparers are stiff. The new standard raises the monetary penalty for tax preparers from $250 to either $1,000 or 50 percent of the tax return preparation fee, whichever is greater. That means if it costs $10,000 to prepare a company's return, and the tax position isn't accepted by the IRS, the tax preparer could be fined $5,000."
Click on link above for complete article
Showing posts with label cpa. Show all posts
Showing posts with label cpa. Show all posts
Friday, January 18, 2008
Monday, November 26, 2007
Unreported Income - Attorney Client Privilege
Attorney Client Privilege - US v Kovel
If retained by an attorney, client accountants may receive the benefits of Attorney-Client privilege. In United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the Attorney-Client privilege was extended to accountants retained to assist the attorney in understanding taxpayer’s financial records.
The IRS Restructuring & Reform Act of 1998 extended Attorney-Client privilege to communications with federally authorized practitioners with respect to tax advice. (IRC § 7525)
IRC § 7525 applies to:
1. Any non-criminal matter before the IRS, or in Federal Court brought by or against the U.S.
2. IRC § 7525(b) provides the privilege will not apply to representation of a corporation involved in the promotion or the direct or indirect participation of any such corporation in any tax shelter.
3. The IRC § 7525 privilege does not extend to criminal tax investigations.
A federally authorized tax practitioner is any individual who is authorized under federal law to practice before the IRS. This includes attorneys, CPAs, and enrolled agents. IRC § 7525(a).
Tax advice is advice given by an individual on a matter for which he is authorized to practice before the IRS. IRC § 7525(a). In general, the privilege, like the common-law privilege, applies to the content of the advice, not the identity of the person seeking the advice.
For communications made on or after October 22, 2004, the privilege does not apply to written communications concerning tax shelters. Thus, the privilege does not apply to any written communication between a tax practitioner and any person, director, officer, employee, agent, or representative of a person, or any other person holding a capital or profits interest in a person, in connection with the promotion of the direct or indirect participation of the person in any tax shelter. IRC § 7525(b).
A tax shelter is a partnership or other entity, an investment plan or arrangement, or any other plan or arrangement, if a significant purpose of the partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax. IRC § 6662(d)(2)(C). (This exception was limited to communications concerning corporate tax shelters, IRC § 7525(b), prior to amendment by Pub. L. 108-357, American Jobs Creation Act of 2004, Section 813.)
The IRS's position is that the Attorney-Client privilege also does not apply to tax accrual workpapers (tax accrual and other financial audit workpapers relating to the tax reserve for deferred tax liabilities and to footnotes disclosing contingent tax liabilities appearing on audited financial statements).
These workpapers are not generated in connection with seeking legal or tax advice, but are developed to evaluate a taxpayer's deferred or contingent tax liabilities in connection with a taxpayer's disclosure to third parties of the taxpayer's financial condition. IRS Announcement 2002-63, 2002-2 C.B. 72.
The crime-fraud exception may be asserted to defeat the claim of tax practitioner privilege for communications that were made for the purpose of getting advice for the commission of crime or fraud. This prevents a party from seeking advice to commit a crime or fraud and then claiming that the communication is privileged.
To assert the crime-fraud exception, (1) there must be a prima facie showing of a crime or fraud, and (2) the communications in question must be in furtherance of the misconduct. U.S. v. BDO Seidman, 368 F.Supp. 2d 858 (N.D. Ill. 2005). If the IRS shows sufficient evidence that the communication was made in furtherance of a crime or fraud, then the taxpayer may respond by providing an explanation that would rebut the IRS's evidence. The crime-fraud exception will apply only if the court finds the taxpayer's explanation unsatisfactory. U.S. v. BDO Seidman, No. 02 C 4822 (N.D. Ill. May 17, 2005), aff’d on this issue and vacated and remanded on other grounds, No. 05-3260 & 05-3518 (7th Cir. July 2, 2007).
If retained by an attorney, client accountants may receive the benefits of Attorney-Client privilege. In United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the Attorney-Client privilege was extended to accountants retained to assist the attorney in understanding taxpayer’s financial records.
The IRS Restructuring & Reform Act of 1998 extended Attorney-Client privilege to communications with federally authorized practitioners with respect to tax advice. (IRC § 7525)
IRC § 7525 applies to:
1. Any non-criminal matter before the IRS, or in Federal Court brought by or against the U.S.
2. IRC § 7525(b) provides the privilege will not apply to representation of a corporation involved in the promotion or the direct or indirect participation of any such corporation in any tax shelter.
3. The IRC § 7525 privilege does not extend to criminal tax investigations.
A federally authorized tax practitioner is any individual who is authorized under federal law to practice before the IRS. This includes attorneys, CPAs, and enrolled agents. IRC § 7525(a).
Tax advice is advice given by an individual on a matter for which he is authorized to practice before the IRS. IRC § 7525(a). In general, the privilege, like the common-law privilege, applies to the content of the advice, not the identity of the person seeking the advice.
For communications made on or after October 22, 2004, the privilege does not apply to written communications concerning tax shelters. Thus, the privilege does not apply to any written communication between a tax practitioner and any person, director, officer, employee, agent, or representative of a person, or any other person holding a capital or profits interest in a person, in connection with the promotion of the direct or indirect participation of the person in any tax shelter. IRC § 7525(b).
A tax shelter is a partnership or other entity, an investment plan or arrangement, or any other plan or arrangement, if a significant purpose of the partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax. IRC § 6662(d)(2)(C). (This exception was limited to communications concerning corporate tax shelters, IRC § 7525(b), prior to amendment by Pub. L. 108-357, American Jobs Creation Act of 2004, Section 813.)
The IRS's position is that the Attorney-Client privilege also does not apply to tax accrual workpapers (tax accrual and other financial audit workpapers relating to the tax reserve for deferred tax liabilities and to footnotes disclosing contingent tax liabilities appearing on audited financial statements).
These workpapers are not generated in connection with seeking legal or tax advice, but are developed to evaluate a taxpayer's deferred or contingent tax liabilities in connection with a taxpayer's disclosure to third parties of the taxpayer's financial condition. IRS Announcement 2002-63, 2002-2 C.B. 72.
The crime-fraud exception may be asserted to defeat the claim of tax practitioner privilege for communications that were made for the purpose of getting advice for the commission of crime or fraud. This prevents a party from seeking advice to commit a crime or fraud and then claiming that the communication is privileged.
To assert the crime-fraud exception, (1) there must be a prima facie showing of a crime or fraud, and (2) the communications in question must be in furtherance of the misconduct. U.S. v. BDO Seidman, 368 F.Supp. 2d 858 (N.D. Ill. 2005). If the IRS shows sufficient evidence that the communication was made in furtherance of a crime or fraud, then the taxpayer may respond by providing an explanation that would rebut the IRS's evidence. The crime-fraud exception will apply only if the court finds the taxpayer's explanation unsatisfactory. U.S. v. BDO Seidman, No. 02 C 4822 (N.D. Ill. May 17, 2005), aff’d on this issue and vacated and remanded on other grounds, No. 05-3260 & 05-3518 (7th Cir. July 2, 2007).
Tuesday, November 20, 2007
Unreported Income: Fraudulent Failure to File Tax Returns
In order to avoid the 75% penalty for fraudulent failure to file tax returns the tax payer must establish:
1) The delinquent filing is due to reasonable cause.
2) The delinquent filing is not due to willful neglect.
If both elements are established the failure to file penalty does not apply.
Penalty: Failure to file tax return
To establish that the penalty does not apply, the taxpayer must furnish the IRS a written statement setting out the grounds of the claim. The statement must contain a declaration that it is signed under penalty of perjury. Treas. Reg. Section 301.6651-1(c)(1). The written statement must be filed with the IRS office where the late return is filed.
If the IRS determines that the delinquency was due to reasonable cause and not due to willful neglect, the penalty is not assessed.
If a taxpayer exercised ordinary business care and prudence and was nevertheless unable to file a return, the delay is due to reasonable cause. Treas. Reg. Section 301.6651-1(c)(1).
The Internal Revenue Manual lists the following circumstances under which reasonable cause may exist:
(1) the delinquency was due to the death or serious illness of the taxpayer or a member of the taxpayer's immediate family (for a corporation, estate, trust, etc., the delinquency was due to the death of the individual responsible for filing or a death in the immediate family of such individual);
(2) the taxpayer is unable to obtain records;
(3) reliance on erroneous advice from the IRS;
(4) reliance on a tax adviser; and
(5) failure to file resulting from a fire, casualty, natural disaster, or other disturbance.
Penalty: Failure to pay tax shown on return
Treas Reg Section 6652(a)(2) penalizes the failure to pay the amount shown as tax on the taxpayer’s return unless the delinquency in payment is due to reasonable cause and not due to willful neglect.
The penalty period starts with the date prescribed for payment (generally the due date of the related return, but determined with regard to extensions) and ends with payment of the tax. The penalty is one-half percent for each month (or part of a month) up to a maximum of 25 percent. However, the one-half percent rate is increased to 1 percent if the taxpayer fails to pay after the IRS notifies the taxpayer.
The appropriate penalty rate is applied to the amount of tax shown on the return, which is the net amount of tax due. The net amount due is the total amount shown as tax reduced by the sum of (1) any part of the tax that is paid on or before the beginning of the month and (2) the amount of any credit against the tax that may be claimed on the return. If the amount of tax required to be shown on the return is less than the amount shown on the return, the lesser amount is used for computing the penalty. Treas. Reg. Section 6651(c)(2).
1) The delinquent filing is due to reasonable cause.
2) The delinquent filing is not due to willful neglect.
If both elements are established the failure to file penalty does not apply.
Penalty: Failure to file tax return
To establish that the penalty does not apply, the taxpayer must furnish the IRS a written statement setting out the grounds of the claim. The statement must contain a declaration that it is signed under penalty of perjury. Treas. Reg. Section 301.6651-1(c)(1). The written statement must be filed with the IRS office where the late return is filed.
If the IRS determines that the delinquency was due to reasonable cause and not due to willful neglect, the penalty is not assessed.
If a taxpayer exercised ordinary business care and prudence and was nevertheless unable to file a return, the delay is due to reasonable cause. Treas. Reg. Section 301.6651-1(c)(1).
The Internal Revenue Manual lists the following circumstances under which reasonable cause may exist:
(1) the delinquency was due to the death or serious illness of the taxpayer or a member of the taxpayer's immediate family (for a corporation, estate, trust, etc., the delinquency was due to the death of the individual responsible for filing or a death in the immediate family of such individual);
(2) the taxpayer is unable to obtain records;
(3) reliance on erroneous advice from the IRS;
(4) reliance on a tax adviser; and
(5) failure to file resulting from a fire, casualty, natural disaster, or other disturbance.
Penalty: Failure to pay tax shown on return
Treas Reg Section 6652(a)(2) penalizes the failure to pay the amount shown as tax on the taxpayer’s return unless the delinquency in payment is due to reasonable cause and not due to willful neglect.
The penalty period starts with the date prescribed for payment (generally the due date of the related return, but determined with regard to extensions) and ends with payment of the tax. The penalty is one-half percent for each month (or part of a month) up to a maximum of 25 percent. However, the one-half percent rate is increased to 1 percent if the taxpayer fails to pay after the IRS notifies the taxpayer.
The appropriate penalty rate is applied to the amount of tax shown on the return, which is the net amount of tax due. The net amount due is the total amount shown as tax reduced by the sum of (1) any part of the tax that is paid on or before the beginning of the month and (2) the amount of any credit against the tax that may be claimed on the return. If the amount of tax required to be shown on the return is less than the amount shown on the return, the lesser amount is used for computing the penalty. Treas. Reg. Section 6651(c)(2).
Monday, November 19, 2007
Unreported Income: Criminal Penalties: Tax Preparers
Clients, with unreported income, may subject tax preparers to criminal penalties, fines, costs of prosecution and up to 10 years imprisonment (2 felonies, 2 misdemeanors):
1. Any person who willfully attempts in any manner to evade or defeat any tax or payment of any tax imposed by the Code is guilty of a felony.
A person convicted of tax evasion may be fined up to $100,000 ($500,000 for a corporation) or imprisoned not more than five years or both, together with the costs of prosecution. This penalty is in addition to any other penalties provided by law. (IRS § 7201.)
2. Any person required by the Code or regulations to file a return, keep any records or supply any information who willfully fails to file the return, keep the records or supply the information is guilty of a misdemeanor.
A person convicted of this offense may be fined up to $25,000 ($100,000 for a corporation) or imprisoned not more than one year or both, together with the costs of prosecution. This penalty is in addition to any other penalties provided by law. (IRC § 7203.)
3. Any person who willfully aids or assists in, or procures, counsels, or advises the preparation or presentation of a return, affidavit, claim, or other document under the tax laws that is fraudulent or false as to any material matter is guilty of a felony. This provision applies regardless of whether or not the taxpayer knows or consents to the falsity or fraud.
A person convicted of this offense may be fined up to $100,000 ($500,000 for a corporation) or imprisoned not more than three years or both, together with the costs of prosecution. (IRC § 7206.)
4. Any person who fails to comply with a summons issued under the Code that calls for testimony or for the production of books or documents and neglects to appear or to produce the books or documents has committed a crime.
A person convicted of this offense may be fined not more than $1,000 or imprisoned not more than one year or both, together with costs of prosecution. (IRC § 7210.)
1. Any person who willfully attempts in any manner to evade or defeat any tax or payment of any tax imposed by the Code is guilty of a felony.
A person convicted of tax evasion may be fined up to $100,000 ($500,000 for a corporation) or imprisoned not more than five years or both, together with the costs of prosecution. This penalty is in addition to any other penalties provided by law. (IRS § 7201.)
2. Any person required by the Code or regulations to file a return, keep any records or supply any information who willfully fails to file the return, keep the records or supply the information is guilty of a misdemeanor.
A person convicted of this offense may be fined up to $25,000 ($100,000 for a corporation) or imprisoned not more than one year or both, together with the costs of prosecution. This penalty is in addition to any other penalties provided by law. (IRC § 7203.)
3. Any person who willfully aids or assists in, or procures, counsels, or advises the preparation or presentation of a return, affidavit, claim, or other document under the tax laws that is fraudulent or false as to any material matter is guilty of a felony. This provision applies regardless of whether or not the taxpayer knows or consents to the falsity or fraud.
A person convicted of this offense may be fined up to $100,000 ($500,000 for a corporation) or imprisoned not more than three years or both, together with the costs of prosecution. (IRC § 7206.)
4. Any person who fails to comply with a summons issued under the Code that calls for testimony or for the production of books or documents and neglects to appear or to produce the books or documents has committed a crime.
A person convicted of this offense may be fined not more than $1,000 or imprisoned not more than one year or both, together with costs of prosecution. (IRC § 7210.)
Wednesday, November 14, 2007
Unreported Income (IRS): CPA Liability
The IRS has a new method for identifying returns with a high probability for unreported income (i.e., Unreported Income Discriminate Index Function (UI DIF)). Unreported income is both civil tax fraud and criminal tax evasion.
Taxpayers who have unreported income may be subject to up to 6 years in prison, 100% penalties and fines, and expose their accountants to civil and criminal liability.
1. Statutes of Limitations
a. Civil Tax Fraud: No statute of limitations on assessment (tax can be assessed at any time)
b. Criminal Tax Evasion: For crimes, the statute of limitations is either 3, 5 or 6 years, only on the prosecution of the crime (i.e., tax evasion, not the assessment of tax owed)
2. Burdens of Proof
a. Civil Tax Fraud: “Clear and Convincing Evidence”
b. Criminal Tax Evasion: “Beyond a Reasonable Doubt”
3. Penalties/Fines
a. Civil Tax Fraud
i. Fraudulent Failure to File Tax Return: (IRC §6651(f))
ii. Fraudulent Tax Return Filed: (IRC §6663(a))
Maximum Penalty: 75% of tax due
iii. Failure to Pay Tax:
Shown on Return (IRC §6651(a)(2)),
Not Shown on Return (IRC §6651(a)(3))
Maximum Penalty: 25% of tax due
b. Criminal Tax Evasion
i. IRC §7201: Evade Tax
Fine: $100,000 (individual) $500,000 (corporate)
Imprisonment: not more than 5 years (or both fine and imprisonment)
ii. IRC §7203: Failure to File or Pay Tax
Fine: $25,000 (individual) $100,000 (corporate)
Imprisonment: up to one year (or both fine and imprisonment)
As a tax preparer, if a client has unreported income:
1. What is your liability re: IRC §6694 preparer penalties?
2. If you advise the client to report the income, do you prepare the tax return, or advise the client to engage an attorney to hire a CPA to prepare the tax return (for attorney-client privilege)?
3. If you advise your client to file or amend a tax return, is it a voluntary disclosure with no criminal liability? Is there any criminal liability for you?
Taxpayers who have unreported income may be subject to up to 6 years in prison, 100% penalties and fines, and expose their accountants to civil and criminal liability.
1. Statutes of Limitations
a. Civil Tax Fraud: No statute of limitations on assessment (tax can be assessed at any time)
b. Criminal Tax Evasion: For crimes, the statute of limitations is either 3, 5 or 6 years, only on the prosecution of the crime (i.e., tax evasion, not the assessment of tax owed)
2. Burdens of Proof
a. Civil Tax Fraud: “Clear and Convincing Evidence”
b. Criminal Tax Evasion: “Beyond a Reasonable Doubt”
3. Penalties/Fines
a. Civil Tax Fraud
i. Fraudulent Failure to File Tax Return: (IRC §6651(f))
ii. Fraudulent Tax Return Filed: (IRC §6663(a))
Maximum Penalty: 75% of tax due
iii. Failure to Pay Tax:
Shown on Return (IRC §6651(a)(2)),
Not Shown on Return (IRC §6651(a)(3))
Maximum Penalty: 25% of tax due
b. Criminal Tax Evasion
i. IRC §7201: Evade Tax
Fine: $100,000 (individual) $500,000 (corporate)
Imprisonment: not more than 5 years (or both fine and imprisonment)
ii. IRC §7203: Failure to File or Pay Tax
Fine: $25,000 (individual) $100,000 (corporate)
Imprisonment: up to one year (or both fine and imprisonment)
As a tax preparer, if a client has unreported income:
1. What is your liability re: IRC §6694 preparer penalties?
2. If you advise the client to report the income, do you prepare the tax return, or advise the client to engage an attorney to hire a CPA to prepare the tax return (for attorney-client privilege)?
3. If you advise your client to file or amend a tax return, is it a voluntary disclosure with no criminal liability? Is there any criminal liability for you?
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