Topics Covered:

1. Jade’s Story Of Her IRS Audit
2. Would Your Business Survive an IRS Worker Classification Audit?
3. When Payroll Taxes Pyramid It Means Penalties, Even Jail
4. Questions from our listeners:

• What is the new maximum wage amount in 2015 that would be subject to a total Social Security FICA tax of 12.4%?
• What is the regular Medicare Tax that applies to compensation?
• What is the new additional Medicare Tax that came into place?
• When does the new additional Medicare Tax get reported and paid?
• What payroll tax liabilities of my business could I be personally liable for?

Yes we are all working for the tax man!

Good afternoon! Welcome to the KahnTaxLaw Radio Show

This is your host Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

You are listening to my weekly radio show where we talk everything about taxes from the ESPN 1700 AM Studio in San Diego, California.

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

It is my objective to make you smarter so that you legally pay the least tax as possible, avoid tax problems and be aware of the strategies and solutions if you are being targeted by the IRS or any State tax agency.

Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into our website at www.kahntaxlaw.com.

I have a lot to cover today in the world of taxes and helping me out today will be my associate attorney Amy Spivey who will be calling in later in today’s show.

So the big question today is if the IRS asked to examine your business’ Federal Tax returns, would you survive the audit? For Jade Phuong who operates a nail salon, it was a nightmare that came very close to ending her business.

Jade’s Story.

Before the IRS turned her world upside down, Jade already had beaten the odds as a small-business owner. Her name salon had been operating more than eight years, a considerable accomplishment considering that most small businesses fail in less than three years. Living at home with her mother, Jade saved enough money to open her nail salon fresh out of nail school at age 25.

Despite a rocky start, Jade was able to build up her business and after a couple of years was able to enjoy a good living from her nail salon. In fact things were going so well that when a space almost twice the size of her current location opened just two doors down, she decided to move to the bigger space and expand into the tanning business by installing six tanning beds in the new space. Jade was feeling good, everything was going great. She bought her first house and moved into it. Jade finally attained the American dream. Then two weeks later she got the letter from the IRS.

The Longest Year

The letter from the Internal Revenue Service was innocuous enough – mixed in with the salon’s mail, it looked just like any other piece of business correspondence.

When Jade realized that it was indeed from the IRS, she felt a twinge of concern, but not panic. As a business, Jade would periodically get notifications and letters from the IRS or the State but this letter was different. Jade opened the letter and read the words, “Your Federal tax returns for the selected tax years have been assigned to me for examination.” The vague sense of unease Jade originally felt was now panic in full bloom.

Jade immediately got on the telephone with her accountant and told him of the letter she received. She even faxed him a copy so he could see it for himself. Sure enough Jade’s last three years of business income tax returns were selected for examination.

Her accountant said don’t worry as he felt confident that this was just a random audit and that Jade’s recordkeeping and reporting to the IRS was done by the book. So the accountant told Jade to contact the IRS agent and arrange for him to come to the business and meet her and look at the business’ books and records.

And so Jade contacted the IRS agent and scheduled a meeting at the salon.

The IRS agent came to the salon and he was business-like, but very pleasant – the agent seemed like someone you could talk to. Apparently the IRS agent very much wanted Jade to think this audit wasn’t a big deal so Jade would open up to the agent.

 

The meeting lasted two and a half hours and the agent asked a lot of questions:  When did we open? How are we set up? Who set up the business organization? Do we write off our car? What kinds of benefits do we give workers? Where do we buy our boutique items?

After leaving the salon that day, the IRS agent went to the office of Jade’s accountant, where the agent spent six hours reviewing the business’ corporate records, check registers, bank deposit slips, car mileage logs, and other papers. The agent returned to the accountant’s office for three additional days.

The examination of Jade’s records was exhaustive and comprehensive but the accountant was confident that the agent would be able to agree with just about everything as reported on the tax returns. The accountant even told this to Jade and further added that he would be very surprised if the proposed liability was more than $1,000.

“You’re joking … Right?”

And a few weeks thereafter, the IRS agent issued a letter. What the agent concluded in that letter about Jade’s business was a shocker. Jade had been classifying her workers as independent contractors. The IRS agent felt they should be classified as employees and under this classification Jade would now owe the IRS $85,000.

Jade was confident that her setup was legal and legitimate because before she even opened the nail salon’s doors, she had consulted and paid a CPA to help her write the business plan and set up the business, including how to classify her workers. The CPA set Jade’s nail technicians as independent contractors. The CPA said he represented a lot of beauty salons, and he said that’s how all the salons were classifying their workers.

But the IRS agent did not agree.

In a nutshell, the IRS agent based his determination on five factors:

1. Realization of Profit or Loss…There was no element of risk for the nail technicians because they did not bear any of the financial burdens of the nail salon, such as rent, utilities, and insurance.

2. Significant Investment … None of the nail technicians had any significant financial investment in the shop. All the investment was by Jade.

3. Integration … The services of the nail technicians were fully integrated into the business operations – meaning that without the services of the nail technicians, Jade could not have continued business operations as a successful nail salon.

4. Payment by Hour, Week, and Month … Upon completion of each customer serviced, the nail technicians then turned over the total received to the Jade. The nail technicians could not retain these payments from customers.

5. Set Hours of Work … The business did not require the nail technicians to work set hours, but Jade allocated the hours the nail technicians would be available.

Well this was not acceptable to Jade so she hired a tax attorney to appeal this determination and fight the IRS.

Despite the IRS agent’s assertion that the workers should be treated as employees, Jade had some good facts favorable to her entitling her to treat the workers as independent contractors.

For one thing, a few years earlier she received a form letter from the State requesting that she complete a questionnaire about her workers and return it to the State. She completed the questionnaire and soon after received a letter from the State confirming that her workers were independent contractors.

In the questionnaire Jade noted that the nail technicians set their own hours. They didn’t get any benefits from the business. Everyone paid their own taxes and they knew they were responsible to pay for their own taxes.

Despite building a case to support classification of the workers as independent contractors, the position of the Appeals Officer at the IRS Office Of Appeals was that Jade still maintained enough control over the workers that they should be treated as employees.

Now this determination could be appealed to the U.S. Tax Court but to fight the IRS in court meant as much as $25,000 in legal fees, plus the $85,000 for the three years if Jade lost. But there was another option for Jade.

If Jade were to agree to convert her workers to employees and now start taking out taxes, provide worker’s compensation and liability insurances, and pay the employer’s share of their future earnings in Social Security taxes, and supply them completely, the IRS would substantially lower the liability for the prior years. In Jade’s case the liability would now drop below $20,000

Jade said at this point I have got to go with this option. So she made the changeover and paid the $20,000 to IRS. Turns out only two nail technicians left due to the changeover in worker status.

Older and Wiser

Things are looking good again to Jade who says the nail business is stronger than it’s ever been. She has increased her business, which has increased her income. She also recently upgraded her tanning salon with all new stand-up beds. Just like when she first opened, it’s the tanning beds that are pulling the salon through in the slow times.

She also has eliminated some things, like entertainment expenses and she started buying product in bulk to cut down costs. After the switch in worker status to employees, Jade raised service prices by about 5% to help cover the now higher costs of doing business. To her surprise, it didn’t hurt business at all. It was Jade’s first price increase in nine years anyway, so it was time. Jade does not know of one client who left as a result of these changes.

Jade’s story serves as a good lesson to anyone operating a business or looking to start a business which is that you need to know the rules and follow them. Don’t think that you are immune from the IRS questioning your business.

Starting in 2015, businesses with at least 50 full-time employees must offer affordable health insurance to all employees or substantial penalties will be imposed. If independent contractors are converted to employee status, this may result in a company having more than 50 full-time employees. Also, the IRS is starting a project to conduct 6,000 random audits over a period of three years with worker classification/misclassification as a key focus. The IRS anticipates that when the project is completed, it will pursue employment tax referrals from state agencies that deal with the classification of workers for both workman’s compensation and unemployment purposes.

Don’t take the chance and lose everything you have worked for. Be a survivor and be successful – which is why you listen to our show.

When we come back we are going to tell you how you can get out of IRS trouble if you have workers you are treating as independent contractors.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

Calling into the studio from our San Francisco Office is my associate attorney, Amy Spivey.

Chit chat with Amy

Would Your Business Survive an Audit?

Jeff says, Like Jade and her nail salon, I do not know of any business owner who wants to be audited by the IRS or their state tax authority.  Audits can be simply random as “decided” by the IRS computer, or they can be triggered by certain characteristics of your business operation, for example how you’ve classified independent contractors or employees (especially if they apply for unemployment insurance, worker’s compensation benefits, or even welfare).

 

Amy, you have identified three key items the IRS and state tax authorities look for if you are an independent contractor or if you use them in your business

In the context of Jade’s nail salon, Jeff to read off each and Amy to explain.

1. Is there a lease between the independent contractor and the owner?

There must be a lease signed by the salon owner/landlord and each booth renter for every year of the audit. The IRS and your state can audit your records for the past three years (or as far back as they want if they determine your returns were fraudulent). The lease must clearly define the day-to-day operations of the booth rental operation and clearly define the separation between the salon owner/landlord and the booth renter. It should be clear how and when rent is paid: how service receipts are collected: hours of operation (hint: the independent contractor sets her own); receptionist services; who provides the equipment; who pays for supplies. Every aspect of the relationship must be spelled out.  A true independent contractor can incur financial loss (which means she invests in the business as well as earns a living from it).The salon owner must not have any control over when, where, or how the independent contractor works.

2. How is rent paid?

This was an area that got Jade in trouble. Independent contractors must pay a flat rate – not a percentage of their service income – based on the space used. Tax agencies take a dim view on charging rent as a percentage of services because it makes it difficult for the independent contractor to incur a loss (0% of 0 income is not a loss). Paying a commission also ties the economic well-being of the salon owner to the independent contractor, making it harder to argue that the independent contractor’s services are not integral to the success of the salon.

3. Who collects payment for services rendered?

Again, this area got Jade in trouble. The booth renter is responsible for collecting payment for all services rendered.  That doesn’t just mean taking the money from them at the front desk; it means the independent contractor must have her own cash box and have checks in her name.  They should be able to make change for cash paying customers and handle bad checks. A good rule of thumb is that a salon owner should never give an independent contractor money, and she should never issue an independent contractor a 1099 form.

Jeff says, now we only discuss three factors but the IRS and State tax agencies have other factors they can consider in determining whether the relationship is truly that of salon owner/landlord and independent contractor.

PLUG: And that is where our expertise and guidance can make a difference. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

 

Jeff asks, so where a business has been treating its workers as independent contractors and there is a concern that the IRS in an audit would not respect this arrangement, what can the business do?

Amy replies: The business should consider entering into the IRS’ Voluntary Classification Settlement Program (VCSP). The VCSP is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

 

Jeff asks, what is the eligibility for this program?

 

Amy replies, The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.

 

A taxpayer must have consistently treated the workers to be reclassified as independent contractors or other nonemployees, including having filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate.

 

Additionally, the taxpayer cannot currently be under employment tax audit by the IRS [income tax audit is OK] and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

 

If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

 

Jeff asks, so for a business that qualifies for VCSP what are they looking at for penalties?

 

Amy replies, A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer will:

• Pay 10% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code;
• Not be liable for any interest and penalties on the amount; and
• Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

 

PLUG: The VCSP is a valuable program that a business owner should consider. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

 

Now if your business treats all of its workers as employees, don’t think that you can still avoid IRS trouble. Stay tuned and you will find out why.

 

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

 

BREAK

 

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

 

And on the phone from our San Francisco office I have my associate attorney, Amy Spivey.

 

When Payroll Taxes Pyramid It Means Penalties, Even Jail

 

Jeff asks, does the IRS pursue all taxes equally?

 

Amy replies, not really. The IRS is especially vigorous in going after payroll taxes withheld from wages that somehow don’t get paid to the government.  The IRS calls it trust fund money that belongs to the government.

 

That makes any failure to pay—or even late payment—much worse.

 

In fact, that’s so regardless of how the employer or its principals use the money, and regardless of how good a reason they have for not handing the money over to the IRS. When a tax shortfall occurs in this setting, the IRS will usually make personal assessments against all responsible persons who have an ownership interest in the company or signature authority over the company accounts.

 

Jeff asks, how does that work?

 

Amy replies, The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person.” The penalty is assessed under Section 6672(a) of the tax code, and the IRS uses it liberally. You can be responsible and therefore liable even if have no knowledge that the IRS is not being paid. If there are multiple owners, multiple officers, multiple check signers, they all may draw a 100% penalty assessment.

 

Jeff asks, what happens when multiple owners and signatories all face tax bills?

 

Amy replies, they generally squabble and do their best to sic the IRS on someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck paying while another who is even guiltier may get off scot-free.

Jeff asks, so if the IRS is going after individuals, does the IRS stop any collection action against the company?

 

Amy says, No, the government will still try to collect from the company that withheld on the wages. The IRS also wants to make sure this kind of bad tax situation doesn’t occur again.

 

Jeff says, now so far you have talked about civil exposure which involves solely the payment of money. Can the government see criminal penalties?

 

Amy says, sure they can and the government will typically seeks to enjoin this behavior. That was the approach the government took with Advanced Underground Construction, an Iowa-based company, and its principal, William David Ward II. The Justice Department sought an injunction against both, alleging the company repeatedly failed to pay federal employment taxes withheld from wage checks, the amount now due exceeding $370,000.

 

The company was using the withheld taxes as working capital, the suit claimed. The government usually succeeds with this kind of argument. In this case, the Federal Court Ordered the Iowa Construction Company to Pay Employment Taxes.

 

The practice the government was going after is sometimes called “pyramiding.” The DOJ noted that the company had made minimal payments of its tax debts, and that attempts to induce voluntary compliance failed. To stop the bleeding in a case like this, the Justice Department can seek an injunction to require a company and its principals to make timely tax deposits, to pay all withheld employment taxes, and to timely file all employment tax returns.

 

Jeff says, and what happens to the principals if they fail to comply with the injunction?

 

Amy replies, they will be held in contempt and put into jail.

 

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

5 Payroll Tax Mistakes to Avoid

 

Jeff says: If you have at least one employee, you are responsible for payroll taxes. These include withholding federal (and, where appropriate, state) income taxes and FICA tax from employees’ wages as well as paying the employer share of FICA tax and federal and state unemployment taxes. The responsibility is great and the penalties for missteps make it essential that you do things right.

 

Jeff to read off each tip and Amy will reply.

 

1.  Misclassifying workers

Perhaps the hottest audit issue today is misclassifying workers. There’s incentive to treat workers as independent contractors rather than employees because payroll taxes and employee benefit costs are high; a company’s only tax responsibility for an independent is issuing a Form 1099-MISC if payments in the year are $600 or more.

You don’t have the freedom to select the label for the worker; classification depends on whether you have sufficient control over the worker. This essentially means having the right to say when, where, and how the work gets done. Having an independent contractor agreement is helpful in showing that you and the worker do not intend any employer-employee relationships, but it doesn’t bind the IRS, who is not a party to the agreement.

 

2.  Not using an accountable plan for employee reimbursements

If you normally pay for travel, entertainment, tools or other business costs for employees, you’re wasting employment tax dollars if you don’t use an accountable plan. With this arrangement, you deduct the expenses but avoid all payroll taxes on reimbursements; employees do not have any income from reimbursements.

To be an accountable plan, the employer must formalize the arrangement and set reasonable times for action (the following times are reasonable to the IRS but you can adopt shorter time limits for action):

• The reimbursable expense must be business related.
• Advances cannot be made before 30 days of the expense.
• Employees must account for the expenses within 60 days of the expense.
• Employees must return excess reimbursements to the employer within 120 days of the expense.

 

3.  Failing to keep payroll records

You are required to maintain payroll records and have them available for IRS inspection. These include time sheets, expense accounts, copies of W-2s and other payroll records. Usually, you should keep information for at least four years.

 

You should also retain copies of Forms I-9, which shows an employee’s eligibility to work in the U.S. States may also have certain hiring forms that should be retained (e.g., E-verify forms).

4.  Choosing to pay creditors before the IRS

When a business gets into a cash crush, it may be tempting to pay the landlord, vendor, or utility company before the IRS; don’t! As a business owner, you are a “responsible person” who remains 100% personally liable for “trust fund” taxes (amounts withheld from employees’ wages). This is so even if your business is incorporated or is a limited liability company.

 

Best strategy: Set aside cash to cover payroll taxes so you won’t use these funds for any other purpose.

 

5.  Failing to monitor payroll company activities

Many small businesses use outside payroll companies to handle the job of figuring withholding as well as transferring funds to the U.S. Treasury to cover payroll taxes. However, some of these companies may not do their job, by error or intentionally. As an employer, even if you use an outside payroll company you remain responsible for payroll taxes.

 

Best protection: Monitor your tax account to see that funds are being deposited on time and in the correct amount. If deposits are made electronically using EFTPS.gov, you can easily see activities in your account.

 

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

 

Stay tuned as we will be taking some of your questions. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

 

BREAK

 

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team along with my associate attorney, Amy Spivey.

 

If you would like to post a question for us to answer, you can go to our website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

 

OK Amy, what questions have you pulled from the kahntaxlaw inbox for me to answer?

 

1. What is the new maximum wage amount in 2015 that would be subject to a total Social Security FICA tax of 12.4%?

 

That amount will be $118,500. (Up from $117,000 in 2014). Remember that the employer pays 6.2% and the other 6.2% is withheld from the employee’s paycheck.

 

2. What is the regular Medicare Tax that applies to compensation?

 

There is no limit on the amount of earnings subject to Medicare (Hospital Insurance) Tax. The Medicare Tax Rate applies to all taxable wages and remains a total of 2.9% (with 1.45% withheld from the employee’s paycheck).

 

3. What is the new additional Medicare Tax that came into place?

 

Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012. The rate is 0.9%.

 

An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

Filing Status	Threshold Amount
Married filing jointly	$250,000
Married filing separate	$125,000
Single	$200,000
Head of household (with qualifying person)	$200,000
Qualifying widow(er) with dependent child	$200,000

 

4. When does the new additional Medicare Tax get reported and paid?

 

You will report Additional Medicare Tax on Form 8959, Additional Medicare Tax, and attach Form 8959 to your income tax return.

 

5. What payroll tax liabilities of my business could I be personally liable for?

 

It would be for those liabilities we call “Trust Fund Liability”. This constitutes those amounts an employer is required to withhold federal income and payroll taxes from its employees’ wages and pay them to the IRS. Withheld payroll taxes are called trust fund taxes because the employer holds the employees’ money (federal income taxes and the employee portion of Federal Insurance Contributions Act (FICA) taxes) in trust until a federal tax deposit of that amount is made.

 

If you have any responsibility for a business you will want to make sure you do not have this personal exposure.

 

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

 

Thanks Amy for calling into the show. Amy says Thanks for having me.

 

Well we are reaching the end of our show.

 

You can reach out to me on Twitter at kahntaxlaw. You can also send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com. That’s k-a-h-n tax law.com.

 

Have a great day everyone!

 

 

 

Topics Covered:

1. The Story Of Bradley Charles Birkenfeld And How Because Of His Actions No Longer Can Foreign Accounts Be A Secret.
2. A. With full implementation of FATCA, Foreign Account Tax Compliance Act, when do you start disclosing your foreign bank accounts and foreign income and how should you disclose?
3. Nine Things That Will Elevate Your Chances Of Being Targeted By IRS For Past Nondisclosure Of Foreign Accounts and/or Failure To Report Worldwide Income.
4. So you have not disclosed your foreign bank accounts. What you should expect your tax preparer to ask you when you come in to get your taxes prepared next year.
5. Questions from our listeners:
6. For the last ten years I maintained a foreign bank account which was never disclosed to the IRS and the IRS has not caught me. What makes you think they will catch me now?
7. I have an undisclosed foreign bank account. What if I just close out the account and transfer the money to the U.S?
8. I have a small amount in an undisclosed foreign account. It is true that the IRS will not bother with me because I am a small fish?
9. It is true the IRS has programs in place that if I come forward the IRS may waive any criminal prosecution and charge a reduced penalty?
10. I told my CPA that I have a foreign bank account that was never disclosed. Should I follow his advice and just amend prior year’s returns and file them with IRS?

Yes we are all working for the tax man!

Good afternoon! Welcome to the KahnTaxLaw Radio Show

This is your host Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

 

You are listening to my weekly radio show where we talk everything about taxes from the ESPN 1700 AM Studio in San Diego, California.

 

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

It is my objective to make you smarter so that you legally pay the least tax as possible, avoid tax problems and be aware of the strategies and solutions if you are being targeted by the IRS or any State tax agency.

Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into our website at www.kahntaxlaw.com.

If you have an undisclosed foreign bank account, then you better listen carefully to today’s show and helping me out today will be my associate attorney Amy Spivey who will be calling in later in today’s show. I also have calling into the studio my guest, Matthew J. Kahn, CPA who will be providing his helpful insight as well.

In November most people are starting to think about all the year-end holidays and celebrations. And as the close of the year approaches, more and more people will start thinking about taxes. And with the close of 2014 coming up quicker than you think, if you have undisclosed foreign accounts you have an important decision to make. That decision being – when do you start disclosing your foreign bank accounts and foreign income and how should you disclose?

Many people thought that forever they can keep their foreign accounts a secret – not just from their creditors and spouses but also from the IRS.

Well thanks to a man called Bradley Charles Birkenfeld, no longer can these foreign accounts be a secret.

Birkenfeld, an American citizen who grew up in Boston and educated at the American Graduate School of Business in Switzerland was an up and coming banker rising through the ranks of Switzerland’s greatest bank, UBS. Working at UBS in Geneva, Switzerland, as a private banker offering wealth management services, his principal job responsibility over his 5-year tenure at UBS was to solicit wealthy Americans to move their assets to the bank, enabling them to hide their funds due to Switzerland’s strict banking secrecy laws and thus avoid paying U.S. taxes.

Birkenfeld and other similar employees advised American clients how to avoid IRS scrutiny, including placing cash and jewels in Swiss safe

deposit boxes.

Birkenfeld was living the high life with UBS going to UBS sponsored events like art shows and yacht races in the United States to attract wealthy people as potential clients. The events gave its Switzerland-based bankers, who essentially behaved as salesmen offering the product of a Swiss tax haven, a chance to network with the rich in order to cement deals, which was illegal under U.S. banking laws.

One of Birkenfeld’s wealthiest clients was billionaire California real estate developer, Igor Olenicoff. Birkenfeld arranged for him to transfer $200 million to UBS and for Olenicoff to have these funds accessible via credit cards supplied to him by Birkenfeld. Birkenfeld then introduced Olenicoff to other bankers at UBS who helped him create off-shore companies to hid his assets and evade taxes.

Olenicoff subsequently pleaded guilty to tax evasion and paid a $52 million fine, but avoided a jail sentence. Apparently the DOJ had their sites on a bigger target – that being Birkenfeld.

Birkenfeld continued work at UBS until 2005 when he resigned. To this day it is not clear why he resigned – could it be he did not get the raise or bonus he expected? Maybe he did not get that promotion he thought he deserved?

What he did end up doing was going to the DOJ and informing the DOJ of UBS’ business practices.

At the same time, Birkenfeld wanted to take advantage of a new federal whistleblower law [the Tax Relief and Health Care Act of 2006] that could pay him up to 30% of any tax revenue recouped by the IRS as a result of Birkenfeld’s information.

Birkenfeld also wanted immunity from prosecution for his part in UBS’s transactions.

Essentially Birkenfeld wanted to have his cake and eat it too!

When Birkenfeld saw that the DOJ was not meeting his demands, he contacted the Securities and Exchange Commission, the IRS, and the U.S. Senate.

You would think with all of this information Birkenfeld would receive royal treatment by the Federal government. Instead, in May 2008, Birkenfeld was arrested in Boston when he deplaned from Switzerland. He was arraigned at the U.S. District Court, Southern District of Florida.

The DOJ prosecutor in the case justified the prosecution of Birkenfeld by claiming he failed to be forthcoming about his clients, specifically, Igor Olenicoff.

Eventually Birkenfeld agreed to plead guilty to a single count of conspiracy to defraud the United States.   Birkenfeld was sentenced by the U.S. District Judge to 40 months in prison and paying a $30,000 fine.

Since Birkenfeld blew the whistle on the UBS tax evasion scandal in 2007, UBS has been able to avoid prosecution by agreeing to pay a fine of $780 million to the U.S. government.

Additionally, UBS paid $200 million for settlement with the U.S. Securities Exchange Commission (SEC) to avoid a trial on UBS’ alleged conduct that the company facilitated the ability of certain U.S. clients to maintain undisclosed accounts in Switzerland and other foreign countries, which enabled those clients to avoid paying taxes related to the assets in those accounts.

Finally to avoid additional fines, UBS agreed to provide the names of all Americans who had offshore accounts with UBS (this totaled more than 4,500 names).

In the wake of the UBS scandal, the erosion of Switzerland’s fabled bank secrecy culminated when Switzerland officially signed on October 15, 2013 a treaty called the Convention on Mutual Administrative Assistance in Tax Matters.  By Switzerland signing the treaty, they no longer could be a tax haven for offshore assets. The U.S. had won its war against Switzerland!

This then set the stage for the IRS’ worldwide campaign to break into foreign financial institutions and uncover U.S. accountholders.

So what ended up becoming of Birkenfeld? Birkenfeld was able to get his sentence commuted and ended up serving about 32 months. In September 2012, the IRS Whistleblower Office awarded Birkenfeld $104 million as a whistleblower. After serving a 32 month jail sentence – that equates to daily compensation of about $105,000.00.

And for everyone else who has an undisclosed foreign bank and does not take the appropriate steps, you are about to suffer a huge financial hemorrhage and be at risk to loose your freedom.

Well it’s time for a break but stay tuned because we are going to tell you Nine Things That Will Elevate Your Chances Of Being Targeted By IRS For Past Nondisclosure Of Foreign Accounts and/or Failure To Report Worldwide Income.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

Calling into the studio from our San Francisco Office is my associate attorney, Amy Spivey.

Chit chat with Amy

So Amy in today’s show we are focusing on the issue that if you have undisclosed foreign accounts you have an important decision to make. That decision being – when do you start disclosing your foreign bank accounts and foreign income and how should you disclose?

Amy I understand that not too long ago Congress gave the IRS broad powers to tackle this problem of taxpayers not disclosing their foreign accounts. Please tell us about this legislation.

Amy replies, FATCA – Foreign Account Tax Compliance Act.

This legislation became law in 2010. Starting in 2014, the IRS will have the ability to match taxpayers’ returns against the information it receives on U.S. taxpayers with accounts at foreign financial institutions. The IRS will likely scrutinize taxpayers who have not filed the required Form 8938, Statement of Specified Foreign Financial Assets, or FinCen Form 114, Report Of Foreign Bank Account (commonly known as “FBAR”). Our office has a lot of cases representing taxpayers with undisclosed foreign bank accounts – it is a hot issue with IRS.

Jeff asks, how is it that foreign banks are acceding to IRS demands for information on U.S. account holders?

Amy, replies: Under FATCA if a foreign bank cannot certify that it has reported its U.S. accountholders to the IRS, that foreign bank will be subject to 30% withholding tax on its U.S. investments.

Jeff asks: So if one has a foreign bank account, how are they getting notified by the foreign bank?

Amy replies: The account holder will be asked to complete a W-9 Form.

Jeff asks: And if the accountholder fails, what happens?

Amy replies, their account will be frozen by the bank and this will be reported to IRS.

Jeff says, PLUG: Having undisclosed foreign accounts or any other tax problem will only get worse if you ignore these problems. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff says, Now Amy you have done some research and found Nine Things That Will Elevate Your Chances Of Being Targeted By IRS For Past Nondisclosure Of Foreign Accounts and/or Failure To Report Worldwide Income.

Jeff to read off each item for Amy to then comment.

1. Starting to report foreign income on your 2014 income tax return and disregarding the fact that you did not disclose this in previous years.
2. Starting to report your foreign accounts on an FBAR in 2014 and disregarding the fact that you did not disclose this in previous years.
3. Filing delinquent FBAR’s with or without statement as to why they are filed late.
4. Filing amended income tax returns identifying that you have foreign accounts and reporting foreign income.
5. Supplying your foreign bank with your identifying information so that the bank can report you to IRS.
6. Ignoring requests from your foreign bank for your identifying information.
7. Transferring funds from the U.S. to your foreign account or from the foreign account to the U.S.
8. Paying your credit cards and other bills from an account associated with a foreign bank.
9. Closing your foreign account and withdrawing the funds or transferring the funds to another bank (whether to the U.S. or another foreign bank).

Jeff says, PLUG: I cannot stress enough of the importance that if you have undisclosed foreign accounts or any other tax problems that you take action now. Call the Law Offices Of Jeffrey B. Kahn. When you mention the KahnTaxLaw Radio Show when making an appointment we will provide you with a Tax Resolution Plan which is a $500.00 value for free. You will meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Thanks Amy for calling into the show. Amy says, Thanks for having me.

Stay tuned because after the break Matthew J. Kahn, CPA will be joining me and he is going to tell you what you should expect your tax preparer to ask you when you come in to get your taxes prepared next year.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

Calling into the studio from South Florida is Matthew J. Kahn, CPA.

Chit chat with Matt

Jeff says: This is Matt’s first time on the show any by the way of full disclosure, Matt is my brother. Matt is a Certified Public Accountant and a Certified Chartered Global Management Accountant and has his own accounting practice in South Florida. He represents clients not only in South Florida but all over the country and internationally. In fact we have some cases that we are working on together where the clients live abroad.

Jeff asks Matt, the first thing that I know comes to someone’s mind is: WHAT ARE THE THREE MOST COMMON INSTANCES THAT SOMEONE WOULD HAVE AN UNDISCLOSED FOREIGN BANK ACCOUNT?

Matt replies:

1. A relative in a foreign country opens a bank account when you were a child and never told you about it.
2. You lived in a foreign country and set up an account there and then came back to the U.S.
3. A relative died and left you with a foreign account.

Jeff states OK so you have given us some examples of how an undisclosed foreign bank account could arise. Jeff asks Matt – so when someone has a foreign account, what are the four filing requirements one must follow?

Matt replies:

1. Must include worldwide income on your income tax return.
2. Look at Schedule B of the return and check off yes to the box inquiring whether you have a foreign bank account.
3. Complete Form 8939 and attach it to the return.
4. File by June 30^th the FBAR (Form Fin CEN 114).

Jeff asks Matt: WHAT ARE THE PENALTIES?

Matt replies: The most significant penalty is the penalty for failure to file a Form TD F 90-22.1 (now known as FinCEN 114), Report of Foreign Bank and Financial Accounts (“FBAR”). The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation. Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation – that is $10,000.00 per account/per year. Considering that the government can go back 6 years, this non-willful penalty can expand rather quickly.

Criminal penalties are also possible, and can include fines of up to $500,000 and/or 10 years in prison.

Jeff says: Those are some serious penalties. If you have undisclosed foreign bank accounts you should not ignore this. We have a special offer for our listeners. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff asks Matt: As a CPA who prepares tax returns for your clients, is there some authority of the IRS that you most follow?

Matt replies: Yes the IRS puts out a Code Of Professional Responsibility commonly called Circular 230 which if a tax preparer violates could lead to big penalties and sanctions for that tax preparer.

Jeff asks Matt, What kind of penalties could a tax preparer be looking at?

Matt replies: Internal Revenue Code § 6694(a) provides that if any part of an understatement of a taxpayer’s liability is due to an “unrealistic position” taken on his return, any income tax return preparer who knew (or reasonably should have known) of this position is subject to a penalty of $250. If the understatement is due to a reckless or intentional disregard of rules or regulations the penalty is $1,000 per occurrence. The preparer’s employer, firm or entity also is subject to the penalty if it knew, or reasonably should have known, of the conduct giving rise to the penalty. While these may not seem like large amounts, if this penalty is assessed IRS employees are instructed to report the income tax return preparer to the IRS Office of Professional Responsibility also known as OPR. A preparer who is referred to the IRS’s Office of Professional Responsibility, may be subject to suspension, disbarment, or censure. In addition, if the preparer has violated Circular No. 230, the IRS may impose a monetary penalty in an amount up to the gross income derived or to be derived from the conduct giving rise to the penalty.

Jeff asks, can the IRS go criminal on the tax preparer?

Matt replies: Unscrupulous tax return preparers are generally prosecuted for violation of the Internal Revenue Code §7201, Attempt to Evade or Defeat Tax, is a felony offense and carries a maximum potential penalty of up to five years in prison and a fine of up to $250,000. Title 26, U.S. Code, Section 7206 (1) and (2), Fraud and False Statements, carries a maximum potential penalty of up to three years in prison and a fine up to $250,000.

Jeff asks: Those are some serious penalties. What is one of the main obligations that a tax preparer must follow?

Matt replies: Circular 230 §10.22 Diligence as to accuracy which states that:

Each attorney, certified public accountant, enrolled agent, or enrolled actuary shall exercise due diligence:

1. In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
2. In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and
3. In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.

Jeff asks: So Matt this does not mean that you as a tax preparer have to actually audit or examine the records of your client.

Matt replies: No a tax preparer would not be auditing or examining a client’s records. Under Circular 230, section 10.34(d), a practitioner may generally rely, in good faith and without verification, on information furnished by a client. However, good faith reliance contemplates that a practitioner will make reasonable inquiries when a client provides information that implies possible participation in overseas transactions/accounts subject to FBAR requirements.

Jeff states, so a tax preparer can reply on information provided by the client in good faith. But what if the client makes certain statements that sound suspicious?

Matt replies, a practitioner may not ignore the implications of any information provided to or actually known by the practitioner. If the information furnished by the client appears to be incorrect, inconsistent with other known facts, or incomplete, the practitioner is required to make further inquiry. The practitioner is also required by Circular 230, section 10.34(c), to advise a client of any potential penalties likely to apply to a position taken on a return the practitioner is preparing or on which she or he is advising.

Now Matt being a tax preparer you get a lot of people that come to you mostly once a year to get their tax returns done. With the IRS having more resources and information to detect taxpayers with undisclosed foreign accounts, what changes should taxpayers expect when they next meet with their tax preparer?

Matt replies, you can expect your tax preparer to ask the following questions:

• Does the client have a foreign account?
• If yes, is it the type of account that is covered by 31 U.S.C. Section 5314?
• If applicable, has the client properly completed Form 1040, Schedule B, Interest and Ordinary Dividends, Part III, Line 7a?
• Has the client annually reported the income from the account?
• Has the client filed FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR)?
• Has the client filed Form 8938, Statement of Specified Foreign Financial Assets, with his or her federal income tax return?
• Has the IRS already contacted the client about the foreign account?

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

You have been listening to Matthew J. Kahn, CPA and if you would like to get in touch with Matt you visit his website at www.yourfloridacpa.com. Thanks Matt for calling into the show. Matt says, Thanks for having me.

Stay tuned as we will be taking some of your questions. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team. For the last segment of each show, I like to pull your questions and do my best to answer them over the air.

If you would like to post a question for us to answer, you can go to our website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

So let me start with this week’s set of questions.

1. For the last ten years I maintained a foreign bank account which was never disclosed to the IRS and the IRS has not caught me. What makes you think they will catch me now?
2. Full implementation of FATCA now mandates reporting of U.S. accountholders by foreign banks to the IRS.
3. IRS has the resources and systems in place to track down and enforce the tax laws on non-compliant taxpayers.
4. Tax preparers are under pressure by IRS to follow due diligence when preparing tax returns.
5. I have an undisclosed foreign bank account. What if I just close out the account and transfer the money to the U.S?
6. The closure of the account and transfer of the funds does not cure past non-compliance.
7. The foreign bank will still report the closed account to IRS and monies that are transferred will be reported through normal banking channels.
8. I have a small amount in an undisclosed foreign account. It is true that the IRS will not bother with me because I am a small fish?
9. IRS is looking to collect a lot of revenue – catching a lot of small fish adds up to a lot.
10. It is true the IRS has programs in place that if I come forward the IRS may waive any criminal prosecution and charge a reduced penalty?

Yes – being proactive and coming forward under one of these programs would be in your best interest. You do not want to wait for the IRS to find you. By then it is too late and you cannot get into one of the IRS’ programs.

5. I told my CPA that I have a foreign bank account that was never disclosed. Should I follow his advice and just amend prior year’s returns and file them with IRS?

That is what we call a quiet disclosure or silent disclosure. It does not work because the IRS is programmed to intercept these filings and have the taxpayers turned over for audit or investigation.

PLUG: Having undisclosed foreign bank accounts is something that we take seriously and so should you. The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Well we are reaching the end of our show.

You can reach out to me on Twitter at kahntaxlaw. You can also send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com. That’s k-a-h-n tax law.com.

Have a great day everyone and a great weekend!