Avoiding Increases in Taxes in IRS Audits over Your Charitable Giving

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Giving money or goods to a charity is admirable but it can also lead to headaches with the IRS if you don’t do it right. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. have dealt with many cases where charity donations being claimed incorrectly were picked up in tax audits and the IRS was looking to assess penalties. As a leading tax attorney in San Francisco, we can offer some tips that can help you to avoid potential problems down the road with a tax filing relating to your charitable giving.

Donating Clothes and Household Goods: One common issue that IRS tax attorneys see with charitable giving comes from donating clothes and household items. If you donate goods with a value of more than $250, you need to get an acknowledgement of the donation in writing from the charity.

Donating Money: If you make a donation of more than $250 to a charity, you need to receive a letter acknowledging this donation from the charity in order to claim a tax exemption. If your donation is under $250, you can either use this type of letter or a bank statement, canceled check or credit card statement as proof of the donation.

Eligible Donations: One of the major issues that an IRS agent will see as a red flag is claiming an ineligible donation. In order for your donation to be tax-deductible, the organization you give it to has to be a registered Exempt Organization.  Also, your charitable deduction cannot include the value of any benefits you received from the charity.  An example would be where you paid $200 to attend a charitable ball for which the charity states that the value of the ticket is $75.  In such an instance your charitable deduction would be $125.

Claiming Deductions for a Home Office

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The tax law allows qualified taxpayers to deduct a home office.  However, because the IRS perceives that taxpayers either misuse or abuse this deduction, the IRS puts these taxpayers at a higher risk for audit. The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. can provide you with guidance in balancing the benefit of the home-office deduction and risk of such deduction being denied by the IRS in an audit.

An IRS audit usually involves many complex tax law issues besides entitlement to and amount of a home-office deduction which we see on a regular basis. With that in mind, here are a few tips to keep in mind if you are looking to claim a home office:

Dedicated Space: Any space in your home that you claim to be your home office needs to be exclusively dedicated to work use. This means that if you have a room in your home that solely functions as your work office, you can claim it. But you can’t claim your kitchen table.

Regular Use: You also need to regularly use your home office space for work in order to claim a deduction. This doesn’t mean that you have to be there working from 9 to 5 every day, but it does mean that you need to work from home frequently.

Indirect Deductions: You can claim 100 percent of your deductions for direct work expenses like your computer, printer or upkeep on your work space. You can also claim a partial deduction for home-related items such as mortgage payments and utility bills. This is prorated based on the size of your home office.

Tips for Surviving a Small Business Tax Audit

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What small business owner would want to get audited by the IRS? Most business owners who receive notice that their business is selected for audit avoid the stress by hiring a criminal tax attorney or an IRS audit specialist attorney to represent the business. An experienced tax attorney knows how to prepare for the audit and can give you the confidence needed to get the best outcome.

The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people with the small business tax audits. Drawing from our experience of tax lawyers directly representing businesses in IRS audits, here are some valuable tips that can help any small business be ready for their date with the IRS:

Stick to the Relevant Facts: Don’t give lengthy explanations to questions from the auditor or start talking about things that aren’t relevant to what was asked. This will only give the auditor other potential avenues for discussions.

Listen to Your Representative: If you are working with a tax attorney lawyer or other professional, make sure you stick to their advice. After all, they have the experience you lack and won’t be intimidated by going through the auditing process.

Bring in the Right Documentation: Make sure that you have all of your receipts or tax records for the year you are being audited for in a system that makes them easy to refer to during the audit session. Don’t being in tax records or receipts from other years; this just opens you up to potential audits on these years as well.

Small Business Owners Can “Fast Track” Audit Process

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The Law Offices Of Jeffrey B. Kahn, P.C. has some news of particular interest to small business owners. The Internal Revenue Service has given small businesses a chance to expedite the audit process with its new Fast Track Settlement program. Under the terms of the program announced by the IRS in November 2013, small business owners can work with their IRS audit attorney to avoid the formal litigation or administrative appeal process. In most cases, the FTS program means that audit issues are taken care of within 60 days.

The Fast Track Settlement program is modeled on a program that has previously existed for medium-sized and large-sized businesses with more than $10 million in annual income. A pilot version of the program started in 2006 and was expanded in 2008 and the IRS is now extending it to all small business owners.

It’s important to keep in mind that the Fast Track Settlement program doesn’t guarantee a positive resolution to your dispute which is why you’ll still want to hire IRS tax attorneys who understand the regulations to fight on your behalf. But what this program offers is to speed up the entire process, saving small businesses from potentially lengthy and costly litigation.

Although the Fast Track Settlement is presided over by an IRS appeals officer who is supposed to be acting as a “neutral party”, that Appeals Officer will not be able to provide you with any guidance or advice.  Because of this, it’s a good idea to work with an experienced San Diego tax lawyer with the Law Offices Of Jeffrey B. Kahn, P.C. to represent you during this phase of the process.

Disclosing Foreign Accounts Through the Offshore Voluntary Disclosure Initiative

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IRS has established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts under what the IRS calls the Offshore Voluntary Disclosure Initiative (OVDI).

On January 9, 2012 the IRS announced the terms of the 2012 OVDI which requires that taxpayers: (1) File 8 years of back tax returns reflecting unreported foreign source income; (2) Calculate interest each year on unpaid tax; (3) Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and (4) Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years.

In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).

Recent closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS.

For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.

Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls of non-disclosure or incomplete disclosure.

IRS Processing Information Reported by Foreign Banks of their U.S. Accountholders

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The Department of Justice started pressuring Swiss Banks including UBS and Credit Suisse to reveal bank account information on their account holders who are U.S. citizens or U.S. residents. Information from the Swiss Banks and other European Banks has now been flowing to IRS and is being used by IRS to uncover taxpayers who have not disclosed foreign income and foreign accounts. The IRS is now aggressively supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world, with a new emphasis in Asia, India, Israel and the Middle East pressuring banks like HSBC and others to reveal U.S. accountholder information.

The IRS has established a Special Unit to disseminate bank information received from foreign banks and compare it to the forms and information reported by U.S. taxpayers on their tax returns. In addition, this Unit is able to review previously filed FBAR’s to determine whether all income was reported on each income tax return. Starting in 2011, taxpayers who have foreign assets are also required to disclose those assets with the filing of their Federal Individual Income Tax Return. This reporting will serve as an additional tool for this Unit.

Following the mandate of the Foreign Account Tax Compliance Act (FATCA), U.S. tax authorities and foreign governments are on track to conclude dozens of agreements known as Intergovernmental Agreement (IGA) in coming months on the sharing of financial data about citizens. FATCA, made law in 2010 as part of a crackdown on tax dodging by wealthy Americans, requires foreign financial institutions to disclose to the IRS more about Americans’ Offshore accounts. Banks and other institutions are affected by the law, which Treasury is implementing through a series of bilateral IGA’s. Completed pacts are in place with Britain, Denmark, Ireland, Mexico and Switzerland. More than 50 other countries are working with Treasury to sign IGA’s by the end of 2013.

The penalties for non-disclosure are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls of non-disclosure or incomplete disclosure.

Reporting Foreign Bank Accounts to IRS

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The Bank Secrecy Act requires that a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This form is used as part of the IRS’s enforcement initiative against abusive offshore transactions and attempts by U.S. persons to avoid taxes by hiding money offshore.

The FBAR covers a calendar year and must be filed no later than June 30th of the following year (regardless of whether you file an extension for you Form 1040) and includes any interest a U.S. person has in:

Offshore bank accounts
Offshore mutual funds
Offshore hedge funds
Offshore variable universal life insurance policies
Offshore variable annuities a/k/a Swiss Annuities
Debit card and prepaid credit card offshore accounts

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls of non-disclosure or incomplete disclosure.

IRS Enforcement Action to Combat Offshore Tax Evasion

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In his closing remarks, IRS Commissioner Doug Shulman affirmed that the IRS has significantly increased its resources and focus on offshore tax evasion. Since 2009 IRS gave taxpayers a chance to come in voluntarily and avoid going to jail. With the IRS’ mining of information it has received over the last few years, the IRS has launched its next wave of investigations on banks, bankers, intermediaries and taxpayers. Not only is the IRS looking to collect additional revenue for past misdeeds but to also to fundamentally change the risk calculus of taxpayers who are thinking about hiding their money overseas and deter the next generation of taxpayers from using hidden bank accounts to cheat on their taxes.

The Bank Secrecy Act requires that a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This form is used as part of the IRS’s enforcement initiative against abusive offshore transactions and attempts by U.S. persons to avoid taxes by hiding money offshore.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

The U.S. since 2009 has prosecuted about 70 U.S. taxpayers and 30 bankers, lawyers and advisers in a crackdown on offshore tax evasion and officials are still swiftly moving forward with further investigations and prosecutions.

In advance of the expected large wave of enforcement to be commenced by IRS, the IRS had established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts under what the IRS calls the Offshore Voluntary Disclosure Initiative (OVDI).

OVDI allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

U.S. Treasury Closer To Inking Foreign Tax Info-Sharing Deals

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U.S. tax authorities and foreign governments are on track to conclude dozens of agreements in coming months on the sharing of financial data about citizens, with deadlines nearing for implementation of a sweeping U.S. anti-tax evasion law – the Foreign Account Tax Compliance Act (FATCA). More than 50 other countries are working with the IRS to sign Intergovernmental Agreements which need to be in place by the end of 2013. If a foreign bank or financial institution falls to comply with FATCA, it could be frozen out of U.S. capital markets. Thus, foreign firms have a big incentive to comply with the law in reporting U.S. account holders.

The Bank Secrecy Act requires that a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the aggregate balances of such foreign accounts exceed $10,000 at any time during the year. This form is used as part of the IRS’s enforcement initiative against abusive offshore transactions and attempts by U.S. persons to avoid taxes by hiding money offshore.

The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. The penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

The IRS has established the Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.