Jeffrey B. Kahn, Esq. Discusses Taxes, the IRS, and Undisclosed Foreign Accounts On ESPN Radio – January 23, 2015 Show

Topics Covered:

1. IRS Seizure Of Business Funds – The Plight Of Carole Hinders.
2. Beware Your Hobby Business Could Land You In Tax Court.
3. FATCA Enforcement – Sovereign Management In Panama Now Under DOJ/IRS Investigation.
4. Questions From Our Listeners:

a. What should I be looking for in a tax preparer this tax season to prepare my tax return?

b. How long should I keep my tax papers?

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. And joining me in the studio is our producer Will Maldonado.

Chit chat with Will.

Jeff continues,
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.
So let’s get the show going with our top story.

How The IRS Turned Carole Hinders’ Life Upside Down.

Iowa restaurant owner’s fight against the IRS gains national attention

A restaurant owner in northwest Iowa has landed in the national news spotlight over her fight with the federal government. Carole Hinders who at the time was 67 years old and a grandmother has operated Mrs. Lady’s Mexican Food in Arnolds Park, Iowa for 38 years.

Nowadays it is most notable for a small business to be in operation for 38 years – especially if it is a restaurant which we all know “come and go”. Even more notable for Ms. Hinders was that she was always in full compliance with her tax obligations. But despite her clean tax record, on May 22, 2013 while settling into a crossword puzzle with her grandchildren she was visited at her home by a pair of IRS agents who stated that they had closed her business bank account and seized all her money, which at the time was almost $33,000.

As the IRS agents were leaving her house she pleaded “How am I supposed to pay my bills? How am I supposed to pay my people?” The agents replied – we don’t know.

You may ask how could this have happened? You see – she did not have any outstanding liability to the IRS. The problem though is that Ms. Hinders’ restaurant only accepts cash so Ms. Hinders makes frequent trips to the bank to avoid having large sums of money on the business’ premises.

As part of the federal government’s dragnet surveillance of the civilian population, everyone’s banking activities are monitored for “red flag” activities. Under the Bank Secrecy Act of 1970, banks are required to report to the IRS transactions on every individual who deposits or withdraws more than $10,000 in cash to or from a personal bank account on a given day. These reports indicate the financial activities that took place and include the individual’s bank account number, name, address, and social security number.

People who know of this law and are seeking to avoid this level of reporting by the bank will often go to great lengths to make multiple deposits so that no single deposit will be greater than $10,000. This tactic is called “structuring”. The IRS thinking that Ms. Hinders was making small deposits to evade this reporting requirement used its civil forfeiture power to seize Ms. Hinders’ bank account and close down her business.

That’s right – federal law enforcement agencies are invested with the power of civil forfeiture whereby the agency can take cash, cars and other property without charging the property owner with a crime. The property owner need not receive any advance warning or notice before the assets are seized by the federal government. The government need not prove that a person is guilty of a crime – only that he or she is suspected of committing a crime. This law was designed to catch terrorists, money launderers, drug lords and serious criminals – but it can also be used by the government against law-abiding businesses.

Ms. Hinders said she received no warning from either her bank or the government before her money was taken. The reason that the federal government does not have to read you your rights, or advise you that you can have a lawyer, or do any of the things that the constitution is supposed to provide, is that they don’t charge the person with the crime, they charge your money with the crime.

Since then, she’s had to borrow money and use credit cards to pay bills and keep her restaurant in business. But Ms. Hinder was not stopping there – she knew she didn’t do anything wrong and did not owe anything to the IRS. But yet the IRS took her money so Ms. Hinders’ decided she was going to fight the IRS.

The Battle Against IRS Begins

Remember Ms. Hinders was never accused of any crime. The Mexican restaurant she owned, Mrs. Lady’s, did not accept credit cards, and she regularly deposited earnings in a bank branch a block away. She followed this procedure for almost four decades. And all this activity occurred in rural Northwestern Iowa – far from any foreign border and in a region not known for drug dealing and money laundering.

Ms. Hinders and similar business owners were making deposits under $10,000 because that is the kind of money their business is bringing in – not because of a desire to avoid government reporting. Ms. Hinders stated “How can I be committing a crime by depositing money that I worked for, and deposited in my own bank account? In 30 years of banking with the same bank, no one ever mentioned that I was making my deposits wrong.”

Ms. Hinders wasn’t using the money for illegal purposes. Her business doesn’t accept credit cards and the law fails to provide provisions for small businesses with limited cash flow. Ms. Hinders frequently deposited money in order to keep it safe in the bank. 

But yet the government was treating Ms. Hinders like a criminal, just for running an honest cash business.

She hired an attorney to sue the IRS and regain her property. In civil forfeiture cases, the government must file lawsuits “against” property or cash in order to keep it. This one was called United States of America v. $32,820.56 in United States Currency (Case No. 2013-CV-4102). This lawsuit was filed in Federal District Court for the Northern District of Iowa. Weeks later Ms. Hinders was deposed. After her deposition, it became overwhelmingly clear that Ms. Hinders was an innocent and hardworking restaurateur. The Assistant United States Attorney on the case had then informed the IRS that they should not go forward with the case. The IRS agreed and the case was dismissed but without prejudice – meaning that the government can file another action in the future to get Hinders’ money if the court grants its motion.

Are There Any Safeguards In Place For The IRS To Follow So Things Like This Do Not Happen?

Critics say the IRS rarely investigates such cases to see if the business owner has legitimate reasons for making small deposits, such as an insurance policy that covers only a limited amount of cash.

Seizing assets without criminal charges is legal under a controversial body of law that allows law enforcement agents to seize cars, cash and other valuables they believe are tied to criminal activity. The burden of proof falls on owners seeking the return of their property. In fact what happened to Ms. Hinders has prompted the two high-ranking members on the House Ways and Means committee to file bipartisan legislation to curb abuses of the practice, known as civil asset forfeiture. Civil asset forfeiture even become an issue in the confirmation of President Obama’s nominee for attorney general, Loretta Lynch, who as United States attorney for the Eastern District of New York presided over a case involving more than $440,000 seized from a family-run cash-intensive candy and cigarette distributor that has been operating in Long Island, New York for 27 years.

There is nothing illegal about depositing less than $10,000 cash unless it is done specifically to evade the reporting requirement. But often a mere bank statement is enough for investigators to obtain a seizure warrant. In the Long Island case, the police submitted almost a year’s worth of daily deposits by a business, ranging from $5,550 to $9,910. The officer wrote in his warrant affidavit that based on his training and experience, the pattern “is consistent with structuring”.

The IRS has since stated that it would consider more carefully seizures in cases where there is no suspicion that the money involved came from an illegal source. But of course officials did not go so far to drop cases that were already underway or to even stop using this form of power. The IRS made 639 of these seizures in 2012, compared to 114 in 2005. And only one in five was prosecuted as a criminal case. So you are probably thinking was the money from the other 80% of cases returned to its rightful owners?

Well in Ms. Hinders’ case she still faces the possibility of the IRS reopening her case. The IRS claimed that their case was “justified” and requested the right to be able to refile the case at another point in time. You would think that the IRS would have instead simply return the money with interest and apologize to Carole for the nightmare they put her through. Instead the IRS is shamefully attempting to mask their retreat by insisting on the right to refile the case in the future.

Well it’s time for a break but stay tuned because we are going to discuss how your Hobby Business Could Land You In Tax Court.

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 joining me in the studio is our producer Will Maldonado.

Beware Your Hobby Business Could Land You In Tax Court

Your hobby business could land you in Tax Court – avoid IRS pitfalls by how you structure your small business.

Many people successfully develop a hobby into a going concern and actually receive income from it. That income must always be reported and taxes paid on that money regardless of your situation. If you leave that hobby as a hobby, under the tax law, you are not allowed to deduct any of the losses incurred by activity in that hobby. That is the reason most people turn their hobbies into businesses once they start making money.

Will asks Jeff: When Are Hobby Losses Deductible?

Jeff replies: By showing that your pursuit of you “hobby” is an activity engaged in for profit, you may be able to deduct those years where you incurred losses if you meet certain presumptions.

Will asks, Jeff, what are those presumptions?

Jeff replies:

For activities not involving the breeding, training, showing, or racing of horses, the presumption is that you business is an activity engaged in for profit where you show annual net income from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the most recent taxable year. So if for the first three years your activity has incurred losses, you must show net income (of at least $1.00) in years four and five in order to still be able to deduct the first three years of losses.

For activities involving the breeding, training, showing, or racing of horses, the presumption will work in the same fashion except you must show annual net income from an activity for 2 or more of the taxable years in the period of 7 consecutive taxable years which ends with the most recent taxable year.

Jeff states, Despite these presumptions, the IRS does not always see your hobby as a viable business, and that is where tax difficulties arise.

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.

Jeff states, There are a number of court cases where the question of hobby or business has been decided for the particular business by the IRS, and under challenge, the cases end up in Tax Court. Here are five cases that landed in Tax Court worth discussing.

Jeff to state each category first and discuss. Will can add color commentary.

1. Fishing: In Busbee v. Commissioner, T.C. Memo 2000-182, this taxpayer decided to hold fishing tournaments. These tournaments required him to promote the activity through flyers, speaking engagements, and other marketing efforts. He had to recruit participants and sponsors. He intended his hobby of fishing tournaments to supplement his retirement income as he developed it into a business. Through the process, he became an expert in bass fishing. The Tax Court considered all of this, and allowed his business.

In Peacock v. Commissioner, T.C. Memo 2002-122, this taxpayer began tournament fishing in his retirement. Sailing everywhere on his personal yacht, he and his wife fished specifically for the pleasure of participating in the tournament, especially when these tournaments were in exotic locales. In this case, the Tax Court decided this was not a business but a hobby for the activity was not “motivated primarily by the pursuit of profit.” What probably hurt their case, even subtly, was the fact that they had just sold a business and were now millionaires.

2. Writing: There is an infamous case which always gives people a chuckle, and that is the man who decided to write about prostitution. Vitale v. Commissioner, T.C. Memo 1999-131. Ralph Louis Vitale, Jr., in 1999, claimed on his tax return that he was in the business of writing about prostitution. When this taxpayer began his “research” four years before his retirement, he was still a full-time employee. Over the course of time, he visited a large number of brothels doing his “research” and always paying for services in cash (no records kept). He did keep a journal detailing each of his visits and expenses, and eventually developed a manuscript from his notes. Vitale submitted his manuscript to a vanity publisher, paying $4,375 to publish it. All tolled, after he received $2,600 in royalties, the publisher went bankrupt. Subsequently, the book rights were returned to the taxpayer, and he again began marketing his book throughout the industry. The IRS said this was just a hobby and disallowed Vitale’s deductions. So Vitale went to Tax Court. At first, the Tax Court felt that the taxpayer had a profit motive and overruled the IRS, even though the court also made comments about the “recreational” qualities of the contents of his book. The court did like his record-keeping and marketing and felt it showed his professionalism. Then the Tax Court disallowed all of his deductions, for the taxpayer could prove none of them (remember the cash payments?), but the court did not penalize this taxpayer in any way, saying that he had made a reasonable attempt to comply with the law.

Jeff states:

The U.S. Tax Court weighs “profit motive” most heavily in each of their decisions. Profit is a key decider when considering whether an activity is hobby or business. Is your hobby truly for profit or only for pleasure? That is foremost and basic premise that the Tax Court considers.

Jeff states:

There seem to be two “hobbies” that trigger audits most frequently and those are horses or yachts. Both are money pits, and so if people can figure out a way to make a business out of them, that will provide either tax deductions and/or income to cover the high expenses of each. The IRS knows this, and is very strict when applying the rules to these activities. When structuring these, pay very close attention to business start-up details.

Jeff states, If you follow good business practices when converting your hobby into a business, you have a greater chance of convincing the IRS it is a real business. Your business records must be up-to-date and accurate, and your business plan must lay out a course for creating profit from your activity in the future. That written business plan can be a real asset if you end up in Tax Court versus the IRS.

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 because after the break we are going to tell you a new target by the IRS to get information on U.S. taxpayers with undisclosed foreign bank accounts.

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 joining me in the studio is our producer Will Maldonado.

Sovereign Management In Panama Now Under DOJ/IRS Investigation.

Jeff states, The government lately has stepped up its efforts in uncovering taxpayers with undisclosed foreign bank accounts and unreported foreign income. Separate from United States income tax returns, many U.S. persons are required to file with the U.S. Treasury a return commonly known as an “FBAR” (or Report of Foreign Bank and Financial Accounts; known as FinCEN Form 114), listing all non-US bank and financial accounts. These forms are required if on any day of any calendar year an individual has ownership of or signature authority over non-US bank and financial accounts with an aggregate (total) balance greater than the equivalent of $10,000.

Will asks: what penalties could taxpayers be facing for non-compliance?

Jeff replies, Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation—and each year you didn’t file is a separate violation. By the way the IRS can go back as far as 6 years to charge violations.

Jeff continues, Criminal penalties for FBAR violations are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment. Many violent felonies are punished less harshly.

Jeff states, 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.

Jeff states, U.S. taxpayers that opened offshore bank accounts through a company called Sovereign Management & Legal, Ltd. Based in Panama, the company offers to help Americans open offshore bank accounts with nominee corporations. Knowing that many people who do take these actions are also committing tax evasion, the IRS and Justice Department obtained a John Doe summons from a federal judge. The IRS hopes to find Americans who used Sovereign to open accounts.

Jeff states, Opening an offshore account isn’t illegal. However, tax evasion and willfully failing to report an offshore account are felonies.

Jeff states, A Federal Judge recently approved the Internal Revenue Service’s issuance of what is known as a “John Doe” summons to several entities in the U.S who utilized the services of Sovereign Management & Legal Ltd. (“Sovereign”). According to Sovereign’s website and the government’s Petition filed with the U.S. District Court for the Southern District of New York, Sovereign provides Offshore Banking, Corporation and Trust services. The U.S. government alleges that U.S. taxpayers used those services to conceal ownership of assets held offshore to evade U.S. taxation.

Jeff states, A “John Doe” summons may be issued when the government is unsure of the exact identity of the person(s) for whom they are seeking the information. These summonses seek information that the government cannot procure through the Foreign Account Tax Compliance Act (“FATCA”) and serves as the latest effort in the IRS’s recent push to achieve global tax compliance from its citizens.

Will asks Jeff, what must the government prove to the Court to get the Court to issue a John Doe Summons?

Jeff replies, For a John Doe summons to be approved, the government is required to make a showing in court that (1) the summons relates to a particular person or ascertainable group, (2) there is a reasonable basis for believing that such person or group may have failed to comply with any provision of the internal revenue law, and (3) the information sought is not readily available from other sources.

The Federal Court found that the government met its burden with respect to these requests. For example regarding the courier companies named in the Summons, the government believes that the John Doe summonses will assist them in identifying U.S. clients of Sovereign through records of shipping services between Sovereign and taxpayers in the U.S.

Will asks Jeff, who was named in the John Doe Summons to be compelled to produce information?

Jeff replies, HSBC USA is among the entities named in the government’s Petition because of its correspondent bank accounts held at the bank by HSBC Hong Kong and HSBC Panama. The correspondent account provides banking services to the foreign bank that does not have a U.S. branch so that the foreign bank may reach U.S. customers. The government alleges that HSBC USA’s records relating to the correspondent accounts will assist the government in determining the identity of Sovereign’s clients who held accounts with HSBC Hong Kong and HSBC Panama through wire transfer information and cancelled checks retained by HSBC USA.

Also named were the New York Federal Reserve, Western Union and Clearing House Payments Company to gather wire and electronic fund transfer information. The New York Federal Reserve Bank maintains the primary electronic funds transfer system for domestic U.S. fund transfers, Western Union could have been used to transfer funds, and the Clearing House Payments Company operates the main electronic funds transfer system for processing international U.S. dollar funds transfers made between international banks. All of these sources are believed to contain information relevant to discovering the identities of U.S. taxpayers hiding assets offshore through services allegedly provided by Sovereign.

Will asks Jeff, I would imagine that documents had to be transmitted to Panama. That being the case who else did the government include in the John Doe Summonses?

Jeff states, The courier companies like FedEx, UPS and DHL were included because they could carry checks and incorporation papers back and forth to Sovereign.

Jeff states, The John Doe summons has already proved to be a powerful tool to help the IRS gather information, including names and account information of U.S. taxpayers with foreign accounts or other foreign financial interests. The IRS has used the John Doe summonses to target individuals with foreign accounts who are hoping to “wait out” the IRS and thus avoid making a voluntary disclosure as well as those intending to avoid future reporting requirements. Once a taxpayer is on the IRS’s radar, IRS Criminal Investigation will no longer clear them to come into compliance under the protections of a voluntary disclosure program.

Will asks Jeff, What Services Offered By Sovereign Management Could Facilitate Tax Evasion By U.S. Taxpayers?

Jeff replies, Curious about the services offered by Sovereign, I visited their website.

One of the services offered by Sovereign is an “anonymous offshore ATM / debit card.” Long associated with tax evasion, offshore debit cards are a popular way for people with hidden assets to repatriate their money into the United States. Transferring money into your US account would leave a paper trial but an anonymous debit card allows one to spend money in the United States and make ATM withdrawals with very little paper trail.

Sovereign advertises that their cards have neither a name imprinted on them nor encoded in their magnetic strips.

Will asks, but don’t you have to produce your identification when opening a foreign bank account?

Jeff replies, Of course, to open a foreign bank account most foreign banks want to see a passport. Sovereign has that covered too. For a fee, Sovereign Management offers “aged” offshore shelf corporations that already have bank accounts. Why present a passport when you can buy a company “off the shelf” that already has an offshore account?

While none of these things alone are illegal, the IRS considers them to affirmative acts of tax evasion. Unless you have some valid business purpose, having a nominee entity will at a minimum get you audited and if you get caught with an unreported foreign account, you could land in jail.

Will asks, Is there a risk of getting caught?

Jeff replies, Absolutely! In the case of Sovereign, because they are located in Panama, their customer lists are beyond the reach of the Justice Department. But the courier companies like FedEx, however, can be subpoenaed and they carry checks and incorporation papers back and forth to Sovereign. The foreign banks themselves are now doing a little of digging to see who actually owns and controls the accounts held in nominee names. And the major credit card companies and ATM networks have records too that the Federal government can reach.

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.

And joining me in the studio is our producer Will Maldonado.

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 Will what questions have you pulled from the kahntaxlaw inbox for me to answer.

Will to ask question and Jeff to respond.

1. Bob asks, What should I be looking for in a tax preparer this tax season to prepare my tax return?

If you’re looking for someone to prepare your taxes, here are a few suggestions: (a) Be “cautious” of anyone claiming to be able to get you a larger refund than other preparers, the IRS says; (b) Beware of anyone who wants to charge you based on a percentage of your income-tax refund; (c) Use a reputable tax professional who signs the tax return and provides a copy; (d) Don’t sign a blank return, no matter how much you trust the person you hire; (e) Check out a preparer’s credentials – ask what, if any, education, training and experience in taxes the candidate has; and (e) If you have a complicated tax situation, consider using a tax attorney, accountant or enrolled agent.

2. Patricia asks, How long should I keep my tax papers?

At least three years, but six years is preferable. The IRS has three years after you file a tax return to complete an audit. For example, if you file your 2014 income tax return on or before April 15, 2015, keep those records until at least April 15, 2018.

The IRS can audit you for up to six years if it suspects that you underreported your income by 25% or more. If the IRS suspects fraud, there is no time limit for an audit, although audits beyond six years are extremely rare.

Keep records of purchases of real estate, stocks, and other investments for at least three years after the tax return reporting their sale was filed.

Jeff states, 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 Will for being on today’s show. Will 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!