In many cases, a taxpayer with an < >IRS audit may have exposure to potential criminal charges in addition to potential increased tax liability, penalties and interest. Cases that have potential criminal exposure are often referred to as “eggshell” or “sensitive issue” audits.

Part One of this article will describes potential tax crimes and why the tax practitioner-client privilege is inapplicable to criminal cases.

Part Two of this article discusses the duties imposed on taxpayer representatives by < >IRS Circular 230 can create liability for incriminating discloses by the taxpayer.

Part Three of this article describes signs to help a taxpayer representative recognize when a criminal investigation is ongoing and the article concludes with a description of remedies to protect both the taxpayer and the representative in “eggshell” audits.

PART THREE

How Can a Tax Practitioner Tell When a Case Contains Criminal Exposure?

Just because a client doesn’t think that they have committed a crime does not mean that the < >IRS will not institute a criminal investigation. Many people charged with tax crimes don’t believe they have done anything wrong. Furthermore, many people charged with tax crimes are found to be not guilty. Therefore, even if a client believes that you have done nothing wrong, practitioners need to be on the look-out for signs of a criminal investigation. Some situations that should raise concern about the possibility of a criminal investigation are:

1. The client, the practitioner or anyone the client knows are visited by an < >IRS Special agent, FBI Agent, or other law enforcement officer. These individuals are likely investigating a tax crime. No matter what they say, they are likely NOT part of any routine audit.

2. The practitioner discovers evidence that indicates that the return contains false or fraudulent information. This is especially true if the practitioner has evidence that the client knew the return information was false. < >IRS auditors are trained to refer cases to Criminal Investigation Division (CID) when they discover false or fraudulent information on a return.

3. The client has not been filing returns. This is true even if the client believes that they have paid the all the tax owed through withholding by an employer or otherwise. Willful failure to file a return is a criminal offense.

4. A grand jury subpoena is served on the practitioner, or the client’s accountant, bank, employer, employee, customers, or any other person which seeks information related to the client. A grand jury’s sole purpose is to determine whether sufficient evidence exists to indict a someone for a crime. If a grand jury is seeking information about a client, a client’s tax return, or a client’s financial affairs, the client is likely a target of a criminal investigation.

5. The client has had trouble with state tax authorities. Often the < >IRS and state tax authorities have information sharing agreements. Therefore, if a client has had trouble with state tax authorities, it is likely that the < >IRS is aware of the situation and will likely look into the matter.

6. A CID summons is served on the practitioner or the client’s accountant, bank, employer, employee, customers, or any other person which seeks information related to you. The CID’s sole purpose is to gather evidence related to a crime. If the CID is seeking information about the client, the client’s tax return, or the client’s financial affairs, the client is likely a target of a criminal investigation.

7. The client has any indication of a non-tax criminal investigation that involves money or property. Many criminal tax cases begin as investigations into some other criminal matter, especially cases that involve money, drugs, or property. Since taxpayers owe taxes on all their income, both legal and illegal, tax cases often evolve from these other types of criminal investigations. In fact, often it is often easier to prove the tax case than the underlying crime.

What Can a Tax Practitioner Do to Protect Themselves?

There are three simple actions that a practitioner can do to limit exposure to liability. These are: •

Disclose. All practitioners should disclose the limits of the tax practitioner privilege to all of their clients. A good way to do this is to include it in your written engagement agreement. This matter should also be discussed with the client at the onset of the engagement and at any time during the engagement that the practitioner suspects there may be a potential criminal investigation. In addition to disclosing the limits of the privilege, it is likely that “best practices” would require the practitioner to disclose one or both of the following potential remedies to the limitations of the tax practitioner privilege. •

Associate. Tax practitioners in “eggshell audits” should consider associating with an attorney. If this arrangement is done properly, all communications should be protected by the attorney-client privilege. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). This arrangement is often more beneficial to the client than an outright referral (see below). This arrangement allows the practitioner to continue in the case often at a lower rate than the attorney. For this arrangement to be effective, the attorney should engage the practitioner via written agreement. This engagement agreement should indicate that:

1. The tax practitioner is acting under the direction of counsel in connection with counsel’s rendering of legal services to the client;

2. Communications between the practitioner and the client are confidential and are made solely for purposes of enabling counsel to provide legal advice;

3. The practitioner’s work papers are held solely for counsel’s use and convenience and subject to counsel’s right to demand their return; and

4. The practitioner is to segregate their work papers, correspondence and other documents gathered during the course of the engagement and designate such documents as property of counsel.

Refer. The last remedy is for the tax practitioner to step out of the situation and simply refer the client to appropriate tax/criminal counsel.

What Type of Attorney Should the Practitioner Associate With or Refer To?

Clients facing an < >IRS criminal investigation or charged with a tax crime need an attorney with specialized skills. This attorney needs to be competent in both tax issues and criminal issues. A tax lawyer won’t do and a criminal lawyer won’t do. They need a lawyer that has experience in BOTH criminal trials and tax law.

Copyright 2005 David Jacquot

Author: David Jacquot

Finding a Preparer

First of all, finding a tax professional to work with is a very important decision. A tax professional is not only a tax preparer, but someone who can provide you with advice on tax issues and assist you with tax planning. You want to find someone who is not only professional and competent, but who is also a good fit for you and your specific needs.

Selecting a preparer solely based on price is not necessarily in your best interest. Preparers who are preparing many returns at lower prices may be more concerned with the quantity of returns prepared than the quality of the returns prepared. Returns that are rushed through may have errors or omissions which you are ultimately responsible for. A thorough, accurate return where deductions have been maximized legitimately should be your primary tax preparation goal.

If possible, it is best to assess your situation and look for a preparer early. This will allow you more time to find a preparer that is a good fit for you and to possibly even take advantage of a tax planning consultation that could save you more money in taxes. Keep in mind that if you wait to call around until tax season (mid-January through mid-April), it may be challenging to find someone who will be willing or able to speak with you over the phone in much detail about your specific situation.

If you find that it is tax season already and you have not decided on the tax professional that you will be using, there are a few ways that you can find out more about some of them without taking up much of their time on the phone. If you have access to the Internet, you can check out websites of local tax professionals to find out more about their businesses, their credentials, and the services that they offer. You can also check with family and friends to get some referrals.

One last point about finding a tax preparer that you really need to know – they are not all the same! Did you know that only a few states require any kind of licensing or registration of preparers? Thus, in most states, just about anyone can open up a tax preparation business. Did you know that they all do not have full-time, year-round hours? This is important in case you have questions or problems after your taxes are prepared. You should do your homework when checking out potential preparers - find out about their licensing/credentials, education, experience, and availability throughout the year. Two professionals that you should consider in your search are Certified Public Accountants (CPAs) and Enrolled Agents (EAs). They each must meet strict criteria to obtain their designations as well as adhere to a strict code of professional ethics and meet annual continuing professional education requirements.

Getting Prepared and Organized

Once you find a preparer that you want to work with, you will want to be well prepared and organized to ensure that you get the most from his/her time and service. Being organized and prepared can reduce not only your tax liability, but your tax preparation fees as well.

Before proceeding with the actual pre-meeting preparation steps and specific items that you should bring to your tax appointment, it should be noted that all preparers do not actually meet with their clients face to face to prepare their returns. Some just have clients drop off or mail their information. Once the returns have been prepared, they mail the returns to their clients or have the clients pick them up. Would you feel comfortable not meeting with your family physician for your child’s annual physical exam? There is so much more you can get out of the tax preparation process by meeting and working with the preparer!

The following are steps that you should take before meeting with your tax preparer:

Schedule your appointment early. The earlier in the tax season you schedule your appointment, the less likely it will be that your preparer is dealing with many stressed-out, last-minute clients. Additionally, you will be more likely to get an appointment for a day and time that fits well into your schedule.

Review last year’s return. This will remind you of any tax issues or situations that you will need to discuss with your preparer as well as remind you of items that you will need for your appointment.

Organize all receipts and paperwork. The “shoebox” or similar method is not the best for your tax appointment, unless you want to pay your preparer to sort, organize, and add up receipts. Have your receipts organized and totaled by category. Have other relevant documents organized by category.

Gather all tax-related mail that you receive to include pre-printed tax forms, tax booklets, and tax reminder notices. These items often will include information that is helpful to your preparer in regards to your situation. Many tax clients assume that because their preparer uses tax software that there is no need to bring these items to their tax appointment.

Prepare information on unusual situations. If you have any unique tax situations or liabilities, prepare to discuss them. This includes any past problems you may have had.

Bring relevant computer data files. If you track your finances with a program such as QuickBooks or Excel, bring the data file(s) with you. Having the data file(s) handy might assist in answering any last minute questions. Call first to make sure the preparer’s office supports your file format.

Brush up on relevant tax law/tax changes. While this it is not always possible for the non-tax professional to be fully versed on tax law, the more informed you are, the better you will be able to assist in the return preparation process, provide important information, and keep unnecessary questions to a minimum. Visit the IRS website (www.irs.gov) and the website for your state department of taxation/revenue – you will most likely be surprised how taxpayer friendly these sites can be.

Compile your questions into an organized list. Try to avoid asking questions haphazardly/at random during your tax appointment or making multiple phone calls to your preparer in the same manner. This is not an efficient use of your time or your preparer’s.

Be on time for your appointment. While we are all busy, there is probably no one as pressed for time as a tax preparer during tax season. If you are late, this could take away from the time the preparer can spend with you. It is important to keep in mind that your preparer may have appointments with other clients before and after your appointment. Accordingly, keep in mind that it is possible for your appointment or the one before yours to run a few minutes over the scheduled/allotted time, so be patient.

Avoid distractions during your tax appointment. Chit chatting with your preparer, cell phones and pagers, and bringing children with you to your tax appointment can create unnecessary distractions for your preparer which could result in unintentional errors on your tax returns. Your preparer needs to be able to fully concentrate on the task at hand.

Do not delay getting information to your preparer. If after your tax appointment you need to get back with your preparer with additional information, do so immediately so your return is still fresh in your preparer’s mind and to avoid the last minute April 15th rush. Remember, your preparer has many other clients to deal with. Thus, he/she cannot be expected to call to remind you that he/she is still waiting on information from you. You should take responsibility for getting additional information needed to your preparer and for following up in regards to your returns in process.

As for some specific items that you will not want to forget to bring to your appointment:

Make sure you have all documents related to income. Examples include wage statements (Forms W-2s); pension and retirement income (Forms 1099-R); interest and dividend income (bank statements and reports, Forms 1099-INT, Forms 1099-DIV); self-employed business income; lottery or gambling winnings; Social Security; unemployment compensation; rental income; commissions; and tips.

Provide documentation of expenses and losses. Examples include self-employed business expenses; lottery or gambling losses; expenses from rentals; medical and dental expenses; unreimbursed employment-related expenses; job-related educational expenses; job search expenses; moving expenses; and child care expenses (to include care provider’s full name, address, and tax ID or Social Security number).

Provide documentation related to your home. Typically, home ownership provides many great tax benefits. If you buy or sell a home during the year, make sure you bring complete documentation regarding the sale or purchase of a home. Additionally, bring information/statements related to real estate and personal property taxes and mortgage and/or home equity loan interest paid.

Documentation related to miscellaneous income or debt. Other items to bring documentation on, if applicable, include, but are not limited to: sales of stocks and bonds; state and local tax refunds; alimony paid or received; estimated or foreign taxes paid; and cash and non-cash charitable donations.

Information on new dependents to be claimed on your tax return or changes to dependents. If you have had a baby, gotten married, have begun supporting a relative, etc., your preparer will need name, Social Security number, and date of birth information (also discussed below). A name change is another example of such information that your preparer will need.

If you are not sure if something has tax implications, bring the related document or information and ask!

Furthermore, if you are a new client to your preparer, you will need the following items/information as well:

Your prior year tax returns to include relevant supporting items such as Forms W-2s. Not only your Federal return, but also your state and any local returns. There are items on your prior year returns that may carry forward to your current tax returns. Additionally, the returns allow the preparer to better understand your tax situation.

Full names, Social Security numbers, and dates of birth for all persons that will be included on your tax returns. It is very important that names and Social Security numbers given to your preparer exactly match up with what is on the individual’s Social Security card. Bringing actual Social Security cards to your appointment helps to ensure this. Additionally, dates of birth must be accurate. When such information is not accurate, this can cause your return to be rejected for processing or otherwise cause a delay in processing of your returns.

In addition to the above listed items, your preparer may have some additional required items, such as a valid state issued identification card or driver’s license for each taxpayer.

Remember, even though the preparer bears some responsibility, you are ultimately responsible for your tax return. So finding a great preparer and being prepared and organized will help ensure that you recognize the greatest tax savings possible and that your tax appointment goes smoothly!

Author: Tiffany J. Morisue

As with anything, there is no free lunch, and creditors are required to report canceled debts to the IRS on Form 1099 (when the canceled balance is $600 or greater). Therefore, the possibility exists that you may owe taxes on the forgiven portion of the debt. For this reason, many financial writers and debt counselors are strongly critical of debt settlement, to the point where they actually recommend against it just because you might end up owing taxes. But the tax consequences of settling your debts are greatly over-emphasized, and this is a really just a minor issue at best.

First, even if you end up owing taxes on the canceled balances, that’s because you saved a bunch of money off your original debts. The total of what you paid the creditor, plus the taxes, will still be much less than what you owed to begin with. There is still a net savings. So it’s hard to understand why this is viewed as a problem in the first place!

Second, the great majority of people who settle their debts are not required to pay taxes on the forgiven part of the balance. That’s because of the “insolvency” rule, described in IRS Publication 908, “Bankruptcy Tax Guide.” Don’t let the title fool you. You don’t need to have filed a formal declaration of bankruptcy to take advantage of the insolvency rule.

Basically, “insolvent” means that you have a negative net worth — that is, you “owe” more than you “own.” As a consequence, most debtors do not have a tax liability on the canceled debts, simply because most debtors are insolvent! It usually comes down to home equity. If you have enough equity in a home (or other property) to outweigh the total of your liabilities (debts), then you have a positive net worth, and will likely have to pay taxes on the forgiven debt amounts. However, the majority of people in serious debt trouble have a negative net worth, and are therefore insolvent. The way it works is that you can offset the canceled debt up to the amount by which you were insolvent at the time you did the settlement.

Come tax time, be sure to get professional tax advice specific to your situation. Also, be sure to read the section in IRS Publication 908 on “reduction of tax attributes,” which requires people using the insolvency rule to reduce their basis in such things as rental property, loss carryovers, etc. Most of that probably won’t apply to you, but again, get specific advice before winging it.

So, the message is, relax about paying taxes on canceled debt balances. That should be the least of your concerns if you’re upside down financially. Don’t let the misguided criticisms of financial writers (who haven’t done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt freedom.

Author: Charles J. Phelan

Fake < >IRS form

Targets of this scam are sent a phony < >IRS Form W-8BEN (”Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding”) which has been altered by the scammers to solicit detailed personal and financial information. The information sought typically includes:

Date of birth
Social Security number
Passport number
Bank name
Account number, type, and date opened
Email address
Profession
Daytime phone number
How often the recipient visits the U.S.
Information on the recipient’s spouse, children, and parents

Fake < >IRS letter

The bogus < >IRS form is accompanied by correspondence, purportedly from the < >IRS, that is aimed at non-resident aliens who have U.S.-based income derived from investments in U.S. property, such as securities or bonds. The fake correspondence claims that the recipient will be taxed at the maximum rate unless the form is filled out with the requested personal and financial data, then faxed to a specified fax number.

About 2.5 million non-resident aliens receive U.S.-based income, according to the < >IRS.

The scam, which has been reported in South America, Europe, and the Caribbean, exploits public anxiety about dealings with the < >IRS and unfamiliarity with the arcane details of U.S. tax laws and procedures. “This is an international variation of an old scheme where scam artists try to get valuable information by pretending to be from the < >IRS,” said < >IRS Commissioner Mark W. Everson. “Taxpayers should be wary of strangers trying to obtain sensitive personal information, whether it’s in person, over the phone, through the mail, or over the Internet.”

Facts worth noting

< >IRS representatives call taxpayers’ attention to the following pertinent facts:

The < >IRS does not allow forms to be faxed.

The < >IRS does not request personal information from non-resident aliens on the W-8BEN.

A genuine Form W-8BEN would sent by the recipient’s financial institution, not by the < >IRS.

The rate at which a non-resident alien pays tax to the < >IRS depends on the terms of the tax treaty between the U.S. and that individual’s country.

Note that while there is a legitimate < >IRS Form W-8BEN, it does not ask for any of the personal information listed above — except, in certain cases, a Social Security number or < >IRS-generated Taxpayer Identification Number. The non-resident alien’s financial institution (whether a bank, a brokerage firm, an insurance company, or some other organization) acts as the non-resident alien’s withholding agent for any income from a U.S. source that is subject to U.S. income tax. The W-8BEN is used by the financial institution to determine whether or not the customer is exempt — and, if not, the appropriate amount to withhold.

Reporting this scam

The Treasury Inspector General for Tax Administration (TIGTA) investigates identity theft related to tax administration. Non-resident aliens who have received a fraudulent letter and form should report this to TIGTA in one of the following ways:

Call the toll-free fraud referral hotline at 1-800-366-4484;

Fax a complaint to 202-927-7018; or

Write to the TIGTA Hotline, P.O. Box 589, Ben Franklin Station, Washington, D.C. 20044-0589.

Recipients of this scam should not under any circumstances provide personal or financial information or follow any other instruction given in the fraudulent letter and form.

All Rights Reserved
http://www.identitytheft911.com/education/alerts/alert20040727irs.htm

Author: Identity Theft 911

These are the kind of services a Tax Attorney can provide: Offer in Compromise Cases, Penalty Abatement Petitions, Full Audit Representations Business Strategy Sessions. Preparation and Filing of Tax Returns.

Settle taxes for Pennies on the Dollar owed, Stop IRS wage and bank levies (garnishments), Have property liens lifted, get affordable installment agreements, File bankruptcy against the IRS, Have penalties and interest forgiven, Reduce taxes by running out the IRS’ time to collect.

Offer in Compromise: Settle your taxes for Pennies on the Dollar owed Professional law offices can help get you a favorable settlement with an experienced IRS tax attorney. The IRS’ Offer in Compromise program allows taxpayers to settle their tax debt.

What is an IRS offer in compromise?

It settles your tax liability for less than the full amount owed, providing you can prove you don’t have the ability to pay. Depending on how much you can afford, you really can pay “Pennies on the Dollar Owed” in taxes.

If it is done correctly - this option could save you an enormous amount of money, and is the best strategy for most taxpayers. You should take extreme caution. You should hire a professional with knowledge of the IRS’ procedures.

This professional should determine the least amount that the IRS will accept from you. If the Offer is not submitted correctly it will be rejected, or you may be required to pay more than is necessary.

An Offer in Compromise may save you a LARGE amount of money. Do you know that the IRS only has a limited time to collect your back taxes?

Let a Professional Tax Attorney determine when the IRS’ time limit to collect taxes runs out.

In most cases the IRS has only a limited time to collect the unpaid taxes. You must CAREFULLY evaluate exactly when that time period will run out.

Your troubles may be solved. and moreover: If the IRS’ time has run out, or if it will run out soon, your troubles may be over.

Delaying tactics may be used to stall the IRS while their time runs out. Once the IRS is out of time, they MUST stop ALL collection action against you.

The IRS MUST release all property liens

TAX RETURNS - FAILURE TO FILE

Many people fail to file Individual Income Tax Returns for a variety of reasons. Some reasons are innocent, although the most common is the fact that people can’t afford to pay the taxes.

When this happens it becomes difficult to get back into the system. “I filed for 1998. I couldn’t pay for 2000, so I did not file. Then I was afraid to file for 2001. I haven’t filed since then. What can I do now?”

If you do not file Income Tax Returns you commit a criminal offense. However, no one who has voluntarily filed back returns before being caught has ever been criminally prosecuted. That is the first key: filing BEFORE they catch you.

IRS Penalties

Some IRS penalties can be as high as 100% to 150% of the original taxes owed. Even if you could pay the taxes owed, the extra penalties will make it impossible to pay off the entire balance.

The IRS imposes penalties to punish taxpayers and keep them in line. The IRS does forgive penalties. Before you pay the IRS any penalty amounts, you may want to consider requesting the IRS to not punish you because it wasn’t your fault.

Author: Frank Hague