Author Archive for Jeffrey B. Kahn, Esq. - Principal Attorney

Jeffrey B. Kahn, Esq. Discusses Undisclosed Foreign Bank Accounts And The IRS On ESPN Radio – April 10, 2015 Show

Topics Covered:

1. Ty Warner, Beanie Babies Creator, Convicted For Not Disclosing Foreign Bank Accounts.

2. Don’t Believe The Deadly Myths Of FATCA Non-Enforcement.

3. The New And Improved IRS Streamlined Procedures For Taxpayers With Undisclosed Foreign Bank Accounts.

4. Questions from our listeners:

     a. What should I look for in finding the best FBAR/OVDP attorney for my situation?

     b. Is it better to hire a sole practitioner to get a one-on-one attorney relationship or a firm with OVDP attorneys who take a team approach?

     c. Should someone hire a local general law firm or look for OVDP attorneys with a potentially wider depth of experience?

     d. Should someone hire a big law firm that does a bit of everything or a tax resolution firm that specializes in nothing but tax resolution?

     e. Should someone hire an OVDP law firm that will use an outside OVDP CPA or a law firm that has a built-in dedicated OVDP-specific accounting department?

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.

April 15th is a day that many people fear but in case you have an undisclosed foreign bank account, your fear has only just begun. And filing an extension for your tax return will only put off the inevitable. But there is hope as I am devoting the entire show today to educate you about this problem and the solution to resolve it.

Ty Warner, Beanie Babies Creator, Convicted For Not Disclosing Foreign Bank Accounts

The Rise And Fall Of Beanie Babies

Ty Warner, the creator of Beanie Baby dolls, wasn’t afraid to take risks. Beanie Babies first appeared in 1993, triggering a craze for the plush toys fashioned into bears and other animals. He ignored the naysayers after Beanie Babies flopped during their initial debut, and pressed forward with a product he believed in more than anyone else. One reason why the toys easily supplanted other fads at the time such as Ninja Turtles and Cabbage Patch dolls was partly because of Mr. Warner’s strategy of “deliberate scarcity”. He rolled out each one—Spot the Dog, Squealer the Pig—in a limited quantity and then retired it.

At the height of the Beanie Babies craze, Mr. Warner was shipping more than 15,000 orders per day to retailers. This explosion of sales made him rich. Forbes recently put his net worth at $2.6 billion. And when Mr. Warner would suddenly change product designs, collectors and wannabe entrepreneurs would snap up the $5.00 plushes and resell them on eBay at mark-ups topping 1,000%! Some people would take extreme measures to secure these rare editions. In 1999, Jeffrey White, from West Virginia, shot and killed a co-worker at a lumberyard after an argument over Beanie Babies.

Three years into the Beanie Babies craze, Mr. Warner boarded a plane bound for Zurich, where he would make the biggest mistake of his life. In 1996, at UBS, one of Switzerland’s largest banks, he opened a secret account invisible to the IRS. The exact amount he deposited is unknown, but by 2002 it had grown to $93 million. To keep the account’s existence from prying eyes, including those of his own accountants, he signed a “hold mail” form that instructed the bank not to send any mail related to the account to the United States and to destroy any documents in his file when they became five years old.

The money Mr. Warner stashed in Switzerland remained there, compounding tax-free, for the next dozen years. And each time Warner got to the part on his Federal individual income tax return that asks if the taxpayer has any foreign accounts, he checked the box that said no.

And over these same dozen years his net worth skyrocketed thanks to his 100% ownership of Ty Inc. In 1998, Ty Warner claimed that his company had $700 million in profits in 1997. If true, that would have made it more profitable than his two top competitors at the time, Hasbro and Mattel, which reported $560 million in combined profits that year.

But you know the old saying – “What goes up also goes down”. Prices for Beanie Babies eventually crashed and collections, which some people insured for thousands of dollars, became worthless.

Ty Warner’s Tax Problems

Mr. Warner’s hubris eventually got the best of him, too; and in October 2013 he pleaded guilty to tax evasion. The 69-year old billionaire broke down crying in U.S. District Court in October 2013 as he pleaded guilty to one count of tax evasion for hiding $25 million in income in secret Swiss bank accounts.

He admitted to the Court in his plea that in late 2002, he moved $93 million to Zürcher Kantonalbank so he could evade paying $5 million in taxes due to the IRS. That’s a painful omission, not only drawing the tax evasion charge but huge FBAR penalties too. In Ty Warner’s case the FBAR penalty will exceed $53 million.

But it does not stop there because these numbers while being staggering, also tie into criminal penalties. A tax evasion conviction carries up to 5 years in prison and a $250,000 fine.

On January 14, 2014 Ty Warner the mastermind behind Beanie Babies—still considered the most successful toy launch in U.S. history—and is among the richest people in America, was sentenced by U.S. District Court Judge Charles P. Kocoras. Mr. Warner said to the Judge, “I never realized that the biggest mistake I ever made in life would cost me the respect of those most important to me.”

The judge noted “Mr. Warner’s private acts of kindness, generosity, and benevolence are overwhelming.” He further lauded Warner for already paying a civil penalty of $53 million (which amounts to just 2% of the billionaire’s estimated net worth), plus back taxes. In so in lieu of the four-year-plus prison term recommended by federal guidelines, Judge Kocoras sentenced Ty Warner to two years of probation, 500 hours of community service, and a $100,000.00 fine.

Crime Doesn’t Pay

You know that the amount Ty Warner saved in income taxes by stashing money overseas was almost laughably small for a billionaire: just $5 million. He wound up having to fork over 16 times that to the feds. Listen to these numbers:

$93 million
Amount in Swiss account in 2002

$107 million
Account value in 2008

$5 million
Taxes saved

$80 million
Civil penalties, interest, and back taxes paid

Beanie Babies are still wonderful toys and, if you’re like most people who have them, yours are in mint condition because you once thought they would make you rich. The good news: Those animals will make a wonderful gift for a local hospital or police station, where they will provide comfort to people too young to remember that there was a time when Beanie Babies drove people to madness and its creator to the IRS. 

Well it’s time for a break but stay tuned because we are going to tell you the Deadly Myths Of FATCA Non-Enforcement you should not believe.

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

Jeff states: Amy and I have been looking forward to provide you with this special edition show where we are devoting this full hour to undisclosed foreign bank accounts. The penalties for non-disclosure can be catastrophic and jail-time is possible. Protect yourself.

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.

Don’t Believe The Deadly Myths Of FATCA Non-Enforcement.

This May Be Your One Last Opportunity to Avoid Criminal Prosecution and Increased Civil Penalties!

Jeff states: Since July 1, 2014, the most feared U.S. legislation regarding international tax enforcement – Foreign Account Tax Compliance Act (“FATCA”) – is being implemented by most banks around the world. As part of this compliance, foreign banks from around the world are sending letters to account holders that they believe have, or had, a U.S. tax nexus (or other U.S. connection) requesting information to determine whether such account holders have disclosed their foreign bank accounts to the IRS. The letters from foreign banks generally require an account holder to disclose whether the account has been declared to the IRS through the filing of a Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR”) form and/or a Form 1040 personal income tax return, participation in the various IRS Offshore Voluntary Disclosure Programs, or otherwise.

Jeff asks Amy: What Else Can You Tell Us About FATCA?

Amy replies: FATCA was signed into law in 2010 and codified in Sections 1471 through 1474 of the Internal Revenue Code. The law was enacted in order to reduce offshore tax evasion by U.S. persons with undisclosed offshore accounts. There are two parts to FATCA – U.S. taxpayer reporting of foreign assets and income on Form 8938 and reporting by a Foreign Financial Institution (“FFI”) of foreign bank and financial accounts to the IRS.  It is the latter that is resulting in FFI’s sending out that dreaded letter to suspected U.S. account holders requesting U.S. taxpayer identification and information (referred hereafter as the “FATCA letter”).

Amy continues: FATCA generally requires an FFI to identify certain U.S. accountholders and report their accounts to the IRS. Such reporting is done either through an FFI Agreement directly to the IRS or through a set of local laws that implement FATCA.

Deadly Myths.

Jeff states: As foreign banks march towards the implementation of FATCA, there are still many people who subscribe to any one or all of the deadly myths that could find themselves facing potentially crippling circumstances after July 1, 2014.

Jeff to read off each myth and Amy to respond.

Myth 1: No action required now.

This is false. As of July 1, 2014 all FFI’s must have implemented a FATCA Compliance Program to comply with its country’s Intergovernmental Agreement (“IGA”) with the United States. FFI’s must self-certify their FATCA status to their withholding agents by providing certification of compliance issued by the IRS. Failure to do so results in a 30% withholding tax imposed on their U.S investments.

Myth 2: Best to “wait and see” for a foreign country’s enabling legislation.

This is false. Wishing this to be the case does not make this so. To be clear, registration and reporting are distinct functions under FATCA. All FATCA registration is directly with the IRS and is occurring now. The truth is, a foreign country’s enabling legislation is simply intended to provide the legal framework for compliance with, not avoidance of FATCA (and other automatic tax information exchange agreements), and the development of the regulatory framework for operating the agreement.

Myth 3: IRS registration may breach confidentiality.

This is false. Withholding agents already require W-8s from all FFI’s to avoid withholding liability. This is a long-established practice and the Form W-8 has simply now been revised to include FATCA status. This procedure is no different than domestic banks requiring your social security number to open an account so it can issue a 1099 each year to the IRS reporting the interest income you earned.

Myth 4: Model 1 or Model 2 IGA’s displace U.S. Treasury Regulations.

This is false. They both work in tandem. A FFI is treated as FATCA-compliant, and not subject to FATCA withholding tax, to the extent it complies with its obligations under the IGA. The U.S. Treasury regulations are incorporated by reference into the IGA. Under the IGA, the foreign country is bound to use U.S. Treasury definitions to the extent those definitions are not defined by the IGA, and importantly, the foreign country is not permitted to use any other definition in local legislation that would “frustrate the purposes” of the IGA.

Myth 5: There is no person charged with the responsibility that a foreign bank complies with the IGA.

This is false. Under the IGA a FATCA Responsible Officer (FRO) must be appointed who is (a) as an officer of the registered deemed-compliant FFI with sufficient authority to ensure that the FFI meets the applicable registration requirements and (b) who certifies that the FFI will comply with its continuing FATCA obligations.

FRO’s have serious compliance responsibilities under FATCA. In fact, FATCA compliance revolves around the FRO, like Sarbanes Oxley compliance revolves around the CFO. Especially in the context of a FFI that does not typically have any staff, the role is even more essential. It’s a fallacy and wishful thinking that FROs can be lax or “lite” under the IGA. The IRS has consistently expressed its expectations that FRO’s deliver robust FATCA compliance and high-quality FATCA information from either procedure. Whoever says otherwise has not been paying attention and we all know how this story ended for Switzerland.

Jeff asks Amy, So what is the Truth About FATCA?

Amy replies, Whether out of lack of knowledge, preparedness or self-interest, those who are propagating these myths are not doing themselves or their U.S. clients any favors. As of July 1, 2014, FATCA went into full effect, which means that FFI’s now have to report the required FATCA information to the IRS. FFI’s around the world have been sending out “FATCA letters”. These letters typically include IRS Forms W-9 and W-8BEN for the U.S. customers to complete and return to the bank. The information furnished by the customer to the bank would then be used by the bank to report information on the customer’s foreign accounts to the IRS. If the customer refuses to answer the questions or provide the necessary forms, the financial institution would often close the account and report it as a “recalcitrant account” to the IRS. So either way, you will be reported to the IRS.

Jeff states: Why You Should Do Something About It Before It’s Too Late

Until the government receives your name and account information and chooses to act on that information, you have the opportunity to avoid the possibility of time in a federal prison and reduce the potential civil penalties for failing to report your foreign account. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, you should seriously consider participating in one of the IRS’s Voluntary Disclosure Programs.

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 about The New And Improved IRS Streamlined Procedures For 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 on the phone from our San Francisco office I have my associate attorney, Amy Spivey.

You are listening to a special edition show where we are devoting this full hour to undisclosed foreign bank accounts. The penalties for non-disclosure can be catastrophic and jail-time is possible. But the IRS has provided programs to come clean and avoid the worst-case scenario.

The New And Improved IRS Streamlined Procedures For Taxpayers With Undisclosed Foreign Bank Accounts

Jeff states: On June 18, 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations and would largely waive these penalties if taxpayers come forward and show that they didn’t hide the money on purpose.

Amy states: 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.

Jeff states: The penalties for FBAR noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes.

Amy states: 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 you with violations.

Jeff states: 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.

Jeff continues: More and more taxpayers find themselves facing the awkward combination of failing to report interest on foreign bank accounts and failing to file FBAR’s. Even if the unreported income is small, the combination of amending tax returns to report it plus quietly filing past-due FBAR’s is a classic “quiet disclosure”. The IRS advises against them and says it can prosecute taxpayers who do it anyway.

Amy states: What the IRS wants taxpayers to do is to join the 2014 Offshore Voluntary Disclosure Program. Like the 2009, 2011 and 2012 programs that preceded it, taxpayers must file up to 8 years of amended returns and up to 8 years of FBAR’s. Taxes on the unreported income, interest and a 20% penalty on the taxes seem reasonable.

Amy continues: But the sticking point for many is the IRS program’s counterpart to the FBAR penalty. Currently, the program’s penalty is 27.5% of the highest aggregate account balance in the undisclosed offshore accounts. For many, that is a crushing penalty, and for that reason many taxpayers have still refused to come forward taking the gamble that even with the new reporting required by foreign banks under FATCA they can remain undetected. Fortunately, starting with July 1, 2014 the IRS has issued new procedures in its Voluntary Disclosure Program that certain taxpayers could qualify of a 5% FBAR penalty and in some cases all FBAR penalties can be waived.

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 Under the streamlined procedures, taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBAR’s (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

Jeff asks Amy: What Constitutes Non-Willful Conduct?

Amy replies: The key to qualification in this new procedure is to prove that your past actions or inactions can be considered to be non-willful conduct.  Non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or conduct that’s the result of a good-faith misunderstanding of the requirements of the law.  The application of this standard will vary based on each person’s facts and circumstances so it is something that has to be evaluated on a case-by-case basis.

Jeff states: If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures.   Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.

Amy continues: Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the Offshore Voluntary Disclosure Program (“OVDP”) or its predecessor programs) may still use the streamlined procedures.

Jeff states: The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.

Jeff continues: Both versions require that taxpayers certify that their conduct was non-willful; file 3 years of back tax returns reflecting unreported foreign source income; File 6 years of back FBAR’s reporting the foreign financial accounts; and Calculate interest each year on unpaid tax.

Jeff continues: For U.S. Taxpayers Residing Outside the United States who apply to the streamlined program, the IRS is waiving the OVDP penalty.

Jeff continues: For U.S. Taxpayers Residing in the United States who apply to the streamlined program, the IRS is imposing a 5% OVDP penalty (applied against the value of the undisclosed foreign income producing accounts/assets).

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.

Continuing with the theme of today’s special edition show on non-disclosure of foreign bank accounts, Amy what questions have you pulled for me to answer?

Amy replies, these questions are from an anonymous listener who has undisclosed foreign bank accounts.

Amy asks: What should I look for in finding the best FBAR/OVDP attorney for my situation?

Jeff replies: I have learned key insights from years of taking cases over where prior OVDP attorney-client relationships have failed. I have also picked up terrific feedback from our past and present clients.  Because of this, I think I am uniquely qualified to know what types of questions you need to ask to find the right OVDP attorney for you.

Amy asks: Is it better to hire a sole practitioner to get a one-on-one attorney relationship or a firm with OVDP attorneys who take a team approach?

Jeff replies: The advantage of the team approach is that your case should benefit well from the collaboration of your law firm. The advantage of a one-on-one attorney relationship is that you deal with the same attorney who personally knows your case. Both these advantages have merit and are important which is why at the Law Offices Of Jeffrey B. Kahn, P.C. we follow a hybrid of these two approaches whereby your case is supported by a team of professionals yet you have direct access to me as the leading tax attorney making sure the your case is proceeding smoothly and that you gain all the possible benefits and best possible outcome.

Amy asks: Should someone hire a local general law firm or look for OVDP attorneys with a potentially wider depth of experience?

Jeff replies: A local general law firm is not going to have the depth of OVDP experience that we do. Yet, we know that many people prefer to hire locally even though after the initial conference, information and documents are exchanged through the mail, fax and internet. That is why I am available to meet with clients in multiple locations in California for client convenience and gain reassurance that my team and I will help you through your offshore issue.

For our worldwide clientele, many of them are already accustomed to and comfortable with having fairly in-depth business relationships with people remotely; and with the Law Offices Of Jeffrey B. Kahn, PC they get the added reassurance of having an OVDP firm who — more than likely — has successfully handled a case just like theirs before.

Amy asks: Should someone hire a big law firm that does a bit of everything or a tax resolution firm that specializes in nothing but tax resolution?

Jeff replies: Bigger does not necessarily mean better. There is a rather steep learning curve to OVDP, so hopefully any law firm you interview will be honest with you about their level of expertise and won’t bill you for their time to get up-to-speed.

The Law Offices Of Jeffrey B. Kahn, P.C. has taken over many OVDP cases where a client had hired a previous OVDP attorney. And routinely we see mistakes someone made that the OVDP attorneys billed their clients for. And then to correct those mistakes — yep they charged their clients for that too. In contrast, we do not look to create work to justify a higher bill. It is in our best interest to get your case resolved as effectively as possible. This is especially important with any cases under the new streamlined procedures as the IRS does not consider your application to the program complete until the full Civil Package is filed. We recognize this and look to turn around this package as quick as possible.

Amy asks: Should someone hire an OVDP law firm that will use an outside OVDP CPA or a law firm that has a built-in dedicated OVDP-specific accounting department?

Jeff replies: From my experience, one of the last things you want is your OVDP attorney to be acting as a mere liaison between an OVDP examiner and a client’s CPA. We strongly prefer our clients to use our own team at the Law Offices Of Jeffrey B. Kahn, P.C. for two reasons:

1. Shouldn’t the attorney who will be negotiating where the numbers on an amended tax return came from actually know where they came from? If the attorney is merely the proxy for the CPA, then there could be missed opportunities of tremendous value.  Small changes in tax treatment can have huge consequences. Did you know that foreign-earned income or PFIC tax reporting requires the highest level of tax knowledge, and that many experts, even experts at the IRS will disagree about legal conclusions — even when facts are similar?

2. As mentioned before, for streamlined OVDP cases, it is important to get the Civil Package completed as soon as possible. Your accountant will likely be busy with regular tax season work and therefore not have the time to attend to your situation. Your accountant may also be part of the problem preventing you from attaining nonwillful status. Remember, until the Civil Package is filed you are not protected if the IRS finds you out first.

The OVDP attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. know not just the tax code but get to know your facts well enough to persuade the IRS to find the most favorable tax treatment for you – and in the case of the streamlined procedures it is for you to be deemed as non-willful.

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.

Well we are reaching the end of our show.

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

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!

What Are The Pros And Cons Of Going On Extension?

It’s that time of year again…tax season. For many small business owners, taxes top the list of business-related concerns. In fact, the National Federation Of Independent Business (“NFIB”) Small Business Economic Trends survey, released earlier this year, revealed that 20% of businesses cite taxes as their biggest problem.

With April 15th fast approaching, more and more small business owners are tossing around the idea of filing for a much-needed tax extension. While filing for an extension might seem like the way to go during the hustle and bustle of tax season, there are a few things small business owners should consider before deciding to file for a six-month extension: 

Extra time to file doesn’t mean extra time to pay. 

An extension will change the tax filing deadline from April 15 to October 15, but you still have to pay the tax you owe by the April 15th deadline.

If you don’t, you’ll have to pay interest on the unpaid amount plus an extra 0.5% in penalties for every month you’re late. However, the penalties for not filing on time are much higher than the penalties for not paying on time; 5% for each month or part of a month you’re late, up to 25%.

That being the case, if you need extra time to finish up your tax return, don’t hesitate to file for an extension. In an effort to avoid needing to file an extension, implement a payroll system you can rely on to automate tax filings and maintain compliance in accordance with ever-changing state and federal regulations. 

You can’t be sure exactly how much you owe without first completing your tax return. 

And, while filing for an extension gives you an additional six months to finish your tax return, you still have to pay the amount owed by April 15th; meaning you’ll have to do some heavy estimating.

If you miscalculate the amount of tax owed, you’ll have to pay the necessary penalties and fees. If you paid less than 90% of the tax you owed, you’ll end up owing a penalty of 0.5% of the unpaid amount every month until you pay the balance.

To avoid unnecessary penalties, the IRS has a Form 1040-ES that includes a worksheet you can use to calculate your estimated tax payments but given the complexities of the tax law and ever-changing rules, it is best to seek a professional tax advisor to ensure the accurate calculation of taxes owed. 

It will make acquiring a new loan difficult. 

If you think you might need a loan sometime in the near future, you might want to think twice before filing for an extension. For starters, a recently filed tax return is usually a required financial document when seeking a loan or other forms of credit from a bank.

Banks use recent tax returns to gauge compliance. While filing for a tax extension doesn’t necessarily raise any red flags, not having your tax return in hand does little for your cause. 

Your potential refund will take longer. 

As a small business or startup, you might be due a tax refund from the IRS; that is once you file your taxes. Filing for a tax extension also means having to wait awhile longer to claim your tax refund. If you wait to file your taxes until October, you won’t see that money until the fall.

Extending the filing of your tax return extends the period of time that the IRS can select your tax return for audit.

Generally the IRS has up to three years after the filing deadline of your tax return to select it for examination or audit.  So if you timely file your 2014 tax return by April 15, 2015, the IRS will have until April 15, 2018 to audit your 2014 tax return.  However, if you file an extension of your 2014 tax return, the IRS will now have until October 15, 2018 to audit your 2014 tax return.

Filing an extension where your prior years’ tax returns are currently under examination.

Since the IRS has a three-year window to audit tax returns, if your 2012 or 2013 tax returns are currently under examination, it is probably a good idea to file an extension for 2014.  This way, the scope of the audit is not expanded to the 2014 tax year as you now would have until October 15, 2015 to file your 2014 tax return.  The IRS cannot force you to file a tax return before its filing deadline so if your audit is completed before October 15th, you may delay or even avoid 2014 being examined by IRS.

Filing an extension where you are currently on a payment plan with the IRS.

A condition of any payment plan established with the IRS for your back tax liabilities is that you do not create any new liabilities.  If you expect to owe for 2014 and you file your tax return no later April 15th with an unpaid balance, the IRS computers will automatically default your payment plan putting you back to square one.  But if you file an extension for 2014, you could possible delay this action by IRS for at least another six months which may be enough time for you to put away extra funds so that when you file 2014 you can include full payment of the balance due and avoid default.

If seeking a payment plan or Offer In Compromise for your back taxes, don’t file an extension and file no later than April 15th. 

Where you owe back taxes to the IRS, it’s usually a good idea to include all tax years in your proposal which could be a payment plan or Offer In Compromise.  Only existing liabilities from filed tax returns may be wrapped into any proposal.  A liability from a 2014 tax return that has yet to be filed will not be included in your proposal and when it now comes time to file, you will need to include full payment.  Otherwise, you now defaulted what was previously set up.

And if you have foreign bank accounts ….

Filing for an extension on your income tax return does not extend the June 30th deadline to file your Report Of Foreign Bank Accounts (“FBAR”) using FinCEN Form 114 with the U.S. Department Of Treasury.

Don’t Take The Chance And Lose Everything You Have Worked For. 

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. 

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Jeffrey B. Kahn, Esq. discusses IRS and taxes on the April 5, 2015 radio show “Talking Money with Mr. C” on 760AM KFMB in San Diego

Issues discussed:

  1. When is traveling a legitimate business expense?
  2. What are the Pros/Cons of doing a tax extension?
  3. How liable am I for my spouse’s tax mistakes?

Jeffrey B. Kahn, Esq. discusses IRS and taxes on the March 22, 2015 radio show “Talking Money with Mr. C” on 760AM KFMB in San Diego

Issues discussed:

a. Yahoo published an interesting video and article this week about what it’s like to get audited by the IRS. http://finance.yahoo.com/news/my-experience-getting-audited-140551190.html You’ve helped a LOT of people in this situation before, so what advice can you give someone who might be getting that notice in the mailbox today…?

b. Your blog on Ty Warner was most interesting.  http://www.kahntaxlaw.com/blog/ty-warner-beanie-babies-creator-convicted-for-not-disclosing-foreign-bank-accounts  So what exactly happened with the Beanie Babies creator and the IRS recently?

Ty Warner, Beanie Babies Creator, Convicted For Not Disclosing Foreign Bank Accounts

It’s been about 20 years since the U.S. suddenly fell in love with the adorable 5-inch Beanie Baby dolls created by Ty Warner. But in October 2013 billionaire Ty Warner broke down crying in U.S. District Court as he pleaded guilty to one count of tax evasion for hiding $25 million in income in secret Swiss bank accounts.

The Rise And Fall Of Beanie Babies

Ty Warner wasn’t afraid to take risks. Beanie Babies first appeared in 1993, triggering a craze for the plush toys fashioned into bears and other animals. He ignored the naysayers after Beanie Babies flopped during their initial debut, and pressed forward with a product he believed in more than anyone else. One reason why the toys easily supplanted other fads such as Ninja Turtles and Cabbage Patch dolls was partly because of Mr. Warner’s strategy of deliberate scarcity. He rolled out each one—Spot the Dog, Squealer the Pig—in a limited quantity and then retired it.

At the height of the Beanie Babies craze, Mr. Warner was shipping more than 15,000 orders per day to retailers. This explosion of sales made him rich. Forbes recently put his net worth at $2.6 billion. Mr. Warner’s obsession even became an asset. When he would suddenly change product designs, collectors and wannabe entrepreneurs would snap up the $5.00 plushes and resell them on eBay at mark-ups topping 1,000%! Some people would take extreme measures to secure these rare editions. In 1999, Jeffrey White, a career criminal from West Virginia, shot and killed a co-worker at a lumberyard after an argument over Beanie Babies.

Three years into the Beanie Babies craze, Mr. Warner boarded a plane bound for Zurich, where he would make the biggest mistake of his life. In 1996, at UBS, one of Switzerland’s largest banks, he opened a secret account invisible to the IRS. The exact amount he deposited is unknown, but by 2002 it had grown to $93 million. To keep the account’s existence from prying eyes, including those of his own accountants, he signed a “hold mail” form that instructed the bank not to send any mail related to the account to the United States and to destroy any documents in his file when they became five years old.

The money Mr. Warner stashed in Switzerland remained there, compounding tax-free, for the next dozen years. And each time Warner got to the part on his Federal individual income tax return that asks if the taxpayer has any foreign accounts, he checked the box that said no.

As his net worth skyrocketed over the next few years, thanks to his 100% ownership of Ty Inc., Mr. Warner couldn’t help bragging about his success. In 1998, experts questioned his claim to be the world’s top toy seller. (Unlike public companies, private companies are not obliged to release revenue figures.) Miffed, Mr. Warner took out a full-page ad in The Wall Street Journal stating that his company had $700 million in profits in 1997. If true, that would have made it more profitable than his two top competitors at the time, Hasbro and Mattel, which reported $560 million in combined profits that year.

But you know the old saying – “What goes up also goes down”. Prices for Beanie Babies eventually crashed and collections, which some people insured for thousands of dollars, became worthless.

Ty Warner’s Tax Problems

Mr. Warner’s hubris eventually got the best of him, too and in October 2013 he pleaded guilty to tax evasion. The 69-year old billionaire who created Beanie Babies broke down crying in court in October 2013 as he pleaded guilty to one count of tax evasion for hiding $25 million in income in secret Swiss bank accounts.

Mr. Warner (#209 on Forbes 400 list) is not the first Forbes 400 member to draw tax charges. Leandro Rizutto (#296), founder of Conair, had his own run in with tax crimes. And another is Igor M. Olenicoff (#184), a Southern California real estate developer with a net worth of $2.9 billion.

According to the charging document, Mr. Warner opened a secret UBS account in 1996. In late 2002, he moved $93 million to Zürcher Kantonalbank. That account produced over $3 million of income in 2002 alone, which he failed to mention on his Form 1040. He even amended his 2002 return in 2007, but once again omitted the offshore income.

Mr. Warner still paid considerable tax on the nearly $50 million of 2002 income he did report. But he shorted the IRS by about $1.2 million. Including the next ten years, he admitted to the Court in his plea that he evaded paying $5 million in taxes due to the IRS. That’s a painful omission, not only drawing the tax evasion charge but huge FBAR penalties too. Prosecuters contended that he was concealing as much as $107 million in undisclosed foreign bank accounts. In Ty Warner’s case the FBAR penalty will exceed $53 million.

The numbers are staggering. And that ties into criminal penalties. A tax evasion conviction carries up to 5 years in prison and a $250,000 fine. Tax convictions even draw prosecution costs on top of all the back taxes, interest and penalties. And the penalties can be huge. Civil fraud penalties alone can add another 75%.

But when it comes to penalties, FBAR charges and penalties—even civil penalties—are the real gravy train for the government. An annual report of foreign accounts in the law since 1970, FBAR’s target money laundering. They were not widely known—or widely enforced—until the UBS scandal of 2008 and 2009.

But now they are ubiquitous, requiring reporting of foreign accounts even by those with mere signature authority but no beneficial interest. A willful failure to file an annual FBAR can trigger a civil penalty of up to 50% of the amount in the account at the time of the violation.

On January 14, 2014 Ty Warner the mastermind behind Beanie Babies—still considered the most successful toy launch in U.S. history—and is among the richest people in America, was sentenced by U.S. District Court Judge Charles P. Kocoras. On this day, Mr. Warner had nowhere to hide. As he walked to a court lectern in an impeccably tailored dark suit, his ginger-colored hair flaring copper under the stark lights, he looked as tentative as a modern-day Willy Wonka clomping across the plaza of his ruined reclusiveness. Mr. Warner said to Judge Kocoras, “I never realized that the biggest mistake I ever made in life would cost me the respect of those most important to me.”

But once Judge Kocoras began to speak, it became clear that Mr. Warner wouldn’t spend one day behind bars for tax evasion. The judge all but produced a sword, asked the toy man to kneel, and tapped him on each shoulder. “Mr. Warner’s private acts of kindness, generosity, and benevolence are overwhelming,” Judge Kocoras said after reading aloud letters from Warner’s supporters.

He further lauded Warner for already paying a civil penalty of $53 million (which amounts to just 2% of the billionaire’s estimated net worth), plus back taxes. “I believe . . . with all my heart, society will be best served by allowing him to continue his good works,” the judge concluded. In lieu of the four-year-plus prison term recommended by federal guidelines, Judge Kocoras sentenced Ty Warner to two years of probation, 500 hours of community service, and a $100,000.00 fine.

How Does This Effect You?

Although Mr. Warner’s numbers are huge, many more garden-variety taxpayers find themselves facing the awkward combination of failing to report interest on foreign bank accounts and failing to file FBARs. Even if the unreported income is small, the combination of amending tax returns to report it plus quietly filing past-due FBARs is a classic “quiet disclosure”. The IRS advises against them and says it can prosecute taxpayers who do it anyway.

What the IRS wants taxpayers to do is to join the 2014 Offshore Voluntary Disclosure Program. Like the 2009, 2011 and 2012 programs that preceded it, taxpayers must file up to 8 years of amended returns and up to 8 FBARs. Taxes on the unreported income, interest and a 20% penalty on the taxes seem reasonable.

But the sticking point for many is the IRS program’s counterpart to the FBAR penalty. Currently, the program’s penalty is 27.5% of the highest aggregate account balance in the undisclosed offshore accounts. For many, that is a crushing penalty, and for that reason many taxpayers have still refused to come forward taking the gamble that even with the new reporting required by foreign banks under FATCA they can remain undetected. Fortunately, starting with July 1, 2014 the IRS has issued new procedures in its Voluntary Disclosure Program that certain taxpayers could qualify of a 5% FBAR penalty and in some cases all FBAR penalties can be waived.

Crime Doesn’t Pay

The amount Ty Warner saved in income taxes by stashing money overseas was almost laughably small for a billionaire: just $5 million. He wound up having to fork over 16 times that to the feds.

$93 million
Amount in Swiss account in 2002

 $107 million
Account value in 2008

 $5 million
Taxes saved

 $80 million
Civil penalties, interest, and back taxes paid

Beanie Babies are still wonderful toys and, if you’re like most people who have them, yours are in mint condition because you once thought they would make you rich. The good news: Those animals will make a wonderful gift for a local hospital or police station, where they will provide comfort to people too young to remember that there was a time when Beanie Babies drove people to madness and its creator to the IRS. 

What Should You Do?

Charges like Mr. Warner’s stratospheric bubble-bursting Beanie Baby tax and FBAR consequences are reminders that your freedom is at stake and the dollars in question can get worse—catastrophically worse—than the reduced FBAR penalty offered by IRS in its Voluntary Disclosure Programs.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. 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.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Jeffrey B. Kahn, Esq. discusses IRS and taxes on the March 8, 2015 radio show “Talking Money with Mr. C” on 760AM KFMB in San Diego

Issues discussed:

  1. Mr. C asks: Did I hear you talking on your radio show about how the IRS can levy accounts before proving any wrong-doing?
  2.   The 5 biggest Homeowner Tax Breaks

Jeffrey B. Kahn, Esq. Discusses Taxes, Undisclosed Foreign Accounts and the IRS On ESPN Radio – February 27, 2015 Show

Topics Covered:
1. An Unusual But Effective IRS Collection Tool: The Writ Of Ne Exeat Republica
2. The IRS Does Care About Your Small Undisclosed Foreign Bank Account!
3. Freelancer? Avoid these ‘7 deadly sins’ at tax time.
4. Questions from our listeners:

a. Will the IRS punish me if I hire a tax attorney 

b. Should I use a national tax practitioner?  

c. I have unfiled tax returns so what should I do?

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 is my associate attorney Amy Spivey who will be calling in later.

An Unusual But Effective IRS Collection Tool: The Writ Of Ne Exeat Republica

Congress has given the IRS potent tools to collect taxes. The IRS can impose liens on a taxpayer’s property and can seize it through levy, all without prior judicial authorization. But for taxpayers who attempt to move or keep their assets offshore to circumvent IRS collections – beware of the writ of ne exeat republica.

That’s right the writ of ne exeat republica. Sounds cool doesn’t it?

Well for those of you who don’t now, the writ of ne exeat republica effectively prevents a person from leaving the Court’s jurisdiction and the IRS has demonstrated that where its efforts to seize a taxpayer’s property to collect his past due taxes are futile, the IRS essentially seizes the taxpayer instead. This writ was used by the royal courts in England starting with the 18th century and is now used in our U.S. courts.

It takes some fairly serious misbehavior to lead a court to bar someone from traveling – and that is what happened to Charles and Kathleen Barrett of Colorado. United States v. Barrett [Case No. 10-CV-02130], 2014 U.S. Dist. LEXIS 10888 (D. Colo. Jan. 29, 2014).

Unknown to the Barretts, the government secured a writ of ne exeat republica just before the Barretts had departed for Ecuador. The government then received a default judgment and an order directing the Barretts to repatriate funds that the IRS believed that the Barretts had wired to Ecuador. Thereafter, the Barretts not knowing that this writ and order were outstanding returned to Colorado to attend their daughter’s wedding.

Take-down At The Airport.

After attending their daughter’s wedding, on the morning of August 8, 2013, Charles and Kathleen Barrett were preparing to leave Colorado for the return trip to Cuenca, Ecuador. Charles was leaving from the Denver airport while Kathleen was flying out of Grand Junction, Colorado, where she had been visiting her mother.


After Charles checked in at the airlines counter at the Denver Airport, he went to the gate an hour before his flight was scheduled to board. Just as he settled into his seat in the waiting area he was surrounded by three men, one of whom showed his U.S. marshals badge. “You’re not flying anywhere today,” one of the marshals told him. “The judge wants to see you.”

Charles turned over his passport and airplane ticket and was led out of the airport in handcuffs. Despite the drama and rough treatment, Mr. Barrett understood why he was being taken away but felt confident the issue could be resolved quickly once he talked to the judge.

You see the Barretts owed the IRS money from 2007 when they received a large refund of $217,615 that they were not entitled to as a result of a tax return filed without their signatures by their tax preparer. When contacted by the IRS about this, they filed a corrected return in 2009, but the Barretts kept the money.

On September 1, 2010, the IRS sued the Barretts in Colorado federal court, and eventually obtained a default judgment against them for $351,197 (which amount included penalties and interest).

Now if the Barretts had simply paid their taxes, this would have been an obscure case for a relatively small amount and probably nobody except the parties concerned would have cared much. But the Barretts decided that they weren’t going to pay, and that’s where it starts getting interesting. Apparently the Barretts decided to move to Ecuador and that they deposited their erroneous refund check of $217,615 first into their domestic bank account and then to an offshore bank account.

IRS Action To Get The Offshore Money Back.

By this time you are probably thinking, “Yeah, and good luck with the IRS collecting any of that money, against a couple living outside the U.S. with bank accounts outside the U.S.”

But, in the off-chance that the Barretts might show up again, on December 2, 2010 the IRS went to a U.S. District Judge, and asked that an order by the cool name of writ of ne exeat republica be issued against the Barretts to keep them from leaving the U.S. (although they were already long gone), requiring them to post a bond for the $351,197, requiring they be detained by the U.S. Marshal Service pending a hearing, requiring that they produce all their books and records of financial assets and accounts, and restricting them from further transferring or alienating their property.

The Federal Court Weighs In.

So when Charles was taken into the courtroom on August 8, 2013, he stood before U.S. District Magistrate Judge Boyd Boland who issued the writ, ordering the Barretts to turn over their passports and preventing them from leaving the country. Judge Boland read Charles his rights and told him he was not allowed to speak.

An attorney for the IRS asked Judge Boland to put Barrett in jail or post bond of $253,000. The judge responded that the writ did not authorize jailing, only the confiscation of passports and other travel documents. But the IRS attorney persisted, claiming the Barretts were flight risks, and the judge finally relented. Charles was fingerprinted and booked into federal jail. However, no charges were filed.

Meanwhile, 200 miles west of Denver in Grand Junction, Kathleen was experiencing the same treatment that Charles was in Denver. She too, was booked into a local jail. It was two days before Charles knew where she was.

On October 11, 2013, the Barretts appeared for a hearing before a U.S. Magistrate Judge. At this time, the IRS identified the assets they believed the Barretts had control of that were available to pay their debt — about $20,000 in cash in various accounts, some real estate in Ecuador, a bunch of minority stock interests in a nutritional food company apparently doing business in Central America, various small assets such as coins and jewelry, a truck and a horse.

Mrs. Barrett claimed that most of the assets were either worthless or not accessible, and at any rate their total value was not much more than $48,000. Of course, these are just the assets that the IRS was able to identify.

As with nearly all the debtors in similar cases involving offshore assets, the Barretts’ biggest failure was their own credibility. Specifically:

  1. The Barretts had obtained a large tax refund through fraud. While they tried to claim that a “maverick accountant” signed their names to the return, when shown their signatures on their returns they claimed that the government forged their signatures. Nonetheless, the Barretts kept the fraudulently-obtained refund.
  2. The Barretts had not voluntarily paid anything to their creditors, and had “loaned” $20,000 to their son just to keep it out of their creditor’s hands.
  3. While basically claiming poverty, the Mr. Barrett had his credit cards paid from an undisclosed account in the U.S., and had wired to another of his sons from $1,500 to $3,000 per month over a 2 to 3 year period.
  4. The Barretts had refused to provide bank account or wire-transfer information for their various accounts.
  5. Mrs. Barrett sold shares in a company that was not disclosed to the U.S. Magistrate Judge for $40,000 while at the same time claiming that her sole income was the $430 she received from Social Security. Some of this money was used to pay the Barrett’s legal fees.

After reviewing the available evidence the court concluded that the Barretts had to stay put until they paid the balance of their tax debt (which after applying prior payments and credits now only amounted to $16,000) and provided satisfactory evidence that their Ecuadorian property truly was unmarketable.

So don’t think that if you flee the country to dodge your debts or avoid reporting your undisclosed foreign bank accounts you will not have any problems when you come back. A U.S. Marshal or your local friendly sheriff will be waiting for you.

Well it’s time for a break but stay tuned because we are going to tell you why the IRS is looking for your small undisclosed foreign bank account.

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

The IRS Does Care About Your Small Undisclosed Foreign Bank Account!

Jeff states, Since 2009 the IRS campaign against unreported income and undisclosed foreign accounts has morphed from a focus on Swiss banks and large accounts to a kind of everyman’s tax disclosure.  But keep in mind that just like when the net is lowered into the water it catches all sizes of fish – the IRS states no undisclosed foreign account is too small to avoid penalties. Many people have problems sleeping because of Foreign Account Tax Compliance Act (FATCA) and the filing requirements of Foreign Bank Account Reporting (FBAR).

Jeff asks Amy, What is FATCA?

Amy replies, FATCA was enacted in 2010 and the IRS has touted that FATCA has been successful so far. The IRS states they have collected US$6.5 billion and they reasonably believe that as much as $100 billion per year could be collected. The IRS is working with other countries that would like to use the U.S. model to improve their tax collection. The IRS will be working closely with the Organization for Economic Cooperation and Development (OECD) to implement Global FATCA (what many people are now calling GATCA); and also that the forms to request information from financial institutions would be standardized so that all countries would use the same forms, making it easy on the financial institutions. The IRS reasonably believes that FATCA can work, and given that the law has the effect of forcing compliance by every country, ultimately, everyone will benefit.

Jeff asks Amy, What is FBAR?

Amy replies, Keep in mind that an FBAR is different from FATCA and the requirements are also different. While impact of FATCA is to report you foreign income on your U.S. income tax returns, FBAR is an informational submission that must be filed with the Treasury Department if you have more than $10,000 in financial assets overseas. So, for FATCA, the financial institutions and the foreign governments will report to the IRS directly, but for FBAR, the taxpayers must self-report to the United States Treasury Department by June 30th each year.

Jeff asks Amy, is there a filing threshold for the FBAR filing?

Amy replies, Sure, there are thresholds, including the rule that you don’t need to file annual FBAR’s if you have $10,000 or less in your accounts. But remember, that is in the aggregate, so having three accounts with $4,000 each puts you over.  

Amy continues, Plus, the $10,000 ceiling is judged every single day of the year. If you ever go over $10,000 in the aggregate at any point during the year, you must file. Remember too that even this FBAR threshold isn’t applicable to income taxes. If small accounts produce income, you must report it.

Jeff states, Say you have a foreign account with $8,000 at all times during the year, and it produces $400 of interest income. Even though the account isn’t subject to FBAR rules, you must report the income. And most foreign banks don’t send you handy Form 1099-type reminders at tax time.

Jeff continues, Even if your undisclosed foreign bank account is small, if you fail to file FBAR’s and/or fail to report income, you could go to jail or face huge fines or penalties. The IRS has made clear that non-compliant accounts—and there’s no threshold for what accounts are too small to ignore—can be dealt with severely.

Amy states, FBAR penalties can be enormous, a civil penalty of $10,000 for each non-willful violation. If your violation is willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation.

Amy continues, Criminal penalties 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.

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, Consider Whether Your Delinquency Is Only In Taxes, Only FBAR’s Or Both.

Where The Delinquency Is FBAR’s Only?

Amy replies, For such cases you could be entitled to an FBAR Penalty Abatement. Perhaps you properly relied on the advice of professionals in not filing the FBAR’s or you reasonably did not know you had a filing obligation. By showing “reasonable cause” you may be able to abate the FBAR filing penalties. While the reasonable cause cases generally arise under the income tax laws and regulations, established under the Internal Revenue Code, FBAR penalties are assessed under the Bank Secrecy Act, which is part of the USA Patriot Act. Nevertheless we have found that precedent set forth in the tax cases may help in supporting reasonable cause to abate FBAR penalties.

Jeff states, Where The Delinquency Is FBAR’s AND Taxes?

Amy replies, You need to consider whether your non-compliance could be deemed willful by the IRS.  Non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or conduct that’s the result of a good-faith misunderstanding of the requirements of the law.  The application of this standard will vary based on each person’s facts and circumstances so it is something that has to be evaluated on a case-by-case basis.

Jeff states, For Non-willful Delinquencies – The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.

Jeff states, a number of documents must be submitted for both versions including 3 years of back tax returns reflecting unreported foreign source income and 6 years of back FBAR’s reporting the foreign financial accounts.

Jeff states:

For U.S. Taxpayers Residing Outside the United States who apply to the streamlined program, the IRS is waiving the OVDP penalty.

For U.S. Taxpayers Residing in the United States who apply to the streamlined program, the IRS is imposing a 5% OVDP penalty (applied against the value of the undisclosed foreign income producing accounts/assets).

Jeff states:

Now If You Believe That The IRS Would Deem You Willful – The 2014 Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.  OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.

Amy states, like the streamlined procedures OVDP requires similar documents to be submitted except that the amended income tax returns and delinquent FBAR’s extend over the last 8 years. But more significant is that you not need to show that you were non-willful. In this program the IRS will apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years. This is referred to as the “OVDP Penalty”.

Jeff states, Remember small amounts and small accounts may not raise the same kinds of big ticket issues. Nevertheless, there’s no small fry rule at the IRS.

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.

Are you a freelancer or self-employed? Stay tuned because after the break we are going to tell you the 7 deadly sins at tax time.

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.

Freelancer? Avoid these ‘7 deadly sins’ at tax time.

Jeff states, In separate reports, Zen99 and the consumer finance web site nerdwallet ranked Los Angeles the best city for freelancers. In 2012, 12% of people in Los Angeles reported themselves as self-employed. Each of these website reports considered housing and health care costs, the percentage of freelancers in an area as factors. Even before the sharing economy began to take off, the entertainment industry and growing tech scene were already strong sources of freelance gigs in L.A.

Amy states, For freelancers, consultants, actors and other self employed people, life gets complicated come tax time. Digging around for the paperwork to fill out tax forms practically qualify as exercise. Such business people have a nightmare trying to find receipts which is why you should keep track expenses and receipts year round rather than pursuing a paper chase as April 15th nears.  

Jeff states, Remember when you can’t find receipts, you can’t write off your expenses and therefore you are paying more money to the government instead of keeping it for yourself.

Jeff to identity each sin followed by Amy explaining. Here are seven don’t – or, deadly sins, for freelancers at tax time:

  1. Not knowing what they owe.  There are 20 different 1099 forms that get sent out to workers to track freelance gigs.  One of them is the 1099-K, which only has to be sent to you by a company in paper form if you make over $20,000. People think – Great, no paper form, no taxes on that. But that’s a big mistake – you still have to self-report the income.  
  1. Not knowing WHEN they owe.  For freelancers who owe more than $1,000 in taxes for a year, tax time comes more often than just April 15th.  They have to pay taxes quarterly. But then it’s not coming out of paychecks like it does for permanent employees. 
  1. Not tracking and writing off the right types of business expenses. Many freelancers fail to realize they can write off part of their cell phone bill as a business expense. Expenses vary by the type of work.  A rideshare driver’s biggest expense will be related to their car, while a web developer’s biggest expense might be their home office. Figuring out what expenses are important to your type of work is important is maximizing your tax savings.
  1. Writing off personal expenses.  This goes back to that cell phone.  If you use the same phone for personal and business purposes, don’t be tempted to write the whole bill off. Estimate the amount you use it for your work. The same goes for your vehicle. Don’t go trying to write off miles driven to the beach. 
  1. The Double No-No: counting expenses twice.  Speaking of vehicles, most people use the Standard Mileage Rate ($0.56/mile for 2014), which factors in gas, repairs and maintenance and other costs like insurance and depreciation. But if you use this rate, you can’t also expense your gas receipts and repair bills.  
  1. Employee AND employer.  Freelancers they play both roles. For regular employees, Federal, State, and payroll taxes are withheld from a paycheck, and distributed on the employee’s behalf. It’s how Social Security and Medicare are funded. The IRS mandates that the employer must pay half of every employee’s payroll tax, and the employee is responsible for the other half.  Independent contractors have to handle both halves.  The IRS does give you a small benefit by letting you deduct the half that you pay yourself as a business expense but don’t believe that because of this a freelancer pays less taxes than the regular wage-working employee.  
  1. Not keeping adequate records. The IRS requires you to keep proof of all business receipts, mileage, etc.  If you can’t show these, the IRS could refute the expense and force you to pay back taxes. The good news is there are other ways to prove expenses if you’ve lost the receipt. A bank or credit card statement with the date and location might do the trick. The IRS may be accommodating if you are doing your best but if you’re being a headache, they’re going to be a headache as well.

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.

What the tax man looks for.

Jeff states, It is a statistical fact: Self-employed individuals are much more likely to get audited than regular employees.

Jeff continues, A tax auditor is looking for certain things when they audit you and your business. The IRS training manuals note that the auditors are examining you and not just your business tax return. Your lifestyle may be checked against your reported income to see if there is a discrepancy which shows skimming, diversion of funds or deception. For example, that mansion with the truck-mount van parked out front may send up the wrong “economic reality” flag.

Amy states, Travel and entertainment deductions in a business are usually suspect as some people try to deduct personal entertainment and meal “business” expenses. You must be able to clearly explain the business relationship in a credible fashion. Taking your friends out to the ballpark or taking the family on a vacation to that industry conference may not quite pass the litmus test of an audit. Writing off your legitimate business entertainment expenses requires detailed explanation of the reason for the expense, as well as a receipt.

Jeff asks Amy, I imagine that every business person keeps a calendar. How could this help or hurt you in an audit?

Amy replies, Your calendar will undoubtedly be scrutinized to make sure there are no glaring gaps between possible work, vehicle or equipment usage and the income reported. As an example: If you are claiming 100% business vehicle usage but your calendars do not confirm the times and locations of service stops, you may be open to an analysis of possible personal use of the vehicle. Entries in a business diary or calendar help to justify an expense to an auditor as long as it appears to be reasonable.

Jeff asks Amy, I imagine that every business person will use a credit card to charge different things? How could this help or hurt you in an audit?

Amy replies, Business credit cards are also highly scrutinized as they have a high potential for misuse (such as use for a personal vacation or personal expenses). Keep these only for legitimate business expenditures (places where company checks won’t do). Too many times a small business owner says that they will “reimburse the business later” for that personal expense put on the business card. That routine just opens you up for closer inspection.

Don’t Take The Chance And Lose Everything You Have Worked For.

Jeff states, Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation.

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. Bill from San Diego asks: Will the IRS punish me if I hire a tax attorney 

On the contrary, often the IRS is happy to see a tax attorney on the case. 

First of all, you have a right to be represented – that is part of the Taxpayer Bill Of Rights.

Second, recognize that the agent has a lot of cases to work. Agents know that when a seasoned tax attorney is involved, the agent will spend less time on the case. Why? There is no need for the agent to spend time to educate a tax attorney unlike a taxpayer. A seasoned tax attorney will also know how to present your case in the most efficient and effective manner while still advocating your position.

In my 27 years of practice, I have never had a case where because the taxpayer hired counsel the IRS agent punished the taxpayer.

2. Debbie from Woodland Hills asks: Should I use a national tax practitioner?  

If you call the guys you see on TV or hear on the radio, you will speak to a commissioned salesperson who will make you a bunch of promises that sound too good to be true- because they are.  Once you sign up with them, that will be the last time you talk to that person.  After that, you may have trouble getting someone on the telephone who knows anything about your case.  Good luck if the IRS comes to your door and you need to speak to someone, especially if they are in a different time zone.  Don’t believe me? go to Google and type in the company name with the word “scam”. 

3. Tim from San Jose asks, I have unfiled tax returns so what should I do?

The best thing you can do is file your tax return as soon as possible. The IRS will eventually find out that you haven’t paid taxes through employers, contractors, mortgage holders or the assets that you purchase. The longer you go without paying taxes, the more fines you will have to pay. If you can’t pay all of your taxes, you may be able to qualify for an Offer in Compromise, Installment Agreement or Currently Not Collectible Status. With the information we can get from IRS and your tax documentation, we can prepare previous years of unfiled tax returns and propose a resolution to the IRS. Also, if you can’t find some of the documentation, we can help.

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!

An Unusual But Effective IRS Collection Tool: The Writ Of Ne Exeat Republica

Congress has given the IRS potent tools to collect taxes. The IRS can impose liens on a taxpayer’s property and can seize it through levy, all without prior judicial authorization. But for taxpayers who attempt to move or keep their assets offshore to circumvent IRS collections – beware of the writ of ne exeat republica.

The writ of ne exeat republica effectively prevents a person from leaving the Court’s jurisdiction and the IRS has demonstrated that where its efforts to seize a taxpayer’s property to collect his past due taxes, the IRS essentially seized the taxpayer instead.

Predictably, it takes some fairly serious misbehavior to lead a court to bar someone from traveling – and that is what happened to Charles and Kathleen Barrett of Colorado. United States v. Barrett [Case No. 10-CV-02130], 2014 U.S. Dist. LEXIS 10888 (D. Colo. Jan. 29, 2014).

Unknown to the Barretts, the government secured a writ of ne exeat republica just before the Barretts had departed for Ecuador. The government then received a default judgment and an order directing the Barretts to repatriate funds that the IRS believed that the Barretts had wired to Ecuador. Thereafter, the Barretts not knowing that this writ and order were outstanding returned to Colorado to attend their daughter’s wedding.

Take-down At The Airport.

After attending their daughter’s wedding, on the morning of August 8, 2013, Charles and Kathleen Barrett were preparing to leave Colorado for the return trip to Cuenca, Ecuador. Charles was leaving from the Denver airport while Kathleen was flying out of Grand Junction, Colorado, where she had been visiting her mother. Both were heading to Miami where they would meet their sons for the flight back to Ecuador.

After Charles checked in at the airlines counter at the Denver Airport, he went to the gate an hour before his flight was scheduled to board. Just as he settled into his seat in the waiting area he was surrounded by three men, one of whom showed his U.S. marshals badge. “You’re not flying anywhere today,” one of the marshals told him. “The judge wants to see you.”

Charles turned over his passport and airplane ticket and was led out of the airport in handcuffs. Four times, Charles recalls, he asked to call to an attorney to represent him before the judge. Four times he was put off. He informed the marshal that his sons, Nathaniel and Jonathan, were waiting for him at the Miami airport and was told that the marshals would contact them. Despite the drama and rough treatment, Barrett understood why he was being taken away but felt confident the issue could be resolved quickly once he talked to the judge.

You see the Barretts owed the IRS money from 2007 when they received a large refund of $217,615 that they were not entitled to as a result of a tax return filed without their signatures by their tax preparer. When contacted by the IRS about this, they filed a corrected return in 2009, but the Barretts kept the money.

On September 1, 2010, the IRS sued the Barretts in Colorado federal court, and eventually obtained a default judgment against them for $351,197 (which amount included penalties and interest). Subsequently, three separate times thereafter the Barretts tried to vacate the default judgment, and three times they failed.

So far, so what — if the Barretts had simply paid their taxes, this would have been an obscure case for a relatively small amount and probably nobody except the parties concerned would have cared much. But the Barretts decided that they weren’t going to pay, and that’s where it starts getting interesting. Apparently the Barretts decided to move to Ecuador and that they deposited their erroneous refund check first into their domestic bank account, and then moved it to another account, and then wire-transferred funds to an account with a bank in Uruguay. The government believed that the Barretts had spirited the $217,615 out of the country.

IRS Action To Get The Offshore Money Back.

By this time you are probably thinking, “Yeah, and good luck with the IRS collecting any of that money, against a couple living outside the U.S. with bank accounts outside the U.S.”

But, in the off-chance that the Barretts might show up again, on December 2, 2010 the IRS went to a U.S. District Judge, and asked that an order by the cool name of writ of ne exeat republica be issued against the Barretts to keep them from leaving the U.S. (although they were already long gone), requiring them to post a bond for the $351,197, requiring they be detained by the U.S. Marshal Service pending a hearing, requiring that they produce all their books and records of financial assets and accounts, and restricting them from further transferring or alienating their property.

The writ of ne exeat republica is a little known and seldom used judicial tool dating to the 18th century English royal court. Originally intended to restrict travel for political reasons, its occasional use in the U.S. court system, primarily in family and tax law cases, has often come under question. When it has been invoked, it has been strictly as a civil law action.

Of course, this writ was without little immediate effect since the Barretts had vamoosed. The writ was issued without the Barrett’s knowledge, by the court on an ex parte basis, which meant that only the IRS showed up to talk with the Judge, and the Barretts were unrepresented — a disadvantage inherent to fleeing the country.

The Federal Court Weighs In.

So when Charles was taken into the courtroom on August 8, 2013, he stood before U.S. District Magistrate Judge Boyd Boland who issued the writ of ne exeat republica, ordering the Barretts to turn over their passports and preventing them from leaving the country. Judge Boland read Charles his rights and told him he was not allowed to speak.

An attorney for the IRS asked Judge Boland to put Barrett in jail or post bond of $253,000. The judge responded that the writ did not authorize jailing, only the confiscation of passports and other travel documents. The IRS attorney persisted, claiming the Barretts were flight risks, and the judge finally relented. Charles was fingerprinted and booked into federal jail. However, no charges were filed.

Meanwhile, 200 miles west of Denver in Grand Junction, Kathleen was experiencing the same treatment that Charles was in Denver. She too, was booked into a local jail. It was two days before Charles and other family members knew where she was.

In Miami, not knowing what had happened to their parents, Nathaniel and Jonathan boarded an American Airlines flight to Quito. The U.S. Marshals had not bothered to inform them that their parents had been detained. Assuming that there was a scheduling problem and that the family would be reunited in Ecuador, they remained on the flight.

Kathleen and Charles saw each other for the first time in five days on Tuesday August 13th, at a hearing in the federal courthouse in Denver. Their attorney immediately demanded that the handcuffs and leg irons be removed. This is a civil not a criminal case, he argued and Judge Boland agreed. The marshals, however, refused to obey the judge’s order based on instructions from their superiors. Charles and Kathleen sat through the hearing literally in chains.

On October 11, 2013, the Barretts appeared for a hearing before a U.S. Magistrate Judge. At this time, the IRS identified the assets they believed the Barretts had control of that were available to pay their debt — about $20,000 in cash in various accounts, some real estate in Ecuador, a bunch of minority stock interests in a nutritional food company apparently doing business in Central America, various small assets such as coins and jewelry, a truck and a horse.

Mrs. Barrett claimed that most of the assets were either worthless or not accessible, and at any rate their total value was not much more than $48,000. Of course, these are just the assets that the IRS was able to identify.

As with nearly all the debtors in similar cases involving offshore assets, the Barretts’ biggest failure was their own credibility. Specifically:

  1. The Barretts had obtained a large tax refund through fraud. While they tried to claim that a “maverick accountant” signed their names to the return, when shown their signatures on their returns they claimed that the government forged their signatures. Nonetheless, the Barretts kept the fraudulently-obtained refund.
  2. The Barretts had not voluntarily paid anything to their creditor, and had “loaned” $20,000 to their son just to keep it out of their creditor’s hands.
  3. While basically claiming poverty, the Mr. Barrett had his credit cards paid from an undisclosed account in the U.S., and had wired to another of his sons from $1,500 to $3,000 per month over a 2 to 3 year period.
  4. There was evidence that the Barretts had wire-transferred money between various accounts, and eventually withdrew $48,720 by a cashier’s check, when a wire-transfer failed.
  5. The Barretts had refused to provide bank account or wire-transfer information for their various accounts.
  6. Mrs. Barrett sold shares in a company that was not disclosed to the U.S. Magistrate Judge for $40,000 while at the same time claiming that her sole income was the $430 she received from Social Security. Some of this money was used to pay the Barrett’s legal fees.

After reviewing the available evidence and applying a multifactor test that considered the merits of the governments underlying tax claim, the relative harm to each party and the public interest to be served by the writ, the district court concluded that the writ should stay in place. Ultimately, the court concluded that the Barretts had to stay put until they paid the balance of their tax debt (which after applying prior payments and credits now only amounted to $16,000) and provided satisfactory evidence that their Ecuadorian property truly was unmarketable.

So don’t think that if you flee the country to dodge your debts or avoid reporting your undisclosed foreign bank accounts you will not have any problems when you come back. A U.S. Marshal or your local friendly sheriff will be waiting for you.

Protect yourself.

If you are in danger of wage garnishments or bank levies or having a tax lien placed against your property, stand up to the IRS and your State Tax Agency by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

The IRS Does Care About Your Small Undisclosed Foreign Bank Account!

Since 2009 the IRS campaign against unreported income and undisclosed foreign accounts has morphed from a focus on Swiss banks and large accounts to a kind of everyman’s tax disclosure.  But keep in mind that just like when the net is lowered into the water it catches all sizes of fish – the IRS states no undisclosed foreign account is too small to avoid penalties. Many people have problems sleeping because of Foreign Account Tax Compliance Act (FATCA) and the filing requirements of Foreign Bank Account Reporting (FBAR).

FATCA

FATCA was enacted in 2010 and the IRS has touted that FATCA has been successful so far. The IRS states they have collected US$6.5 billion and they reasonably believe that as much as $100 billion per year could be collected. The IRS is working with other countries that would like to use the U.S. model to improve their tax collection. The IRS will be working closely with the Organization for Economic Cooperation and Development (OECD) to implement Global FATCA (what many people are now calling GATCA); and also that the forms to request information from financial institutions would be standardized so that all countries would use the same forms, making it easy on the financial institutions. The IRS reasonably believes that FATCA can work, and given that the law has the effect of forcing compliance by every country, ultimately, everyone will benefit.

FBAR

Keep in mind that an FBAR is different from FATCA and the requirements are also different. While impact of FATCA is to report you foreign income on your U.S. income tax returns, FBAR is an informational submission that must be filed with the Treasury Department if you have more than $10,000 in financial assets overseas. So, for FATCA, the financial institutions and the foreign governments will report to the IRS directly, but for FBAR, the taxpayers must self-report to the United States Treasury Department by June 30th each year.

Sure, there are thresholds, including the rule that you don’t need to file annual FBARs if you have $10,000 or less in your accounts. But remember, that is in the aggregate, so having three accounts with $4,000 each puts you over.  

Plus, the $10,000 ceiling is judged every single day of the year. If you ever go over $10,000 in the aggregate at any point during the year, you must file. Remember too that even this FBAR threshold isn’t applicable to income taxes. If small accounts produce income, you must report it.

Say you have a foreign account with $8,000 at all times during the year, and it produces $400 of interest income. Even though the account isn’t subject to FBAR rules, you must report the income. And most foreign banks don’t send you handy Form 1099-type reminders at tax time.

Even if your undisclosed foreign bank account is small, if you fail to file FBARs and/or fail to report income, you could go to jail or face huge fines or penalties. The IRS has made clear that non-compliant accounts—and there’s no threshold for what accounts are too small to ignore—can be dealt with severely.

FBAR penalties can be enormous, a civil penalty of $10,000 for each non-willful violation. If your violation is willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation.

Criminal penalties 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.

Consider Whether Your Delinquency Is Only In Taxes, Only FBARs Or Both.

Where The Delinquency Is FBAR’s Only –

For such cases you could be entitled to an FBAR Penalty Abatement. Perhaps you properly relied on the advice of professionals in not filing the FBARs or you reasonably did not know you had a filing obligation. By showing “reasonable cause” you may be able to abate the FBAR filing penalties. While the reasonable cause cases generally arise under the income tax laws and regulations, established under the Internal Revenue Code, FBAR penalties are assessed under the Bank Secrecy Act, which is part of the USA Patriot Act. Nevertheless we have found that precedent set forth in the tax cases may help in supporting reasonable cause to abate FBAR penalties.

Where The Delinquency Is FBAR’s AND Taxes

You need to consider whether your non-compliance could be deemed willful by the IRS.  Non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or conduct that’s the result of a good-faith misunderstanding of the requirements of the law.  The application of this standard will vary based on each person’s facts and circumstances so it is something that has to be evaluated on a case-by-case basis.

For Non-willful Delinquencies – The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.

Both versions require that taxpayers:

a. Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

b. File 3 years of back tax returns reflecting unreported foreign source income;

c. File 6 years of back FBAR’s reporting the foreign financial accounts; and

d. Calculate interest each year on unpaid tax.

In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:

a. Possible waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record;

b. Possible waiver of 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); and

c. Possible waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651.

For U.S. Taxpayers Residing Outside the United States who apply to the streamlined program, the IRS is waiving the OVDP penalty.

For U.S. Taxpayers Residing in the United States who apply to the streamlined program, the IRS is imposing a 5% OVDP penalty (applied against the value of the undisclosed foreign income producing accounts/assets).

Now If You Believe That The IRS Would Deem You Willful – The 2014 Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.  OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.

OVDP requires that taxpayers:

  • File 8 years of back tax returns reflecting unreported foreign source income;
  • File 8 years of back FBAR’s reporting the foreign financial accounts;
  • Calculate interest each year on unpaid tax;
  • Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and
  • Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years. This is referred to as the “OVDP Penalty”.

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).

What Should You Do?

Remember small amounts and small accounts may not raise the same kinds of big ticket issues. Nevertheless, there’s no small fry rule at the IRS. Even small amounts of income and account balances can be worth addressing. It’s far better to address these issues than to worry endlessly over not being in compliance with the rules. We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. 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.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Freelancer? Avoid these ‘7 deadly sins’ at tax time.

In separate reports, Zen99 and the consumer finance web site nerdwallet ranked Los Angeles the best city for freelancers. In 2012, 12% of people in Los Angeles reported themselves as self-employed. Each of these website reports considered housing and health care costs, the percentage of freelancers in an area as factors. Even before the sharing economy began to take off, the entertainment industry and growing tech scene were already strong sources of freelance gigs in L.A.

For freelancers, consultants, actors and other self employed people, life gets complicated come tax time. Digging around for the paperwork to fill out tax forms practically qualify as exercise. Such business people have a nightmare trying to find receipts which is why you should keep track expenses and receipts year round rather than pursuing a paper chase as April 15th nears.  

Remember when you can’t find receipts, you can’t write off your expenses and therefore you are paying more money to the government instead of keeping it for yourself.

Here are seven don’t – or, deadly sins, for freelances at tax time:

  1. Not knowing what they owe.  There are 20 different 1099 forms that get sent out to workers to track freelance gigs.  One of them is the 1099-K, which only has to be sent to you by a company in paper form if you make over $20,000. People think – Great, no paper form, no taxes on that. But that’s a big mistake – you still have to self-report the income.  
  1. Not knowing WHEN they owe.  For freelancers who owe more than $1,000 in taxes for a year, tax time comes more often than just April 15th.  They have to pay taxes quarterly. But then it’s not coming out of paychecks like it does for permanent employees. 
  1. Not tracking and writing off the right types of business expenses. Many freelancers fail to realize they can write off part of their cell phone bill as a business expense. Expenses vary by the type of work.  A rideshare driver’s biggest expense will be related to their car, while a web developer’s biggest expense might be their home office. Figuring out what expenses are important to your type of work is important is maximizing your tax savings.
  1. Writing off personal expenses.  This goes back to that cell phone.  If you use the same phone for personal and business purposes, don’t be tempted to write the whole bill off. Estimate the amount you use it for your work. The same goes for your vehicle. Don’t go trying to write off miles driven to the beach. 
  1. The Double No-No: counting expenses twice.  Speaking of vehicles, most people use the Standard Mileage Rate ($0.56/mile for 2014), which factors in gas, repairs and maintenance and other costs like insurance and depreciation. But if you use this rate, you can’t also expense your gas receipts and repair bills.  
  1. Employee AND employer.  Freelancers they play both roles. For regular employees, Federal, State, and payroll taxes are withheld from a paycheck, and distributed on the employee’s behalf. It’s how Social Security and Medicare are funded. The IRS mandates that the employer must pay half of every employee’s payroll tax, and the employee is responsible for the other half.  Independent contractors have to handle both halves.  The IRS does give you a small benefit by letting you deduct the half that you pay yourself as a business expense but don’t believe that because of this a freelancer pays less taxes than the regular wage-working employee.  
  1. Not keeping adequate records. The IRS requires you to keep proof of all business receipts, mileage, etc.  If you can’t show these, the IRS could refute the expense and force you to pay back taxes. The good news is there are other ways to prove expenses if you’ve lost the receipt. A bank or credit card statement with the date and location might do the trick. The IRS may be accommodating if you are doing your best but if you’re being a headache, they’re going to be a headache as well.

What the tax man looks for.

It is a statistical fact: Self-employed individuals are much more likely to get audited than regular employees.

A tax auditor is looking for certain things when they audit you and your business. The IRS training manuals note that the auditors are examining you and not just your business tax return. Your lifestyle may be checked against your reported income to see if there is a discrepancy which shows skimming, diversion of funds or deception. For example, that mansion with the truck-mount van parked out front may send up the wrong “economic reality” flag.

Travel and entertainment deductions in a business are usually suspect as some people try to deduct personal entertainment and meal “business” expenses. You must be able to clearly explain the business relationship in a credible fashion. Taking your friends out to the ballpark or taking the family on a vacation to that industry conference may not quite pass the litmus test of an audit. Writing off your legitimate business entertainment expenses requires detailed explanation of the reason for the expense, as well as a receipt.

Your calendar will undoubtedly be scrutinized to make sure there are no glaring gaps between possible work, vehicle or equipment usage and the income reported. As an example: If you are claiming 100% business vehicle usage but your calendars do not confirm the times and locations of service stops, you may be open to an analysis of possible personal use of the vehicle. Entries in a business diary or calendar help to justify an expense to an auditor as long as it appears to be reasonable.

Business credit cards are also highly scrutinized as they have a high potential for misuse (such as use for a personal vacation or personal expenses). Keep these only for legitimate business expenditures (places where company checks won’t do). Too many times a small business owner says that they will “reimburse the business later” for that personal expense put on the business card. That routine just opens you up for closer inspection.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.