IRS Prevails on Controversial Captive Insurance Structure

As tax attorneys in Columbus, Ohio, we assist many individuals and businesses with tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels. As part of that work, we keep up on tax cases in the United States Tax Court that may impact our clients. One case that Nardone Limited has been following is: Avrahami v. Commissioner, 149 T.C. No. 7, which was decided on August 21, 2017. Avrahami was a closely-watched case because of the recent IRS enforcement activity in the Captive Insurance area. The IRS is concerned about the abuse of Captive Insurance entities by third-party promoters and taxpayers that: (i) sincerely fail to understand the ramifications of a third-party promoter’s advice, or more likely, (ii) taxpayers that are blinded by the so-called tax savings created by the Captive Insurance structure.

What are Captive Insurance Companies?

A pure Captive Insurance company is one that insures only the risks of companies related to it by ownership (the “Captive”). When the insured pay an insurance premium to the Captive, the insured receive a deduction for the amount actually paid. On the other hand, the Captive is exempt from taxation on premiums received, up to a certain ceiling. The exemption from taxation on the insurance premiums allow the Captive to build up a large surplus. The Captive is then taxed on its investment income only. This is a significant savings for the insured that paid the premiums and, directly or indirectly, own the Captive.

So, Where Is the Abuse?

Before we talk about the specific abuse, we must first discuss the concept of economic substance—generally and in layman’s terms. The idea is this: for a transaction to have economic substance, the decision to enter into the transaction must be motivated by a legitimate business purpose and not solely for the tax benefits involved (i.e., it must have a substantial non-tax purpose). This is where the abuse lies. The Captive Insurance promoters that tout themselves to be tax attorneys, tax CPAs, and insurance experts promote the tax benefits of forming a Captive for various business owners that are generating significant amounts of income and paying a significant amount of federal taxation. These business owners are usually looking for creative ways to avoid paying taxes. The promoters are relying on the fact that the overall structure promoted is complicated and that the taxpayers will either not understand it, and therefore not challenge it, or simply be blinded by the significant tax savings promoted. As one person has attempted to explain to our firm, if it is complicated and sounds sophisticated, then it must be true, it must be consistent with the law, and the individuals promoting it must be smart since we (i.e., the business owners) do not understand it. In fact, when someone questions the business owner, the business owner will ask, “Why would my tax attorney, tax CPA, or insurance advisor steer me wrong?” Well, they are potentially steering you wrong because of the significant benefits that the promoters receive for setting up the Captive structure.

How are the Captive Insurance Structures Promoted?

The promoters will talk about the form of the transaction and how the form is consistent with and satisfies federal law, both statutory and common law.  The promoters will persuade legitimate businesses, which are already fully insured by traditional unrelated third-party insurance companies, that the business is underinsured. The promoters will tell the businesses that they need environmental insurance, terrorism insurance, and other types of insurance, not typically covered by the businesses’ current policies. The promoters will then go out and have an actuarial firm come up with the necessary premiums to implement the types of insurances chosen by the business. The two main problems with this promotion is: (i) the insurance is either not a practical risk for that particular business, and therefore does not represent an insurance coverage that an ordinary and prudent person would purchase for their business, or (ii) the premiums are unreasonably high that no person, other than one that is trying to avoid paying taxes, would actually pay. So, what happens is that the insured is either buying insurance for the next “zombie apocalypse” that will never impact that particular business or the taxpayer is purchasing insurance that could traditionally be purchased by a staple insurance company for much less than the amount paid by the insured to the insurer. It just does not pass the smell test and violates all sensibilities—other than the fact that it is entered into for the primary benefit of tax avoidance.

Nardone Limited Comment: In the Avrahami case, the Tax Court chose not to discuss the taxpayer’s or promoters’ motivations for entering into the transaction. The Tax Court missed an opportunity to send a message and deter Captive promoters and taxpayers from entering into substantially similar transactions. In my humble opinion, however, just like hundreds around the country that have yet to be identified by the IRS, this case appears to involve individuals that disguised a transaction that did not have a legitimate non-tax business purpose, and did so, for the sole purpose of obtaining the significant tax benefits, which culminated in generating deductions and sheltering income from taxation on a tax-deferred basis. It is important to point out that the Tax Court did ultimately abate certain accuracy-related penalties, likely based upon reliance upon the taxpayers’ tax professionals.  Either way, until the IRS gets more aggressive and begins going after the promoters, this abuse will continue.  To say it another way, what is the difference between a taxpayer that enters into a sophisticated scheme to shelter money through a Captive with no legitimate business purpose, and an individual that intentionally fails to report his income altogether? In both instances, they are not paying taxes; one is just more complicated than the other and harder to uncover and enforce.

The Avrahami decision is attached here. As the reader of this blog, read it yourself and come to your own conclusion. But, we will leave you with this:

“You know, you can put lipstick on a pig, but it’s still a pig.”

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by the IRS or the Ohio Department of Taxation, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

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August 18, 2017

IRS Limiting the Number of In-Person Appeals Conferences

As tax attorneys in Columbus, Ohio, we assist individuals and businesses with tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels, including with the IRS and the Ohio Department of Taxation. Further, the tax attorneys at Nardone Limited routinely advise taxpayers about their appeal rights as part of our tax controversy work. As an example, we assist taxpayers with filing appeals requests at the administrative level with the appropriate taxing authority, including the Internal Revenue Service (“IRS”) and the Ohio Department of Taxation and then any necessary appeals. Generally, taxpayers prefer in-person appeals conferences as in-person appeals conferences are potentially more beneficial than other forms of conferences, such as telephone conferences. This article is the first of two regarding the IRS’s recent policy relating to in-person appeals conferences.

IRS Policy Change

In 2016, the IRS changed its policy regarding in-person appeals conferences to try and resolve appeals in less burdensome ways, such as by telephone or through virtual conferences. IRS Fact Sheet, Changes to Case Transfer and Conference Procedure (Oct. 3, 2016). According to the IRS, the change came after the IRS found that some language in Appeals’ letters that suggested to taxpayers that they needed to request an in-person appeals conference to take full advantage of the appeals process. See IRS Fact Sheet. The IRS found that many of the cases where taxpayers requested in-person appeals conferences could be, and usually are, handled through other methods, such as by telephone. See IRS Fact Sheet. According to the IRS, the IRS believes the policy changes will clarify procedures for taxpayers and make sure taxpayer dollars are used more efficiently. See IRS Fact Sheet. In-person appeals conferences are not being eliminated. Rather, the IRS is taking the position that in-person appeals conferences are no longer the preferred method for appeals resolution. See IRS Fact Sheet. Although the IRS contends that in-person appeals conferences are not preferred over any other method of appeals resolution, there are distinct advantages to being face to face with the appeals officer.

Benefits of an In-Person Appeals Conference

From Nardone Limited’s perspective, there are many reasons why in-person appeals conferences may lead to more resolutions than other methods, such as via telephone conference. Tax appeals can be extremely complicated and technical, and it is not always possible to fully discuss such cases over the phone. Tax appeals can also be large cases that span multiple years with massive amounts of documents and figures which, again, are not easy to fully discuss over the phone. Another reason is simply human nature. It is easier to say no to someone you have never met over the phone than it is to say no directly to someone’s face. It is also much easier to establish rapport with the parties in an in-person meeting than it is over the phone. During in-person appeals conferences, taxpayers and their attorneys can read the body language and facial expressions of the IRS appeals officers to gauge how their arguments are being received, and can change their method of presentation to reach a better result for the taxpayer. This is impossible to do over the telephone.

Ultimately, from Nardone Limited’s perspective, the IRS implemented the new policy to decrease the number of in-person appeals conferences to save money. There is an argument, however, that the policy will actually end up costing both the IRS and the taxpayers more in the long run.  If appeals are unable to be resolved during a telephone conference, some taxpayers will be forced to litigate against the IRS, and, as a result, the IRS will be forced to expend more money to defend its position. Potentially, the cost of defending such cases could cost the IRS more than initially allowing more in-person appeals conferences. To take advantage of these benefits, the taxpayer should request an in-person appeals conference if the facts and circumstances of the taxpayer’s case would allow the taxpayer to benefit most from an in-person appeals conference. But, the conference may be held out of state and force the taxpayer to travel far to attend an in-person appeals conference. As a result, the taxpayers should weigh the cost of traveling to an in-person appeals conference to receive these benefits, with the cost savings of other methods of resolution, such as telephone conferences. The mechanics of how and when in-person appeals conference requests are granted are discussed in our follow-up article, Requesting an In-Person Appeals Conference.

Conclusion

An in-person appeals conference is not necessary in every case. In some cases, telephone conferences and other methods of resolution can lead to a settlement and end up saving both the taxpayer and the IRS time and resources. From Nardone Limited’s perspective, this was the reasoning behind the new IRS policy to limit the number of in-person appeals conferences. But, there are many appeals cases that would benefit from having an in-person appeals conference, especially those cases which are technical and complicated. We strongly encourage the IRS to reconsider their policy change because we believe the policy change will result in an increase of costs and less rights to taxpayers. Taxpayers should weigh the benefits of an in-person appeals conference against the potential cost of traveling to the conference, or potential litigation if the conference does not result in a favorable outcome for the taxpayer. The IRS may grant a taxpayer’s request for an in-person appeals conference, however, the IRS may require that a taxpayer located in Ohio travel to Oklahoma for the conference, as an example. Ultimately, choosing the right method for an appeals conference will ultimately save the taxpayer time and money.

Contact Nardone Limited

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by the IRS, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

July 20, 2017

Taxpayers May Request Penalty Abatements When IRS Fails to Follow Proper Assessment Procedures

IStock_000009013053_SmallAs tax attorneys in Columbus, Ohio, we assist many individuals and businesses with U.S. tax reporting requirements, tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels. Further, the tax attorneys at Nardone Limited routinely advise taxpayers about penalty assessments and penalty abatements as part of our tax controversy work. As an example, we assist taxpayers with filing penalty abatement requests at the administrative level with the appropriate taxing authority, including the IRS and then any necessary appeals. Below is a discussion on the supervisor approval requirement when the IRS assesses penalties. Taxpayers may be able to request an abatement of certain penalties if the IRS has not followed the proper procedures, including obtaining written supervisor approval.

Written Approval Required

Generally, the IRS may not assess a penalty against a taxpayer unless the penalty has been approved in writing by the immediate supervisor of the individual making the initial assessment. See Internal Revenue Code (“IRC”) § 6751(b)(1). In fact, written supervisor approval must be completed before the IRS issues a Notice of Deficiency. If the taxpayer, in good faith, has an argument that the IRS did not follow the proper procedure when assessing penalties, then the taxpayer may be able to request an abatement of those penalties. When taxpayers are requesting an abatement of penalties requiring supervisor approval, the burden is on the IRS to prove that the IRS followed the proper procedure and received written approval by a supervisor before assessing the penalty against a taxpayer, provided there is not an exception to the requirement for written supervisor approval. See IRC § 7491.

Exceptions to Written Approval Requirement

There are two exceptions to the written supervisor approval requirement. See IRC § 6751(b)(2). The first exception to the written supervisor approval requirement is penalties assessed: (i) for failure to file or failure to pay under IRC § 6651; (ii) for failure by an individual to pay estimated income tax under IRC § 6654; and (iii) for failure by a corporation to pay estimated income tax under IRC § 6655. That is, these penalties do not require written approval by a supervisor.

The second exception is for penalties that are calculated electronically, as long as the penalty is free from any independent determination by an IRS employee. Some penalties are assessed using an automated system, called the Automated Underreporter Program. The Automated Underreporter Program compares a taxpayer’s return with third-party returns and sends the taxpayer a letter if there is a proposed deficiency. The taxpayer then has the opportunity to respond. If the taxpayer responds to the IRS’ letter, written approval by an IRS supervisor is necessary before a penalty can be assessed. If the taxpayer does not respond, the penalty is considered automatically calculated and may be assessed without written supervisor approval. See IRM 20.1.1.2.3.2. Accuracy-related penalties for negligent and substantial understatement under IRC § 6662 are assessed under this program, and therefore only require supervisor approval if the taxpayer responds to the pre-notification letter. See IRM 20.1.1.2.3.2. But, as technology advances, the IRS will likely calculate more penalties automatically through electronic means, widening the electronically calculated exception to the written supervisor approval rule. As an example, penalties for frivolous filings are now calculated through an automated electronic system and therefore do not need written supervisor approval unless the taxpayer responds to the IRS letter. See Deyo v. U.S, 296 F. App’x. 157, 2008 WL 4601890.

Obtaining Information from IRS

If the IRS assesses a penalty that requires supervisor approval, the document that contains the supervisor’s written approval is kept with the taxpayer’s file. The IRS is not required to provide a copy of the written approval to the taxpayer, though it may do so as a courtesy if requested by the taxpayer. See IRC § 6751. Documentation of the supervisor’s written approval may be obtained by the taxpayer through a Freedom of Information Act request (FOIA). See IRM 20.1.1.2.3. These records are important for the taxpayer for purposes of a penalty abatement request. Without obtaining a record of the written approval, the IRS could potentially make an argument that the taxpayer’s abatement request is frivolous. Again, keeping accurate and adequate records is essential to successfully defend against an IRS examination, appeal, or ultimately, litigation. The Tax Court has not generally been treating the taxpayer’s argument that the IRS failed to obtain written supervisor approval as frivolous. But, the Tax Court does consider the argument that the IRS failed to follow proper procedure to be frivolous if the taxpayer does not have evidence that the IRS did not obtain written supervisor approval.

Ultimately, if the IRS has assessed a penalty against you or your business, the attorneys at Nardone Limited can work with you to determine whether or not you have a good faith argument for a penalty abatement request due to the IRS’ failure to follow proper procedure and obtain written supervisor approval.

Contact Nardone Limited

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including penalty abatement requests. If you or your business have been contacted by the IRS, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

July 12, 2017

Becoming a Real Estate Professional for the Passive Activity Loss Exception

As renting becomes more common than buying, more individuals are renting out properties and are earning income and accruing losses from their rental activities. As tax attorneys in Columbus, Ohio, we assist many individuals and businesses that become subject to an Internal Revenue Service audit or examination. Below is an overview of the real estate professional exception to the passive activity loss rules. The tax lawyers at Nardone Limited assist Ohio taxpayers on understanding the real estate professional exception and can provide guidance on how to successfully be considered a real estate professional for purposes of the passive activity loss rules.

Passive Activity Loss Rules

The passive activity loss rules typically limit the amount of passive losses than can be currently deducted. Rental real estate is automatically classified as passive for the purposes of this rule. Therefore, losses from rental real estate are not currently deductible, unless an exception applies. There is a statutory exception that allows up to $25,000 of passive rental real estate losses to be currently deducted. But, the $25,000 exception is only available if the taxpayer’s adjusted gross income is less than $150,000 and the taxpayer meets certain other requirements. The statutory exception does not reclassify rental real estate losses as active, however.

Real Estate Professional Rule

In general, the real estate professional rule provides an exception from automatically classifying rental real estate as passive. Rental real estate losses are not automatically considered active if the taxpayer is considered a real estate professional. Instead, a real estate professional is allowed to use one of seven material participation tests to determine if their rental activity should be classified as active or passive. A real estate professional who is able to classify their rental real estate as active can deduct losses currently, which is a huge benefit to the taxpayer as they can use these losses to offset their ordinary income.

Real Estate Professional Determination

To be considered a real estate professional, a taxpayer must first perform personal services in a real property trade or business in which they materially participate. The hours a taxpayer works in the real property trade or business must exceed their other business hours, and must also exceed 750 hours. A real property trade or business includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. The hours a taxpayer works as an employee of such a trade or business do not count unless the taxpayer is at least a 5% owner in the trade or business. Once a taxpayer is considered a real estate professional, the taxpayer must look at each rental property interest separately and apply one of the material participation tests in order to characterize that property as active or passive. A real estate professional can group all rental property together for this determination only if they file a formal election with the IRS.  

Nardone Limited Comment: Taxpayers need to be aware of the complexity regarding the real estate professional determination. The rule sounds very easy. But, the Internal Revenue Service will closely scrutinize the taxpayer’s activities, and strictly construe those against the taxpayer. The taxpayer must have very detailed records supporting the activities and documenting the taxpayer’s hours and participation in those activities. In handling many IRS examinations and audits, rarely do we find taxpayers that properly document their involvement in real estate activities. We have litigated this issue in the United States Tax Court, and the Tax Court judges and the Tax Court itself, will strictly construe this exception, as well. Thus, taxpayers must be proactive and work with their tax professionals on the front end of preparing their tax return. That is, if you intend to make the election regarding the real estate professional exception on your 2017 tax return, do not wait until 2018, when you intend to file your return, to begin that documentation.

Contact Nardone Limited

Nardone Limited frequently represents individuals and businesses in federal tax matters, including the real estate professional exception. If the IRS, Ohio Department of Taxation, or other taxing authority has contacted you or your business to be audited or examined, do not go at it alone.  You should contact the tax attorneys at Nardone Limited.  We have vast experience representing individuals and businesses in IRS audits, exams, appeals, United States Tax Court, and other courts.  Contact us today for a consultation. 

May 09, 2017

Working with IRS Revenue Officers and Defending the Trust Fund Penalty Investigation

The tax attorneys at Nardone Limited in Columbus, Ohio, are committed to keeping taxpayers updated on how to utilize the Internal Revenue Service’s collection alternatives to manage their federal tax liabilities. The IRS has broad authority and tools available to collect delinquent taxes, including conducting a trust fund investigation of responsible persons. When an IRS revenue officer contacts a taxpayer, it is important that the taxpayer be aware of and understand the various collection alternatives available to resolve federal tax liabilities. Aside from simply paying the tax liability in full, there are various collection alternatives available to taxpayers that can help reduce or eliminate tax liabilities arising from an IRS audit or examination, including, but not limited to: (i) offer-in-compromise; (ii) installment agreements; (iii) currently not collectible status; (iv) discharge taxes in bankruptcy; and (v) challenge to the underlying tax liability.

Background Regarding Trust Fund Investigations

Internal Revenue Code (“IRC”) §6672, or otherwise referred to as the trust fund recovery penalty or a civil penalty, is one of the most invoked sections of the Internal Revenue Code by the IRS.  The statute creates a unique vehicle for the collection of what are referred to as trust fund taxes (i.e., those taxes collected from employees and held in trust for the United States).  In the context of employment taxes, the term trust fund taxes refers only to taxes withheld from employees—federal income taxes and one half of Federal Income Contributions Act (FICA)—not to the portion of employment taxes that the business itself owes, such as its matching share of FICA or the Federal Unemployment Tax Act (FUTA).  Regardless of whether the service attempts to collect the unpaid taxes from the business as the primary obligor, IRC §6672 empowers the IRS to collect the unpaid trust fund tax liabilities of corporations and other limited liability entities from the personal assets of those persons who are responsible for the nonpayment of the taxes. 

Willfulness

As part of the trust fund investigation, the IRS revenue officer will pursue all responsible persons under IRC §6672.  One of the many defenses that arise—as it relates to the IRS revenue officers’ attempted assessment against responsible persons—is the element of willfulness.  Willfulness is not defined in the IRC.  Rather, the Internal Revenue Manual section 5.7.3.3.2 provides the following definition:

“Willful means intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental.  No evil intent or bad motive is required…  To show willfulness, the government generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements.  A responsible person’s failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the TFRP ‘willfulness’ element.”

The willfulness element of IRC §6672 is a lower standard than willfulness for criminal tax purposes.  See Stake v. United States, 347 F. Supp. 823 (D. Minn. 1972) (stating that the term “willfully,” as used in statute subjecting to penalty a person who is required but willfully fails to collect, account for and pay over any tax, is not the same as when used in sections imposing a criminal liability and instead means a choice voluntarily, consciously and intentionally made to pay other creditors before paying the government). Generally, willfulness exists if: (i) the responsible person was aware that the taxes were unpaid and, possessing the power to pay them with funds of the taxpayer entity, signed checks paying another creditor; or (ii) the responsible person’s actions were “grossly negligent” or in ‘reckless disregard’ of the fact that the taxes were due and would not be paid. 

Defenses to Willfulness

Thus, recognizing the elements for purposes of the definition of willfulness, taxpayers must consider the facts and circumstances of their particular case, to establish the necessary defenses.  When we think through willfulness, we have to apply that concept of willfulness to the underlying facts and circumstances.  We have to come up with credible and supportable arguments for purposes of the defense.  Below are some of the commonly cited defenses to a trust fund investigation determination that the taxpayer’s conduct was willful: 

  • Establish that responsible person was merely negligent. Generally, this involves proving that the person did not know the taxes were unpaid and did not a good reason to know; 
  • Establish reasonable cause in not paying the taxes. This defense, though generally available in penalty defenses, is generally unavailable in TFRP cases; however, some circuits have cited to this defense.  Research your circuit and tailor your argument accordingly;
  • Establish that no funds existed at the time the person became responsible. This defense becomes available when an individual takes over a financially distressed business with unpaid trust fund taxes.  Look to fit into the circumstances described by the Supreme Court in Slodov v. United States, 436 U.S. 238 (1978); and
  • Establish that the person, though having general management control, did not have control over the finances of the corporation.

Contact Nardone Limited

 Nardone Limited frequently represents individuals and businesses in federal tax matters, including collection alternatives. If you or your business have been contacted by an IRS revenue officer, or are struggling with tax liabilities, you should contact one of our tax attorneys today. Nardone Limited’s tax attorneys have vast experience representing clients before the IRS. We will thoroughly review your case to determine what options and alternatives are available to you.  Contact us today for a consultation to discuss your case.

 

April 19, 2017

IRS Changes FBAR Filing Deadline Beginning with Tax Year 2016

Nardone Limited’s tax attorneys assist taxpayers with U.S. tax reporting requirements, tax examinations, tax audits, appeals, and litigation relating to civil and criminal tax matters at the federal, state, and local levels. Further, the tax attorneys at Nardone Limited routinely advise taxpayers about U.S. tax reporting obligations regarding foreign financial accounts and the importance of reporting previously undisclosed foreign accounts as part of our criminal and civil tax controversy work. If a taxpayer has a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain threshold amounts, the taxpayer may be required to report the account annually by electronically filing a FinCen 114, Report of Foreign Bank and Financial Accounts (“FBAR”), as discussed further below.

FBAR Filing Requirements

A U.S. person is required to file a FBAR if: (i) the U.S. person had a financial interest in or signature authority over at least one financial account located outside the United States and (ii) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported. A U.S. person must file the FBAR electronically through the FinCen’s BSA E-filing system. Failing to meet the FBAR filing requirements may result in serious consequences for taxpayers, as detailed in our previous article, FBAR penalties: The Significant Impact Taxpayers Can Face.

The previous annual FBAR filing requirement due date was June 30th. But, beginning with the 2016 tax year, the U.S. Government changed the deadline for filing FBARs to coincide with the individual federal income tax return deadline. Thus, the FBAR filing requirement is April 15th moving forward. The due date for filing FBARs for tax year 2016 was April 18, 2017; however, the IRS is granting automatic 6-month extensions to October 15th to provide taxpayers with ample time to file their FBARs. Taxpayers are not required to make a specific request for the 6-month extensions. Ultimately, it is very important that taxpayers with foreign accounts understand the FBAR filing requirements to ensure they are compliant with U.S. tax laws.

Opportunities to Report Previously Undisclosed Foreign Accounts and Assets

Many taxpayers are either not aware of the U.S. reporting requirements or simply choose to ignore the filing requirements relating to foreign accounts. We strongly encourage our clients to become compliant with any and all U.S. reporting requirements relating to their foreign financial accounts, even if they have not done so in the past. The Internal Revenue Service (“IRS”) offers various programs that allow taxpayers to disclose offshore accounts and resolve any tax and penalty obligations, as discussed further in Nardone Limited’s previous article, IRS Commissioner Urges Taxpayers to Take Advantage of IRS Voluntary Disclosure Programs, Citing $8 Billion in Collections. The Offshore Voluntary Disclosure Programs (“OVDP”) and the Streamlined Filing Compliance Procedures (“SFCP”) offer taxpayers who have undisclosed foreign accounts a way to become compliant with the U.S. tax laws. Nardone Limited routinely assists taxpayers with preparing and submitting OVDPs and SFCPs.

If you have a financial interest in, or have signature authority over a foreign account, we encourage you to contact Nardone Limited at (614) 223-0123 to ensure that you are compliant with any and all U.S. reporting requirements. Nardone Limited’s tax attorneys will review your case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.

February 09, 2017

Tax Attorneys Nick Reeves and Christopher Tackett Speak to Columbus Bar Association on Defending Ohio Sales Tax Audits

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Nardone Limited tax attorneys Nick Reeves and Christopher Tackett recently were asked to serve as guest presenters at the Columbus Bar Association, Business Taxation Committee meeting on February 8, 2017. Mr. Reeves and Mr. Tackett were honored to appear at the Business Tax Committee and deliver their presentation on defending Ohio sales tax audits. In particular, Mr. Reeves and Mr. Tackett presented strategies to avoid the Ohio Department of Taxation’s use of the indirect “mark-up” method for estimating sales tax liability. Attorney Nick Reeves discussed certain proactive steps that a business in the bar, restaurant, and liquor industry can take prior to the sales tax audit, to put the business in the best position to defend against the indirect mark-up method during an Ohio sales tax audit. Mr. Reeves also discussed steps and strategies for how to defend against Ohio sales tax audits.  To conclude the presentation, litigation attorney Chris Tackett presented regarding the administrative appeal process and strategies for appealing an Ohio sales tax assessment. Mr. Tackett also spoke regarding specific strategies for contesting the mark-up audit method on appeal, and on strategies for seeking abatement of penalties associated with Ohio sales tax assessments.  The presentation went very well, and Nardone Limited would like to thank the CBA Business Tax Committee for inviting us to participate.    

January 23, 2017

Vince Nardone Talks IRS Enforcement at OSCPA Southwest Ohio Tax Update

Ohio society of cpasTax attorney Vince Nardone recently spoke at The Ohio Society of CPAs Southwest Ohio Tax Update held on Thursday, January 19, 2017 in Fairfield, Ohio.  Mr. Nardone spoke to large group, mostly consisting of CPAs and accountants from the Cincinnati area, on updated trends regarding IRS enforcement activities.  As part of our efforts to continue to represent our business and individual taxpayers and defending those taxpayers in IRS audits, examinations, and appeals, we strive to stay on top of the IRS trends in enforcement.  We appreciate and thank The Ohio Society of CPAs tax learning manager, Bob Meister, for inviting us and allowing us to participate. 

December 15, 2016

IRS Documentation Requirements Concerning Charitable Contributions

The tax attorneys at Nardone Limited, in Columbus, Ohio, strive to regularly report on IRS audit and exam issues that may affect our clients. Charitable giving typically peaks as the tax year comes to a close for most individuals and businesses, especially during the holidays. It is important for purposes of IRS audits and exams that taxpayers retain the correct kind of documentation for their charitable contribution deductions.  

Charitable Contribution Deduction

Taxpayers who itemize their deductions are entitled to deduct the amount of contributions made to qualified charitable organizations. Internal Revenue Code §170. Taxpayers report their charitable donations on Schedule A of Form 1040, U.S. Individual Income Tax Return. Deductions are available for contributions of cash, goods, securities, and intellectual property. A taxpayer may not take a charitable contribution deduction for the value of services rendered. For example, a taxpayer cannot deduct the value of his time spent volunteering at a food bank, however, he could deduct the value of the truck or cash he donated to the food bank. There are special rules concerning substantiation of different types of donations. To withstand IRS audits and exams taxpayers must be familiar with the substantiation requirements and have the substantiating documentation handy.

What Kinds of Contributions Qualify for Deductions?

As stated above, a charitable contribution is only deductible if made to a qualified charitable organization. Qualified charitable organizations exist exclusively for the advancement of religious, charitable, or educational purposes. These organizations are tax-exempt and have filed the requisite paperwork to receive charitable contributions with the IRS. In other words, while a taxpayer may have charitable intent when he gives his coat to a person in need, the IRS will not honor a deduction for the cost of the coat, because the taxpayer did not make a contribution to a qualified charitable organization. The IRS would allow a deduction if the taxpayer donated his coat to a qualified charitable organization, like the Salvation Army, and acquired the requisite supporting documents. Additionally, charitable contributions must not involve reciprocity of any kind. The IRS would allow a deduction for contribution to a taxpayer’s place of worship, if the taxpayer received nothing of value in return for his donation. But, if the taxpayer’s donation went towards payment of the taxpayer’s child’s parochial education, then the IRS would disallow at least the portion of the deduction attributable to the tuition. It is not determinative that the parochial school is a qualified charitable organization; the IRS may still deny a deduction if the contribution involves a measurable benefit to the taxpayer.

What Kind of Documentation Does the IRS Require?

The presumptive reason that the IRS requires deductible donations to be made to qualified organizations is ease of administration and promotion of truthful tax reporting. The coat recipient in the first example will likely not be available to substantiate the donation when the IRS comes knocking. In that vein, there are a number of substantiation requirements for different types of donations. The general rule is that when the donation is larger, the substantiation must be stronger. For cash donations, the donor must maintain a bank record, cancelled check, receipt or other communication from the donee. If the taxpayer donates property other than cash to a qualified organization, he may generally deduct the fair market value of the property. For noncash gifts of less than $250, the taxpayer must maintain a receipt from the donee, including the donee’s name, the date and location of the donation, and a detailed description of the donated property. For any contribution of $250 or more (including contributions of cash or property), a taxpayer must obtain and keep in his records a contemporaneous written acknowledgment from the qualified organization, indicating the amount of cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. If a taxpayer takes a donation for more than $500, he must include a description of the donated property with the tax return. For non-cash donations of over $500, the taxpayer must fill out Form 8283, Noncash Charitable Contributions, and file the form with the tax return. For noncash gifts over $5,000, taxpayers must get an appraisal. Failure to provide any of the required documentation may result in the IRS disallowing the deduction. The IRS’s disallowance of a deduction results in increased tax liability for the taxpayer. Thus, it is important that taxpayers make sure they can support each and every deduction with the appropriate documentation, or taxpayers may face unexpected liabilities.

Contact Nardone Limited

The tax attorneys at Nardone Limited have a great deal of experience representing taxpayers who are undergoing IRS audits, IRS exams, or criminal tax investigations. To the extent you have questions relating to charitable tax deductions and substantiation or any of the above, you should contact one of the experienced attorneys at Nardone Limited.

Contact us today for a consultation to discuss your case.

Vince Nardone Talks IRS Enforcement at Ohio Society of CPAs Mega Tax Day


Ohio society of cpasTax attorney Vince Nardone recently spoke at the Ohio Society of CPAs 2016 Mega Tax Day held on Tuesday, December 13th.  Mr. Nardone spoke to a large group of participants on updated trends regarding IRS enforcement activities.  As part of our efforts to continue to represent our business and individual taxpayers and defending those taxpayers in IRS audits, examinations, and appeals, we strive to stay on top of the IRS trends in enforcement.  We appreciate and thank the Ohio Society of CPAs for inviting us and allowing us to participate in their yearly event. 

 

 

July 25, 2016

Vince Nardone Named to 2017 Ohio Super Lawyers List

Attorney Vince Nardone has been named to the 2017 Ohio Super Lawyers list. Super Lawyers, a division of Thomson Reuters, is a rating service that rates and lists lawyers who have attained a high-degree of peer recognition and professional achievement. The selection process is based upon peer nominations and evaluations, as well as independent research.

A description of the selection process can be found at http://www.superlawyers.com/about/selection_process.html.

August 18, 2017

July 20, 2017

July 12, 2017

May 09, 2017

April 19, 2017

February 09, 2017

January 23, 2017

December 15, 2016

July 25, 2016

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