By Ryan J. Donmoyer, Bloomberg.com
The Internal Revenue Service is considering registering or licensing paid tax preparers such as H&R Block Inc. and Jackson Hewitt Tax Service Inc. as part of a broad review of the way Americans file tax returns, Commissioner Doug Shulman said.
Shulman told a House Ways and Means subcommittee today he is preparing a “comprehensive set of recommendations” that may include new regulations for preparers to help recover an estimated $290 billion in uncollected taxes. He later told reporters that may include a registration or licensing requirement.
Requiring paid tax preparers to register or become licensed would establish a national accreditation framework for the industry for the first time, with the goal of improving accuracy of tax filings and ending fraud that investigators say fleeces both taxpayers and the government.
“This is nothing less than a transformational shift,” Shulman said.
Sixty-one percent of individual tax returns are done by paid preparers, according to IRS Taxpayer Advocate Nina Olson, the chief ombudsman for U.S. taxpayers, who has recommended licensing of preparers since 2002.
“Untrained and unscrupulous preparers present a serious problem,” Olson wrote in a 2006 report to Congress.
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By CURT ANDERSON, Associated Press
FORT LAUDERDALE, Fla. (AP) — A wealthy accountant who is the first U.S. citizen charged in a wide-ranging tax probe of Swiss banking giant UBS AG was granted release from jail Wednesday on $12 million bail.
Federal prosecutor Jeffrey Neiman said the unusually large amount was necessary because of the high risk that Steven Michael Rubinstein might flee the country. Rubinstein, 55, is also a citizen of South Africa and owns a condominium in Israel in addition to his main home in Boca Raton
U.S. Magistrate Barry Seltzer also ordered Rubinstein to a dusk-to-dawn home curfew, wear an electronic monitoring ankle bracelet and travel only within South Florida. He agreed to surrender keys to a 45-foot boat docked outside his home and gave up his U.S. and South African passports.
Rubinstein is scheduled to enter a plea April 22 to charges of filing a false 2007 tax return by failing to disclose income from his UBS accounts, which carries a maximum three-year prison sentence. The Internal Revenue Service claims Rubinstein failed to report UBS income on his returns from 2001 to 2007, but he is only charged so far for the 2007 return.
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Filed under: tax evasion, tax haven, tax preparer, unreported income
Salt Lake City (Aug. 19, 2008)
By WebCPA staff , WebCPA.com
A Utah attorney was sentenced to 120 months in prison and 36 months of supervised release after he was convicted of participating in a $20 million offshore tax fraud conspiracy.
In addition to jail time, Dennis B. Evanson of Sandy, Utah, was ordered by U.S. District Judge Tena Campbell of Salt Lake City to forfeit four pieces of real property, a Hummer and a Toyota Tundra, and to pay a money judgment of $2.77 million.
A federal jury convicted Evanson in February of conspiracy to commit mail and wire fraud, tax evasion, and assisting in the filing of false tax returns. According to prosecutors, Evanson and his co-defendants conspired between 1996 and April 2005 to conceal portions of his clients’ income from the IRS and to create false tax deductions for them. Evanson and another defendant received a fee for their services typically equal to 30 percent of the tax evaded by clients.
The scheme included offshore companies and bank accounts in the Cayman Islands and Nevis, offshore nominees and opinion letters that purported to give legal authority to the fraudulent transactions.
Four co-defendants have also pleaded guilty. Accountant Brent Metcalf of Cottonwood, Utah, pleaded guilty to conspiracy and aiding in the filing of a false tax return on Jan. 25, 2008. Attorney Graham R. Taylor of Tiburon, Calif., pleaded guilty on Jan. 24, 2008. CPAs Stephen F. Petersen of Coalville, Utah, and Reed H. Barker of Littleton, Colo., pleaded guilty to tax fraud on Jan. 18, 2008. Petersen also pled guilty to aiding in the preparation of a false tax return on behalf of a client. All four co-defendants are awaiting sentencing.
For my upcoming seminar May 2008 on IRS and Unreported Income I have prepared the following summary: Tax Preparers Unreported Income: Criminal Penalties and Fines (Imprisonment up to 18 Years)
1) IRC §7201: Tax Evasion (Willful Evasion of Tax)
Felony: Up to 5 years in prison
Fine: $100,000 (individual), $500,000 (corporation)
2) IRC §7206: Fraudulent Tax Return (Preparation)
Felony: Up to 3 years in prison
Fine: $100,000 (individual), $500,000 (corporation)
3) Additional Felonies:
IRC §7212: Obstruct (Impede Collection of Tax)
18 U.S.C. 371 – Conspiracy to Impede Tax Collection
(Separate Charge of Impeding)
4) IRC §7203: Failure to File Tax Return
(Keep Records, Supply Information)
Misdemeanor: Up to 1 year in prison
Fine: $25,000 (individual), $100,000 (corporation)
5) IRC §7210: Failure to Comply with Summons
(Testimony, Production of Books & Records)
Misdemeanor: Up to 1 year in prison
Filed under: tax evasion, tax preparer, unreported income
Highlights of Los Angeles Times article 2/2/2008
A federal jury in Florida acquitted actor Wesley Snipes of felony charges of tax fraud and conspiracy Friday but found the former high-profile star guilty on three misdemeanor charges of failing to file a tax return.
Snipes and two co-defendants were indicted in October 2006. The government alleged that he tried to defraud the Internal Revenue Service by filing false tax returns for 1996 and 1997 that claimed a total of $11.4 million in refunds. The IRS also contended the actor didn’t file tax returns for 1999 through 2004, despite earning millions of dollars during that period.
Snipes’ co-defendants, a longtime Florida tax protester and an accountant hired by Snipes as a consultant, were convicted of tax fraud and conspiracy.
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1. Tax Understatement Penalty (Pre 5/26/07)
For income tax returns prepared prior to May 26, 2007, a preparer is subject to a $250 penalty (for each understatement of tax liability on a tax return or refund claim he prepared) if the understatement:
a. Was caused by a position that did not have a realistic possibility of being sustained on its merits,
b. The preparer knew or should have known of the position, and
c. The position was not disclosed or was frivolous (IRC § 6694, prior to amendment by Pub.L. 110-28, the Small Business and Work Opportunity Act of 2007, Section 8246(b)).
2. Tax Understatement Penalty (Post 5/25/07) IRC § 6694
Under IRC § 6694, effective after May 25, 2007, a tax preparer may be subject to a penalty for each understatement of tax liability on a tax return (or refund claim) he prepares if the understatement results from a tax return position in which the preparer did not have a reasonable belief the tax treatment was more likely than not the proper treatment.
If the preparer can not meet the more likely than not standard but has at least a reasonable belief for the position, the preparer may avoid the penalty for an understatement of tax by specifically disclosing the position taken on the tax return.
If the preparer cannot demonstrate at least a reasonable basis for the position, specific disclosure of that position will not insulate the preparer from the understatement penalties. (IRC § 6694(a)(2))
Penalty ($1,000/50% Income)
The amount of the penalty is the greater of:
a. $1,000 or
b. 50% of the income derived from the preparation of the tax return (the penalty is not imposed if the understatement is due to reasonable cause)
3. Willful Tax Understatement
Penalty ($5,000/50% Income)
a. Willfully understates liability for a return (or refund claim), or
b. The understatement is caused by the preparer’s reckless or intentional disregard of rules or regulations,
c. For willful or reckless conduct the penalty is equal to the greater of $5,000, or 50% of the income derived by the tax return preparer from the preparation of the return or claim with respect to which the penalty is imposed (IRC § 6694(b)(1))
Both tax understatement penalties: $1,000 or $5,000 cannot be imposed with respect to the same tax return (or refund claim) (IRC § 6694(b)(3))
An understatement of liability for the purpose of these penalties is any understatement of the net amount of tax payable or any overstatement of the net amount of such taxes that may be credited or refunded.
Any understatement is not reduced by any carryback. (Treas. Reg. Section 1.6694-1(c)).
The preparer generally may rely in good faith without verification upon information furnished by the taxpayer. The preparer does not have to audit, examine or review books and records, business operations, or documents or other evidence to verify independently the taxpayer’s information. The preparer must make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. The preparer must inquire to determine whether a claimed deduction is supported by any facts and circumstances that the tax laws require as a condition to claiming the deduction. (Treas. Reg. Section 1.6694-1(e)).
The understatement penalty is an assessable penalty that is due after notice and demand from the IRS. However, unless the statute of limitations may expire without adequate opportunity for assessment, the IRS will send, before assessment the penalty, a 30-day letter to the preparer notifying the preparer of the proposed penalty and the opportunity of the preparer to request a review of the proposed assessment by IRS Appeals. (Treas. Reg. Section 1.6694-4(a)(1)).
The penalty may not be challenged in Tax Court prior to payment of the penalty because the deficiency procedures do not apply. (IRC § 6696(b)). However, a special procedure allows preparers to sue for a refund of an understatement penalty without having to pay the full amount of the penalty. A preparer may, within 30 days after the day that the IRS demands payment of the penalty, pay at least 15 percent of the penalty and file a refund claim for the amount paid. (IRC § 6694(c)(1)).
If the refund claim is denied, the preparer may, within 30 days after the denial file a refund suit. The suit may also be filed within 30 days of after six months have passed since the filing of the claim if the claim has not been denied by that time. (IRC § 6694(c)(2)).
The IRS can counterclaim for the remainder of the penalty in the refund suit. The IRS cannot levy or begin a court proceeding to collect the remainder of the penalty until the final resolution of the refund suit.
A court may enjoin the IRS from levying or beginning a collection proceeding during this period. (IRC § 6694(c)(1)). If the preparer does not begin a refund suit within the time allowed, the restrictions on IRS collection action expire on the day after the last day that the suit could have been filed. (IRC § 6694 (c)(2)). The running of the period of limitations for collecting the penalty is suspended for the period that the IRS is prohibited from collecting the penalty. (IRC § 6694(c)(3)).
1. Aiding and Abetting Tax Understatements (Penalty)
Any person who aids or assists in, or gives advice concerning, the preparation or presentation of any portion of a return, affidavit, claim, with the knowledge that the portion, if submitted, will create an understatement of the tax liability of another person must pay a penalty for each document that the person helps in preparing. (IRC § 6701(a)).
The penalty applies when a person orders a subordinate to act in a manner that violates this provision (or when a person knows that a subordinate will violate this provision and does not attempt to prevent the violation). (IRC § 6701(a), (c)).
A person who provides only mechanical assistance for a document, such as typing or photocopying, does not aid or assist in the preparation of the document. (IRC § 6701(e)).
The penalty applies regardless of whether the taxpayer was aware of, or consented to, the document that causes the understatement. (IRC § 6701(d)).
The penalty is $1,000 per violation with regard to a return or document concerning a taxpayer other than a corporation, and $10,000 with regard to a return or other document concerning the tax liability of a corporation.
The penalty applies only once for assistance given to a taxpayer for a specific tax period regardless of the number of documents prepared that case an understatement for that tax period. (IRC § 6701(b)). The penalty is generally in addition to any other penalty provided by law.
2. IRS: Burden of Proof
The burden of proof involving the issue of whether any person is liable for the penalty is on the IRS. (IRC § 6703(a)). (The government must prove its case by a preponderance of the evidence.)
3. Contest Penalty
The penalty is an assessable penalty. (IRC § 6703(b)). Accordingly, it is due after notice and demand from the IRS. (IRC § 6671(a)). It can not be challenged in the Tax Court prior to payment of the penalty because the deficiency procedures do not apply. (IRC § 6703(b)).
IRC § 6703(c) provides an alternative method for contesting assessment. The alternative method applies if, within 30 days after notice and demand for the penalty, the preparer pays not less than 15 percent of the asserted penalty and files a claim for refund of the amount paid. The IRS may file a counterclaim for the unpaid remainder of the penalty in such a proceeding. (IRC § 6703(c)(1)).
If the requirements as to timely payment of the 15 percent amount and as to filing of a refund claim are satisfied, then the IRS is prohibited from further collection activities with respect to the penalty until completion of the preparer’s challenge to the penalty. (IRC § 6703(c)(1)). The next step in the process occurs if the IRS denies the refund claim or fails to act on the claim within six months of filing, at which time the preparer has 30 days within which to initiate a refund suit in the United States district court to determine liability for the IRC § 6701 penalty.
During the pendency of the refund suit, the statute of limitations on collection is suspended. (IRC § 6703(c)(3)). The IRS may not make, begin, or prosecute a levy or proceeding in court for collection of the unpaid remainder of the penalty until final resolution of the refund suit. Final resolution of the proceeding includes any settlement between the IRS and the preparer, and any final determination by the court (for which the period of appeal has expired).
Filed under: IRS, irs tax audit, tax preparer, unreported income
Attorney Client Privilege – US v Kovel
If retained by an attorney, client accountants may receive the benefits of Attorney-Client privilege. In United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the Attorney-Client privilege was extended to accountants retained to assist the attorney in understanding taxpayer’s financial records.
The IRS Restructuring & Reform Act of 1998 extended Attorney-Client privilege to communications with federally authorized practitioners with respect to tax advice. (IRC § 7525)
IRC § 7525 applies to:
1. Any non-criminal matter before the IRS, or in Federal Court brought by or against the U.S.
2. IRC § 7525(b) provides the privilege will not apply to representation of a corporation involved in the promotion or the direct or indirect participation of any such corporation in any tax shelter.
3. The IRC § 7525 privilege does not extend to criminal tax investigations.
A federally authorized tax practitioner is any individual who is authorized under federal law to practice before the IRS. This includes attorneys, CPAs, and enrolled agents. IRC § 7525(a).
Tax advice is advice given by an individual on a matter for which he is authorized to practice before the IRS. IRC § 7525(a). In general, the privilege, like the common-law privilege, applies to the content of the advice, not the identity of the person seeking the advice.
For communications made on or after October 22, 2004, the privilege does not apply to written communications concerning tax shelters. Thus, the privilege does not apply to any written communication between a tax practitioner and any person, director, officer, employee, agent, or representative of a person, or any other person holding a capital or profits interest in a person, in connection with the promotion of the direct or indirect participation of the person in any tax shelter. IRC § 7525(b).
A tax shelter is a partnership or other entity, an investment plan or arrangement, or any other plan or arrangement, if a significant purpose of the partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax. IRC § 6662(d)(2)(C). (This exception was limited to communications concerning corporate tax shelters, IRC § 7525(b), prior to amendment by Pub. L. 108-357, American Jobs Creation Act of 2004, Section 813.)
The IRS’s position is that the Attorney-Client privilege also does not apply to tax accrual workpapers (tax accrual and other financial audit workpapers relating to the tax reserve for deferred tax liabilities and to footnotes disclosing contingent tax liabilities appearing on audited financial statements).
These workpapers are not generated in connection with seeking legal or tax advice, but are developed to evaluate a taxpayer’s deferred or contingent tax liabilities in connection with a taxpayer’s disclosure to third parties of the taxpayer’s financial condition. IRS Announcement 2002-63, 2002-2 C.B. 72.
The crime-fraud exception may be asserted to defeat the claim of tax practitioner privilege for communications that were made for the purpose of getting advice for the commission of crime or fraud. This prevents a party from seeking advice to commit a crime or fraud and then claiming that the communication is privileged.
To assert the crime-fraud exception, (1) there must be a prima facie showing of a crime or fraud, and (2) the communications in question must be in furtherance of the misconduct. U.S. v. BDO Seidman, 368 F.Supp. 2d 858 (N.D. Ill. 2005). If the IRS shows sufficient evidence that the communication was made in furtherance of a crime or fraud, then the taxpayer may respond by providing an explanation that would rebut the IRS’s evidence. The crime-fraud exception will apply only if the court finds the taxpayer’s explanation unsatisfactory. U.S. v. BDO Seidman, No. 02 C 4822 (N.D. Ill. May 17, 2005), aff’d on this issue and vacated and remanded on other grounds, No. 05-3260 & 05-3518 (7th Cir. July 2, 2007).
Filed under: irs tax audit, tax preparer, unreported income
Taxpayers who have unreported income, may subject their tax preparer (CPA) to up to 9 years imprisonment, with the following penalties:
Tax Preparer Penalties
1. Penalty for causing an understatement of tax on a return (IRC § 6694), either: greater of ($1,000/or 50% of Income Derived), or if willful: ($5,000/50% of Income Derived)
2. Penalty for aiding and abetting an understatement of tax (IRC § 6701) either: $1,000 per violation (individual taxpayer), $10,000 per violation (corporate taxpayer)
3. Tax Preparer/Criminal Penalties
a. Felony Tax Evasion (IRC § 7201) (i.e., assist Taxpayer in evading tax)
Fines: $100,000 (per person)/ $300,000 (per corporation). Up to 5 years imprisonment (or both) plus: costs of prosecution
Misdemeanor Additional Tax Evasion (IRC § 7203)
Failure to file Taxpayer’s tax returns, keep records, supply information
Fines: $25,000 per person/ $100,000 per corporation. Up to 1 year imprisonment (or both) plus: costs of prosecution (This penalty is in addition to other penalties)
b. Willfully aiding the preparation of a false tax return (IRC § 7206)
Felony: Fines: $100,000 per person, $500,000 per corporation. Up to 3 years imprisonment (or both) and costs of prosecution.
Misdemeanor: (Additional) IRC §7210: Failure to comply with Summons for testimony or produce books and records. Fine: $1,000. Up to 1 year imprisonment.
Filed under: IRS, irs tax audit, tax preparer, unreported income
In order to avoid the 75% penalty for fraudulent failure to file tax returns the tax payer must establish:
1) The delinquent filing is due to reasonable cause.
2) The delinquent filing is not due to willful neglect.
If both elements are established the failure to file penalty does not apply.
Penalty: Failure to file tax return
To establish that the penalty does not apply, the taxpayer must furnish the IRS a written statement setting out the grounds of the claim. The statement must contain a declaration that it is signed under penalty of perjury. Treas. Reg. Section 301.6651-1(c)(1). The written statement must be filed with the IRS office where the late return is filed.
If the IRS determines that the delinquency was due to reasonable cause and not due to willful neglect, the penalty is not assessed.
If a taxpayer exercised ordinary business care and prudence and was nevertheless unable to file a return, the delay is due to reasonable cause. Treas. Reg. Section 301.6651-1(c)(1).
The Internal Revenue Manual lists the following circumstances under which reasonable cause may exist:
(1) the delinquency was due to the death or serious illness of the taxpayer or a member of the taxpayer’s immediate family (for a corporation, estate, trust, etc., the delinquency was due to the death of the individual responsible for filing or a death in the immediate family of such individual);
(2) the taxpayer is unable to obtain records;
(3) reliance on erroneous advice from the IRS;
(4) reliance on a tax adviser; and
(5) failure to file resulting from a fire, casualty, natural disaster, or other disturbance.
Penalty: Failure to pay tax shown on return
Treas Reg Section 6652(a)(2) penalizes the failure to pay the amount shown as tax on the taxpayer’s return unless the delinquency in payment is due to reasonable cause and not due to willful neglect.
The penalty period starts with the date prescribed for payment (generally the due date of the related return, but determined with regard to extensions) and ends with payment of the tax. The penalty is one-half percent for each month (or part of a month) up to a maximum of 25 percent. However, the one-half percent rate is increased to 1 percent if the taxpayer fails to pay after the IRS notifies the taxpayer.
The appropriate penalty rate is applied to the amount of tax shown on the return, which is the net amount of tax due. The net amount due is the total amount shown as tax reduced by the sum of (1) any part of the tax that is paid on or before the beginning of the month and (2) the amount of any credit against the tax that may be claimed on the return. If the amount of tax required to be shown on the return is less than the amount shown on the return, the lesser amount is used for computing the penalty. Treas. Reg. Section 6651(c)(2).