The Dreaded Notice of Deficiency

An IRS Notice of Deficiency is a proposed increase in your taxes and a notice of your right to challenge that increase. It’s also called a CP3219A letter.

No one likes getting these notices. Who wants to be told by the biggest collection agency in the world, the IRS, that you owe them more money? Not me and not you.

The are a number of reasons for the IRS sending you this notice. The more common ones are claiming deductions the IRS won’t allow, a change in child tax credits, and penalties on early withdrawals from retirement accounts.

You need to be aware that this notice is under a 90 day time constraint, which begins on the notice date listed in your notice. If you miss the deadline, you will be in default and the changes will automatically be applied. The IRS will send you a bill for this new amount.

Let’s breakdown the notice. I will do my best to simplify it for you.

The first page gives you a summary of the proposed changes which includes the increase in tax (deficiency) and the penalties the IRS will assess. These proposed changes usually include a Substantial Tax Understatement penalty, a Failure To File penalty and interest charges.

The Substantial Tax Understatement penalty is 20% of the amount of the underpayment if the increase in your tax is greater than 10% of the amount you claimed, or $5,000.00, whichever is greater.

For example, let’s say you filed your tax return with a taxable income of $100,000.00. The IRS audits your return and finds that you have an additional $12,000.00 to add to your taxable income. This is more than 10% of $100,000.00 and more than a $5,000.00 adjustment. The penalty is then calculated by taking 20% of the $12,000.00 adjustment. So, the penalty is $2,400.00.

The Failure To File penalty is added because you did not claim the adjusted amounts the IRS is now claiming as due. This penalty is assessed at 5% of the adjusted amounts, per month for up to five months.

Using the example above, the Failure To File penalty would be 5% of the $12,000.00. This equals $600.00.

Interest charges are also accruing on the proposed adjusted amount. And it is calculated from the date the return is due, regardless of extensions.

You have three options to respond to the IRS’s proposed increases. They are:

  • agree to the proposed changes
  • contact the IRS directly and attempt to resolve it
  • file a petition with the U.S. Tax Court

The first option is to agree with the changes, pay the proposed amount due and be done with it. Or if you can’t pay it immediately, you can waive your rights by signing the Notice of Deficiency Waiver and returning it to the IRS. They will send you a bill and you will be obligated to pay it. If you don’t, then they will start collection action against you.

The second option is to contact the IRS directly and dispute the proposed changes. You will need to get your case together, explain the validity of your challenge, and fax or mail it to the IRS. The explanation needs to be signed by you, otherwise the IRS may not accept it.

The third option is to file a petition with the U.S. Tax Court. If you chose this route, it is imperative that you file your case before the 90 day date stated in your notice. Failing to file by the listed date, means you lose the right to be heard by the tax court. Going to court and pleading your case is a process. It can be done pro se, but I always recommend that you get an experienced tax attorney with tax court litigation experience to represent you.

Keep a copy of your notice because I will need to see it if you decide you want my help. It gives me the details of what the IRS is seeking from you.

Sources:

Understanding Your CP3219A Notice

Important Facts about Filing Late and Paying Penalties

Topic Number 653 – IRS Notices and Bills, Penalties, and Interest Charges

26 CFR § 1.6662-4 – Substantial understatement of income tax

26 U.S. Code § 6662. Imposition of accuracy-related penalty on underpayments

26 U.S. Code § 6651. Failure to file tax return or to pay tax

IRS Trust Fund Recovery Investigations

You may be facing a trust fund recovery investigation because you didn’t pay the 941 taxes. The IRS considers this a loan they didn’t agree to. They don’t like making loans.

A trust fund recovery investigation is governed by the Internal Revenue Manual 5.7.4 Investigation and Recommendation of the TFRP. They are conducted by the revenue officer assigned to your case.

The revenue officer is going to interview you as the potentially responsible person. I wrote about responsible parties in a previous article called Personal Liability for Unpaid Trust Fund Taxes.

The IRS revenue officer uses the following core evidence in determining the trust fund penalty liability:

  • Form 4180 interviews
  • Articles of Incorporation
  • Bank signature cards or electronic PINs/Passwords assignment information
  • Copies of a sampling of cancelled checks demonstrating payment to other creditors in preference to the government or
  • If the taxpayer predominately uses electronic banking, bank statements demonstrating debit transaction payments in preference to the government

The Form 4180 is the questionnaire the IRS revenue officer will use when conducting the interview. The 4180 form is used as the record of the interview.

The purpose of the Form 4180 and the interview, is to secure direct detailed information regarding the potentially liable person’s involvement in the business. It is used to determine if the potentially liable person meets the criteria for willfulness and responsibility, which I wrote about in a previous article called Personal Liability for Unpaid Trust Fund Taxes.

The problem with the Form 4180 is that it reduces the investigation into yes and no answers. IRS tax problem cases can’t be boiled down to yes and no answers. There are always more facts involved that aren’t brought up in the trust fund recovery penalty interview.

At the end of the interview, the person being investigated will be asked to sign the Form 4180. This is a slippery slope. You could be agreeing to things you don’t mean to agree to.

If you find yourself being asked to submit to an IRS trust fund penalty investigation and interview, get some experienced help. Going it alone could be disastrous.

Sources:

5.7.4 Investigation and Recommendation of the TFRP

Personal Liability for Unpaid Trust Fund Taxes

Trust fund taxes also called 941 taxes or employment taxes, must be withheld by an employer from an employee’s wages or salary and timely paid to the IRS. You hold them on behalf of your employees, hence the trust fund categorization.

If the trust fund taxes are not collected, accounted for and paid to the IRS, then the IRS may assess a trust fund recovery penalty against the person they deem liable. The penalty is equal to the amount of the taxes owed.

It’s a 100% penalty. So if the business owes $100.00 and the IRS says you have to pay it, then you owe the IRS $100.00. And they are going to do their best to get it from you or the business.

The IRS decides who is responsible for the 100% penalty. They use the following criteria in making their decision;

  • who is responsible for collecting, accounting for and paying the trust fund taxes
  • who acted willfully in not doing the above

The IRS defines willfully as “voluntarily, consciously, and intentionally”. So if you are the person the IRS is focusing on as the responsible person, they will be looking to see what your role is in the business and how you handled your responsibilities.

The people the IRS usually looks at are the;

  • owners
  • officers
  • partners
  • accountants and bookkeepers
  • those who direct or have authority to direct the spending of business funds

Once this penalty is assessed against the responsible person (maybe you?), the IRS may take all of your personal assets to satisfy the business debt they found you liable for. This could mean garnishing your personal bank accounts or your paycheck, or both.

What they can’t take is your exempt assets. But don’t expect the IRS to tell you what those are.

The easiest way to avoid this happening is to pay the taxes when they are due. From my experience, this isn’t always possible for a lot of business owners, especially small business owners. There always seems to be more pressing issues that require immediate attention. And quite often there are cash flow issues.

The IRS operates as a slow burn with each missed 941 filing and each missed payment, fanning the flames. It then erupts into a fire when you least expect it.

So how do you deal with it? Get experienced help. If you get caught in this situation it’s a buzz-saw of a problem.

Sources:

Could You be Personally Liable for Certain Unpaid Federal Taxes?

Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

IRS Third Party Summons and How to Deal With Them

So you just got notice that the IRS issued a summons to your spouse, a family member or someone you do business with such as a bank, supplier or client of yours. I bet your first response was embarrassment and your second response was fear. Both valid.

The IRS can issue a third party summons “to a person other than the person with respect to whose liability or return the summons is issued, or any officer or employee of such person.” The Internal Revenue Manual Part 25, Chapter 5, Section 6, gives them the authority to do this.

The IRS must do three things for the third party summons to be in compliance with the law.

  1. The IRS must give you notice of the summons.
  2. The IRS must give the third party 23 days to respond to the summons. Response time is calculated from the date the notice is mailed or personally served on you.
  3. The IRS cannot accept the records from the third party until the 24th day after the notice, unless this time has been waived in writing.

There are two ways for you to respond. You can comply or file a petition to quash the summons.

Complying means you are not fighting the IRS. They will continue to enforce the summons against the third party, get what they need and use that against you. 

Filing a petition to quash the summons means you are going ask a judge to deny the IRS’ third party summons.  You will have to file a civil case in a U.S. District Court. You have 20 days from the time you are noticed to file your petition.

Dealing with a summons is more complex than the scope of this article. There are a number of case specific factors that need to go into determining how you respond to a third party summons.

If you were served notice, get experienced help. Don’t wait until the last minute. You could lose important rights by failing to meet required deadlines.

The Truth About an IRS Offer In Compromise (OIC)

So you are in trouble with the IRS and you see those commercials on TV and hear those radio advertisements telling you that they can settle your IRS debt for pennies on the dollar. Sounds good, right?

Well, the truth is that the IRS rarely settles for pennies on the dollar. It can happen, I have seen it happen, but its not common.

What these tax resolution companies are typically referring to in their commercials is an Offer in Compromise (OIC). The Offer in Compromise is a collection alternative the IRS can use when its to their advantage. In other words, when the IRS thinks they don’t have a chance of getting their money from you they will entertain an OIC.

The IRS accepts about 40% of the submitted offers. To have a chance at the IRS accepting your offer in compromise depends on a number of critical factors with the prime one being your collectibility.

You have to prove it to the IRS that you can’t pay the taxes owed. You have to prove your un-collectibility.

Guess how the IRS determines your collectibility?  By you throwing yourself under the bus and sending them the information they need to make the determination. If they don’t accept your OIC they have your detailed financials and now know what to go after to collect.

I am not advocating that you mislead, omit or withhold information from the IRS. That’s just asking for trouble.

What I am telling you is to get professional and experienced representation regarding your IRS tax problem. You could get yourself into a pickle not knowing what you are doing.

Besides the “pennies on the dollar” fallacy, another common misconception I have run into is that people think that the IRS will wheel and deal on what is owed. And that the way to do this is by submitting an OIC.

News flash. It doesn’t work that way. It’s about collectibility.

Don’t make matters worse for yourself by going it alone. Get experienced help.

Have you been served with an IRS Summons?

 

Have you been served with an IRS summons to produce documents or to appear and give testimony? The first thing you should absolutely do is LAWYER UP, LAWYER UP, LAWYER UP! Get a tax defense attorney that is experienced in fighting the IRS.

When you are served with an IRS summons, you should never attempt to handle it yourself. There are specific legal requirements that need to be met in order to defend against an IRS summons.

 

If your case is at the enforcement stage and you have to appear before the IRS, you absolutely must get a tax defense attorney to appear with you. Its your right to be represented.

During the questioning, you have the right to stop the line of questioning, leave the room and confer with your attorney regarding the questions. You can do this on a question by question basis.

In my practice, I have found that when taxpayers get summoned by the IRS, they tend to ignore it out of fear. The consequences for not answering an IRS summons are severe.

Taxpayers that fail to respond to an IRS summons can expect to be served with a Motion for Contempt filed in the federal U.S. District court where they live. You fail to show up to that Contempt hearing and you will then get served with a Petition to Show Cause for your non-appearance.

Failure to appear at the Show Cause hearing means the judge will issue an order for your arrest. You will be brought into Court by U.S. Marshals to explain to the Judge why you have not turned over the documents and given testimony to the IRS in response to the summons they issued against you.

If the above civil remedies fail, then pursuant to Internal Revenue Code Section 7210, the IRS can refer your case to the Department of Justice for a misdemeanor arrest against you and a $1,000.00 fine for failing to produce the records requested and for failing to appear and testify. That’s a pretty steep punishment if you are convicted.

Being served with an IRS summons is serious business. Get a tax attorney who goes to court and has experience dealing with the IRS at this level.

If you had ignored the summons and now find yourself with a court date looming for a summons enforcement hearing, don’t wait. Call me.

Anytime you have the opportunity to cross-examine or question an IRS agent in Court, you should do so. The Court will listen to you. Judge’s want to hear what’s going on.

If you really want to fight the IRS, you have options. Take advantage of them. Call me today.

Martial Arts Practice in Law

For anyone actually following my online ramblings at this site or one of my other sites, knows that I am heavily involved in martial arts. I have been doing so for many moons now.

My martial arts practice preceded my law practice. But, the two, in essence, hold the same philosophy. They are branches of the same tree.

Martial arts is adversarial. Lawyering is adversarial. Both hold the idea that there is only one winner. Or in its more dramatic form; eat or be eaten, kill or be killed.

I have been doing martial arts for so long that it is an intimate part of me. It dictates and drives my waking experience. It is the same with lawyering.

Anyway, I brought martial arts practices into my law. I continually train to be calm in the moment of chaos. To wait that split second while an attack is happening before reacting to it.

In lawyering, this means to slow down and remove myself from the emotion that arises from some action being taken. Practically speaking, I will read the pleading or document, put it down and let it soak in, before replying.

This works wonders. What happens is that once I go beyond the initial emotive response, I can look at things with a clearer mind. Emotion clouds your thoughts.

In the ring, its hard to get beyond the fight or flight autonomic response. But when I do, I fight better. The soft spots on my opponent open up and I see those weaknesses with greater clarity.

In the legal arena its the same. You want to be able to control your emotion. You want to see the weaknesses in your opponent’s case. You want clarity.

Which is why emotions need to be controlled when it comes to fighting. Or in more polite circles, being adversarial. Uncontrolled emotions contribute to the chaos.

An exercise I have taken from my martial arts training and applied to my lawyering, is controlled breathing. This goes hand in hand with controlling emotions and gaining clarity.

It sounds like an idiotic thing to say but proper and controlled breathing makes a world of difference. For my Systema training, I am always working on breathing and how it affects my brain/body interaction.

For instance, I will hold my breath while doing leg lifts and go beyond that point where my brain is screaming for oxygen. Getting beyond that brings me to a place of knowing.

How I brought this into my lawyering is to hold my tongue when I want to immediately respond. It’s painful doing that. But time and again, when I practice this, my responses are better and more comprehensive.

To me, lawyering and practicing martial arts are synonymous. The same intent and philosophy expressed through two different mediums.

One thing I have to mention, is that you don’t want to be squash out your emotions. They make that fire in your belly. They make you passionate. They make your words burn and give you the ability to spit fire. You just want to control them.

 

 

 

 

Tax Resolution Companies: Some Frightful Experiences

Over the years, I have had clients retain me after they had already paid for the services of a tax resolution company. The most common complaint I hear is that the tax resolution company charged the client for taking on the case but never did any work leaving the client in a worse situation than when they started.

Typically, my clients were charged thousands of dollars for simple matters but were often told the case was too complex or taking too much time and were either asked to fork over more money or their case was going to be dropped. In the meantime, no work, or very little work, was done on the client’s behalf. The result being no result.

Much to my chagrin, this is still happening. A recent client told me that they retained the services of a tax resolution company out of Chicago, paid them a few thousand dollars, only to be told that they were dropping the case because it was too complex. Thank you very little tax resolution company.

An experienced tax practitioner would have known it was a complex case just by looking at the paperwork from the client. Maybe this tax resolution company did and chose to pick up some quick money knowing they were not going to do the case anyway. I am speculating here because I don’t know the mind of the tax professional at that company.

Did my client ask for a refund? Yes. Was my client given a refund? No.

Instead, my client was given some lame-o excuse why he wasn’t getting his money back. No refund, no satisfaction.

In another recent example, a different client of mine received a solicitation in the mail that he thought was another IRS lien. He was frantic. I reviewed it for him and told him it was just an ad and that I had it under control. I was immediately thinking that it was an unduly influencing or coercive ad my client received.

After reviewing the ad, I couldn’t help myself but to call the company and see what they were about. I called and talked with a tax resolution salesman who went through what he could do for me and how his tax resolution company could settle my IRS debt for pennies on the dollar blah blah blah. Completely illegal approach he was using. They are located in Los Angeles CA.

One of the things he told me was that his company had attorneys on staff. I asked him if I could talk to one and he said no. When I asked him for one of the attorneys name and if he could have one of them could call me back to discuss my case, he still said no. He said he needs to qualify me first. But Mr. Hot Shot Tax Resolution Salesman wouldn’t confirm with me if he was qualified to qualify me. It was a Catch 22.

This leads me to believe they have no attorneys on staff. This is against IRS regulation on a number of points and also qualifies as deceptive business practices.

 

Mr. Hot Shot Tax Resolution Salesman and I continued to talk. I wanted to hear more of what he had to say. He was persistent in wanting my confidential and personal information so that he could “analyze my case and see if he can help me”. But before I was going to give this golden information over to him, I wanted to know what his qualifications were for analyzing my IRS case. I guess after much frustration with my non-compliance, he finally told me he was a CPA. But when I asked him for his CPA license number so I could verify his credentials, he wouldn’t give it to me. Which leads me to believe he was not a CPA.

According to IRS Circular 230 and IRS Rev. Proc. 81-38, you need to be an attorney, a CPA or an enrolled agent to discuss a taxpayer’s case. Anyone else is not qualified to do so and is acting illegally.

The company I called, which I will not name, now has me on their auto dialer and I receive at least two calls a day from them. A couple of times I hit the number 1 to be connected to a live “tax professional”. What I got was another unqualified hot shot tax resolution salesman trying to separate me from my money.

I am not here to disparage all tax resolution companies. There are some that are good and honest. But, it seems to me, that the norm is the opposite. That the more aggressive tax resolution companies have the intent to ravage the client and fleece them of as much money as possible instead of actually digging into the client’s case and acting as their zealous advocate.

I hope this isn’t a sign of things to come or a repeat of the past. Its this type of action that made the FTC and IRS clamp down on tax resolution businesses in 2012. It seems as though some people are not following the rules.

 

The Meaning of Frivolous in IRS Tax Protestor cases

Having dealt with a number of tax protestors, I have noticed one thing common among all of them and something they take great offense towards. Its the use of the term “frivolous”.

The IRS classifies tax protester arguments as “frivolous” arguments. I have tried to explain this term to tax protestors because there is a difference between the common usage and legal usage of the term “frivolous”. They usually get hung up on this.

“Frivolous” from a legal standpoint means to be legally insufficient. “Frivolous” in common usage means to be lacking of value or purpose. So, to be legally “frivolous” does not necessarily mean to be lacking in value or purpose.

Make no bones about it though, being classified as legally “frivolous” does mean the argument is not going to stand up in court. Which is the yardstick for legal sufficiency.

In the case of “frivolous” arguments under the IRS, they are using the term as it applies to legal argument. Case precedent and IRS code dictate that certain arguments used by tax protestors are indeed legally insufficient.

I know the tax protestor position is that their arguments are not “frivolous” because they have value and purpose. But value and purpose does not make it legally sufficient.

Their claim is that their arguments have not been ruled on yet by the Supreme Court. Maybe so. But this still leaves their arguments in the legal netherworld.

Unless the tax protestor camp comes up with some new legal reasoning as to why they aren’t obligated to voluntarily pay their taxes, they are at a dead end. The IRS and the tax courts are and have been tracking the tax protestor arguments and overruling them at every turn.

The IRS is so serious about combating “frivolous” tax protestor positions that they updated their web page on March 2014 to include substantial information  on “frivolous” arguments.  The page is entitled “The Truth About Frivolous Tax Arguments“. Its intended as a serious notice to all who plan on advancing “frivolous” legal positions.

The page goes in depth with the more common tax protestor arguments. It even goes so far as to caution any lawyers who advance any “frivolous” legal positions, that they will be sanctioned.

If you decide to advance a “frivolous” legal position, this shows you your opposition’s legal position and what you need to overcome. But if you decide to advance your legal position based on  the current and enunciated “frivolous” positions, its foolish and doomed to failure.

I think its interesting that the IRS updated their web page around the same time that the START report came out naming Sovereign Citizens as the number one terror threat to the United States. Extreme Anti-Tax groups where ranked 12th, with no specific group being named under this moniker.

Of note, the actual acts of violence committed by either Sovereign Citizens or Extreme Anti-Tax groups is almost non-existent unlike Islamic Extremists/Jihadists which ranked second in the START report. Instead, Sovereign Citizens and Extreme Anti-Tax groups have been labeled paper terrorists for voluminous legal filings, in some instances.

Using a totality of the circumstances reasoning lens, it makes me wonder if there isn’t some hidden legal merit to the tax protestor position. At its essence, isn’t their position akin to the Boston Tea Party? Just my thoughts.

 

My Fascination with Sovereign Citizens

I have dealt with and represented people that are part of the sovereign citizen movement. Its fascinating and their ideas about the law and living in the United States are quite radical.

My introduction to the sovereign citizen’s movement first came about many years ago while I was working at a law firm doing immigration, bankruptcy and IRS tax resolution. The two most memorable and eye opening experiences involved a person who wanted help with immigration issues and the other person was an ardent tax protester. Both people were highly intelligent and lucid.

Neither person became a client because the attorney owner of the firm did not want to expose himself in anyway. This stuff is serious and has dire consequences.

The person, who was not a client, and who wanted help with immigration issues was involved with the Pembina Little Shell Indian Tribe. He gave me lots of information regarding it and I read it all and searched more about it on my own.

The Little Shell claim to be exempt from any U.S. laws based on a treaty they have with President Abraham Lincoln. Because of this they claim that they can issue their own ID cards, driver’s licenses, birth certificates, etc.

A person could become a member of the Little Shell Tribe by merely paying a membership fee. Once paid, you are now supposedly exempt from any U.S. law.

The second person, who was not a client, introduced me to the tax protester movement. He gave me a ten cd set on the movement. I still have the set and occasionally listen to it.

I group both the tax protestor and Little Shell member into the sovereign citizen movement because they espouse the same thing; exemption from U.S. law as it is currently interpreted.

Because of my involvement with IRS tax resolution, I get tax protesters calling me for help. The arguments they present aren’t going to hold up, no matter how fervently they believe them.

I like helping people get out of trouble and stay out of trouble, especially this group. Sovereign citizens, for the most part, are well intended, they are just misguided.

A side note: I like the symbol that they use and is posted above. It is an ages old Grateful Dead skull from the Steal Your Face album cover that they co-opted and now claim rights to it under UCC 1-1308. This sums up their philosophy.