IRS Tax Audits & Collections By Gary S. Wolfe, Esq. 1 Other Books by Gary S. Wolfe: Asset Protection 2015: IRS Tax Audits and Lawsuits Tax Planning for U.S./California Wine Exports The IRS and Defrauded Investors: Theft Tax Loss Offshore Tax Evasion: The IRS and Swiss Banks Expatriation: The IRS & U.S. Taxes EB-5 Visas: International Investors & U.S. Taxes U.S. Pre-Immigration Tax Planning Tax Planning for U.S. and State Exports: IC-DISC Offshore Tax Evasion: IRS Offshore Voluntary Disclosure Program Asset Protection 2013: The Gathering Storm Offshore Tax Evasion: IRS Tax Compliance FATCA/FBAR International Tax Evasion & Money Laundering Offshore Tax Evasion: U.S. Tax & Foreign Entities For more information please see website: gswlaw.com Published by BG Digital Publishing All Rights Reserved 2015 Gary S. Wolfe 2 Table Of Contents Introduction PART I – IRS Audit Statistic Chapter 1 – IRS Audits 2014 Chapter 2 – IRS Audits FY 2012 Chapter 3 – Offshore Tax Evasion: IRS Tax Audit Chapter 4 – Criminal Tax Evasion: Burden of Proof Chapter 5– Criminal Tax Evasion: Collateral Estoppel Chapter 6 – IRS Civil Tax Audits: Statute of Limitations Chapter 7 – GAO Report PART II – Collections Chapter 8 – Collections Chapter 9 – The IRS and U.S. Taxpayer Emails PART III – International Tax Evasion Chapter 10 - International Tax Evasion: Money Laundering Chapter 11 - International Tax Evasion: Tax Evasion & Money Laundering (Additional Issues) Chapter 12 - International Tax Evasion: Civil/Criminal Penalties Chapter 13 - International Tax Evasion: Willfulness Defense Chapter 14 - Form W-8 Tax Withholding Chapter 15 - IRS Form W-9 Chapter 16 – Summary of HIRE and Foreign Account Tax Compliance ACT Chapter 17 - Foreign Financial Assets 3 Chapter 18 - U.S. Taxpayer FBAR Tax Compliance Issues Chapter 19 - Amended Tax Returns (Voluntary Disclosure) Chapter 20 - Statute of Limitations (FBAR) Chapter 21 - Annual Filing Requirements and Reasonable Cause Exception (FBAR) Chapter 22 - Civil and Criminal Penalties (FBAR) Chapter 23 - Criminal Penalties: Willful Failure to File (Defenses) (FBAR) PART IV – IRS/OVDP Chapter 24 - IRS Voluntary Disclosure: History Chapter 25 - Offshore Voluntary Disclosure Program 2012 Chapter 26 - IRS/OVDP 2012 Tax Compliance Chapter 27- IRS Voluntary Disclosure 2013: An Update Chapter 28 - Ty Warner & the IRS Voluntary Disclosure Program Chapter 29- IRS Civil/Criminal Penalties-Reasonable Cause (Willfulness) Chapter 30 - Accuracy Related Penalty Chapter 31 - Omission of Over 25% of Income Chapter 32 - FBAR Civil Penalties: Reasonable Cause Exception Chapter 33 - Collection After Assessment Chapter 34 - IRS: Jeopardy Assessment Chapter 35 - Offer in Compromise Chapter 36 - Attorney-Client Privilege Chapter 37 - Medicare Tax on Investment Income About the Author – Gary S. Wolfe 4 Introduction US Taxpayers who are under IRS Tax Audit, need to be aware of the following: 1. The audit does not mean taxes are due. Rather, the purpose of the audit is to ascertain how much in tax is due, if any. 2. Prior to the IRS imposing tax due under the audit, the Taxpayer/Taxpayer Representative may present legal authority and evidence to the IRS to confirm no tax is due. In the event of an adverse audit finding, they may request an audit reconsideration with the auditor, a meeting with the auditor's supervisor, and if necessary move up the IRS hierarchy to request a meeting with group/regional managers if the taxpayer does not believe they have been fairly treated or if their constitutional rights have been violated including the rights to due process and equal protection of the law (under the 14th amendment), and the right not to have excessive fines imposed (under the 8th amendment). If the taxpayer is accused of any criminal conduct, they may refuse to give any further evidence based on the 5th amendment right against self-incrimination. 3. Prior to the IRS assessing tax, penalty and interest the taxpayer has the right to seek an administrative IRS appeal, a post-Appeal mediation, and if the matter is not resolved the taxpayer who receives a Statutory Notice of Deficiency may go to US Tax Court prior to paying any tax due which is not assessed until after Tax Court trial. In the event the taxpayer files a Tax Court Petition the IRS will refer the matter back to Appeals for another settlement conference prior to tax court trial. In summary, the taxpayer has many avenues to object to the tax proposed prior to assessment of the tax, the IRS filing of a tax lien (for the tax year(s) at issue) and the initiation of IRS tax collection for the tax due after audit. Once the tax is assessed, prior to payment the taxpayer who cannot pay the tax in full may request an installment agreement for a monthly payment of the tax due based on their financial circumstances. In the alternative, the taxpayer may seek an offer in compromise to pay less than the amount of the tax due based on either doubt as to liability or doubt as to collectability. If the offer in compromise is accepted the taxpayer will have IRS collection "frozen" while the offer is being reviewed. If the offer is rejected the taxpayer may seek an appeal of the offer rejection under the IRS Collection Due Process Procedures (which were introduced as part of the Taxpayers Bill of Rights). Two final caveats: - Taxpayer's should never waive their 5th amendment right against self-incrimination and offer evidence, which may be used against them for criminal prosecution. - Taxpayer's should hire tax counsel to represent them, be professional and timely in their IRS responses to avoid IRS jeopardy assessments i.e. either a pre-audit asset 5 seizure or an asset seizure prior to the IRS filing of a tax lien based on collection of the tax "being in jeopardy.” 6 Part 1 – IRS Audit Statistics Chapter 1 – IRS Audit Statistics On 2/24/15, the USA Today article, IRS Audit Rate for Individuals Drop by Kevin McCoy, confirmed that in 2014 the IRS Audit Rate dropped to .86% its lowest level since 2005. Previously, IRS audits rose between 2005-2010 and have fallen 21.4% from 2011-2015. In 2014 the IRS audited 1.1m taxpayers with income less than $200k (compared to 1.4m in 2010), and audited 34,000 taxpayers with income over $1m (compared to 41,000 in 2012). Click link above for complete article. IRS Audit Stats According to the IRS Data Book (calendar year 2012, thru 9/30/12), in 2012, the IRS: 1. Processed 237.3 million federal tax returns 2. Collected $2.52 trillion in taxes 3. Issued tax refunds: $373.4 billion 4. Net tax collections: $2.15 trillion Since US government spends $3.79 trillion there was $1.27 trillion “revenue shortfall”. Largest source of IRS tax receipts was 55% ($1.387 trillion) from individual estate and trust income taxes. Calendar year 2011 (thru 9/30/11); 1. Estate tax returns: 12,582 estate tax returns filed, 3,762 audited (29.9% audit rate); estates b/n $5-10m had a 60% audit rate, estates over $10m had a 100% audit rate; 2. Gift tax returns: 223,090 filed, 3164 audited (1.42 % audit rate) 3. Income tax returns: 143,399,737 individual tax returns filed, 1,481,966 audited (1.03% audit rate) In 2013 the audit rates were as follows: 1. Individual audits less than 1% (.96%) ie. 1 of every 104 tax returns 2. Income under $200k, audit rate is .88% (less than 1%) 3. Income b/n $200k-$1m audit rate is 2.7% ( 1 out of 37) 7 4. Income over $1m, audit rate is 10.85% (1 of 9) 5. For top income: b/n $5-10m 16% audit rate, over $10m (24% audit rate) 8 Chapter 2 - IRS Audits FY 2012 The IRS 2012 Fiscal Year Performance Results (10/1/11 – 9/30/12, updated 12/31/13) confirm the IRS increased audits by more than 12%. 1. Total IRS Audits (FY 2012): 18,654,923 2. Total Additional Tax Assessed from Audits in FY 2012: $38,699,308,000 Additionally, the IRS employed 97,941 employees (Budget $12.1billion), collected $2.5 trillion in taxes, and processed 237.3 million tax returns. Detailed audit activities include the following: 1) Form 1040 - 143.4 million tax returns filed, audit rate 1.03% 2) Form 706 - 12,582 tax returns filed, 3,762 audited (29.9%). Estates between $5 million and $10 million audited nearly 60%, estates over $10 million 100% audit rate. 3) Form 709 - 223,090 tax returns filed, 3,164 audited, (1.42%) 4) Form 1065 - 3,524,808 tax returns filed, 16,691 audited (.47%) 5) Form 1120S - 4,469,329 tax returns filed, 21,658 audited (.48%) 6) Form 1120 - 1,999, 266 tax returns filed, 32,701 audited (1.64%) 7) Form 1041 - 3,036,900 tax returns filed, 5,070 audited (.17%) IRS Audits 2012 Part II According to the IRS Data Book (calendar year 2012 through 9/30/2012) in 2012, the IRS processed more than 237.3 million federal tax returns, and collected $2.52 trillion in taxes, issued refunds ($373.4 billion) net tax collections ($2.15 trillion). Since the U.S. government spent $3.79 trillion in expenditures, there was a "revenue shortfall in 2012 of: $1.27 trillion. The largest source of IRS tax receipts is from individual, estate and trust income taxes allocating for nearly 55% of gross tax collections ($1,387,836,515) IRS Audits 1. Corporate Tax: C-corporations (Form 1120) had 3.4 times the audit rate vs. S- corporations/Partnerships: C-Corp (1.64%), Partnerships (.47%), S-Corp (.48%) 2.