The IRS’s Identity Protection Personal Identification Number (“IP PIN”) is intended to protect those who are victims of identity theft. It does so by making it harder for third parties to file fraudulent tax returns. The IP PIN can also cause problems for taxpayers. This is particularly true for tax returns that are filed close…Continue readingRejected e-File Return is a Valid Tax Return
Will the IRS penalize you if you are unable to file your tax return on time due to the burden of caring for a loved one with COVID? The IRS has not provided penalty relief for taxpayers impacted by COVID-19. The existing penalty relief rules may provide a remedy for some taxpayers. These rules do…Continue readingIllness as a Defense to Late Filing Penalties
The public may not be fully cognizant of this, but, the IRS is in the business of processing information and making decisions. It accomplishes this by siloing work on tax returns and accounts. The siloed work is intended to allow the IRS to process and make consistent decisions based on a very large volume of…Continue readingFixing Trust Fund Recovery Penalties
The IRS has been focusing on tax return preparer audits. The aim of these audits is to impose penalties on tax return preparers. The IRS typically provides a means for tax preparers to appeal these penalties administratively, but there are cases where it doesn’t provide this opportunity. In those cases the IRS will assess the…Continue readingThe Tax Preparer’s Right to Appeal Return Penalties
What if you have a tax question and find a court case that: (1) has the same facts as your case, (2) addresses the same tax item as in your case (such as a tax deduction, credit, etc.), and (3) the court case is decided in the taxpayer’s favor, but the court case does not…Continue readingSubstantial Authority, When the Authority is Not Clear
The IRS’s power to regulate tax return preparers was limited by the Loving v. Internal Revenue Service, 742 F.3d 1013 (D.C. Cir. 2014) line of cases. These cases generally limit the IRS’s ability to regulate tax preparer conduct at an administrative level. But the IRS still has a number of tools at its disposal to…Continue readingAbout Tax Preparer Penalty Audits
The courts recently held that penalties have to be abated if the IRS does not obtain written manager approval for the penalties. The IRS has been abating penalties for this since the ruling. But there is a question as to when does the IRS have to obtain manager approval? Is it sufficient that the IRS…Continue readingTiming for Written IRS Manager Approval for Penalties
Can the sole owner of a foreign trust who is also its sole beneficiary be penalized twice for not filing a single Form 3520? Can the IRS choose the higher penalty for the beneficiary in this situation? In Wilson v. United States, No. 19-cv-5037 (BMC) (E.D.N.Y. 2019), the IRS argued that it could impose pick…Continue readingForeign Trust Beneficiary Liable for a Double Tax Penalty?
If you hire a competent tax advisor and end up having a late filed return, you may be able to avoid penalties for the late filing. But this is a defense. It is something that you, the taxpayer, have to prove. So how does a taxpayer prove that they relied on a tax advsior? The…Continue readingReasonable Cause: Proving Reliance on a Tax Advisor
The IRS often turns a deaf ear to taxpayers who miss a filing deadline due to some action or inaction by their CPA or tax preparer. This is the case for late filing tax penalties. But what about a late filed accounting method change? Is reliance on a CPA or tax preparer sufficient for a…Continue readingIs Reliance on a CPA Sufficient for a Late Filed Tax Form?
Sec. 6701 imposes a penalty for assisting another person in understating their tax liability. The Sec. 6701 penalty is not subject to a statute of limitations. The IRS can assess these penalties at any time, even years and decades after the fact. This can result in very large penalty assessments for those who are in…Continue readingCPA Penalized for Knowledge of Understatement
What happens if the IRS violates the law? Specifically, what if the IRS assesses a penalty and attempts to collect it without first issuing the proper notice to the taxpayer? The court addresses this in Romano-Murphy v. Commissioner, 152 T.C. 62, in the context of a trust fund recovery penalty. Facts & Procedural History The…Continue readingWhat if the IRS Violates the Law?
The IRS has been increasing its focus on tax return preparers who file false or fraudulent tax returns. Congress recently beefed up the due diligence requirements preparers have to comply with and the penalty amounts have also been increased. But these laws only apply to tax returns the preparer actually prepared. In Tolentino v. United…Continue readingReturn Preparer Liable for Returns She Didn’t Prepare
The IRS and the courts have invalidated penalties where the IRS fails to obtain IRS manager approval before assessing the penalty. It has done so in cases where the penalties are manually assessed by IRS personnel. But what about penalties that are automatically assessed by the IRS’s computers? The court addresses this in Atl &…Continue readingIs IRS Manger Approval Required for Computer Generated Penalties?
You work hard to build a business, you find success over the years, and then you find out that your long term accountant did not remit payroll taxes and you owe a significant balance. What do you do? The recent McClendon v. United States, No. 17-20174 (5th Cir. 2018) case provides some answers. The Facts & Procedural…Continue readingLoaning Money to Business Triggers Trust Fund Penalty
If you take all of the steps to prepare and remit a tax return to the IRS except for placing it in the mail, is this sufficient to avoid a failure to timely file penalty? There is case law suggesting that it may be in some circumstances. The U.S. Tax Court recently addressed this in…Continue readingCourt Rejects the ‘Taking All Necessary Steps’ Defense to Penalties
The Dewees v. United States, 16-cv-01579 (D.D.C. 2017) case is a good reminder that late-filed Forms 5471 should include reasonable cause statements. These statements can be submitted under the IRS’s Delinquent International Information Return Submission Procedures to avoid penalties being assessed. The Facts and Circumstances in Dewees Dewees is a U.S. citizen who lived in…Continue readingIRS Penalties for Late-Filed Forms 5471
The IRS often willing to abate or remove tax penalties. To do so, taxpayers usually have to show that they acted with reasonable cause and in good faith. Relying on a competent tax professional can be one way taxpayers can make this showing. But what exactly is a competent tax professional? The court addressed this…Continue readingPenalty Abatement for Reliance on Tax Advisor Who Made Obvious Errors
Do taxpayers have to use the official forms published by the IRS? In May v. United States, No. 15-16599 (9th Cir. 2017), the court considered whether a taxpayer is subject to the listed transaction penalty if he fails to file the IRS’s reportable transaction form, but the IRS is otherwise furnished with all of the information…Continue readingDo You Have to Use the IRS’s Official Forms?
Can the IRS withhold or set off a penalty refund owing to a taxpayer if the taxpayer has already recovered the amount in excess of the penalty from its tax attorney for malpractice? The court considered this in Ervin v. United States, No. 4:13-CV-00127-JHM (W.D. Ky. 2017). Facts & Procedural History Ervin participated in a tax shelter…Continue readingIRS Must Refund Penalties Despite Tax Malpractice Recovery
It is not clear as to what level of conduct justifies the imposition of the $100,000+ foreign bank account reporting (“FBAR”) civil tax penalty. In Bedrosian v. United States, No. 15-5853 (E.D. Pa. 2017), the court considered whether reckless conduct is sufficient given the facts presented in the case. The FBAR Civil Tax Penalty The…Continue readingReckless Conduct Sufficient for FBAR Civil Tax Penalty
The Section 6707A reportable transaction penalty can be difficult to work with given the more limited avenues for contesting the penalty. The court addressed this in Bitter v. Commissioner, T.C. Memo. 2017-46, in the context of a Section 412(i) plan. Tax advisors have been waiting for an answer to the very question about how to…Continue readingComputing the Reportable Transaction Penalty
The IRS will often assert trust fund recovery penalties against anyone who signs checks written on the business checking account. The court addressed this in Shaffran v. Commissioner, T.C. Memo. 2017-35, concluding that some check signing activity alone is not sufficient to impose a trust fund recovery penalty. The case provides some insight as to…Continue readingCheck Signing Activity Not Sufficient for Trust Fund Penalty
It is clear that one cannot rely on a tax attorney to file a tax return for purposes of removing penalties if the return is not filed. But can you rely on an attorney if the attorney provides advice as to the wrong date for filing? The court addresses this in Estate of Hake v.…Continue readingRelying on Tax Attorney for Filing Deadline is Reasonable Cause
The IRS is serious about unpaid employment taxes. The trust fund recovery penalty can be used to collect these taxes. This penalty makes a business tax liability a personal liability. With most penalties, the penalty can be abated for reasonable cause. But what about the trust fund penalty? Can it be abated for reasonable cause?…Continue readingNo Reasonable Cause Defense for Some Trust Fund Penalties
The failure to pay penalty is one of the most commonly assessed penalties. The penalty does not apply and can be abated or removed if the taxpayer can establish that the failure to pay is due to reasonable cause and not to willful neglect. But how do you establish reasonable cause? In C1 Design Group, LLC…Continue readingProof of Cash on Hand to Abate Failure to Pay Penalty
Taxpayers who are assessed trust fund recovery penalties need to take note of the U.S. Tax Court’s recent decision in Anderson v. Commissioner, T.C. Memo. 2016-219. The decision highlights a potential foot fault they may make when trying to resolve their trust fund recovery penalties at the IRS administrative level. Facts and Procedural History The…Continue readingJudicial Review for Trust Fund Recovery Penalties
An IRS agent is generally required to get written approval from their manager for a tax penalty can be assessed. This is requirement is set out in the Code. This begs the question as to what happens if the agent does not get written approval before he closes the audit? The court addressed this in…Continue readingWritten Manager Approval for Penalties
Tax matters can be litigated in a number of different courts. One of the advantages of bringing suit in U.S. Tax Court is that the tax does not have to be paid prior to bringing suit. For tax matters litigated in the U.S. District Courts or the Court of Federal Claims, the tax has to…Continue readingReportable Transaction Penalty, Full Payment Required
The IRS has the ability to assess a trust fund recovery penalty against those who are responsible for withholding payroll taxes for employees if they fail to withhold and pay over the taxes to the IRS. Then penalty is equal to the amount of the withheld but unpaid tax. Liability for the penalty falls on…Continue readingStay-at-Home Mom Not Liable for Trust Fund Recovery Penalty
In Hatcher v. Commissioner, T.C. Memo. 2016-188, the court considered a very common error IRS agents make in computing the Section 6662 accuracy related penalty. The IRS applied the penalty to the entire understatement of tax, rather than the portion of the understatement that was not subject to the reasonable cause defense. This is one…Continue readingAccuracy Related Penalties Do Not Apply to Full Understatement of Tax
The U.S. Supreme Court has made it clear that taxpayers cannot avoid penalties by blindly rely on tax attorneys to file tax returns and make tax payments. These situations are unfortunate. The court in Specht v. United States, No. 15-3095 (6th Cir. 2016) highlights one way that taxpayers may be able to avoid the bright…Continue readingCourt Revisits Reasonable Cause Abating Penalties
The IRS is authorized to abate penalties for reasonable cause. There is no set of standard facts or factors that show reasonable cause. Taxpayers have made various arguments, with the IRS and courts rejecting most of them. How bad does life have to be for there to be reasonable cause? The court addresses this in…Continue readingWhat Facts are Needed to Abate Penalties?
Given its limited resources and ability to detect foreign assets, accounts and income, the IRS has offered various voluntary programs to entice taxpayers to come clean and report this information. The IRS’s OVDP program and the more recent streamlined procedures are two examples. The Maze v. Internal Revenue Service, Nos. 15-1806 (D.D.C. 2016), highlights several…Continue readingThe IRS’s Streamlined Procedures for Foreign Accounts
In Hom v. United States, No. 14-16214 (9th Cir. 2016), the court addressed whether an online payment account and whether poker websites triggered FBAR filing requirements. The stakes are high with FBAR penalties, so those with foreign accounts should take heed. FBAR Filing Requirements Taxpayers with an interest in or authority over certain foreign accounts…Continue readingOnline Account Trigger FBAR Filing, Not Poker Websites
Taxes are often neglected when a business is having financial difficulties. This can have serious repercussions for the business and the individuals who are responsible for having taxes withheld and remitted to the IRS. The IRS has the ability to assess trust fund recovery penalties against these individuals, which essentially makes the business tax liability…Continue readingFailing Business Triggers Trust Fund Penalties
In Chief Counsel Memo 201623010, the IRS addressed whether Section 6702 frivolous return penalty can be abated due to the taxpayer’s mental incapacity. One would think that a mentally incapacitated person would not be liable for a penalty for filing a frivolous tax return. Mental Incapacity, Generally The law recognizes that mental incapacity as a…Continue readingMentally Incompetent Owes Frivolous Return Penalty
It is almost always advisable to keep on the lookout for and open correspondence from the IRS. The Haben v. Commissioner, T.C. Summary Opinion 2015-55, case provides an example. In Haben, the U.S. Tax Court concluded that a taxpayer could not contest a trust fund recovery penalty during a collection due process hearing because he…Continue readingYou Cannot Dodge Notice for the Trust Fund Recovery Penalty
In Eaton Corporation & Subsidiaries v. Commissioner, the U.S. Tax Court concluded that raising the reasonable cause/good faith defense to tax penalties waived the work product, attorney-client, and federal tax practitioner privileges. This is a serious issue that has to be considered when submitting penalty abatement requests based on a reasonable cause defense. APA (Advance…Continue readingReasonable Cause Defense for Penalty Waives Privilege
The courts have been abating penalties if the IRS fails to obtain manager approval for the penalties. But what about penalties assessed by the IRS computer? Do they need to be approved by a manager? The court addresses this in Grace Foundation v. Commissioner, T.C. Memo. 2014-229. Facts & Procedural History R.S. Ohendalski created and…Continue readingDo IRS Penalties Assessed by Computers Need Manager Approval?
Marriage can be challenging. This is particularly true when it comes to finances. And it is even more so when it comes to taxes. But what if a spouse reports something wrong? Can the other spouse get out of penalties for the wrong doing? The court answers this in Miller v. Commissioner, T.C. Summary Opinion 2014-74,…Continue readingWife Can Rely on Husband (to Avoid a Tax Penalty)
Can tax penalties be abated for anxiety and depression due to the death of a spouse to cancer and the September 11, 2001 terrorist attacks on the World Trade Center? The court addressed this in Kwosh v. Commissioner, T.C. Memo. 2008-204, in light of the 10 percent addition to tax on early retirement distributions and…Continue readingAbate Tax Penalties for Anxiety & Depression for 911 Attacks
The IRS can impose a number of different types of penalties. It often does so when it should not. The recent Wilson v. Commissioner, T.C. Summary Opinion 2008-91, case considers a situation where the court concludes that the tax attorney was incompetent and could not be relied on to avoid the imposition of penalties. Facts &…Continue readingTaxpayer Cannot Rely on Incompetent Tax Attorney
The IRS has the ability to impose penalties on income tax return preparers for certain conduct. These rules changed last year, which makes it due time to provide an overview of the new rules. A Little Background As mentioned above, Congress amended the Code just over a year ago to beef up the tax return…Continue readingThe New Tax Return Preparer Penalty
Say you are convicted of a tax crime and the criminal judge finds that your conduct has not risen to the level of tax fraud. Should a civil court later say that this same conduct does in fact rise to the level of tax fraud? In Maciel v. Commissioner, the Ninth Circuit Court of Appeals…Continue readingCourts Says No Criminal Fraud, IRS Imposes Civil Fraud Penalty
How does the IRS apply partial payments when a trust fund penalty has been assessed? Can the IRS apply payments to the trust fund portion of the employment taxes or must it apply the payment to the non-trust fund penalty portions? Trust Fund & Non-Trust Fund Tax Employers are generally required to withhold employment taxes…Continue readingStrategy for Paying Late Employment Taxes
The tax penalty for filing a frivolous income tax return has been set so low and its reach so limited that the penalty has not been of much concern to taxpayers. Unfortunately, those days are now gone. The Tax Relief and Health Care Act of 2006 has made sweeping changes to the Section 6702 frivolous…Continue readingThe Improved Frivolous Return Penalty
Bad facts can create bad law. This describes the law for IRS penalties. The IRS abates or removes penalties at the administrative level for most taxpayers who have good facts. The rest of the cases are litigated–resulting in a lot of court cases where the government wins. It is somewhat rare for taxpayers to prevail…Continue readingNo Tax Penalties for Obscure Tax Forms
If you do not receive a Form 1099 to report income to you and you omit it from your tax return, are you liable for penalties if the IRS later notices the issue and makes an adjustment? The Mabinuori v. Commissioner, T.C. Summary Opinion 2006-109, case provides an opportunity to consider this question. Facts & Procedural…Continue readingMissing Form 1099 May Establish Reasonable Cause
Many unfortunate taxpayers find themselves in the position of owing a tax debt that consists of a small tax liability and a large assessment of tax penalties and interest. In many of these cases the penalties and interest can be substantially larger than the original tax debt. This situation often forces taxpayers to seek the…Continue readingAbatement of Tax Penalties and Interest
Can drug addiction or migraines be an excuse for filing a tax return late? The court addresses this in Jordan v. Commissioner, T.C. Memo. 2005-266, for a life insurance salesman who became addicted to OxyContin prescribed for his severe headaches. Facts & Procedural History Mr. Jordan was a life insurance salesman. Mr. Jordan had a…Continue readingDrug Addiction Excuse for Filing Tax Return Late?
Businesses often succumb to the temptation to use taxes withheld from employees wages to manage cash flow problems. These “government loans” can prove to be quite costly. Hart v. Commissioner, 19120-12 provides an example. Facts & Procedural History The taxpayer worked for a real estate firm. The firm did not pay its payroll taxes. The…Continue readingBetter than a Soap Opera? Trust Fund Tax Disputes