Wednesday, October 28, 2020

IRS launches A Closer Look Webpage - Audit Rates Increase as Income Rises

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The IRS unveiled a new online publication called “A Closer Look” to provide a more detailed look at some of the major issues facing IRS and tax administration. 
  • This post focuses on compliance and audits. 
  • The post includes data about audit rates that provides insight and 
  • perspective into which income groups are more likely to be audited.
    • Audit Rates Increase as Income Rises

Few Things Can Generate As Much Taxpayer Concern, Confusion and Controversy as an IRS Audit.

Tax audits are a critical compliance tool to help ensure fairness in the tax system, and the IRS works hard to ensure the agency's audit selection process is fair and impartial. Decisions to conduct audits are based on the financial information that's on – or not on – the tax return. There's an extensive set of checks and balances to ensure fairness with individual audits, and there are important protections and appeals for taxpayers during the administrative process as well.

But before an audit of a taxpayer takes place, the IRS career leadership team must make higher-level decisions on where to focus our limited audit resources across the agency. Given the breadth of our economy and the types of income people have, the IRS takes steps to ensure audits are spread across income categories – to ensure fairness and support voluntary compliance with the nation's tax laws.

Like many things involving taxes, there are complexities behind audit rates. On the surface, these can be easy to misinterpret. A Closer Look at audit rates provides insight into which income groups are more likely to be audited.

Higher-Income Taxpayers Face Greater Chance of Audit

Despite common misperceptions about IRS examination rates, the reality is that the likelihood of an audit significantly increases as income grows.

Taxpayers with incomes of $10 million and above had substantially higher audit rates than taxpayers in every other income category for each calendar year from 2010 through 2015. Those with incomes above $1 million also had higher exam rates than all other groups earning less.

Tax Year 2015 provides a good historical overview of where IRS compliance priorities are focused. The exam coverage rate of taxpayers with incomes of $10 million or more is 8.16%. The rate for those between $1 million and $10 million is 2.53%. And other income categories are far below that – generally less than 1%.

Tax Year 2015 is the last year for which we know the actual audit rates, because the IRS can still open audits for more recent years, so the data for more recent years is not yet complete.

The chart below shows that higher-income taxpayers were audited at much higher rates in 2013-2015. Data is not yet complete for the more recent years, particularly for high-income taxpayers for the 2016 through 2018 tax years, where many examinations are in the process or have yet to even begin.

IRS Audit Rates By Income Category: 2013-2015 Shows More Exams For Higher Income Over Time

Total positive incomeTotal returns filed in TY2013Returns examined*Percent covered
No total positive income**619,69478,57312.68
$1 under $25,00056,181,555    464,856   0.83   
$25,000 under $50,00034,753,396121,841   0.35   
$50,000 under $75,00019,532,03263,700   0.33   
$75,000 under $100,00012,787,90352,852   0.41   
$100,000 under $200,00017,451,78890,236   0.52   
$200,000 under $500,0004,844,78240,290   0.83   
$500,000 under $1,000,000800,12111,802   1.48   
$1,000,000 under $5,000,000342,60510,782   3.15   
$5,000,000 under $10,000,00023,4131,499   6.40   
$10,000,000 and above14,0091,68912.06
Total positive incomeTotal returns filed in TY2014Returns examined*Percent covered
No total positive income**662,876   49,829   7.52   
$1 under $25,00054,956,300   390,799   0.71   
$25,000 under $50,00035,090,262   147,805   0.42   
$50,000 under $75,00019,676,659   82,822   0.42   
$75,000 under $100,00013,130,657   49,717   0.38   
$100,000 under $200,00018,405,264   73,729   0.40   
$200,000 under $500,0005,324,980   29,884   0.56   
$500,000 under $1,000,000910,977   10,362   1.14   
$1,000,000 under $5,000,000401,634   10,651   2.65   
$5,000,000 under $10,000,00028,847   1,512   5.24   
$10,000,000 and above18,122   1,572   8.67   
Total positive incomeTotal returns filed in TY2015Returns examined*Percent covered
No total positive income**701,594   31,329   4.47   
$1 under $25,00054,135,898   357,410   0.66   
$25,000 under $50,00035,589,401   141,727   0.40   
$50,000 under $75,00020,312,858   108,219   0.53   
$75,000 under $100,00013,063,770   64,324   0.49   
$100,000 under $200,00019,459,846   92,124   0.47   
$200,000 under $500,0005,788,644   31,804   0.55   
$500,000 under $1,000,000962,481   10,898   1.13   
$1,000,000 under $5,000,000428,082   10,244   2.39   
$5,000,000 under $10,000,00031,159   1,367   4.39   
$10,000,000 and above19,531   1,593   8.16   

Source: Table 17a, Internal Revenue Data Book, 2019
*Returns examined is total of columns “Closed” and “in process”.
** Returns that show no total positive income report zero or negative income. The negative income could be negative business income and/or capital losses. Returns with no TPI are filed by taxpayers in any of the income categories, and there is no prevalence of one over the other. These returns account for less than 0.5% of the individual filing population.

The Typical Audits For Higher-Income Taxpayers
Involve at Least Three Different Tax Years,
Include Related Entities, and
Routinely Take Years To Resolve.

The highest income taxpayers face the most significant chance of an examination, and they face the most highly trained and experienced IRS agents and teams utilizing our most sophisticated tools and techniques.

At the end of the day, the IRS strives to properly serve compliant taxpayers and uphold the nation’s tax laws, ranging from civil side audits and notices to criminal investigations in the most egregious cases. We face tough choices each year as far as where to deploy resources given the breadth of our responsibilities, but our choices are guided by fair and impartial audit plans throughout the process.

Have IRS Tax Problem?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at: or
Toll Free at 888 8TAXAID (888-882-9243) 

IRS CONTINUES to Criminally Prosecutes Employers For Failure To Pay Withheld Payroll Taxes - As Promised!

On October 29, 2019 we ORIGINALLY posted The IRS is Now Criminally Prosecuting Employers For Failure To Pay Withheld Payroll Taxes! where we discussed that the IRS is stepping up criminally prosecuting business owners for failing to turn over withheld payroll taxes.

Then on October 12, 2020 we posted The IRS Criminally Prosecutes Yet Another Employer For Failure To Pay Withheld Payroll Taxes!, on June 4, 2020  we posted Another Employer Gets Criminally Prosecuting For Failure To Pay Withheld Payroll Taxes! and on June 29, 2020 we posted More Employers Gets Criminally Prosecuting For Failure To Pay Withheld Payroll Taxes! and now according to DoJ, a federal grand jury returned an indictment, charging a North Carolina couple with federal employment tax and individual income tax violations.

As alleged in the indictment, from 1992 through the present, James Rice was an orthopedic surgeon who owned and operated an orthopedic practice that the indictment refers to as “Sandhills Orthopaedic.” The indictment further alleges that his wife, Susan Rice, worked at Sandhills Orthopaedic and handled the administrative operations, including payroll and employment tax obligations. Susan Rice also purportedly owned and operated a truffle business. 

The Rices Have Been Charged With A Variety Of Tax Offenses, Including Conspiring To Not Pay Any Taxes On Their Business And Personal Income And To Defraud The United States By Failing To Pay Employment Taxes
Owed By Sandhills Orthopaedic. 

Between 2007 and 2014, the Rices allegedly withheld employment taxes from Sandhills Orthopaedic’s employees, but failed to pay over approximately $580,000 in social security and other tax withholdings to the IRS. 

The indictment also alleges that the Rices did not file individual income tax returns for the 2014 through 2016 tax years, despite earning gross income in excess of the filing threshold, and that James Rice did not file corporate tax returns for an entity over which he was president for the 2014 through 2017 tax years. 

If Convicted, The Rices Face A Statutory Maximum Sentence of Five (5) Years In Prison and A $250,000 Fine For
Each Conspiracy, Tax Evasion, and Employment Tax Count.

They also face one (1) year in prison for each of the charges relating to failing to file individual and corporate tax returns

They are also subject to additional monetary penalties, supervised release, and restitution. 

An indictment merely alleges that crimes have been committed. The defendants are presumed innocent until proven guilty beyond a reasonable doubt.

Thinking of Borrowing From Your Company's
Payroll Tax Withholdings?

You Better Thank Again, if You Like Your Freedom!

Have Payroll Tax Problems?
 Contact the Tax Lawyers at 
Marini & Associates, P.A.  

for a FREE Tax HELP Contact Us at:
or Toll Free at 888-8TaxAid

Tuesday, October 27, 2020

Court Vacates Enhanced Sentencing For Perjury In $2.7M Tax Fraud Case

According to Law360, aNorth Carolina federal court wrongly applied an obstruction of justice enhancement to the 46-month sentence of a man convicted of tax fraud totaling more than $2.7 million, and he must be resentenced, the Fourth Circuit said Thursday.

The three-judge panel vacated Arthur Joseph Gerard's sentencing in a North Carolina district court for helping a holistic medicine business' conspiracy to hide more than $2.7 million from the Internal Revenue Service. 

The appellate court upheld Gerard's conviction, but found the lower court didn't fully explain how Gerard's testimony satisfied the three elements of perjury that would support the sentence enhancement for obstruction of justice, according to the per curiam opinion.

"While the court found that Gerard's testimony was contradictory and false, the court did not rule on whether the false testimony was material or given willfully," the court said.

Gerard was sentenced in November to 46 months in prison to be followed by three years of supervised release, and was ordered to pay nearly $568,000 in restitution, according to court documents.

On appeal, Gerard had argued that the lower court failed to detail an example where his testimony could be considered perjury that would warrant a sentence enhancement for obstruction of justice, according to court documents. In the lower court's opinion, there was inadequate discussion of why the sentence enhancement was warranted and a failure to "identify any explicit findings regarding perjury," Gerard said in his appeal brief.

Meanwhile, the U.S. government argued that the rationale for the sentence enhancement was properly laid out in the lower court's opinion, clearly identifying several of Gerard's statements as false, according to its brief.

The case is U.S. v. Arthur Joseph Gerard III, case number 19-4858, in the U.S. Court of Appeals for the Fourth Circuit.

Have IRS Tax Problem?

 Contact the Tax Lawyers at
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Inability to Use Tax Software Properly Does Not Constitute "Reasonable Cause"

The court of claims In ALL STACKED UP MASONRY, INC. v. U.S., 26 AFTR 2d 2020-XXXX, (Ct Fed Cl), 10/22/2020 held that “Taxes are what we pay for civilized society.” Compania General De Tabacos de Filipinas v. Collector, 275 U.S. 87, 100 (1927) (Taft, C.J.). For good reason, there are few lawful justifications for failing to pay one's taxes. 

Plaintiff All Stacked Up Masonry, Inc. (“All Stacked Up”), a corporation, believes it has such an excuse. It brings this suit to challenge penalties and interest assessed by the Internal Revenue Service (“IRS”) following its failure to file the appropriate payroll tax documents and its failure to timely pay payroll tax liabilities for multiple tax periods.

All Stacked Up filed its Complaint seeking a refund of $95,590.67, the amount it previously paid to the IRS in tax penalties and interest for the periods ending December 31, 2013, through December 31, 2015. All Stacked Up asserts that its failure to comply with its tax obligations should be excused due to “reasonable cause” and thus, the penalties and interest it paid should be refunded. 

The basis of All Stacked Up's assertion of reasonable cause involves an injury suffered by the owner, Sean Spraungel. 

This Injury Caused All Stacked Up To Delegate Tax Preparation Responsibilities To An Employee, Who Could Not Properly Operate The Tax Preparation Software. 

The Employee's Failures Left All Stacked Up
Noncompliant With Its Tax Obligations.

Although Spraungel may have suffered significant injuries after falling on ice, and other employees of the corporation may have experienced user difficulties in operating tax preparation software, these excuses cannot establish “reasonable cause” necessary to abate tax penalties assessed by the IRS. 

Furthermore, even if All Stacked Up could show reasonable cause for failing to file a return or pay the taxes owed, part of All Stacked Up's claim would nevertheless be barred by the applicable three-year “look-back” period.

For the reasons set forth above, the Court hereby GRANTS the United States' motion to dismiss, (ECF No. 11), pursuant to RCFC 12(b)(6), and DISMISSES All Stacked Up's Complaint without prejudice. The Clerk is directed to enter judgment accordingly.

Have IRS Tax Problem?

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Marini & Associates, P.A. 

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Sunday, October 25, 2020

IRS Will Resume Issuing The 500 Series "Balance Due Notices" To Taxpayers Later This Month

On August 26, 2020 we posted IRS Is Not Sending Notices for Unpaid Taxes Until it Catches Up on Mail Backlog, where we discussed oAugust 21, 2020, the IRS announced that it has suspended the mailing of three notices – the CP501, the CP503 and the CP504 – that go to taxpayers who have a balance due on their taxes. 

Although the IRS continues to make significant reductions in the backlog of unopened mail that developed while most IRS operations were closed due to COVID-19, this temporary adjustment to processing is intended to lessen any possible confusion that might be associated with delays in processing correspondence received from taxpayers.

Now the IRS will resume issuing the 500 series balance due notices to taxpayers later this month. These notices were paused on May 9 due to COVID-19.

Although the IRS continued to issue most agency notices, the 500 series were suspended temporarily because of a backlog of mail at the IRS due to COVID-19. 

The Mail Backlog Is Now Caught Up Enough
To Account For The Timely Mailed Payments.

In late October or early November some taxpayers will begin seeing the updated 500 series notices with current issuance and payment dates.

Have IRS Tax Problem?

 Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at: or
Toll Free at 888 8TAXAID (888-882-9243) 

Thursday, October 22, 2020

BDO PR CPA Indicted On Wire Fraud Charges In Sting Relating To Act 20 And Act 22 Scheme

According to DoJ, on October 14, 2020, a Federal Grand Jury in the District of Puerto Rico returned an indictment charging Gabriel F. Hernández, with ten counts of wire fraud, in violation of Title 18, United States Code, Section 1343.  The indictment was unsealed after the arrest of the defendant by federal law enforcement officers from IRS-CI.

“As I have said in the past, persons who are involved in committing fraud are encouraged to come forward to authorities – that includes individuals that are fraudulently using Puerto Rico’s tax laws to evade federal taxes,” said U.S. Attorney Muldrow. 

“This Case Should Also Serve As A Warning To Anyone Considering Seeking To Evade Taxes By Illegally Exploiting Federal And Puerto Rico Tax Laws.”

“Federal and Puerto Rican tax laws have been put in place to invigorate the economy and provide financial relief to Puerto Rico.  IRS Criminal Investigation will vigorously pursue any individuals and professionals that fraudulently enrich themselves by abusing government tax incentive programs,” said Tyler R. Hatcher, Special Agent in Charge of the IRS-CI Miami Field Office.

According to allegations in the indictment, Hernández, a CPA who served as Tax Manager and Partner-in-Charge of the Tax Division of a large public accounting, tax, consulting and business advisory firm (BDO), devised a scheme to defraud the Internal Revenue Service of the United States Department of the Treasury. The scheme involved the submission of false information to the government of Puerto Rico in an attempt to fraudulently provide Company A with federal tax relief via the provisions of Act 20.

Act 20, also known as the Export Services Act, offers tax incentives for Puerto Rican companies to export services to other jurisdictions. The tax benefits on income derived from customers outside Puerto Rico in relation to services rendered from Puerto Rico included a fixed income tax rate of 4% for eligible export services, a 100% tax-exemption on dividends from earning and profits, and a 60% tax-exemption on local municipal taxes.

In December 2018, Hernández formed Company A under Puerto Rico law for an undercover special agent of the IRS-CI posing  as a wealthy United States taxpayer from Arizona. 

In December 2019, Hernández caused to be prepared and filed a fraudulent tax-exemption application with the Office of Industrial Development and fraudulently obtained Act 20 tax exemption status
for Company A.

In December 2019, Hernández also determined that Company A would report $500,000 in business earned income in Puerto Rico, which would reduce Company A’s federal taxes. Then in July 2020, Hernández caused a Puerto Rico corporate tax return for Company to be prepared and filed with the Puerto Rico Department of Treasury (Hacienda), falsely claiming that $500,000 was earned in Puerto Rico by Company A.

Hernández also caused the preparation and filing of false 2020-2021 Business Volume Declarations with the Municipality of San Juan based on the false earnings. The defendant unjustly enriched himself and others by receiving fees in exchange for these false and fraudulent acts.

The indictment further alleges that, as part of the scheme, the defendant defrauded the IRS, and unlawfully evaded the assessment and payment of taxes, by engaging in financial transactions devoid of any economic substance (sham transactions). 

The Transactions Were Intended to Create The Illusion of A Consulting Business Earning Income From Services Performed Within Puerto Rico, Rather Than Within
The Mainland United States.

The defendant and others communicated by e-mail and telephone with undercover special agents of the IRS-CI in interstate and foreign commerce as part of the scheme. The defendant and others misrepresented, concealed, and hid, acts done in furtherance of the scheme.

If found guilty, the defendant faces a maximum statutory sentence of up to 20 years in prison and a fine up to $250,000 for charges relating to wire fraud. 

  • An indictment is a charging document containing allegations. 
  • All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.
Want REAL Advice on How to Qualify For 
Puerto Rico Benefit Tax Benefits Under Act 20 and Act 22? 

Contact the Tax Lawyers at 
Marini & Associates, P.A.
for a FREE Tax Consultation 
Toll Free at 888-8TaxAid (888 882-9243).