Debtors’ taxes are not discharged in bankruptcy where tax return was filed late .

The United States Bankruptcy Appellate Panel (BAP) for the Tenth Circuit has held that a debtor's Form 1040 filed after IRS had assessed the tax liabilities for the year involved did not qualify as a return, as defined by the so-called “hanging paragraph” following 11 USC 523(a)(19). As a result, the tax debt relating to this return was excepted from discharge under 11 USC 523(a)(1)(B)(i). (In re Wogoman, No. CO-11-084 (B.A.P. 10th Cir. 7/3/12)

Debtors Mitchell J. Wogoman and Holly L. Wogoman filed their petition for Chapter 7 bankruptcy relief on Jan. 20, 2011. On Feb, 18, 2011, they initiated an adversary proceeding against IRS to determine the dischargeability of their federal income taxes for tax years '98, 2000, 2001, 2002 and 2003. IRS determined that they owed no taxes for '98 and agreed that their tax debts for 2000, 2002, and 2003 were dischargeable.

The Wogomans did not file a return for 2001 by the regular or extended due date. In October 2003, their tax preparer sent them a letter pointing out they had not filed a 2001 return and needed to take action.

IRS commenced an examination in 2004 to determine the Wogomans' delinquent 2001 tax liability. After establishing a proposed tax liability, IRS issued a statutory notice of deficiency notifying the Wogomans of the deficiency and their right to challenge it in Tax Court, which they did not do.

On Feb. 21, 2005, IRS assessed the deficiency for the 2001 taxes. The Wogomans did not pay the assessed liability, but filed a Form 1040 for tax year 2001 on Aug. 1, 2006. IRS abated part of their 2001 income tax liability and associated penalties on Nov. 13, 2006. On Mar. 23, 2007, they entered into an installment agreement with IRS to pay the remaining 2001 taxes and penalties, and subsequently made approximately 20 payments under the agreement.

Before the bankruptcy court, IRS argued that because no return had been filed at the time it assessed the 2001 taxes, 11 USC 523(a)(1)(B)(i) excepted these taxes from discharge. The Wogomans argued that the express statutory language of the “hanging paragraph” (see below) does not require that a return be filed prior to assessment in order to be effective for dischargeability purposes. The bankruptcy court ruled that the 2001 tax debt was nondischargeable because it came into existence before the filing of the Form 1040 by the Wogomans in 2006. They appealed.

A bankruptcy discharge does not discharge an individual from a debt for a tax with respect to which a return, if required, was not filed. (11 USC 523(a)(1)(B)(i)) The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) added language relevant to this exception in a hanging paragraph. It provides that a return for bankruptcy dischargeability purposes means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). The hanging paragraph further provides that the term “return” includes a return prepared pursuant to Code Sec. 6020(a), but does not include a return made pursuant to Code Sec. 6020(b).

 

The Tenth Circuit BAP said that the question for it was whether the Wogomans' 2001 tax liability was a tax for which no return was filed within the meaning of 11 USC 523(a)(1)(B)(i)). Because the 2001 Form 1040 filed by the Wogomans in August 2006 was not filed pursuant to Code Sec. 6020(a) or Code Sec. 6020(b), the Court observed that the second sentence of the hanging paragraph was not relevant in this case. However, it said the first sentence of the hanging paragraph was relevant.

On appeal, the Wogomans argued that the express language of 11 USC 523(a)(1)(B)(i) does not distinguish between returns filed pre-assessment and those filed post-assessment, and the Court should not read into it the requirement that a debtor must have filed a return prior to an assessment by IRS in order for taxes to be dischargeable. Instead, they asserted that the bankruptcy court should have employed a four-pronged test formulated by courts pre-BAPCPA.

To qualify as a return under the four-pronged test, known as the Beard test:

(1) the document must purport to be a return;

(2) it must be executed under penalty of perjury;

(3) it must contain sufficient data to calculate tax liability; and

(4) there must be an honest and reasonable attempt to satisfy the requirements of the tax law. (Beard, (1984) 82 TC 766)

The Tenth Circuit BAP concluded that the 2001 taxes could not be discharged under three different alternative approaches to the issue.

1. The 2001 taxes could not be discharged under the pre-BAPCPA Beard test because the return filed in 2006 by the Wogomans did not meet the fourth requirement, i.e., it did not represent an honest and reasonable attempt to satisfy the requirements of the tax law.
2. While the Tenth Circuit BAP did not conclude as have several bankruptcy courts and the Fifth Circuit in McCoy, Linda Trenett v. Mississippi State Tax Comm, (2012, CA5) 2012 WL 19376, that all late-filed returns are excepted from discharge under the first sentence of the hanging provision, it found in this case that the return was excepted from discharge because applicable requirements were not met. The Tenth Circuit BAP stressed that the debtors in this case, without any reason justifying the delay, did not file their 2001 return until August 2006, after IRS had completed the burdensome process of determining their tax liability, providing the statutory notice of deficiency, assessing the taxes, and attempting collection. Regardless of whether the hanging paragraph creates a much more restrictive rule than the pre-BAPCPA Beard test, the Tenth Circuit BAP found that the 2001 return filed by the Wogomans post-assessment did not meet applicable filing requirements, and therefore, their 2001 tax liability was excepted from discharge.
3. The taxes could not be discharged under the position advanced by IRS that if a return has not been filed prior to assessment, the tax liability cannot be discharged. IRS argued that the Fifth Circuit had gone too far in concluding that every tax for which a return is filed late is nondischargeable. The Tenth Circuit BAP said in this case, whether it adopted the Fifth Circuit's reasoning or IRS's assessment rule, the Wogoman's 2001 tax liability was excepted from discharge.

New FAQs for Offshore Voluntary Disclosure Program

The IRS said Tuesday that it has collected more than $5 billion in its offshore voluntary disclosure programs (IR-2012-64), the third of which was announced in January this year. At the same time, it also released 55 questions and answers updated for the 2012 program.

This program handles penalties the same way the 2011 program did, except that the penalty on the highest aggregate account balance in the taxpayer’s foreign bank accounts during the years at issue is increased from 25% in the 2011 program to 27.5% in the new program. Individuals with offshore accounts or assets of less than $75,000 in any calendar year covered by the new initiative will qualify for a 12.5% penalty rate. Some taxpayers will qualify for a 5% rate, but only in narrow circumstances, including in the case of foreign residents who are unaware that they are U.S. citizens.

Also, as in the 2011 program, participants must file all original and amended returns for the affected years and pay back taxes and interest for up to eight years and pay accuracy-related and/or delinquency penalties.

In the latest release, the IRS noted that it had closed what it called a “loophole” in the current program. Under existing law, a taxpayer who challenges a disclosure of tax information in a foreign court is required to notify the U.S. Justice Department of the appeal. If a taxpayer fails to disclose this, he or she is ineligible for the disclosure program.

Under the 2012 program, the IRS may also announce that certain taxpayer groups that have (or have had) accounts at specific financial institutions will be ineligible for the disclosure program because the U.S. government is taking actions in connection with those financial institutions. With this release, the IRS put taxpayers on notice that their eligibility for the disclosure program could be terminated in these circumstances.

The IRS announced a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns to provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The IRS is promising to release more details, but under the new procedure, taxpayers would be required to file delinquent returns for the past three years and delinquent FBARs (Forms TD F 90-22.1, Reports of Foreign Bank and Financial Accounts) for the past six years and to pay any related federal tax and interest due. After reviewing the returns, the IRS may not assert penalties or pursue follow-up actions, if it deems the taxpayer to present a “low compliance risk.” The new rules will go into effect on Sept. 1, 2012.

There are also new procedures for taxpayers who have foreign retirement plans (such as Canadian Registered Retirement Savings Plans) to resolve certain issues. In some circumstances, under tax treaties these plans qualify for income deferral if a timely election is made. The “streamlined procedures” help taxpayers who failed to make the election (IR-2012-65, see also OVDP FAQs 54–55).

If you have UNREPORT FOREIGN INCOME, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

Tax amnesty offered to Americans in Canada

The U.S. Internal Revenue Service said it will waive potentially massive penalties for certain “low compliance risk” tax payers who opt to come clean.

Shulman announced the IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns and provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The newprocedure will go into effect on Sept. 1, 2012.

To qualify, individuals must submit three years of back taxes, six years of bank reporting forms – so-called Report of Foreign Bank and Financial Accounts, or FBARs – and a signed letter explaining why they haven’t filed.

The IRS defines low risk as people who have “simple” returns and owe less than $1,500 a year in taxes, based on the past three tax years. To owe less than $1,500 in US Tax, assuming a Single Filing Status and 1 Personal Exemption, your combined income would have to be less than $22,650.

Estimated Tax Analysis
Gross income		$22,650
Qualified plan contributions	-	$0
Adjusted gross income	=	$22,650
Standard/Itemized deductions	-	$5,950
Personal exemptions	-	$3,800
Taxable income	=	$12,900
Tax liability before credits		$1,500
Child tax credits	-	$0
Estimated tax liability	=	$1,500

This really only helps americans who retire in Canada and Canadians who pay Canadian Taxes on their World Wide Income and who use a US "Foreign Tax Credit" to reduce their US Tax to $1500.
Example: A US Citizen can earn interest of between 1% – 3%, on principle of between $755,000 – $2,265,000 and still qualify for this US amnesty (see chart below); even where this income may not have be subject to Canadian taxation.

Rate of Interest	Principle	Income
0.01	$2,265,000	$22,650
0.015	$1,510,000	$22,650
0.02	$1,132,500	$22,650
0.025	$906,000	$22,650
0.03	$755,000	$22,650

The United States is unique among developed countries in requiring all citizens, including dual Canadian-Americans, to file taxes with the IRS every year, regardless of where they live.

There are roughly a million Americans in Canada – many with little or no ties to the United States. An increasingly onerous U.S. crackdown on Americans who hide money offshore is forcing many of them out of the shadows.

Canadian Tax experts said the measures go a long way to resolving an issue that has caused a wave of angst among Americans in Canada and a flood of business for lawyers and accountants.

It’s a good start and it’s particularly good for about 90 per cent of Americans in Canada, most of whom will fall into the low risk category.

But individuals who don’t owe much tax, but have closely held partnerships, investment companies or trusts aren’t likely to benefit.

The IRS initially promised details of the amnesty late last year. But U.S. officials have struggled internally over whether people who haven’t filed for years deserve any special leniency.

The IRS also announced special “streamlined” procedures for reporting certain foreign retirement accountant, mentioning specifically Canadian Registered Retirement Savings Accounts. Individuals will be allowed to retroactively elect to defer income in those accounts.

Without the amnesty, Americans who haven’t filed their taxes and other IRS forms face penalties totalling tens of thousands of dollars per year and risk criminal prosecution. See IR-2012-64 for more details.

If you would like to avail yourself of this new Amnesty, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

Fiduciaries Held Liable For Estate & Gift Tax under Federal Priority Statute

Fiduciaries (trustees, executors, personal representatives) normally are not personally liable for the obligations of the trusts and estates they administer. As mentioned here previously, a major exception to this is the federal priority statute (a/k/a the federal claims statute) under 31 USC §3713(b)/Code § 6901(a)(1)(B). This little gem can create personal liability for a fiduciary that pays out estate or trust assets (including by reason of a distribution to beneficiaries) with knowledge that there are existing federal liabilities (such as taxes) that are unpaid, if the estate or trust is unable to later satisfy those liabilities.

This is not an abstract risk, but a very real liability for fiduciaries, as two fiduciaries learned in a recent case in Texas. In that case, the IRS asserted that a decedent did not pay gift taxes during lifetime, attributable to gifts indirectly made to the decedent. That is, the original donor did not pay the gift taxes on gifts to the decedent, so the decedent was liable for the gift taxes as a transferee. Both the executor of the decedent’s estate, and the trustee of his revocable trust, were knowledgeable of the IRS’ claim but nonetheless paid out funds without making provision for the payment of the gift taxes.

The case is illustrative of various aspects of the statute.

A. The executor was liable for personal property that was distributed to beneficiaries.

B. The executor was liable for rent payments made by the estate. Such payments are subordinate in priority to the federal claim for taxes.

C. The executor was NOT liable for funeral and last illness expenses.

D. The trustee of a revocable trust got caught up in the statute because the trustee was deemed to be the equivalent of a representative of the estate due to the obligation of the trust to pay the decedents debts.

E. The fiduciaries had taken income tax charitable deductions for over $1.1 million that had been set aside to fund charitable bequests. Such bequests were subordinate to the federal claim, so the fiduciaries were held personally liable for those set-aside amounts because the court found that the funds were beyond the reach of the IRS.

F. The fiduciaries were liable for legal and other expenses they paid for the charities.

G. The fiduciaries do not have to receive formal notice or a claim from the IRS, to be on notice for purpose of the statute.

H. The fact that the fiduciaries did not believe the IRS’ claim was valid, or that they relied on their professionals, did not relieve them of liability.

United States v. Macintyre (S.D. Tex., 2012) CIVIL ACTION H-10-2812
For more on this matter go to Charles (Chuck) Rubin

Inter-agency cooperation against tax crimes and other financial crimes is the future.

A report by Organisation for Economic Co-operation and Development (OECD) has concluded that International co-operation is essential in the fight against tax and other financial crimes.

This report which, was release on June 14, 2012, aims at improving the understanding and use of international co-operation mechanisms. After describing the different agencies involved in the fight against financial crimes, the report provides an overview of the international instruments available and summarises current initiatives to improve inter-agency co-operation.

The core of the report is a catalogue describing the basic features of the main instruments for international co-operation in combating financial crimes.

If you have an International Tax Problem, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

IRS Targets Israeli Banks and Their US Client

On June 14, the Department of Justice unsealed an indictment against three American tax preparers for helping clients avoid taxes by moving money to Israel.
The transgressions detailed in the indictment were relatively small. The indictment said the father and son David and Nadav Kalai and their colleague David Almog at a firm called United Revenue Service helped several clients duck taxes by moving money to two Israeli banks, identified only as “Bank A” and “Bank B.”

The indictment revealed the existence of a grand jury that is almost surely going after much bigger fish. And the details provided in it appear to suggest that “Bank A” is Bank Leumi, whose private banking operation is headquartered in Tel Aviv, and“Bank B” is Bank Hapoalim, which also maintains its global private banking center in Israel’s second-biggest city.”

Because tax evasion is a felony in Israel and because the US has a treaty with Israel; this offense is an extraditable offense in Israel. Now will Israel refuse to hand over a dual citizen? The state of Israel was certainly not created to protect Jews from crimes of international tax evasion. More importantly, the US is Israel’s only real ally in the world. So do not be surprized if Israel hands over those dual citizens that the Department of Justice (DOJ) suspects of tax evasion.

If you have an undisclosed account in Israel, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).

Remember, the FBAR Offshore Voluntary Disclosure Process (OVDI) program is most likely available — Even if your bank, even if your personal banker is under investigation, the program is still available as long as YOU are not personally under audit or investigation by the IRS.

Getting ITIN becomes even more difficult for now.

IR-2012-62, June 22, 2012 WASHINGTON — The Internal Revenue Service announced on June 22, 2012, important interim changes to strengthen its procedures for issuing Individual Taxpayer Identification Numbers (ITINs) from now through the end of the year. Designed specifically for tax-administration purposes, ITINs are only issued to people who are not eligible to obtain a Social Security Number. Foreign nationals and non-resident aliens are among those who must obtain ITINs. · During this interim period, the IRS will only issue ITINs when applications include original documentation, such as passports and birth certificates, or certified copies of these documents from the issuing agency. · During this interim period, ITINs will not be issued based on applications supported by notarized copies of documents. · In addition, ITINs will not be issued based on applications submitted through certifying acceptance agents, unless they attach original documentation or copies of original documents certified by the issuing agency. The changes, which are effective immediately. Final rules will be issued before the start of the 2013 filing season. Some categories of applicants are not impacted by these interim changes, including spouses and dependents of U.S. military personnel who need ITINs. People who should follow the current procedures outlined in the Form W-7 instructions include: Military spouses and dependents without an SSN who need an ITIN (Military spouses use box e on Form W-7 and dependents use box d). Exceptions to the new interim document standards will be made for military family members satisfying the documentation requirements by providing a copy of the spouse or parent’s U.S. military identification, or applying from an overseas APO/FPO address. Nonresident aliens applying for ITINs for the purpose of claiming tax treaty benefits (use boxes a and h on Form W-7). Non-resident alien applicants generally need ITINs for reasons besides filing a U.S. tax return. This is necessary for nonresident aliens who may be subject to third-party withholding for various income, such as certain gaming winnings or pension income, or need an ITIN for information reporting purposes. While existing documentation standards will be maintained only for these applicants, scrutiny of the documents will be heightened. The IRS may require some taxpayers who have already filed applications to furnish additional documentation directly to the IRS. No additional action is required for people who have already filed ITIN requests unless they are contacted by the IRS.