IRS’ 2019 ‘Dirty Dozen’ Tax Scams Highlights Inflating Deductions & Credits

The Internal Revenue Service on March 12, 2019 warned taxpayers in IR-2019-36 to avoid falsely inflating deductions or credits on tax returns as part of its 2019 list of the “Dirty Dozen” tax scams.

Taxpayers should watch for areas frequently targeted by unscrupulous tax preparers include overstating deductions such as charitable contributions, medical expenses, padding business expenses or falsely claiming the Earned Income Tax Credit, Child Tax Credit and other tax benefits.

Some taxpayers who prepare their own returns, as well as those who use unscrupulous preparers, may also pad their deductions and credits to inflate their refund or lower their tax bill.

Padding deductions and credits is part of this year’s “Dirty Dozen” list of common tax scams. Taxpayers may encounter these schemes any time, but many of them peak during the tax filing season as people prepare their tax returns or hire others to help with their taxes.

The IRS reminds taxpayers that they are still personally at risk, even if someone suggests using these strategies or a paid tax preparer actually prepares their return. By the time the IRS contacts the taxpayer about these problems, the promoter or preparer is often long gone.

Avoids scams, file an accurate return

Preparing an accurate tax return is a taxpayer’s best defense against scams – and the best way to avoid triggering an audit. Significant penalties may apply to those who file incorrect returns including:

• 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
• $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” This is a return that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
• In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the tax return resulted from tax fraud.

Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as willful failure to file a return; supply information; or pay any tax due; fraud and false statements; preparing and filing a fraudulent return and identity theft.

One way for taxpayers to ensure they file an accurate tax return and claim only the tax benefits they’re eligible to receive is by using tax preparation software.

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Budget Cuts Leading to Fewer IRS Investigations

According to researchers and former government auditors, budget cuts within the Internal Revenue Service (IRS), which have cut enforcement staff by a third, may be responsible for the drop in the number of tax evasion cases pursued in recent years.  

In 2017, 795 cases were brought be the IRS’ criminal division, representing a drop of almost a quarter since 2010. 

 

Audits and criminal referrals are down sharply, since Congress cut the tax agency’s budget and management changed priorities. The answer, researchers and former government auditors say, is simple. The IRS pursues fewer cases of tax evasion than it did less than 10 years ago.

Provided you’re not a close associate of President Donald Trump, there may never be a better time to be a tax cheat.

In 2017, the IRS’s criminal division brought 795 cases in which tax fraud was the primary crime, a decline of almost a quarter since 2010. “That is a startling number,” Don Fort, the chief of criminal investigations for the IRS, acknowledged at an NYU tax conference in June 2018.

Bringing cases against people who evade taxes on legal income is central to the revenue service’s mission. In addition to recouping lost revenue, such cases are supposed “to influence taxpayer behavior for the hundreds of millions of American citizens filing tax returns,” Fort said. With fewer cases, experts fear, Americans will get the message that it’s all right to break the law.

Starting in 2011, Republicans in Congress repeatedly cut the IRS’s budget, forcing the agency to reduce its enforcement staff by a 1/3.

 

But that drop doesn’t entirely explain the reduction in tax fraud cases. Over time, crimes only tangentially related to taxes, such as drug trafficking and money laundering, have come to account for most of the agency’s cases. 

 

“Due to budget cuts, attrition and a shift in focus, there’s been a collapse in the commitment to take on tax fraud,”

 

said Chuck Pine, who used to be the third-ranking criminal enforcement officer at the IRS and is now a managing director at BDO Consulting. “I believe there are thousands of individuals who have U.S. tax obligations and are not complying with U.S. tax laws.”

The result is huge losses for the government. Business owners don’t pay $125 billion in taxes each year that they owe, according to IRS estimates. That’s enough to finance the departments of State, Energy and Homeland Security, with NASA tossed in for good measure. Unlike wage earners who have their income separately reported to the IRS, business owners are often on the honor system.
The IRS declined to comment on its enforcement efforts.

Criminal referrals were always rare and are becoming rarer still, dropping from 589 referrals in 2012 to 328 in 2016. With the government conducting 1.2 million audits in 2016, that’s one criminal referral for roughly every 3,600 audits.

In recent years, the IRS has also been pulled away from classic tax dodging cases by soaring rates of identity theft. IRS management assigned scores of agents to chase perpetrators who used stolen identities to collect tax refunds.

The IRS allowed Americans with foreign accounts to voluntarily disclose them and pay a smaller penalty than they would have had they been caught hiding the information. Some 56,000 people participated, netting the government $11.1 billion. The IRS’s criminal division also brought several cases against people for concealing accounts.

For all this success, there has been little change in the amount of wealth stashed overseas. Americans have about $1.2 trillion of personal assets in tax havens, according to data compiled by Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley, and two colleagues. It’s unclear what portion has been disclosed to the IRS.

“What has happened over the last 10 years is real progress,” Zucman said. “But what the data suggest is that it has not had a dramatic effect on the amount of offshore wealth.” Money has flowed out of Switzerland and into Asian tax havens like Hong Kong and Singapore.

Moreover, the IRS has made little use of new weapons in the fight against wealth hidden overseas. In 2010, President Barack Obama signed a law that was supposed to provide a crucial tool for government auditors and prosecutors. That law, the Foreign Account Tax Compliance Act, required banks with American account holders to report information to the United States. Like employers filing W-2 forms about their workers, these reports would force account holders to come clean.
Eight years later, the program is still getting off the ground. Countries around the world have signed agreements, and more than 100,000 foreign banks have sent information to the United States.

But “there is no ongoing compliance impact of the FATCA at this time,” according to a report by the inspector general for the IRS.

 

The report found serious problems with the millions of records collected so far. About half of the records, for example, didn’t include identification numbers for the taxpayers, making it difficult to match the accounts with specific individuals. The IRS hadn’t set up a process for using the records. The agency said it was working on such a system.

Have a Tax Problem?    

 

 

Contact the Tax Lawyers at 

Marini & Associates, P.A. 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).

 

 



Source ProPublica

The Old One-Two Punch – Stealing and Not Reporting Your Stolen Income

According to the DoJ,  an Alabama Woman Sentenced to 46 Months in Prison for Stealing Over $700,000 From Her Employer and Failing to Report Income on Her Tax Returns.

Isn't that amazing?

Can you imagine stealing income and not

paying taxes on your stolen income?

Have none of these taxpayers (and I use that term loosely) ever heard of Al Capone?

According to court documents, from February 2007 through May 2014, Alita Baker Edeker, a resident of Valley, Alabama, embezzled $700,000 of her employer’s funds by diverting payments from clients of the company to debit and credit cards she controlled.

Edeker made false entries in the company’s books and records in order to conceal her embezzlement.

After embezzling the funds, Edeker willfully filed false tax returns for tax years 2011, 2012, and 2013 that did not report the money. (WOW!).

In addition to the term of imprisonment imposed, Edeker was ordered to serve three years of supervised release and to pay restitution in the amounts of $819,497.29 to her employer and $101,604 to the Internal Revenue Service (IRS).

Have a Criminal Tax Problem?    

 

 

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or Toll Free at 888-8TaxAid (888 882-9243).

 



 

 

SC Will Not Review LLCs' Claim That John Doe summonses Violated Its Rights Under Federal Privacy Law

The Supreme Court has refused to review a Sixth Circuit decision, affirming a district court, which dismissed claims filed by two limited liability companies (LLCs) that IRS violated the Right to Financial Privacy Act by issuing John Doe summonses for their financial information without prior court approval.

IRS issued two "John Doe" summonses without first obtaining approval in a federal district court as required by Code Sec. 7609(f). IRS served the summonses on Chase Bank to obtain financial records relating to two single-member LLCs.

 

The issues are (1) whether the U.S. government waived its sovereign immunity to allow LLCs to sue under the Right to Financial Privacy Act; and (2) whether the LLCs have any remedy under the Code for IRS's violation of Code Sec. 7609(f).

 

The Sixth Circuit dismissed the LLCs' claims that IRS violated the Right to Financial Privacy Act by issuing the John Doe summonses. The Court reasoned that such claims by LLCs, unlike such claims by certain partnerships, were barred by sovereign immunity. The Court also found that the taxpayer had no remedy under the Code with respect to IRS's failure to obtain prior court approval. (Hohman et al v. Eadie et al, (CA 6 7/5/2018) 122 AFTR 2d 2018-5053, see LLC isn't treated like a partnership under federal privacy law)

 

The Sixth Circuit agreed with the district court that the US government did not waive sovereign immunity. It said that the question of whether an LLC has standing under the Act was an issue of first impression in the circuit courts and had only been addressed by two district courts, both of which ruled against the LLCs.

 

The Sixth Circuit said that, admittedly, a single-member LLC resembled individuals or partnerships covered under the Act. However, "it is never the Court's job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that... it never faced." Here, the Court said, an LLC was plainly not within the plain meaning of the words "individual or a partnership of less than five individuals." "While it is true that single-member LLCs, are disregarded by the government for federal income tax purposes, that fact does not overcome the limited liability aspect and strict textual approach that this court must apply when interpreting waivers of sovereign immunity."

 

The Court also concluded that there was no remedy under the Code for IRS's violation of Code Sec. 7609(f). It said that the Code provision that came the closest to providing a remedy for the taxpayers in this case was Code Sec. 7433. However, Code Sec. 7433 only authorizes damages for claims in connection with any collection of federal tax and does not allow for damages for violations made during the assessment or tax determination part of the process.

 

No further review. On Feb. 19, 2019, the Supreme Court refused to review the Sixth Circuit's decision. Accordingly, that decision is now final.

 

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or Toll Free at 888-8TaxAid (888 882-9243).

 



SC Ruled that Injured Rail Workers' Compensation is Taxable

According to Law360, the U.S. Supreme Court ruled on March 4, 2019, that a railroad company’s payments to an injured employee for lost wages are taxable, saying the definition of “compensation” for railway workers is similar to “wages” under the Social Security system.

In overturning the Eighth Circuit’s decision that personal injury awards for railroad employees cannot be taxed, the Supreme Court said the circuit court got it wrong when it construed “compensation” to mean only pay for active service.

The decision resolves a disconnect between the definitions of taxable compensation in two federal statutes that are supposed to work together to fund retirement benefits for rail employees who do not participate in the Social Security system. The Railroad Retirement Act, or RRA, created benefits for rail staff, and the Railroad Retirement Tax Act, or RRTA, established the taxes needed to fund the benefits.

In a 7-2 opinion, Justice Ruth Bader Ginsburg noted that Congress created the railroad retirement system and the Social Security system during the Great Depression to ensure financial security for employees when they reach old age.

“Given the similarities in timing and purpose of the two programs, it is hardly surprising that their statutory foundations mirror each other,” she said.

The case is BNSF Railway Co. v. Michael D. Loos, case number 17-1042, in the U.S. Supreme Court.

 

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Contact the Tax Lawyers at I hear wha big tonight or tomorrow

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New Section 250 Regulations Allow Individuals to Get a Foreign Tax Deduction

According to Law360, Individual taxpayers with businesses abroad can elect for corporate treatment and receive a deduction on their intangible income worth up to 50 percent, according to regulations released by the U.S. Treasury Department on March 4, 2019.

 

The regulations, on Section 250 , outline that individuals can use Section 962 ,to have subsidiaries they own treated as if they were corporations subject to the Tax Cuts and Jobs Act’s tax on global intangible low-taxed income. Tax practitioners were unsure whether Section 962 would enable individual taxpayers to use GILTI’s 50 percent deduction, which statutorily is available only to corporations.

March 4, 2019's regulations also detail new rules for how U.S. corporations can claim a 37.5 percent deduction on their foreign-derived intangible income, or income earned in the U.S. through the sale of products or services to foreigners for use abroad. Taxpayers will have to provide documentation, establishing in many cases not only their basis for believing that their goods are used abroad, but also details on the nature of their transaction, a potentially difficult administrative headache for a company with a large and complex overseas presence.

 

Both GILTI and FDII are key planks in the international framework of the TCJA, providing similar low rates, 10.5 percent and 13.125 percent, respectively for intangible income earned overseas or in the U.S. The dual rates are meant to create a carrot-and-stick result that, the TCJA’s authors claimed, would create a level playing field for companies deciding where to put their intellectual property and other valuable mobile assets.

In both cases, the low rate is established through a deduction that corporations can claim once their taxable income is tallied.

While the TCJA exempts most worldwide income from taxation, under GILTI it immediately sweeps in some foreign earnings, defined as intangible through a formula based on the amount of tangible assets the company holds offshore, and taxes them as if they were U.S. income. Corporations can then apply the Section 250 deduction and receive the low 10.5 percent rate. But that second step did not seem to be available to individuals, even though their income would still be taxed under GILTI.

That disparity left individual taxpayers with the possibility of a 37 percent rate on their overseas intangible income, what many considered to be an unfair and onerous burden.

Tax practitioners immediately explored the possibility of electing for corporate treatment under Section 962. But 962’s history indicated that it ensured only that individuals paid the same rate as corporations, not that they had access to the same deductions as corporations.

Citing a section of Section 962’s legislative history, stating that its purpose was to ensure that individuals’ tax burdens would “be no heavier than they would have been had they invested in an American corporation doing business abroad,” the proposed regulations mandate that income under Section 962 would be reduced by the amount of a Section 250 deduction that would have been available to a domestic corporation.

The proposed regulations are also the first window taxpayers have had into what kind of documentation Treasury will use to determine if a company is eligible for an FDII deduction.

FDII mirrors the treatment of GILTI, providing a 37.5 percent deduction on intangible income held domestically and equaling a rate of 13.125 percent. The provision is similar to a patent box, a popular policy in Europe that grants a lower rate to intangible assets such as intellectual property held in the jurisdiction. But the FDII deduction is available only on foreign sales.

Treasury outlined a series of rules and tests that companies would have to satisfy to verify that their income was really from foreign sales. Those rules also include exemptions to some of the documentation requirements for small businesses, or those with less than $10 million in annual sales or less than $5,000 from an individual customer, which were not set in the legal language of TCJA.

In the regulations Treasury also indicated it would distinguish between sales and services, which receive different treatment in the statute, based on the “overall predominant character of the transaction.”

Government officials in Europe and elsewhere have criticized the FDII tax benefit, claiming it subsidizes exports and ignores requirements from the Organization for Economic Cooperation and Development to include requirements that benefits to intellectual property be paired with real research and development. Challenges before both the OECD’s Forum on Harmful Tax Practices and the World Trade Organization are expected.

 

 

Have an International Tax Problem?   



 

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Marini & Associates, P.A. 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).

 

IRS Issues Proposed Regulations on Deduction for Foreign-Derived Intangible Income and Global Intangible low-taxed income

The Internal Revenue Service issued proposed regulations under section 250 of the Internal Revenue Code, which offers domestic corporations deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income. Section 250, as well as section 951A dealing with global intangible low-taxed income, was added by the 2017 Tax Cuts and Jobs Act (TCJA).

These proposed regulations provide guidance on both the computation of the deductions available under section 250 and determination of FDII. In addition, the proposed regulations provide rules for the computation of FDII in the consolidated return context. Proposed guidance on the computation of global intangible low-taxed income was published in the Federal Register on Oct. 10, 2018.

New reporting rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are also described in the proposed regulations.

Importantly, These Newly Released Regulations Confirm That an Individual or Trust That Has Made a 962 Election Is Allowed to Take the 250 Deduction Resulting in an Effective 10.5% Rate.

Treasury and IRS welcome public comments on these proposed regulations. For details on submitting comments, see the proposed regulations.

 

Have an International Tax Problem?   



 

Contact the Tax Lawyers at 

Marini & Associates, P.A. 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243).