IRS Audits - How Are Tax Returns Selected for Audit?

In order to determine how to respond to an IRS Tax Audit, it is helpful to understand how tax returns are selected for examination. The IRS selects returns for examinations in several ways, some based upon objective criteria coded into a carefully protected computer program and others based upon old fashioned investigation work. 

Selection for an IRS Audit does not always suggest there’s a problem. The IRS uses several different methods:

1. Random Selection and Computer Screening?  Sometimes returns are selected based solely on a statistical formula. The IRS compares your tax return against “norms” for similar returns. The IRS develop these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.

Many returns are selected through the use of a computer program called the Discriminant Function System (DIF). This program scores each return that is filed for potential error based upon past IRS audit experience. The returns receiving high scores are made available for examination. IRM 4.1.3.2 (10-24-06). The DIF formulas are listed in the Law Enforcement Manual, which is not publicly available.

1. The Discriminate Function (DIF) score is the product of a mathematical formula for identifying and selecting returns for examination.
2. The program scores tax returns using a formula based on historic information obtained from specific examination programs. A high DIF score indicates a high potential for adjustment.
3. The Service periodically conducts compliance studies to update and reformulate its basis for audit selection formulas. 
4. Different types of taxpayers and returns are subject to different DIF formulas. While the specifics of the program are not public, certain items appear to cause a return to be selected for examination, such as:

                                                               i.      Participation in a Tax Shelter,

                                                              ii.      A large Charitable Contributions,

                                                            iii.      A Home Office Deductions

                                                            iv.      A Large Travel & Entertainment Expense (e.g. Sky Box. etc.) or

                                                             v.      A Large Automobile Expense.

Returns selected under the DIF program are then manually screened, so that attachments to the return and other data that a computer cannot detect can be properly considered.

Other returns are selected at random under current national or regional studies, such as the National Research Program (NRP), the successor to the Taxpayer Compliance Measurement Program (TCMP). The results of these examinations are used to measure and evaluate taxpayer compliance and to revise the DIF program. NRP and TCMP audits.

Alternatively, the IRS may receive information from other federal agencies. (See IRM 4.6.2 (8-1-02)) and they may also receive information through federal-state programs (See IRM 4.1.4.2.4 (10-24-06)). 

2. Related examinations – The IRS may select your returns when they involve issues or transactions with other taxpayers, such as Business Partners or Investors, whose returns were selected for audit. This is affectionately referred to as an “Audit by Infection.”
3. Review After Selection by IRS - After selection, an experienced auditor reviews the return. They may accept it; or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.

a.       Filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process and the amended return may itself be selected for audit.

b.      A refund is not necessarily a trigger for an audit, but it could trigger an examination.

4.      Information Provided by 3^rd Parties – The Service also relies on information provided by third parties, such as banks, brokers and employers. Much of this information is required to be reported by payers of certain types of income on Forms W-2 or 1099.

 

5.     Referrals by IRS Agents - Referrals may also be made by other examining agents. For example, the return of a party related to another taxpayer being audited, such as the partners of a partnership being audited may also be selected for audit. The Service also may investigate tips regarding potential noncompliance, and select those returns for audit as a result.
 

6.     Other IRS Audit Triggers - Examinations may also be triggered a variety of other ways, such as, by mathematical errors or missing information. Also, a claim for refund can potentially trigger an examination.

The IRS has broad authority to examine tax returns. An understanding of the rights and responsibilities of both taxpayers and the examining agent can help reduce the scope of a tax audit or examination and can lead to a more favorable disposition.

 

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). 



 

How Will the IRS Know About My Foreign Account?

Taxpayers who have financial assets outside the United States often ask the question "How will they (IRS) know about my Foreign Account?;" when they are considering how (or whether) to come clean and inform the IRS about their previously undisclosed foreign financial accounts.

For years, there was little public knowledge of the U.S. government’s foreign financial reporting requirements, and enforcement of those rules was not always very strict.

However, since 2008,  a string of scandals involving foreign banks and investigations by the U.S. government into various non-U.S. financial institutions has garnered international media attention and changed the way governments around the world deal with offshore financial accounts.

 

1. FATCA. In 2010, the U.S. Congress supplemented its existing international tax treaties and information exchange agreements by passing the Foreign Account Tax Compliance Act (“FATCA”).

• The main goal of FATCA was to make it more difficult for U.S. taxpayers to hide assets in offshore accounts and entities and therefore to increase U.S. tax revenue by ensuring income from those accounts is reported in the U.S. Government officials have estimated that the U.S. loses between $40 billion and $70 billion a year in unpaid taxes on offshore assets.
• FATCA requires worldwide financial institutions to report to the IRS certain information about accounts that are owned by U.S. persons (whom they identify through a variety of methods, including the request of Forms W-9).
• While FATCA has drawn intense criticism from around the world (and in the U.S.), it now appears that the law is here to stay, and other governments have made similar strides in increasing the scope of their international tax information exchange.

2. Swiss Bank Program. The U.S. government recently ended their "Swiss Bank Program" a disclosure program that forced Swiss banks to reveal the ways in which they helped U.S. taxpayers evade taxes.

 

• Over the three year program, the U.S. gathered information from 80 Swiss banks and collected over $1 billion in penalties from those banks.
• The program also provided information to the IRS about other jurisdictions that may commonly hide U.S.-owned assets.

3. Data Mining. The IRS also continues to "Data Mine" to gather information provided by the more than 54,000 taxpayers who have filed under the IRS’ Offshore Voluntary Disclosure Program since 2009.

• The U.S. will use this information to assess what other jurisdictions, foreign banks, and facilitators may be assisting U.S. clients in evading their tax obligations and to assist in future prosecutions.

4. Panama Papers. In April 2016 over 11.5 million financial and legal records from Panamanian law firm Mossack Fonseca where leak to the press, which underscores the risk of public disclosure of financial records related to undisclosed foreign financial accounts.

• An anonymous source provided the information in the “Panama Papers” leak to various global news organizations that have since been reviewing the files in detail.
•  The leak created a scandal for many high-profile politicians around the world and forced some to resign.
• It was revealed that the firm had created over 2,800 companies in offshore havens for over 2,400 U.S. clients as well.
• While many of these transactions are legal, U.S. taxpayers must fulfill various foreign information reporting requirements with the IRS related to non-U.S. financial accounts and entities, or they face substantial penalties for noncompliance.
• In response to the Panama Papers, the U.S. government has also proposed and enacted new rules making it harder to conceal the identities of the true owners of companies.
• The release of the Panama Papers is just the latest example in the ongoing movement around the world to make it harder for taxpayers to hide their assets offshore and evade taxes.
• Nowhere has this movement been more pronounced than in the U.S., where government officials have repeatedly made clear that continuing to hide financial assets will get more and more dangerous and difficult, and that taxpayers should come forward as soon as possible to come into compliance with their U.S. tax and reporting obligations.

Marini & Associates, PA has assisted several hundred clients with coming into U.S. tax compliance and avoiding the draconian penalties that the IRS may impose on U.S. persons with undisclosed accounts.

Do You Have Undeclared Foreign Income?

 

  

 Want to Know if Which OVDP Program is Right for You?

 

Contact the Tax Lawyers at 

Marini& Associates, P.A.  

 

 

for a FREE Tax Consultation

at: www.TaxAid.com or www.OVDPLaw.com or

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

 

New US E Business Visa Route for Frustrated Central American, Chineese, Indian & Venezuelan Investors

Citizenship applications for the Caribbean island of Grenada have boomed in the last three years.

Reports have emerged that Grenada’s citizenship by investment program, introduced in 2014, is being used to fast-track US E2 visa applications.

Grenada is the only Caribbean country with a fast-track citizenship program, which signed a Commerce and Navigation Treaty with the USA. As a result, Grenada’s citizens are eligible for the US E2 non-immigrant visa. This means Grenadians can secure and US E2 visa with a substantial investment in a US-based business and employing some US citizen or US resident staff.

The rise in Grenadian citizenship applications is partly attributed to the ever-increasing backlog of immigration applications in the US. Citizens of China, El Salvador, Guatemala & India in particular are facing severe delays, with some facing a 10-year wait.

Grenada should also work for Venezuelan nationals and nationals of other Central and South American Countries not on the E2 Treaty Investor or E1 Treaty Trader country List.

As a result, wealthy foreign investors are applying for citizenship in Grenada and then filing an application for an E2 visa for the US.  The E2 visa category is a non-immigrant visa category which can continue to be extended as long as the business continues in the US.  This may be preferable for some wealthy investors who wish to avoid the possible tax consequences of a green card.

The Grenada citizenship program as a route to gaining an E2 visa may be worth considering for some. However, it requires  a significant investment:

The Grenada citizenship program may also be worth considering for nationals of Countries not on the E2 Treaty Investor or E1 Treaty Trader country List. It should be noted that Grenada is on the E2 Treaty Investor list.  Not on the E1 Treaty Trader list.  In most cases this probably does not make much difference.

Requirements for Grenada Citizenship 

According to a report published by Forbes, a minimum investment of $200,000 (US) will secure Grenadian citizenship within 12 weeks. Once citizenship is obtained an investor, along with his or her family, can submit an application for an E2 visa in the US. The Forbes report claims that an investor’s entire family could be in the US within 8 weeks.

Overall, obtaining Grenadian citizenship and then applying for a US E2 visa could take less than six months. Once in the US, an investor can acquire an Employment Authorization Document for a spouse, enabling them to work anywhere in the country.

Investors can also send their children to US schools, qualifying for in-state tuition rates and they can travel back and forth freely to their country of origin to take care of business operations back home.

Aside from meeting the requirements for citizenship in Grenada, applying for a US E2 visa would involve incorporating a US company, establishing an office with a legitimate phone number and possibly a website. An investor would need to register with the Inland Revenue Service (IRS), open a bank account and deposit a large sum of money (>$100,000).

Additionally, a viable business plan will be required to establish a company in the US, potentially via a franchise purchase. Meanwhile, any investor would need to speak a basic level of English and have managerial or executive experience, or at the very least, have an idea of how to run their business.

With the possibility of having to wait 10 years and with President Trump ‘attacking’ the H1B and L1 visas, those who can afford to are opting for citizenship in Grenada followed by an application for an E2 visa.

So far, the E2 Treaty Investor visa has not made it on to Trump’s radar.

Not Qualify for an E Visa?

 

 

Need to Quickly Acquire Citizenship in Grenada?
 

 

Contact the Lawyers at 

Marini& Associates, P.A.  

 

 

for a FREE Tax Consultation

at: www.TaxAid.com or www.OVDPLaw.com or

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

 



All That You Wanted to Know About Form 706NA - Part I

On Tuesday, August 15, 2017 we posted Issues Concerning Filing a Form 706NA? where we discussed that deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets. We also discussed that Many foreigners owning property or assets in the United States are in violation of 706-NA filing requirements because of a number of misunderstandings. The basic rule is pretty clear-if a foreign decedent has assets in the United States with a gross value in excess of $60,000, the estate is supposed to file a tax return with the Internal Revenue Service. 

Now our Estate Tax Attorney, Robert S. Blumenfeld, Esq. is supplementing this posting with a discussion regarding Form 706 NA in a 3 part series, which we have titled All That You Wanted to Know About Form 706NA. PART 1: 

In the area of estate tax compliance, many of us have prepared Form 706’s, the estate tax return for US citizens and domiciliaries.  To be sure, this form is quite voluminous and can take a while to fill out but there are very few mysteries beyond schedule E; what percentage of an asset might be includable in an estate, the value of an annuity, what debts and expenses are deductible, the calculation of the marital deduction, and the generation-skipping tax computation. 

The Form 706NA, however, preparation of the tax return for the estate of the nonresident alien owning property in the United States, can present a more daunting task.

Form 706NA is deceptively simple- two pages- how difficult could it be to prepare? For 32 years as a senior attorney at the IRS, our Estate Tax Attorney Robert S. Blumenfeld audited these tax returns, and he can tell you that they are more fraught with more potential mystery than the Sphinx. 

Let's look at line 1 where it requests  the decedent's name. Many foreign decedents come from countries where people have hyphenated names, especially the spouses. So is the correct name Maria Smith or Maria Smith- Gonzalez? It is often best to go back to the country where the decedent lived and use the name which drops the post hyphenated portion. Most of the tax returns that he has seen or prepared, are based it on this concept.

The next box asked for the decedent’s tax identification number. Virtually all American citizens born in the United States are assigned SS#’s at birth so there is no problem. In the case of a nonresident alien (N/A), there is no tax identification number so we enter “N/A-nonresident alien” inbox two. 

This creates the second problem. If the estate has to pay any transfer tax, when the return is filed, there is no module (TIN or SS#) into which the IRS can place the payments. Ergo, the IRS has a fund called “unpostables” where money paid to the IRS lacks an identification number with which to associate it. Therefore, if you file a Form 706NA which shows tax, be certain to keep a copy of the front of the check and photostat the endorsement after the check is negotiated. This is the least difficult way to associate the payment with the tax return. Absent keeping these two identification benchmarks, it could take many months for the IRS to agree that the payment in the unpostable module should be associated with a particular estate.

Decedent’s domicile and citizenship are very critical. The United States currently has circa 20 estate/gift tax treaties with foreign countries, many of which are in Europe. 

A non-resident alien from a non-treaty country receives an estate tax exemption (unified credit) of $13,000 which basically means that the first $60,000 is not taxed. The unified credit for treaty based countries can reach a figure of $5.5 million free of tax. In addition to this, in each instance where one represents a nonresident alien decedent, it is critical to find out whether this is a country which has such a treaty with the United States. 

Next, it is critical to determine the citizenship and domicile of the decedent. When one peruses the individual treaties, one will note that some treaties are based on domicile, others on citizenship.  A German citizen domiciled in say Mexico would not be able to utilize the German treaty because that particular treaty is predicated on domicile. A Mexican citizen however, domiciled in Germany, could enjoy the full benefit of the US/German treaty. Ergo, a German living in Mexico would have a $60,000 exemption from tax while a Mexican domiciled in Germany would have a $5.5 million exemption.

Have a US Estate Tax Problem?


Estate Tax Problems Require

an Experienced Estate Tax Attorney

 

 

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).

Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.

  

 

50% Owner Liable for Trust Fund Penalty Despite Not Having Primary Responsibility For Taxes.

A district court has determined on summary judgment that a 50% owner of a member-managed company, who was required to sign off on all significant decisions and actions relating to the company, was liable for the trust fund recovery penalty under Code Sec. 6672.

The court found that his role in the company established that he was a responsible person, regardless of whether the other owner had primary responsibility for the company's taxes; and he was found to have acted willfully where he knew (or should have known) that the taxes were unpaid but continued to pay other creditors instead.

U.S. v.Commander, (DC NJ 4/3/2017) 119 AFTR 2d ¶2017-620

 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).

 

Ireland Disagrees with EU's Decission That it Needs To Collect €13 Billion in Tax From Apple

On October 18, 2013 we posted Ireland to Close Highly Criticized Loophole, but Create an Even Bigger One where we discussed that Ireland said it planned to shut down a much-criticized tax arrangement used by Apple Inc to shelter over $40 billion from taxation, but will leave open an even bigger loophole that means the computer giant is unlikely to pay any more tax. The highly criticized arrangement has become known in the tax avoidance industry as the "double Irish". this arrangement has been used by Google, Microsoft & Apple, just to name a few. 

 

Now according to Law360, Ireland’s new finance minister rejected demands from the European Union’s competition watchdog to collect €13 billion ($15.3 billion) in back taxes from Apple Inc., saying in an interview published August 16, 2017 that the technology giant did not receive any special tax benefits compared to other businesses.

Paschal Donohoe, who has been serving as Ireland’s minister for finance and public expenditure and reform, told the German newspaper Frankfurter Allgemeine that he disagrees with the European Commission’s August 2016 ruling, which concluded that Apple had entered into a sweetheart tax deal with the Irish government to “substantially and artificially” lower its taxes.

Donohoe said that Ireland is Not Blocking the Global Fight Against TaxEvasion, but there is only so much

the EU can Achieve on its Own in this area.

 

 

“We are not the Global Tax Collector for Everyone Else,”

he said.

Both Ireland and Apple have appealed the commission’s decision, which found that two tax rulings Ireland had issued to Apple in 1991 and 2007, allowing the software giant to allocate almost all of its sales profits to “head offices” that existed only on paper, were in violation of the EU’s state aid rules.

Under the EU's unique state aid system, national tax authorities are barred from giving benefits to some companies that are not available to others, and member states cannot treat multinational companies more favorably than standalone companies.

The commission said that the allocation of profits to head offices, with no employees or physical locations, allowed Apple’s effective corporate tax rate to go down from 1 percent in 2003 to 0.005 percent in 2014 on the profits of the Irish-incorporated subsidiary Apple Sales International.
 

The commission’s investigations into Apple’s tax arrangements, as well as those of Starbucks Corp., had previously drawn the ire of the Obama administration, which complained that the commission appeared to be unfairly targeting U.S. businesses and that American taxpayers may end up having to foot the bill for foreign tax credits that the companies may be able to claim following a retroactive imposition of taxes.

A U.S. government has filed an application to intervene in Apple’s suit so that it can have its say on the retroactive application of state aid rules to the company.

Need Tax Efficient Tax Planning?

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.  

 

 

for a FREE Tax Consultation

at: www.TaxAid.com or www.OVDPLaw.com or

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

Issues Concerning Filing a Form 706NA?

On September 23, 2015, we posted "Some Nonresidents with U.S. Assets Must File Estate Tax Returns" where we discussed that deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.

 

Many foreigners owning property or assets in the United States are in violation of 706-NA filing requirements because of a number of misunderstandings. The basic rule is pretty clear-if a foreign decedent has assets in the United States with a gross value in excess of $60,000, the estate is supposed to file a tax return with the Internal Revenue Service. 

Many people think of numerous reasons not to file. The main one relates to mortgages or liens against the US property. Assume that a property in Florida is worth $150,000 and there is a $100,000 mortgage held by Bank of X. The owner of the property dies. Is a 706-NA required? Yes-you are not permitted to net the mortgage against the fair market value of the property. The only way you can do this is if the person who owns the property is a German domiciliary in which case the value can be netted on the tax return. This is a peculiarity of the German- United States estate tax convention. Cyst The deceased German domiciliary must still file the tax return because the gross value of the property, the criteria for filing a tax return, is still met. 

 

Other people look to tax treaties to avoid filing the tax returns even when the assets exceed $60,000. What most people do not realize is that in order to take advantage of a tax treaty, one needs to file a federal estate tax return and include a form 8833 with the return explaining the application of the treaty to this particular estate. If you fail to file the 706-NA, you would still technically owe tax on any US situs asset with a gross value in excess of $60,000.

 

Let's make it very simple for everyone- if you represent a foreign client with assets in the United States  with a gross value exceeding $60,000, you are required to file a federal estate tax.

Without the filing of the tax return, you are unable to take advantage of deductions, credits, and treaties benefits which might aid you in reducing the gross federal tax to a point of zero. Additionally, I might add, your client's estate is not in compliance with federal estate tax laws if no 706-NA is filed

 Have a US Estate Tax Problem?

 

Estate Tax Problems Require

an Experienced Estate Tax Attorney

 

 

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).

Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.