Form 941 Penalties

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In a previous article, we covered some of the basics of Form 941. In this article, we will explore some of the major penalties that may apply for failure to comply with the requirements of Form 941. These penalties may be severe and, in certain circumstances, may even lead to criminal charges.

Failure to File Penalty

The IRS may apply a failure to file penalty for any month, or part of a month, for which a required return is not filed (disregarding extensions). The penalty is 5% of the unpaid tax due on such return, with the maximum penalty typically 25% of the tax owed.

Failure to Pay Penalty

The IRS may also apply a failure to pay penalty for any month, or part of a month, for which the tax due is paid late. This penalty is 0.5% per month of the amount of the tax. In certain circumstances, individual filers may be able to qualify for a reduced penalty of 0.25% per month, if an installment agreement is in effect. The maximum amount of the failure to pay penalty is also 25% of the tax owed.

Interaction between the Failure-to-File and Failure-to-Pay Penalties; Reasonable Cause Defense

If both of the above-mentioned penalties apply to a given month, then the failure to file penalty will be reduced by the amount of the failure to pay penalty. It is important to note that a “reasonable cause” defense is applicable to these penalties – i.e. if the employer’s attorney is able to demonstrate, in writing, that the failure to file or to pay was due to a reasonable cause, then such penalties will be abated by the IRS.

Interest

Interest may also be charged, in addition to any applicable penalties. Interest begins to accrue from the date due of the tax owed on any unpaid amount.

Penalty Rates for Amounts not Properly or Timely Deposited

In general, penalties may also apply if a filer does not make required timely deposits, or if the amounts deposited are less than required. If a filer is able to establish a reasonable cause defense and demonstrates that the failure to comply with the requirements was not due to willfully neglect, then the IRS will not impose the penalties. In certain other circumstances, the IRS may also agree to waive penalties.

For amounts that are not timely or properly deposited, the following penalty rates will apply:

2% – Deposits 1 to 5 days late.
5% – Deposits 6 to 15 days late.
10% – Deposits 16 or more days late.
10%- Amounts paid within 10 days of the date of the first IRS notice requesting the tax due.
10% – Deposits paid directly to the IRS, or paid with a tax return.
15% – Amounts unpaid more than 10 days after the date of the first IRS notice requesting the tax due, or the day on which an IRS
notice and demand for immediate payment was received by afiler, whichever is earlier.

Late deposit penalty amounts are calculated from the due date of the tax liability, and are determined using calendar days.

Trust Fund Penalty

If income, Social Security, or Medicare taxes that are required to be withheld are not withheld or paid, a filer may be personally liable for the Trust Fund Penalty. Important note: use of a third-party payroll service provider or other type of agent will not relieve a required filer of the responsibility of ensuring that deposits are timely and properly deposited, and that returns are filed.

The Trust Fund Penalty is the full amount of the unpaid trust fund tax. The penalty may be imposed on any person determined by the IRS to be responsible for collecting, accounting for, and paying over required taxes, and who acted willfully in not doing so, and the penalty may apply to individuals personally if such unpaid taxes cannot be collected from the employer or business directly.

Criminal Penalties

Those who fail to comply with the bank deposit requirements for the special trust account for the U.S. Government may also be charged with criminal penalties. We will cover the criminal penalties in more detail in future articles.

Averages Failure to Deposit (FTD) Penalty

The IRS may also assess an “averaged” failure to deposit (FTD) penalty of 2% to 10% for filers who are scheduled to make monthly deposits, and who do not properly complete Part 2 of Form 941 when a tax liability listed on Form 941, line 10, equals or exceeds $2,500. The IRS may also assess an “averaged” FTD penalty of 2% to 10% for scheduled semi-weekly depositors who show a tax liability on Form 941, line 10, equaling or exceeding $2,500, and who fail to complete Schedule B of Form 941, fail to attach a properly completed Schedule B of Form 941, or improperly complete Schedule B of Form 941.

The averaged FTD penalty is calculated by distributing a total tax liability listed on Form 941, line 10, equally throughout the tax period. As such, deposits and payments may not be counted as timely because the actual dates of tax liabilities may not be accurately determinable.

Contact Sherayzen Law Office for Legal Help With Negotiating Form 941 Penalties

If you are facing Form 941 penalties, contact Sherayzen Law Office NOW. While the exact options available to you will depend on your particular fact pattern, our experienced tax firm will rigorously represent your interests in IRS negotiations and strive to reduce such penalties, exploring all viable legal options.

Treasury and the IRS Issue Proposed Regulations for FATCA Implementation

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On February 8, 2012, the U.S. Treasury Department and the Internal Revenue Service issued proposed regulations for the next major phase of implementing the Foreign Account Tax Compliance Act (FATCA).

FATCA and FFI Reporting under Proposed Regulations

FATCA was enacted by the U.S. Congress in 2010 as part the Hiring Incentives to Restore Employment (HIRE) Act. This law specifically targets non-compliance by U.S. taxpayers using foreign accounts.

FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The proposed regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for FFIs, other foreign entities, and U.S. withholding agents.

The proposed regulations implement FATCA’s obligations in stages to minimize burdens and costs consistent with achieving the Congress’ compliance objectives. The rules and implementation schedule are also adjusted to allow time for resolving local law limitations to which some FFIs may be subject.

In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

a) Identify U.S. accounts,
b) Report certain information to the IRS regarding U.S. accounts,
c) Verify its compliance with its obligations pursuant to the agreement, and
d) Ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system which will become available by January 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

Effect of FATCA Regulations on Non-Disclosure of Foreign Accounts

Once implemented, the regulations will mark a major breakthrough in IRS efforts to identify U.S. taxpayer non-compliance through offshore holdings. In essence, the FFIs reporting will supply the IRS with continuous and accurate information that will allow them to identify failure to by the US taxpayers to disclose foreign financial accounts.

Armed with this information, one can expect the IRS to acquire new tremendous enforcement tools throughout the world. It is very likely that the IRS will be able to substantially increase its investigations of non-compliant U.S. taxpayers as well as successfully prosecute them.

Immediate Effect of FATCA: Urgency in Voluntary Disclosures

Thus, the ultimate effect of FATCA will be felt on the number of voluntary disclosures. At this point, a large number of currently non-compliant U.S. taxpayers are in high danger of being discovered and prosecuted by the IRS within relatively near future.

Since voluntary disclosure is not generally available in case of IRS investigation and/or prosecution, it appears that the need for these taxpayers to engage in voluntary disclosure is becoming increasingly urgent. Combined with other creation of FATCA – Form 8938 – I expect to see a large number of voluntary disclosures in 2012.

Contact Sherayzen Law Office for Help With Offshore Voluntary Disclosure

If you currently have undisclosed foreign bank and financial accounts or unreported foreign income, contact Sherayzen Law Office. Our experienced voluntary disclosure firm will help you identify the extent of your tax reporting requirements, analyze your potential tax liabilities, describe available voluntary disclosure options, and guide you throughout your voluntary disclosure, including completing the required documentation, setting forth your legal case, and rigorous IRS representation.

CPT (Carriage Paid To)

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The purpose of this article is provide a general background to one of the most important terms in international contract drafting, Incoterms 2010 CPT.

General Provisions of CPT

CPT (Carriage Paid To) means that the seller delivers the goods to the carrier of another person nominated by the seller at an agreed place and that the seller must contract and pay the costs of carriage necessary to bring the goods to the named place of destination.  This means that the seller fulfils his obligation to deliver at the point when he hands the goods over to the carrier, not when the goods reach the place of destination.

The most important issue here is to understand that the risk and costs are transferred at different places. The risk passes to the buyer at the point of delivery to the carrier, whereas the costs are covered by the seller up to the agreed place of destination.  This is why It is crucial for the parties to identify as precisely as possible in the contract both the place of deliver and the place of destination.

What if several carriers are used for the carriage to the agreed destination point and the parties failed to agree on a specific point of delivery?  The default position under the Incoterms rules is that the risk passes when the goods have been delivered to the first carrier at the place that the seller chooses (i.e. buyer has no control).   In order to override the default rule, the parties must specify in their contract the stage or place at which the risk should pass to the buyer.

Also, note that if the seller incurs costs under his contract of carriage related to unloading at the named place of destination, the seller cannot recover such costs form the buyer (unless otherwise agreed between the parties).

Seller’s Export Clearance Obligations

CPT requires the seller to clear the goods for export, but not import (including any import duty or paperwork).  The export clearance obligation means that the seller will have to obtain, at his own risk and expense, any export license and carry out all custom formalities necessary for the export of the goods as well as for their transport through any country prior to the point of delivery.

Seller is Obligated to Procure the Carriage Contract, but Not Insurance

While the seller is obligated to procure a contract for the carriage of the goods from the agreed point of delivery to the named place of destination at his own expense, no such obligation for the insurance contract exists.  The seller is not obligated to make a contract of insurance, but the seller must provide the buyer, at the buyer’s request (as well as the buyer’s risk and expense) with information that the buyer needs for obtaining insurance.

Other Seller’s Obligations

In addition to the obligations above, Incoterms 2010 spell out other obligations of the seller under the CPT, such as: delivery obligations, allocation of costs, notices to the buyers, delivery documents, packaging, assistance with information, et cetera.

Let’s look now at the buyer’s obligations.

Buyer’s Obligation to Pay

The buyer’s first and foremost obligation is to pay the price of the goods as provided in the contract of sale.

Buyer’s Import Clearance Obligations

One of the other principal obligations of the buyer is to obtain, at its own risk and expense, any import license or other official authorization and carry out all customs formalities for the import of the goods.

The buyer must also ensure that everything is done in order for the goods to pass through any third country after they have been shipped from the seller’s country.  The chief exception is if such obligation is for the seller’s account under the contract of carriage.

Other Buyer’s Obligations

In addition to the obligation’s above, Incoterms 2010 set forth other important obligations of the buyer under the CPT, including: taking delivery, inspection of goods, notices to the seller, assistance with information and other obligations.   Some of these obligations may have important consequences with respect to the allocation of costs and transfer of risk under the CPT.

Contact Sherayzen Law Office NOW for Help with International Contracts

Obviously, the article above only gives some broad background information on CPT and should not be relied upon to make a legal determination in your particular situation.  Rather, if you are about to engage in a transaction involving an international delivery of goods, contact Sherayzen Law Office for legal help.  Our experienced international contract firm can assist you at every stage of your contract: negotiation, drafting and enforcement. We will provide a rigorous representation of your interests, protect your contractual rights, and strive to ensure that the contemplated transaction goes as smoothly as planned.

Taxation of Oil & Gas Royalty Interests

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The recent oil boom in regions such as the Bakken Oil Field has created millionaires overnight based upon royalty interests in oil and gas leases of investors. While fortunes can be made from such payments, it is important to understand that there may be various potential risks involved, as well as numerous taxes. This article will generally discuss three common types of royalty interests, and taxation of payments received from such interests.

Oil and Gas Interests Royalties

There are generally three main types of royalties received for oil and gas interests: standard royalty interests, overriding royalty interests, and working interests

Standard Royalty Interests

A standard royalty interest (also called a “landowner’s royalty”) entitles an owner of mineral rights (a lessor in a lease) to an agreed-upon part of the total oil and gas production attributable to the lease, minus reasonable production costs of the producer (the lessee in a lease). Royalties are usually expressed as a percentage or a fraction of the total production of the well.

Drilling and producing oil and gas wells entail certain types of costs. Unless stated otherwise in a lease, exploration, marketing and production costs are generally paid by the production company, whereas post-production costs may be shared by the landowner with the production company. Depending upon the terms of the lease, certain post-production costs incurred that add value to the oil and gas drilled at the wellhead prior to the place of sale (such as various treatment, compression, processing and transportation costs) may be deducted by the lessee when calculating the royalty payment amount. Additionally, royalty interest payments may be subject to various federal, state and county taxes (which will be detailed later).

Overriding Royalty Interests

Another type of royalty is the overriding royalty interest. A holder of such interest is entitled to a share of the production revenues from a well, free of production and monthly operating costs. Like a standard royalty interest, overriding royalty interests are subject to taxes and post-production costs. Unlike standard royalty interests, holders of overriding royalty interests do not own the underground minerals, and they will not have any ownership rights once well production ends. Overriding royalty interests can be both assigned from holders of a working interest (defined below), as well as created by a leaseholder who retains an override after assigning a leasehold to a working interest owner.

Working Interests

A working interest is the interest obtained by a lessee under an oil and gas lease. Under this interest, holders fully participate in production revenues based upon the percentage of working interest that is owned along with other investors. Unlike royalty interests, holders of working interests fully participate in the profits generated from successful wells. However, owners of working interest are generally directly liable for payment of the applicable share of drilling costs, and other associated costs, such as operating, leasing and exploration costs. Working interest holders generally do not own the underground minerals. Working interests may offer significant tax advantages.

Taxation of Royalties

Landowners must pay taxes on royalties received from production companies, in addition to numerous other potential taxes. Under the Federal income tax, royalties are considered to be ordinary income. However, royalty owners may generally deduct up to 15% of their income received from mineral interests through depletion allowances.

Most states in which oil and gas are produced also levy a severance tax on such production. These taxes are deducted from royalties received, and are calculated based upon either the value of the production, or the production volume, depending upon the state’s tax laws. Additionally, many counties also levy annual ad valorem taxes based upon the value of oil and gas wells in production.

Contact Sherayzen Law Office for Tax Help With Oil and Gas Royalty Interests

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Federal, state and local taxation planning and reporting often necessitates an experienced understanding of complex regulations, statutes, and case law, and penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your tax needs. Email [email protected] or call (952) 500-8159 for a consultation today.

Criminal Tax Evasion

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This article provides some general background to IRC Section 7201 criminal tax evasion charges and describes Section 7201 principal criminal penalties.   As you will see, the penalties are severe, and you should immediately seek the advice of a tax attorney if you have any doubts as to whether you are complying with the law and IRS rules.

Legal Test under IRC Section 7201

IRC Section 7201 deals with criminal tax evasion charges.  In Sansone v. United States, 380 U.S. 343, 354 (1965), the United States Supreme Court stated that two different charges can be brought pursuant to Section 7201: (1) the offense of willfully attempting to evade or defeat the assessment of a tax, and (2) the offense of willfully attempting to evade or defeat the payment of a tax.

The legal test that the government must satisfy consists of three elements:(1) that a tax deficiency existed, (2) an affirmative act of tax evasion, or an attempt to evade taxes, and (3), willfulness. The government is required to prove each of three elements beyond a reasonable doubt – the standard of proof in criminal cases – in order to show a violation of this section. By contrast, in a typical civil case, the standard of proof is only a preponderance of the evidence.

In general, the courts have held that filing a false return may demonstrate an attempt to evade the assessment of a tax, but it is not necessary for an individual to have filed a false return in order to show an attempt of tax evasion.  Certain courts have also held that it is not required for the government to prove the exact amount of tax due in order to show tax evasion.

Each of the elements necessary to prove a violation may involve complex factual matters and/or legal arguments, so you may be well advised to seek an experienced tax attorney if you find yourself in such a case.

Penalties under IRC Section 7201

Under IRC Section 7201, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

Thus, the criminal penalties under Section 7201 may consist of two parts.  First and foremost, imprisonment of up to five years (this charge may have its complications when combined wiht other penalties – therefore, the particular facts of your case will determine whether you potentially face more than five years in prison).  Second, the monetary penalty of up to $100,000 if the defendant is an individual or up to $500,000 if the defendant is a corporation.  The statute allows for the combination of both types of penalties in a single case.

Contact Sherayzen Law Office for Legal Help in Dealing with Section 7201 Charges

If you are or may potentially be in a situations where the U.S. government may charge you with criminal tax evasion offenses, contact Sherayzen Law Office for legal help.  Our experienced tax firm will analyze your case, help you determine whether you may potentially face criminal charges (if you not yet charged), determine the probability of a successful criminal prosecution by the U.S. government, build a creative ethical defense (while considering other possibilities to turn this into a civil case), and rigorously represent your interests in court and during negotiations with the U.S. Department of Justice or IRS.