Alternative Minimum Tax: Basic Facts for Tax Year 2010

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Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the Alternative Minimum Tax AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax. The AMT provides an alternative set of rules for calculating a taxpayer’s income tax. In general, these rules should determine the minimum amount of tax that someone with a certain amount of income should be required to pay. If a taxpayer’s regular tax falls below this minimum, he has to make up the difference by paying alternative minimum tax.

A taxpayer may have to pay the AMT if his taxable income for regular tax purposes (plus any adjustments and preference items that apply to him) are more than the AMT exemption amount.  The AMT exemption amounts are set by law for each filing status. For tax year 2010, Congress raised the AMT exemption amounts to the following levels:

$72,450 for a married couple filing a joint return and qualifying widows and  widowers;
$47,450 for singles and heads of household;
$36,225 for a married person filing separately.

The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’  tax rate has increased to $6,700 for 2010.

Tax Lawyers Minneapolis | IRS Increases Interest Rates for the Second Quarter of 2011

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The Internal Revenue Service announced that the interest rates for the calendar quarter beginning April 1, 2011, will increase by one percentage point. Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. With respect to corporations, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Hence, the rates will be as follows:

Overpayment

3% – for corporations
4% – individuals
1.5% for the portion of corporate overpayment exceeding $10,000.

Underpayment

4% generally
6% for large corporate underpayments

2011 Offshore Voluntary Disclosure Initiative vs. Statute of Limitations

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As I already described in an earlier article, the IRS instituted a new voluntary disclosure program, called 2011 Offshore Voluntary Disclosure Initiative (“OVDI”). One of the most problematic areas under OVDI is the length of the examination period.

Agreeing to assessment of taxes and penalties for all voluntary disclosure years is part of the resolution offered by the IRS for resolving offshore voluntary disclosures. The OVDI disclosure period is 2003 through 2010 – eight years in total.

This contrasts greatly with the general three-year statute of limitations for IRS examination. Therefore, a tax attorney should consider all options prior to engaging in OVDI in order to avoid subjecting his client to unnecessary penalties.

One of the major factors in electing quiet disclosure versus OVDI is considering whether one or more of the numerous exceptions to the general IRS statute of limitations may apply. For example, if the IRS can prove a substantial omission of gross income, the statute of limitations is likely to be expanded to six years. Moreover, if there was a failure to file certain information returns, such as Form 3520 or Form 5471, the statute of limitations will not have begun to run. If the IRS can prove fraud, there is no statute of limitations for assessing tax. In addition, the statute of limitations for asserting FBAR penalties is six years from the date of the violation, which would be the date that an unfiled FBAR was due to have been filed. See 31 U.S.C. § 5321(b)(1).

Obviously, other factors should be considered before the decision to engage into OVDI is made. The chief factor would of course be the likelihood of criminal prosecution if the taxpayer fails to make use of OVDI. Engaging in voluntary disclosure pursuant to OVDI virtually eliminates possibility of criminal prosecution.

These factors aside, though, close analysis of the IRS statute of limitations is one of the most important considerations of whether to engage in OVDI.

Contact Sherayzen Law Office NOW!

Sherayzen Law Office can help. Our international tax firm has guided our clients throughout the United States through a voluntary disclosure process, making sure that the rights of our clients are protected and they pay only fair taxes and penalties.

IRS Begins Processing Tax Forms Affected by Late Tax Changes

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Today, the IRS announced that it has started processing individual tax returns affected by legislation enacted in December. On Monday, IRS systems began to accept and process both e-file and paper tax returns claiming itemized deductions on Form 1040, Schedule A, as well as deductions for state and local sales tax, higher education tuition and fees and educator expenses.

Earlier, in 2010, the IRS announced it would delay processing of some tax returns in order to update processing systems to accommodate the late tax law changes. These tax law provisions were extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which became law on December 17, 2010.

Due to the expected increase in tax return volumes being transmitted this week, the IRS cautioned a small number of taxpayers may experience a brief delay in receiving their e-file acknowledgment, which is normally provided within 24-48 hours.

Business taxpayers who use the 1040 series can file now as well. However, the February 14 start date does not apply to non-1040 business tax forms affected by the recent tax law changes. The IRS will announce a specific date in the near future when it can begin processing those impacted business tax forms.

Failure to Conduct Voluntary Disclosure: Possible Penalties

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The IRS just instituted a new voluntary disclosure program for taxpayers who have offshore accounts or assets and who failed to properly report them to the IRS and pay appropriate U.S. taxes. It is called 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”). While 2011 OVDI is not available for everyone and some particular circumstances of a case may determine whether it is advisable to go through this program, this new voluntary disclosure program offers a great chance for taxpayers to bring their tax affairs in order and virtually eliminate the possibility of criminal prosecution.

However, what may happen if a taxpayer who should have voluntarily disclosed his offshore income and assets, but fails to do so through 2011 OVDI and the IRS discovers the noncompliance through later examination? This article addresses the common types of penalties that a taxpayer may be subject to in cases where IRS identifies noncompliance with U.S. tax laws before the taxpayer goes through the voluntary disclosure process.

Penalties in General

In general, if the IRS finds out that a taxpayer is not in compliance with U.S. tax laws and fails to voluntarily disclose his offshore assets and foreign bank accounts, the taxpayer may be subject to severe civil and criminal penalties. In additional to accuracy related penalties, the fraud-related penalties, FBAR penalties, and foreign asset reporting penalties (with interest) may be imposed. Combined, all of these penalties and interest may exceed the actual value of nondisclosed assets and foreign bank accounts. In the worst-case scenario, a criminal prosecution may be launched against the noncompliant taxpayers.

Finally, the voluntary disclosure process – which would otherwise be a far less painful way to deal with this problem – is automatically unavailable for taxpayers as soon as they are under civil examination of the IRS.

Let’s discuss the penalties in detail.

Accuracy-Related and Failure to File and Pay Penalties

An accuracy-related penalty on underpayments is imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

If a taxpayer fails to file the required income tax return, a failure to file (“FTF”) penalty may be imposed pursuant to IRC § 6651(a)(1). The penalty is generally five percent of the balance due, plus an additional five percent for each month or fraction thereof during which the failure continues may be imposed. The total penalty will not exceed 25 percent of the balance due.

If a taxpayer fails to pay the amount of tax shown on the return, a failure to pay (“FTP”) penalty may be imposed pursuant to IRC § 6651(a)(2). The penalty may be half of a percent of the amount of tax shown on the return, plus an additional half of a percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding the total of 25 percent of the balance due.

Fraud Penalties

Fraud penalties may imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that may essentially amount to 75 percent of the unpaid tax.

FBAR Penalties

Read this article discussing the penalties that may be imposed as a result of a taxpayers failure to file the FinCEN Form 114 formerly Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”).

Other Penalties

Depending on a particular fact pattern, additional penalties may be imposed for failure to file Form 926, 3520, 3520-A, 5471, 5472, and 8865.

Criminal Prosecution

In the worst-case scenario, a criminal prosecution may be launched by the IRS. Huge penalties and potential jail time are the possible in case of tax evasion.

Contact Us to Let Us Help You

Sherayzen Law Office can help. We are a tax firm based in Minnesota who has helped taxpayers throughout the United States to disclose offshore assets, foreign bank accounts and unreported foreign income to the IRS, avoiding the nightmare scenarios for our clients.

For many taxpayers, 2011 OVDI is a chance to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.

If you believe that you may not be in full compliance with U.S. tax laws, the worst course of action is to do nothing and wait for the IRS to discover your noncompliance. Once this happens, your options are likely to be severely limited and the penalties a lot higher. Therefore, call or e-mail us NOW to let us help you with your tax problems. Remember, all calls and e-mails are confidential and attorney-client privileged.