Posts

High Income Non-Filer IRS Compliance Campaign Update: Notice CP-59 With International Tax Compliance Focus

/in , /by

On February 29, 2024, the IRS announced a major update to one of its compliance campaigns that focuses on high income non-filer taxpayers.  Let’s discuss this major update to the High Income Non-filer IRS Campaign in more detail.

High Income Non-Filer IRS Campaign: Background Information

As part of its extensive tax enforcement planning in the mid-2010s, the IRS decided to restructure LB&I in a way that would focus the division on issue-based examinations and compliance campaign processes. The idea was to let LB&I itself decide which compliance issues presented the most risk and required a response in the form of one or multiple treatment streams to achieve compliance objectives. The IRS came to the conclusion that this was the most efficient approach that assured the best use of IRS knowledge and appropriately deployed the right resources to address specific noncompliance issues.

The first thirteen campaigns were announced by LB&I on January 13, 2017. Since then, there have been numerous campaigns announced by the IRS with a focus on various priority topics. The most recent wave (during the years 2023 and 2024) of the IRS campaigns is due to the additional funding that the Congress allocated to the IRS as part of the Inflation Reduction Act.

This very much applies to High Income Non-Filer Campaign. Without adequate resources, the IRS non-filer program has only run sporadically since 2016 due to severe budget and staff limitations that did not allow to properly work on these cases. With the new Inflation Reduction Act funding available, the IRS has now upgraded and essentially re-launched this campaign.

High Income Non-Filer IRS Campaign: Focus on US international Tax Compliance

Even if you did not read the description of the IRS campaign, the very fact that the Director of the Withholding & International Individual Compliance Practice Area is in charge of this campaign gives away the focus on US international tax compliance.  Moreover, the emphasis is on individuals with potentially high income, not businesses.   

Indeed, High Income Non-Filer IRS Campaign focuses on individuals who have not filed their US tax returns even though they have received high (including foreign-source) income in the past. The very first phrase of the campaign’s description states: “U.S. citizens and resident aliens are subject to tax on worldwide income”.  The campaign, however, applies to all high-income non-filers, not just those who did not report their foreign income.

High Income Non-Filer IRS Campaign: IRS Targets 125,000 Noncompliant Taxpayers

It is very interesting to note that this campaign begins with direct targeting of known individuals — the IRS already identified 125,000 taxpayers that the agency wishes to contact.  In other words, this is a well-planned campaign with the IRS already knowing who it wants to target.

Where did the IRS get the information about these taxpayers? Mostly, IRS has received third-party information – such as through Forms W-2 and 1099s – indicating these people received high income. Additional information the IRS received from foreign banks and other sources.

High Income Non-Filer IRS Campaign: CP-59 Notice

The IRS has launched the new compliance effort with the IRS CP-59 Notice letters.  The letters already started to go out focusing on taxpayers who have not filed their tax returns since 2017. The mailings include more than 25,000 notices to taxpayers with more than $1 million in income and over 100,000 notices to taxpayers with incomes between $400,000 and $1 million between tax years 2017 and 2021.

Not all letters will go out at the same time. The IRS plans to mail anywhere between 20,000 to 40,000 letters each week, beginning with the filers in the highest-income categories. The IRS noted that some of these non-filers have multiple years included in the case count so the number of taxpayers receiving letters will be smaller than the actual number of notices going out.

High Income Non-Filer IRS Campaign: FBAR Noncompliance Is Also Targeted

This campaign has one very unpleasant side-effect.  In many cases, behind income tax noncompliance, there are likely unreported foreign accounts that needed to be disclosed on FBARs and perhaps even Form 8938. This circumstance can turn the case into something a lot more serious beyond just income tax noncompliance.

High Income Non-Filer IRS Campaign: What to Do If You Receive CP-59 Notice

The first thing to do is not to panic and not to procrastinate. You should take the next step very fast in order to avoid follow-up notices and a full audit with potentially severe consequences.

The second step is to contact immediately Sherayzen Law Office for professional help, especially if your noncompliance involves large amounts of income and US international information returns, such as FBAR or Form 8938. We will analyze the facts of your case, estimate your potential IRS penalty exposure and advise on the way to move forward to deal with the situation.

High Income Non-Filer IRS Campaign: IRS Actions Escalate If Tax Returns Are Not Filed

Taxpayers who fail to respond to the IRS notices will first receive additional notices.  If still no response, the IRS enforcement efforts will escalate to an audit, filing of an unfavorable Substitute for Return (SFR) (without any proper deductions or exemptions), collection actions, a petition to Tax Court and even potentially criminal prosecution.

Contact Sherayzen Law Office if Your Receive Notice CP-59 Concerning Unfiled Returns

If you are a taxpayer who has not filed his tax returns and you receive an IRS Notice CP-59, contact Sherayzen Law Office for professional help.  We have helped high-net-worth individuals with their US domestic and US international tax compliance as well as audits of their US tax returns. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

IRS Corporate Jet Audits Campaign | MN IRS Audit Tax Lawyer

/in , , /by

On February 21, 2024, the IRS announced that it will begin dozens of audits of business aircraft usage as part of a new tax enforcement campaign. In this short article, I will discuss these new IRS corporate jet audits in more detail.

IRS Corporate Jet Audits: Focus on Personal Use of High-Net Individuals

The IRS announced that it will be auditing the usage of corporate aircraft for personal purposes.  The chief revenue agency of the United States was blunt in identifying who it is targeting — high-net individuals. The audits will focus on aircraft usage by large corporations, large partnerships and high-income taxpayers and whether, for tax purposes, the use of jets is being properly allocated between business and personal reasons.

Officers, executives, other employees, shareholders and partners often use business aircraft for both business and personal reasons. In general, the Internal Revenue Code allows a business deduction for expenses of maintaining an asset, such as a corporate jet, as long as the company uses the asset for a business purpose. However, the company must allocate use of a company aircraft between business use and personal use. This is a complex area of tax law, and record-keeping can be challenging.

Hence, for someone such as an executive using the company jet for personal travel, the amount of personal usage impacts eligibility for certain business deductions. Use of the company jet for personal travel typically results in income inclusion by the individual using the jet for personal travel and could also impact the business’ eligibility to deduct costs related to the personal travel.

The number of audits related to aircraft usage could increase in the future following initial results and as the IRS continues hiring additional examiners.

IRS Corporate Jet Audits: Funding and Strategies

The IRS was quick to identify  the Inflation Reduction Act as the source of funding of this new IRS campaign. The IRS will be using advanced analytics and resources from the Inflation Reduction Act to more closely examine this area. At the same time, the agency complained that, in the past, it did not have the resources to properly audit this area due to low resources.

“During tax season, millions of people are doing the right thing by filing and paying their taxes, and they should have confidence that everyone is also following the law,” said IRS Commissioner Danny Werfel. “Personal use of corporate jets and other aircraft by executives and others have tax implications, and it’s a complex area where IRS work has been stretched thin. With expanded resources, IRS work in this area will take off. These aircraft audits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities.”

The examination of corporate jet usage is part of the IRS Large Business and International division’s “campaign” program. Campaigns apply different compliance streams to help address areas with a high risk of non-compliance. These efforts include issue-focused examinations, taxpayer outreach and education, tax form changes and focusing on particular issues that present a high risk of noncompliance.

IRS Corporate Jet Audits: Implications for Broader IRS Tax Enforcement

The IRS corporate jet audits are just part of a larger effort of the IRS to step up tax enforcement worldwide. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to avoid taxes. The IRS is now taking swift and aggressive action to close this gap with the focus on high-net-worth individuals.

“The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act,” Werfel said. “We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law. The IRS will have more announcements to make in this important area.”

Of course, one of the most important areas of the increased IRS tax enforcement is US international tax compliance. This involves compliance with foreign income reporting, FBARs and various other information returns (Forms 3520, 3520-A, 5471, 8865, 8938, et cetera).

Contact Sherayzen Law Office for IRS Audits of Your US International Tax Compliance

If the IRS is auditing your US international tax compliance, including foreign income and foreign asset reporting, contact Sherayzen Law Office for professional help as soon as possible. We have helped taxpayers around the world with the IRS international tax audits. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

TAS Significant Hardship Definition | International Tax Lawyer & Attorney

/in , /by

Sometimes, a taxpayer may find himself in a situation where his problem cannot be resolved through normal IRS channels. In this case, one of the options is to secure the help of the Taxpayer Advocate Service (“TAS”). TAS can issue a Taxpayer Assistance Order (TAO) to require the IRS to desist from a certain action that causes the taxpayer to suffer or about to suffer a significant hardship. At this point a logical question arises: what does “significant hardship” mean in this context? In this article, I will try to answer this question and introduce the readers to the Significant Hardship definition.

Significant Hardship Definition: Background Information

The Taxpayer Advocate Service is an independent organization within the IRS, led by the National Taxpayer Advocate (“NTA”). Each state has at least one Local Taxpayer Advocate (“LTA”), who is independent of the local IRS office and reports directly to the NTA.

 TAS helps individual and business taxpayers resolve problems with the IRS by:

  • • Ensuring that taxpayer problems not resolved through normal IRS channels are promptly and impartially handled;
  • • Assisting taxpayers who are facing hardships; identifying issues that impact taxpayer rights, increase taxpayer burden or otherwise create problems for taxpayers, and bringing these issues to the attention of IRS management; and
  • • Recommending administrative and legislative changes through the National Taxpayer Advocate’s Annual Report to Congress.

Pursuant to §7811(a); 7803(c); Reg. §301.7811-1(a)(1), NTA has the authority to issue TAO when the taxpayer is suffering or is about to suffer a significant hardship as a result of the manner in the administration of tax laws, including action or inaction on the part of the IRS. TAO may have broad implications, including obligating the IRS to release a levy, stop a collection action and even stop an audit.

Significant Hardship Definition: General Definition

Treas. Reg. §301.7811-1(a)(4)(ii) defines “significant hardship” as “a serious privation caused or about to be caused to the taxpayer as the result of the particular manner in which the revenue laws are being administered by the IRS.”  Significant hardship includes situations in which “a system or procedure fails to operate as intended or fails to resolve the taxpayer’s problem or dispute with the IRS”.

The regulations state a non-exclusive list of four situations that the IRS classifies as significant hardship:

“(A) An immediate threat of adverse action; (B) A delay of more than 30 days in resolving taxpayer account problems; (C) The incurring by the taxpayer of significant costs (including fees for professional representation) if relief is not granted; or (D) Irreparable injury to, or a long-term adverse impact on, the taxpayer if relief is not granted.” Id.

It should be pointed out that even if the taxpayer’s situation falls within any of these four situations (or a similar situation that the NTA agrees that it constitutes significant hardship), it does not mean that NTA will automatically issue TAO.  Rather, NTA must still determine whether the facts and the law support such a dramatic relief for the taxpayer.

Let’s go over each of the four categories of significant hardship one by one.

Significant Hardship Definition: Immediate Threat of Adverse Action

The Treasury Regulations do not detail the definition of this category except to provide the following example of what “immediate threat of adverse action” means:

“The IRS serves a levy on A’s bank account. A needs the bank funds to pay for a medically necessary surgical procedure that is scheduled to take place in one week. If the levy is not released, A will lack the funds necessary to have the procedure. A is experiencing an immediate threat of adverse action.”

Significant Hardship Definition: Delay of More Than 30 Days

There are two situations when a delay of more than 30 days may result in significant hardship. First, “when a taxpayer does not receive a response by the date promised by the IRS.” Treas. Reg. §301.7811-1(a)(4)(iii). Second, “when the IRS has established a normal processing time for taking an action and the taxpayer experiences a delay of more than 30 days beyond the normal processing time.” Id.

The regulations give the following example of a delay causing significant hardship: “B files a Form 4506, ‘Request for a Copy of Tax Return.’ B does not receive the photocopy of the tax return after waiting more than 30 days beyond the normal time for processing.”

Significant Hardship Definition: Significant Costs

The Treasury Regulations again do not detail the definition of this category except to provide the following example of what “significant costs” means:

“The IRS sends XYZ, Inc. a notice requesting payment of the outstanding employment taxes and penalties owed by XYZ, Inc. The notice indicates that XYZ, Inc. has small employment tax balances with respect to 12 employment tax quarters totaling $10x. XYZ, Inc. provides documentation to the IRS that it contends shows that if all payments were applied to each quarter correctly, there would be no balance due. The IRS requests additional records and documentation. Because there are 12 quarters involved, to comply with this request XYZ, Inc. asserts that it will need to hire an accountant, who estimates he will charge at least $5x to organize all the records and provide a detailed analysis of how to apply the deposits and payments. XYZ, Inc. is facing significant costs.”  Treas. Reg. §301.7811-1(a)(4)(iv).

Significant Hardship Definition: Irreparable Injury

The IRS again fails to detail the definition of this category beyond providing an example of an “irreparable injury”:

“D has arranged with a bank to refinance his mortgage to lower his monthly payment. D is unable to make the current monthly payment. Unless the monthly payment amount is lowered, D will lose his residence to foreclosure. The IRS refuses to subordinate the Federal tax lien, as permitted by section 6325(d), or discharge the property subject to the lien, as permitted by section 6325(b). As a result, the bank will not allow D to refinance. D is facing an irreparable injury if relief is not granted.” Id.

Contact Sherayzen Law Office for Professional Help with IRS Audits

If the IRS has informed you that your federal tax returns are subject to an audit and you have foreign assets/foreign income, contact Sherayzen Law Office for professional help.  We are a team of dedicated tax professionals, headed by an international tax attorney Mr. Eugene Sherayzen, with extensive experience in IRS audits of US taxpayers with foreign assets. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2022 Fourth Quarter IRS Interest Rates (Underpayment & Overpayment)

/in , /by

On August 15, 2022, the IRS announced that the 2022 Fourth Quarter IRS interest rates will again increase for both underpayment and overpayment cases. This increase closely follows the Federal Reserve’s recent increases in interest rates.

This means that, the 2022 Fourth Quarter IRS interest rates will be as follows:

Six (6) percent for overpayments (five (5) percent in the case of a corporation);
Six (6) percent for underpayments;
eight (8) percent for large corporate underpayments; and
three and one-half (3.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. This means that the next change in the IRS underpayment and overpayment interest rates may occur only for the 1st Quarter of 2023.

The the 2022 Fourth Quarter IRS interest rates are important for many reasons. These are the rates that the IRS uses to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an IRS audit or an amendment of his US tax return. The IRS also utilizes these rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment interest rates on a regular basis. We often amend our client’s tax returns as part of an offshore voluntary disclosure process. For example, both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures require that a taxpayer amends his prior US tax returns, determines the additional tax liability and calculates the interest on this liability.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2022 Fourth Quarter IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. Surprisingly, we sometimes see this scenario arise in the context of offshore voluntary disclosures.

Sherayzen Law Office continues to track any changes the IRS makes to its overpayment and underpayment interest rates.

Establishing Cost-Basis in Foreign Real Estate | IRS Audit Tax Lawyer & Attorney

/in , , /by

One of the most challenging issues during an IRS audit is establishing cost-basis in foreign real estate.  This issue most frequently comes up in the context of real estate that was obtained through inheritance or gift many years ago.  In this article, based on my IRS audit experiences, I would like to discuss the main challenges and case strategies associated with establishing the cost-basis in foreign real estate in a manner that would satisfy the IRS during an audit.

An important note: I will not be discussing this issue in the context of an IRS audit of an offshore voluntary disclosure and how it would affect the calculation of an Offshore Penalty.  This essay is strictly limited to an IRS audit that involves US international tax issues without the taxpayer ever going through a voluntary disclosure.

Another important note: this article is written more for the benefit of other international tax lawyers, not the general public.

Establishing Cost-Basis in Foreign Real Estate: Importance

Before we discuss the problems associated with establishing the cost-basis in foreign real estate, we need to first understand why this issue is so important.  There are three main consequences to establishing cost-basis in the context of an IRS audit. 

First, the income tax impact of failure to establish cost-basis in a foreign property on the audited taxpayer may be truly disastrous.  Obviously, if you cannot prove any cost-basis in a property (or you can only convince the IRS that there was minimal cost-basis), you will have to recognize all proceeds from the sale of this property as capital gains (or potentially subpart F income if you owned a property though a foreign corporation).

Second, there is a very important psychological impact on the entire audit if you have a large unreported gain from sale of foreign real estate.  The IRS agent in charge of an audit is likely to take a more aggressive position not only on this issue, but also on other issues irrespective of whether they are directly related to unreported gain.   The most frequent victims of this hardened attitude of an IRS agent are the legal arguments in support of a reasonable cause.

Finally, a large gain from a sale of foreign real estate is likely to encourage the IRS to dig deeper and even expand the audit to more years.  In one of my audit cases, an IRS agent initially believed that there was a large capital gain and expanded the audit to five prior years; however, he reversed this decision once I was able to show that the sold real property had a much higher cost-basis due to numerous improvements that were made by my client over a number of years.

In other words, establishing cost-basis in a sold real estate property may be one of the most crucial issues in an IRS audit.

Establishing Cost-Basis in Foreign Real Estate: Top 3 Challenges

The challenges to establishing cost-basis in foreign real estate are highly dependent on the facts of the case.  However, there are three main themes that usually appear in one form or another in every IRS audit case.

The first challenge is absence of documentation.  This is by far the most common and most important battleground between the IRS and the taxpayer during the vast majority of IRS audits in this area, especially if the direct documentation is absent due to passage of time.

The second challenge is the potential opposition from the IRS to proving cost-basis indirectly through usage of circumstantial evidence and third-parties.

The third challenge is establishing the credibility of evidence. For example, in one of my cases, the IRS initially refused to accept a valuation report prepared by a local professional valuation expert because the report lacked a proper explanation of how he arrived at the proposed values.

Establishing Cost-Basis in Foreign Real Estate: Top 4 Strategies for Overcoming Challenges

There are numerous strategies to deal with the cost-basis establishment challenges. Your choice among them should depend on the facts and circumstances of your case.  Sometimes, you will even come up with a brand-new strategy tailored specifically to the unique challenges of your case.

Nevertheless, there are four common themes to the strategies used in overcoming the aforementioned challenges.  First, you need to recreate the logical history of the property and capital improvements to the property in order to convince the IRS that the valuation your client supplied is logical and reasonable.

Second, demonstrate to the IRS agent in charge of your client’s audit that you are a reliable source of information.  The more objective you appear (and you actually are), the more the IRS sees that you will not allow false facts or statements to enter the record, the more the IRS sees that your client shares both of these traits, the more likely the IRS agent will accept your position or be willing to achieve a compromise with you (see below).

Third, utilize indirect and circumstantial evidence as well as third-party affidavits/testimony to support the valuation of the property.  In other words, if you have no ability to directly establish the cost-basis of a property, then you need to find creative ways to build the necessary records and establish their credibility through usage of supporting documents and/or testimony. 

For example, in one of my previous audits, the client had no documentation whatsoever except one isolated receipt to prove the substantial improvements made to her foreign real estate over the past almost forty (!) years.  My solution to this problem was to first get an affidavit from my client fully stating all improvements made with approximate cost based purely on her memory.  Then, I obtained additional signed statements from neighbors largely supporting the estimates as well as the fact that these improvements were indeed made. Finally, I obtained a statement from a local construction company owner who stated that he recalled these improvements and confirmed the estimated amounts.  Additionally, all of the improvements were properly explained by the history of how the property was obtained, for what purpose and why so many improvements were needed.  All of these facts and circumstances were explained in a letter to the IRS agent together with the legal basis (i.e., case law) showing how courts have accepted similar evidence in the past. Under the weight of this substantial record (and some other circumstances of this case), the IRS finally agreed to accept all improvements as part of an overall compromise.

Finally, use creative legal strategies to convince the IRS to accept a different cost-basis in a property through operation of tax rules.  This is a very complex strategy, but it is more commonly employed than one may believe.  For example, in one of my prior audit cases, the IRS agreed to disregard the foreign corporation that owned the foreign property allowing the stepped-up basis for this inherited property.

Contact Sherayzen Law office for Professional Help with IRS Audits Involving Foreign Real Estate

If you have foreign assets and you are audited by the IRS, contact Sherayzen Law Office for professional help.  We have helped hundreds of US taxpayers around the world to bring their tax affairs in full compliance with US tax laws, including during IRS audits.  We can help you!

Contact Us Today to Schedule a Confidential Consultation!