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Serious Illness as Reasonable Cause | International Tax Lawyer

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We are continuing our series of articles on Reasonable Cause. Today, we will discuss whether a serious illness can establish a reasonable cause for abatement of the IRS penalties. It is important to note that this discussion of serious illness as a reasonable cause is equally applicable to death and unavoidable absence of the taxpayer (in fact, the Internal Revenue Manual (IRM) discusses all three circumstances – death, serious illness and unavoidable absence of taxpayer – at the same time in providing guidance on reasonable cause).

Serious Illness Can Constitute a Reasonable Cause

IRM 20.1.1.3.2.2.1 (11-25-2011) expressly states that serious illness can be used as a Reasonable Cause Exception: “death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause for filing, paying, or depositing late… .” In this context, “immediate family” means spouse, siblings, parents, grandparents, or children.

In the business context, a reasonable cause may be established if death, serious illness or other unavoidable absence occurred with respect to a taxpayer (or his immediate family) who had the sole authority to execute the return, make the deposit, or pay the tax. The same rule applies to corporations, partnerships, estates, trusts and other legal vehicles for conducting business.

Taxpayer Has the Burden of Proof to Establish that Serious Illness Constitutes Reasonable Cause for His Prior Tax Noncompliance

Stating that a serious illness can constitute a reasonable cause for abatement of the IRS penalties with respect to prior tax noncompliance is not equivalent to stating that serious illness automatically establishes a reasonable cause.

On the contrary, the taxpayer has the burden of proof to establish that serious illness did indeed constitute reasonable cause with respect to his prior tax noncompliance. In other words, serious illness may not be sufficient to establish reasonable cause for various reasons (for example, in cases where it was not actually related to tax noncompliance).

Factors Relevant to Determination of Whether Serious Illness Is Sufficient to Establish Reasonable Cause Exception

IRM 20.1.1.3.2.2.1 (11-25-2011) provides a list of recommended factors to consider in evaluating a taxpayer’s request for abatement of penalties based on serious illness, death or unavoidable absence. I somewhat modified the list to fit in all factors expressly mentioned in the IRM. Here is the non-exclusive list of factors expressly referenced in the IRM:

1. the relationship of the taxpayer to the other parties involved;

2. the dates, duration, and severity of illness (in case of death, the date of death; in case of unavoidable absence, the dates and reasons for absence);

3. how the event prevented tax compliance;

4. how the event impaired other obligations (including business obligations);

5. if tax duties were attended to promptly when the illness passed (or within a reasonable period of time after a death or absence);

6. (in a business setting) in a situation where someone other than responsible person or the taxpayer was responsible for meeting the infringed business tax obligation, and why that person was unable to meet the obligation;

7. (in a business setting) if only one person was authorized to meet the tax obligation, whether such an arrangement was consistent with ordinary business care and prudence.

This is not an all-inclusive list of factors. The IRM foresees the possibility that any other relevant factors may be considered in the analysis of whether a Reasonable Cause Exception was established based on serious illness, death or unavoidable absence.

Contact Sherayzen Law Office for Experienced Help With Establishing A Reasonable Cause Defense, Including Based on Serious Illness

There is always a risk that the IRS may reject a taxpayer’s reasonable cause argument, often simply because the argument was never properly elaborated by the taxpayer. This is why it is important to maximize your chance of success by timely securing professional legal help.

Sherayzen Law Office is a highly experienced tax law firm that has helped its clients around the world to establish various reasonable cause defenses against IRS domestic and international tax penalties. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

EU Automatic Exchange of Banking and Beneficial Ownership Data Approved

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On November 22, 2016, the European Parliament approved the automatic exchange of banking and beneficial ownership data across the European Union. The directive received an overwhelming support from the Parliament: 590 members voted “yes”, 32 – “no”, and 64 did not vote.

Since the original proposal was already approved by the EU Council on November 8, 2016, the only issue left before the directive will come into force will be the final adoption of the directive by EU Council. Once the directive on the automatic exchange of banking and beneficial ownership data is adopted by the Council, the member states will have until December 31, 2017, to implement it.

The directive represents a major undertaking with respect to the automatic exchange of banking and beneficial ownership data. Once it is adopted, the directive will allow tax authorities of every EU member state to automatically share the banking information such as account balances, interest income and dividends. Moreover, the directive also requires the EU member states to create registers recording the beneficial ownership of companies and trusts. This means that the tax authorities of all EU member states will finally acquire access to the information regarding the true beneficiaries of foreign trusts and opaque corporate structures.

The idea behind the new legislation on the automatic exchanges of banking and beneficial ownership data is to provide the EU member states with tools to fight cross-border fraud and tax evasion, preserving the integrity of their domestic tax systems.

However, it appears that there are still serious implementation issues with respect to the new directive. The most serious problem is that the directive merely allows the automatic exchange of banking and beneficial ownership date in the EU, but it does not obligate the member states to do so. Furthermore, the banking industry’s role in the facilitation of tax evasion is not addressed at all by the legislature.

After the directive on the automatic exchange of banking and beneficial ownership date is adopted, the European Parliament is going to take up the legislation to provide for a cross-border method for accessing the shared information.

An interesting question for US taxpayers is whether any of the information acquired through the EU sharing mechanism will be shared with the IRS through FATCA. The likelihood of this scenario is fairly strong and may further expose noncompliant US taxpayers to IRS detection.

Streamlined Disclosure Attorney Minneapolis | FATCA OVDP Lawyer

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Streamlined Disclosure Attorney Minneapolis is becoming a common search for an individual who is looking for professional help in Minneapolis with his streamlined voluntary disclosure of undeclared foreign assets and foreign income. Let’s analyze this search term – Streamlined Disclosure Attorney Minneapolis – to understand what kind of an attorney fits into this search.

Streamlined Disclosure Attorney Minneapolis Search Covers SDOP and SFOP

First of all, Streamlined Disclosure Attorney Minneapolis search applies to attorneys who help clients with both SDOP (Streamlined Domestic Offshore Procedures) and SFOP (Streamlined Foreign Offshore Procedures). I already explored the both of these options in earlier articles.

Streamlined Disclosure Attorney Minneapolis Search Applies Only to International Tax Attorneys

Second, Streamlined Disclosure Attorney Minneapolis applies only to international tax attorneys. This is the case because both programs, SFOP and SDOP, form part of the IRS voluntary disclosure options which, in turn, form part of the much larger US international tax law practice. Thus, in order to be a Streamlined Disclosure Attorney in Minneapolis, the attorney must be first and foremost an international tax attorney.

What is the practical application of this conclusion? Simple and yet highly important – an attorney who offers SDOP and SFOP services must be knowledgeable in other areas of international tax law, because both of these voluntary disclosure options are highly dependent on the facts of the case and the interpretation of these facts in light of US international tax laws and regulations (including FATCA). Furthermore, SDOP and SFOP are directly concerned with various US international tax forms such as FBAR, Form 8938, Form 5471, Form 3520, Form 8621 and many others.

Hence, a search for Streamlined Disclosure Attorney Minneapolis can easily be replaced by a search for a broader category of International Tax Attorney Minneapolis.

Sherayzen Law Office is a top choice when you search for Streamlined Disclosure Attorney Minneapolis

Sherayzen Law Office Ltd. is an international tax law firm that specializes in all types of offshore voluntary disclosure, including SDOP and SFOP. Our professional tax team, headed by Mr. Eugene Sherayzen, is highly experienced in helping US clients around the globe with their US international tax issues, including voluntary disclosure of foreign accounts and other foreign assets. This why Sherayzen Law Office should be a top candidate when you search for Streamlined Disclosure Attorney Minneapolis.

Contact Us Today to Schedule Your Confidential Consultation!

Abusive Tax Shelters on the IRS “Dirty Dozen” List of 2015

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On February 3, 2015, the IRS said using abusive tax shelters and structures to avoid paying taxes continues to be a problem and remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

“The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them,” said IRS Commissioner John Koskinen. “The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Abusive tax shelters are classified as illegal scams and can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Abusive Tax Shelters

Abusive tax shelters have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax shelters. CI’s primary focus is on the identification and investigation of the promoters of the abusive tax shelters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax shelters, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax shelters.

What are these abusive tax shelters? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes. These abusive tax shelters are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The abusive tax shelters are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement may be classified as abusive tax shelter. Another thing to remember is that the promoters of abusive tax shelters often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

Abusive Tax Shelters: Misuse of Trusts

Trusts also commonly show up in abusive tax shelters. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift transfer taxes.

These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

Abusive Tax Shelters: Captive Insurance

Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies. Tax law allows businesses to create “captive” insurance companies to enable those businesses to protect against certain risks. The insured claims deductions under the tax code for premiums paid for the insurance policies while the premiums end up with the captive insurance company owned by same owners of the insured or family members.

The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

In the abusive tax shelters, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS. The promoters assist with creating and “selling” to the entities oftentimes poorly drafted “insurance” binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant “premiums,” while maintaining their economical commercial coverage with traditional insurers.

Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the Code provision. Underwriting and actuarial substantiation for the insurance premiums paid are either missing or insufficient. The promoters manage the entities’ captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.

IRS Pursuit of Mizrahi Bank Clients Gains Steam

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It is well-known that the IRS is in hot pursuit of U.S. taxpayers with undisclosed bank accounts in Mizrahi Bank. There have been a number of victories that the IRS has scored against Mizrahi Bank clients. The latest example of this is the case of Monajem Hakimijoo who plead guilty on February 13, 2014.

According to court documents, Mr. Hakimijoo, a U.S. citizen, and his brother maintained an undeclared bank account in Israel at Mizrahi Bank in the name of Kalamar Enterprises, a Turks and Caicos Islands entity they used to conceal their ownership of the account. Mr. Hakimijoo and his brother used the funds in the Kalamar account as collateral for back-to-back loans obtained from the Los Angeles branch of Mizrahi Bank. Although Mr. Hakimijoo and his brother claimed the interest paid on the back-to-back loans as a business deduction for federal tax purposes, they failed to report the interest income earned in their undeclared, Israel-based account as income on their tax returns. In total, Mr. Hakimijoo failed to report approximately $282,000 in interest income. The highest balance in the Kalamar Enterprises account was approximately $4,030,000.

As further described in the release by the U.S. DOJ, in March 2013, Mr. Hakimijoo was scheduled to be interviewed by Justice Department attorneys and IRS special agents. Prior to the interview, Mr. Mr. Hakimijoo, through counsel, provided the attorneys and special agents with copies of his amended tax returns for 2004 and 2005. When asked if the amended tax returns had been filed with the IRS, Mr. Hakimijoo indicated that the returns had been filed. Shortly thereafter, the IRS determined there was no record of the amended returns being filed with the IRS. When Mr. Hakimijoo was asked to provide copies of cancelled checks to prove that the taxes reflected on the amended returns had been paid, none were provided.

Points of Interest of the Mr. Hakimijoo Case

Several features are prominent in this case. First, the Mizrahi Bank account in question was not in Switzerland, but Israel itself. This is one more example of the IRS interest in countries other than Switzerland. Israel is an obvious target, but it appears that it will not take long for the IRS to expand into the neighboring country of Lebanon.

Second, it seems incredible that Mr. Hakimijoo would engage in such reckless conduct as to gamble on the IRS not finding out that he has not filed the amended tax returns. Equally puzzling is the fact that the guilty plea did not involve any type of a false statement charge.

Finally, unfortunately for Mr. Hakimijoo, the facts of his case were greatly influenced by the use of an entity to conceal the ownership of the Mizrahi Bank account.

U.S. Taxpayers with Undisclosed Accounts in Israel Should Do Some Type of Voluntary Disclosure

Mr. Hakimijoo is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with concealing undeclared bank accounts in Israel that were used to obtain back-to-back loans in the United States. It is unlikely that the IRS will relent its pursuit at this point given the wealth of information that has been collected through the IRS voluntary disclosure programs as well as the Swiss voluntary disclosure program for banks.

The biggest lesson for U.S. taxpayers with undisclosed accounts in Israel and Mizrahi Bank specifically is that the IRS will not limit itself to Switzerland. Hence, there is a great urgency for these taxpayers to commence the analysis of their voluntary disclosure options as soon as possible. Some options may still be open if these taxpayers come forward now; these options may be closed once the taxpayer is subject to an IRS investigation.

Contact Sherayzen Law Office for Experienced Professional Help with Your Voluntary Disclosure

If you are a U.S. person who has (or had at any point since 2007) undisclosed bank or financial accounts in Israel and any other foreign country, you should contact Sherayzen Law Office as soon as possible for professional help. Our experienced international tax law firm has helped taxpayers throughout the world with their voluntary disclosures and we can help you.

Call Us to Schedule Your Confidential Consultation NOW!