With the recent Equifax Credit Bureau identity theft event, and many prior episodes of personal identifying information being stolen (Yahoo, etc) that appears to happening all the time now, I thought an article would be helpful on how your tax returns are affected by such events, and concrete steps you can take to protect yourself (and your parents if they are elderly).

From my experience as a CPA and Tax Attorney, if you think you are completely protected from identity theft issues by hiring a credit monitoring company, you are partially incorrect. The value of these companies is that they alert you if someone has stolen your identity and used (or try to use) this information to obtain credit. The problem is that often that the notification of this is after the crime has occurred, and you still have to deal with the clean-up. You may be better off pulling your own credit report every four months (from the three free ones you get every year) and doing this work along with a credit monitoring company just to make sure its done correctly. This is also a good way to make sure that your credit information is generally correct, and you can dispute any incorrect items through the credit companies.

Tax-HelpFrom a tax perspective, the “bad guys” are using your social security number and other identifying information  to get tax refunds. They do this by filing false income tax returns with your information, and typically having the refund directly deposited into a foreign bank account they control. When this happens (per the IRS 14,000 times it was done in 2016), you typically only find out when you file your legitimate income tax return, and are told by the IRS that a tax return has already been filed, and a refund already issued. The IRS will not go after you for the false refund, but this creates a huge mess that you will be dealing with for 1-2 years. Well, the question is, how do you avoid such a mess? The IRS has a program where you can request a PIN that they would send you, and you would use when you file your income tax returns. The “bad guys” would not have this PIN, so they would be blocked from filing a false tax return. As with most IRS related matters it is not easy to get a PIN (hopefully this will change someday). To obtain a PIN, you need to file Form 14039 (Identity theft Affidavit) with the IRS, and request one. When you file this form, the IRS will also mark your account as having a higher risk of fraud, and keep an eye on it for you. In addition, you should also obtain and examine your IRS tax account transcripts and review the activity for filed tax returns and refunds. I would take this step every six months. Therefore, with the PIN filing method, and reviewing your account at the IRS twice a year, you should feel confident that you have this issue under control with them.

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Tax issues surround our daily lives, whether it is tax on your income or sales taxes you owe for your business. However, there are times in your life, whether its a sickness, divorce, death in the family, business problems, or just being busy,  that you overlook that there are income or sales taxes to pay. Therefore, it is always good to look back and try to determine if there are tax issues in your past that needs to be resolved now by creating a tax payment plan or filing an offer in compromise. Whatever the issue, a tax debt is never eliminated quickly. For instance, New York State typically has 20 years to collect on taxes that you owe to them. When a tax debt increases with time (due to penalties and interest for not paying on time), your financial well being only worsens and the tax problem only becomes more difficult to resolve. Its best to act quickly and to monitor your tax health. In general terns, the Internal Revenue Service has 10 years to collect the tax once they make an assessment, so this is both a Federal and State tax law issue.

The Issue of Unpaid Taxes and example of lack of contact

At my office about five times a year, I receive a call from a person who use to live in New York State, and then moved out of state many years ago. They call and tell me that there bank account was frozen by New York State, and the monies taken for unpaid taxes. Often, there taxes can relate to tax years ten to eighteen years ago, and involve a business tax debt (often sales taxes). The enforcement arm (i.e. collections department) of the New York State Tax Department does not spend time trying to contact the errant taxpayer, they just take the asset to satisfy the tax debt, so it comes as a surprise (emotional and financial) to the taxpayer that they have an issue. For these people, while they were troubled that their business failed, and leave the state, it only becomes worse to ignore the unpaid taxes since with penalty and interest I have seen tax debts of $20,000 grow to a few hundred thousand dollars. Therefore, it is important to stay in touch with the tax authorities, and provide them with current mailing addresses, so you are not blind sighted by a tax levy (where they take your assets). For the person who simply does not know if they have a tax issue lurking in there past, they can always call the state that they resided in, or the IRS, and ask if they owe any taxes, and also review there own credit report to see if that shows any tax debts.

a1-300x300A recent Internal Revenue Service Office of Chief Counsel memorandum (CCA 201725026) provides guidance on whether the IRS can charge interest on court ordered restitution payments related to Title 18 criminal tax cases. As background, typically when a court orders restitution in a criminal tax case, it is often for an amount equal to the taxes not paid by the defendant due to their conduct. Before Congressional FETI ACT of 2010, the restitution was not viewed as a “tax” under the income tax rules. This act changed that.

The three main issues addressed in this memorandum are:

  1. Whether the court-ordered restitution incurs interest under Title 26 (Internal Revenue Code)

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Many new clients call us in a panic when they receive a letter from the IRS that their income tax return has been selected for an audit. In most cases the client knows that they overstated their tax deductions, or less likely did not report all of their income. In either case,  being caught is not a pleasant result. When the IRS audits an income tax return for deductions, it focuses on whether you have a receipt. From the basic perspective, the IRS is looking for a stack of receipts that add up to the tax deduction taken on the income tax return.

A lot of clients think that a bank statement or credit card statement is a receipt. This is not correct, since a bank statement or credit card bill only shows that the expense was paid, but not the details of the item purchased in order to verify it is a business deduction. Therefore, its important to save the actual receipts to get the tax deduction you are entitled to.

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We often find when a client has not filed in many years that the most important to first address is to gather the tax data needed to prepare the income tax returns.

If the client was an employee during the time period, we can get their W-2 income tax data from the IRS. Typically, then the only items missing would be itemized tax deductions and information about tax dependents.  We would also need their spouses data if we are filing joint tax returns.

If the client was self employed, the process is much more involved. We have to calculate the business income and expenses related to the self employment income. This often means trying to obtain credit card statements  and bank statements to help determine the business expenses, and then start gathering the receipts to back up the expenses. For the income earned, we can usethe bank statements and review the deposits made. With this information, and the information above, we would then be able to prepare the income tax returns.

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On a regular basis (perhaps 4-5 times a month) a panicked person calls my office and explains that the IRS just called them and if they do not send them money that day, that they will be arrested and charged with a tax crime. In most cases the caller did not think they had a tax problem before the call.

In some cases, they do have a tax issue (such as unpaid taxes and a IRS tax lien was filed).  As most callers realize after I tell them it is just a scam and the IRS never calls and requests money that day. The IRS does have collection personnel, that are called Revenue Officers, but they never make such threats. They do visit taxpayers at their homes, and send letters. Obviously, if that happens you would want to get legal assistance if the debt is large (over $10,000). Do not be scammed by the fake IRS Revenue Officers. Since the scam has been going on for a few years, it must obviously be successful. If you are scammed contact the IRS and NY AG office. Since it seems like the elderly are the most frequent victims it would be a good idea for their family to have a conversation with their elder family member and explain that frauds like this happen, and they should call you before they send the caller any money.

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Often clients meet with us and they are suffering from a tax mess. The IRS (or NYS Tax Dept.) is pursuing them and they have often fallen behind in preparing tax returns or making tax payments. One aspect of a tax attorney’s job is to help figure out the mess and assist people with their tax problems. To that end goal, its important for potential clients to bring a summary of their tax problem. This could include information of the tax return years not filed, general approximate amount of the tax liability, and the type of taxes owed (income, sales tax, payroll tax). Along with this information, bring any letters you received from the IRS or NYS Tax Department. The value of the tax letters is that it states the amount of the tax debt, who it’s owed to, the tax years and type of tax owed. Most clients do not understand these letters, so bring them to the meeting and we can quickly gather that information. Its also helpful to have an idea of the value of your assets and the amount of debts you have. Estimates are fine, but this information helps us decide the best resolution of your tax case (i.e. a tax payment plan or an offer in compromise). On the flip side, it would not be helpful at the first meeting to bring boxes of information since we do not need all that details at this point. The overall key is to spend a few hours before the meeting to organize yourself and this will pay dividends at the meeting.

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The benefits of disclosing under the IRS streamlined voluntary disclosure program are often thought of the solution for a client who has 1) not filed their FBAR reports, 2) have undisclosed foreign income, and 3) whose conduct was not intentional (non tax fraud cases). However, the limits of the streamlined disclosure program do not require that you must have all three factors in play to be eligible. If you simply have under-reported foreign income , but you filed all your FBAR reports, and disclosed the assets in your tax return, then you are still eligible to file under the program and get the benefits of the program if you just made a mistake in calculating your income. The main benefit of the program is that the outcome is much more certain than a quiet disclosure (where you just mail in the amended income tax returns). The penalty is five percent of the asset balance, plus tax and interest on the under-reported income. Under a quiet disclosure, you could be charged with higher penalties, or even criminal conduct if the IRS disagrees that your conduct was unintentional.  Therefore, while no solution is risk free, the streamlined disclosure may be useful tool in many cases.

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There are major differences in the way that the NY Tax Department and the IRS view a tax debt.

The NYS Tax Department, especially with unpaid sales tax, views the unpaid taxes as money that needs to be paid to them. They are less willing than the IRS to understand that a taxpayer will not be able to pay them back all the taxes, interest (in the 7.5% to 14.5% range) and penalties they owe. They want to be paid back in up to five years through a payment plan, even though legally they have twenty years to collect. When such a payment plan becomes impracticable since the monthly payments are not affordable, an offer in compromise may then be the best solution since I find that the offer in compromise group is willing to work out a fair deal to resolve the tax issue.

The IRS, on the other hand, is more flexible than NYS Tax Department since if you can prove to them that you only have enough income to pay basic living expenses (rent, food, transportation, etc),  they will allow the tax debt payment be differed until your income rises to a level where you can pay toward your tax debt and also pay basic living expenses. The IRS calls this “status” currently non-collectible, and it helpful even though interest (usually about 3-4%) is charged on the unpaid debt, since this status allows for a normal lifestyle and allows for greater planning to take place to resolve the tax debt through an offer in compromise. I have also found that the IRS allows for more flexible payment plan arrangements, such as tax payment plans that  take into account seasonal income issues (contractors, etc in the winter), and modified payment plan where for some period of time (six month, one-year, etc.) the payment is lower to allow the taxpayer to adjust their living expenses to enable them to make the payments. Lately, NYS Tax Department is less willing to entertain the modified payment approach.

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It is easy to think the IRS is not an easy organization to deal with. From my experience, that is true most of the time. One aspect of their collection efforts where they do show kindness is when they view a taxpayer as currently non-collectible. What this means is that even though the taxpayer owes money they are unable to pay off the tax debt based on the taxpayers current income and expenses. From my experience, a taxpayer who makes less than $50,000 a year and has court ordered payment (such as past debts, child support) often falls within this category. The tax debt still accrues interest. However, the delay buys time to submit an offer in compromise to resolve the tax problem.

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