When a client has a tax problem, that may also be a criminal tax problem since they crossed the line of mere negligence to civil fraud, extra steps are needed to protect the clients interests. As in all cases, there is not a bright line between civil and criminal tax cases, and many tax cases with the potential for criminal prosecution are resolved through civil proceedings.

A criminal tax case involved when the taxpayer willfully violated the tax laws. The most common examples of this is tax evasion or failing to file a tax return. Typically, the government must institute criminal charges within six years of the due date of the tax return. Criminal tax cases are typically investigated within the IRS by special agents. Many cases start of civil audits, and as information is uncovered that leans toward potentially criminal conduct, the audit can shift to the criminal investigation group within the IRS. Therefore, it is important to recognize the warning signs  that the person handling the civil audit, whether it is a compliance officer of revenue agent, is going to suspend the audit and refer the case to the criminal investigation unit. Since the IRS will not tell the taxpayer about the potential criminal investigation, the clearest indicator that the case was referred is it is difficult to reach the civil auditor after many attempts.   However, before that happens there are warning signs to look for that the case is headed in the direction of a criminal issue when during the course of the audit the auditor asks for many details related to omitted income, the audit is taking longer than normal, the auditor is issuing summons to third parties, or is making copies of all the relevant documents. Most seasoned tax professionals can spot this issue fairly easy.

The next issue therefore, is how to handle the case at that moment you suspect a criminal issue. A IRS special agent will normally want to visit the taxpayer at their home, as a surprise tactic to gather information. The  taxpayer should not let the agent into the home, and should tell the agent they are retaining council to assist with the matter.  Since this initial interview may be the most important event during the case, it has to handled with care. Many honest taxpayers believe that they can talk their way out of trouble, but then they start making admissions and factual misstatements that criminally hamper their case. In most cases, a tax attorney should be the person explaining to the IRS why certain items are missing from the tax returns, and the taxpayer should remain quiet.

When a taxpayer owes the Internal Revenue Service (“IRS), they can enter into a payment plan to pay the taxes owed. Often, under this scenario the IRS may file a federal tax lien to protect their interest in case the payment plan defaults. The federal tax lien is against the assets of the taxpayer, such as real property or personal property. Examples of assets that the lien would go against include the taxpayer’s vehicles, real property, and personal property. Just for clarity, a federal tax lien comes about when you have unpaid taxes. In cases where that unpaid tax amount reaches certain dollar amount thresholds, the IRS will file a notice of federal tax lien to establish its lien status against other creditors, such a mortgage on real property by a bank. Typically, this is important since it matters when the lien has been filed, since the liens typically have to be paid off in the order they were filed. Therefore, if you first first, you would be paid off before a lien filed after you.

From a practical perspective, if there is a notice federal tax lien, it most likley has it most negative impact on real property since its rare that a taxpayer would sell a vehicle or other personal property and the lien issue even be raised by the IRS or the purchaser. This is not the case for real perty since title insurance causes an analysis of the properties title, and tax liens would show up on the lien search, and would have to be paid off at closing.

Therefore, you might ask what do you do if the proceeds of the property sale are not sufficient to pay of the tax lien in full, but you still want to sell the property?  The answer to that question is that by filing Form 14135, Application for Certificate of Discharge of Property from Federal tax Lien,  which asks the IRS to discharge the tax lien from a particular piece of real property in exchange for the fair market value of the IRS’s interest in that real property.  T complete the application, you need to attach the deed to the property, an appraisal, county valuation, contract of sale, the title report, and proposed closing statement. Be careful with the appraisal since the IRS will use that report to justify the monies it receives in the sale. This can sometimes be problematic since if the appraisal was ordered for the bank to justify the loan amount, it will typically be appraised at a value very close to the contract price. When this is a problem is when the seller, in order to entice a buyer, offers a sellers concession by inflating the selling price and then the bank loan is paying for the closing costs which helps the buyer. From the IRS perspective, they sometimes see the higher selling price (over fair value) and want that amount. In most cases we can correct their misunderstanding on this issue, but it is a item to pay attention to if your are looking to discharge a tax lien and also offer a seller’s concession.

It is always better to file your tax returns, even though you can not pay the taxes owed since it lowers the failure to file penalty which can amount to about 25% fine. If the IRS owes you money, you will not receive the refund unless you file a tax return. If you do not file in three years from the tax filing date, your anticipated refund will be lost forever.

If you owe tax, the IRS will file a substitute tax return, at the highest tax rate possible. They will then take steps to collect the tax debt, even though it might be the wrong amount. The IRS often shares these calculations with the state tax authorities, and they charge a tax bill as well. The states also have the power to revoke drivers licenses for not paying your taxes, thus the penalties can be very harsh.

a5-300x300The penalties for not filing and not paying on time accrue until the tax is paid. There are limits, such as 25% of the tax owed for not filing on time at a rate of 5% a month, but overall the quicker you pay the taxes, the lower the tax penalties will be. Therefore, it best to reduce the tax penalties to avoid paying thousands more in taxes than what you would have owed.

There is no denying that a sales tax audit is not a pleasant encounter with the New York State Tax Department. I guess any interaction with the tax authorities is likely to produce an uncomfortable experience but going through a detailed sales tax audit is like going to the dentist. As a tax attorney who assists clients with providing guidance through all phases of the sales tax audit process the goal is to have the audit produce minimal pain and little financial loss.

a8-300x301-299x300Through many tax audits, I have gained an original perspective on the motivations on the State Tax Department to improve their taxing abilities by being aggressive with imposing taxes. As troubling as this may appear, it must be remembered that the best offense is a great defense. In many cases, a typical client does not spend the time to compile the necessary and sufficient documents to meet the needs of the auditors. This is a huge mistake, but you may ask why do we care about the tax auditors, and if they review the right records?  In a few words, they will make your life hell if your records are poor. Often, most taxpayers do not have the correct records, so the first step is to organize their records which will make the audit go much better, and reduce the cost of crazy wild guesses by the tax department in their quest to create a tax bill. Any time a client does not have ample tax records, the tax laws and regulations allow the state to start calculating the taxable sales, and they never come out on the low side.

Seeing that having good records can be so critical to a successful sales tax audit, I spend a lot of time with my clients to organize and improve their sales tax records before the audit begins. They are often shocked at the level of detail we make their records. When the actual audit starts, we (my client and I) sit along with the auditors and be available to answer questions and try to manage the process. Trying to influence the auditor is key, and honey works better than vinegar, if you know what I mean. Most clients are uncomfortable at first being at the sales tax exam, but after a while they understand the value in being there to help reduce their tax bill. Also, by showing our real human side and showing that we will not be bullied around, in all times in a friendly nonetheless productive manner, a positive difference can be had. If the sales tax auditor is being debilitating to constructive progress, then we can ask to speak to the persons supervisor and division group manager if we decide that would be productive. If all else fails, and where the client’s records have no value we try to reach a low tax settlement. In the conciliation conference, a mediation comes about between the taxpayer and tax department to come to a settlement. Often the results of this process are very good, and a reasonable result can be obtained to lower the tax bill to amount that can be paid all at once, or a reasonable payment plan can be established.

Usually, the most panicked and upset clients call me and when they have not filed their tax returns in many many years, and are extremely worried that by this inaction they will be arrested, or worse thrown in prison. Occasionally, clients are audited for non-tax problems ( for example workman’s payment insurance, highway permits) by the IRS or State of New York, and the auditor makes the discovery that the taxpayer has not filed their income tax returns in a long time. This “great” discovery causes a lot of angst to the taxpayer, but usually the IRS and the States are not quick to press charges if the tax returns are filed quickly (see list below of action steps needed). Typically, you only have a criminal tax problem is you intentionally do not pay the right amount of taxes, so usually they issue is manageable. Therefore, non filing typically does not cause the same level of problems are actively avoiding paying taxes, and your almost never going to jail.  Please keep in mind, in New York State it is actually a felony to not file your income tax returns for at least three years in a row where you owe taxes for each of those years. It is not often that NYS Tax uses this law to charge a taxpayer with a crime, but I have seen it applied in hundreds of cases, so it is not overly rare that they do.

a7-300x300The IRS and NYS tax auditors normally take the approach of creating their own estimated version of the income tax return you failed to file (called a substitute tax return), and charging the taxes owed based upon their computation based on limited information. Please keep in mind they have no incentive to lower your tax bill, so their work is suspect. The crucial point is that the substitute tax returns tends to overstate the tax debt amount, since they give you no deductions and use  the highest possible tax rate. As they say, you never get something good for nothing.

The very long standing IRS’s voluntary disclosure policy applies to a taxpayer who: 1) Informs the IRS or NYS that they failed to file a tax return, 2) You make the disclosure prior to being notified by the tax authorities, or before you are under criminal investigation for failing to pay the right amount of taxes, 3) File the correct income tax come returns, and cooperate with the tax authorities (NYS and IRS) in ascertaining their correct income tax liability, and 4) Make full payment of the amount of the sales or income taxes due, or if are unable to make payment in full, to create a monthly tax payment plan for the tax balance owed.

In the event that you are in tough financial times that makes it difficult to pay your tax obligations, and this fact can be verified to the IRS that collecting from you will generate a monetary hardship, the IRS will place your tax account with them into a noncollectable position known by the IRS as conditionally “currently not collectible”. This status could be granted to both people and business corporations. Generally, this classification will be reexamined in one to two years to see if your finances have changed and you are collectable. Through the entire time that your accounts is deemed noncollectable, the IRS will not levy you or ask for payments. Most states do not follow this same rule, unfortunately.

a10-300x300In nearly all taxpayer situations, the IRS collects economic information of your noncollectable position simply by causing the taxpayer two complete comprehensive forms, which are forms 433-A, 433-B, and 433-F, that are used to verify your income and assets and your financial ability to pay your back taxes. These forms are actually challenging to complete properly since you wish to provide correct information used by the Internal Revenue Service to factor your ability to pay, while also making sure the payment plan is not to high in amount and you default it.  The factors the IRS considers is s persons age group, education level, their employment position, the cost of residing in the region of the country the taxpayer lives, medical problems, to name a small number of items they review. The IRS income uses countrywide and regional standards, consequently deviations from the standardized amounts have to be validated for every case.

The IRS defines financial hardship in perhaps a means that you’ll would not. If you don’t have any belongings, as well as your income is actually simply only plenty enough to cover your simple bills there is usually an excellent chance the IRS wouldn’t normally view your income as being a good levy source to focus on and you’d be deemed currently not really collectible “CNC”. For those who have belongings, or middle/high income, this will be more challenging to prove this position although having possessions or retirement assets may not result in not obtaining this status.  However, if the IRS recognizes you to be noncollectable, and you incur a fresh taxes debt, they will start collection activity again.

What you need to prepare for our first meeting really depends on your circumstances, but at the very least you should gather enough information, so you can answer help us answer these two questions. First , which tax return periods have not been filed (a range or estimate is fine), and do you have a general idea of what you owe and to whom?

a5-300x300The reason I need to have information to answer these two answers, and also as a way for you to come to grips with the issue and understand the problem that needs to be solved, is that the amount of tax debt you owe is very important (as I will explain later), and to who you owe it to drives the choices we have to offer to solve the tax issue. The reason the later question needs to be answered is that the various taxing authorities have different rules that they follow when deciding on how to handle a tax matter. For instance the IRS and NYS Tax Dept. have very different rules regarding establishing a payment plan, or filing an offer in compromiser. The amount owed is important, since a payment plan can be set up quickly (1-2 months), versus a offer in compromise settlement takes much longer (5-9 months). The solution required also depends on how old the tax debt is, and your finances. Overall, these issues are not easy, and that’s why we offer a free consultation so you get to know me, and also get some information related to how we would attack the issue.

Below is a list of some basic paperwork to collect before the meeting. Please be aware that we do not need all the letters you received, so a sample is fine since the IRS and NYS tax tends to send out many duplicate items over time. Here is the list.

It is always a good idea to understand how a tax debt may be relieved, and what options are available for you.

In most cases, the amount owed to the IRS is a money issue, and does not cross the line to being a criminal matter of being charged with tax evasion. The IRS will charge interest and penalties on the tax debt, so its critical to try to resolve the issue, through a settlement or quickly paying the debt, before the amount increases beyond your control. The IRS debt is special and should be thought of as having more issues than other debts since the IRS can take money from you bank account, or take your wages when you owe them, and they can do all of this without your permission.

a9-300x300The IRS trains their collection people well, so once they get assigned to your case there will be a lot of work to resolve the matter and they will make your life unpleasant. They will send a ton of notices, and even come to your home to interview you. Its best to be polite, but do not give them any detailed information and tell them you need to hire a tax attorney to resolve the issue. They will request financial information in the Form 433-A, which is for individuals, or the Form 433-B, which is the form for businesses. Along with these forms that will require the last six months of your bank statements, and information to verify your income and expenses, such as copies of bills, mortgage payments, pay stubs etc.

When a taxpayer can not pay the IRS a lump sum payoff for their tax debt, they need to create a payment plan with the IRS. There are a number of options to consider when the payment plan is established. Obviously, it is almost always best to create the lowest monthly payment plan amount as possible and then pay more to get the balance down quickly, but not be at risk of defaulting the payment plan if money is tight. Therefore, there a number of factors to consider to get the correct balance of paying down the debt quickly, and not having a future issue. As with other payment plans that you might establish with a creditor, the amount you will pay will depend on the amount you owe, the amount you can afford to pay, and what assets and income you have.

a10-300x300As an overview, the IRS has many programs that allow for payments of taxes over time. The payment plans are within the discretion of the IRS, which means they decide the amount per month they will accept. Often it takes a lot of hard work to get the IRS to agree on an affordable number. The IRS does not give much flexibility with the monthly payment being late once the payment plan is established. In some rare instances, the payments can fluctuate if the person or business has seasonal income, or income on a non-recurring basis, such a lawyer who gets paid on contingency basis.

There are three common ways that you can make payments under the payment plan.

Once you owe taxes to the IRS, they have very specific criteria of what expenses they will allow over the long term when they determine how much they will ask you to pay back per month to repay the debt. To understand the process the IRS uses, it is important to realize they are trying to collect as mush as possible from you, and it does not always matter how much you can afford to pay. From the taxpayers perspective, the goal is to reach a payment plan that from a monetary perspective allows you to live your life in a reasonable manner, and pay down the debt as quickly as possible without incurring unbearable stress.

Tax-HelpOverall, the starting point to determine the amount of your monthly income you can pay each month is determined by the IRS by having you complete either a 433-A, 433-B or 433-F form. These forms are used by individual and business taxpayers. Completing these forms can be very tricky since the IRS does not explain their use in a clear fashion, and often if you just fill them out in good faith you will end up paying them a lot more per month than you can afford. When this happens, most people stop paying their current taxes correctly and the tax issue snowballs into a complete mess.

The IRS national standards for food, and misc. expenses, such as clothing are consistent across the country so that presents a practical problem if you live in an area of the country where the living expenses are high (for instance the metro NY area). There has also established national standards for vehicle expenses, out of pocket health care, and housing. For housing expenses, the IRS does refine the calculation to the state and county level, but in many cases that amount is less than the average person spends for housing. Since it is not easy in most cases to change your housing costs, this is an issue that is not easy to solve. If your costs are within the standard amount, the IRS will not question the expenses so you do not need to prove you paid it.

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