But a word of caution to anyone thinking about holding back a little and not giving Uncle Sam his dues: however smart you think you are, and however cleverly you think you can hide various income from the taxman, the IRS has far smarter people on the payroll, and sooner or later they will catch up with you.

If anyone is left in any doubt over this, a quick look at the so-called rich and famous should paint a very obvious picture. After all, these are the people we look up to; these people are the achievers, the successful ones, and they’ve surrounded themselves with managers and accountants. And yet, despite this seeming shield of invulnerability, the IRS – just like the Mounties – always seems to get their man.

Names like Lindsey Lohan and R. Kelly are commonplace in the celebrity train wreck gossip columns, both with high-profile tax ‘issues’ with the IRS among their many other woes. However, there are plenty of far more illustrious and wholesome names who have fallen foul of the IRS.

Just last week multiple Grammy winner Lauryn Hill was convicted of tax evasion and will spend the upcoming months in federal prison, but she is just the most recent in a long line of respected celebrities who have incurred the attention (and wrath) of the IRS.

Hollywood demigod Martin Scorsese had a $2.85 million lien levied against him by the IRS. Champion of green fuels, advocate of marijuana, all-round folk-hero and close friend of President Jimmy Carter, Willie Nelson had all of his belongings (including six houses) seized and auctioned off by the IRS after he failed to pay ‘the man.’ But for the granddaddy of all tax offenders, the Vice President of the United States was even forced to resign from office after (amongst other things) failing to pay taxes. In fact, had Spiro Agnew remained in office the soon-to-happen Watergate scandal would have promoted him to President and leader of the free world.

The moral of these tales is probably ‘suck it up and cut the check to the IRS’, because if even the Vice President got caught, you will too. Another lesson to be learned here is that it’s also a wise move to have someone who knows the tax laws every bit as well as the IRS to be on your side. Whether you’ve already fallen foul of the IRS and need some help, or you simply want to stay on the good side of the taxman, an IRS tax lawyer can be a useful ally.

He gives small mention to large amounts of cash that have been spirited out of the country and invested in tax havens around the world. Treasury has broken into some of the Swiss banks, but there are a lot of other tax havens that have not been touched.

Why doesn’t the IRS do more to correct this problem?  It tries, but the problems are huge.  IRS has to administer an obscenely complicated set if laws with limited resources.  It can only audit about 2% of all returns.  Where cash is not deposited in a bank account it is very difficult to detect.  Indirect methods of determining income by measuring expenditures can detect unreported income, but the audit costs consume limited resources and it cannot get to everyone.

This is not a simple matter. The first part of the analysis is whether any of the various exceptions to inclusion in income provided by §108 of the Code allow you to not include the forgiven debt in income. Exclusions provided by §108(a)(1) are:

(A) Discharge in the context of a Title 11 (bankruptcy) case
(B) Discharge to the extent of insolvency
(C) Discharge that comes from qualified farm indebtedness
(D) Discharge that comes from real property business indebtedness
(E) Discharge of qualified principal residence indebtedness
These exceptions are very complicated and require detailed factual and legal analysis. If you are able to exclude indebtedness under the (A) through (C), §108 then requires a reduction of tax attributes. You must determine the extent to which you have tax attributes and the order in which they are to be reduced.
A further complicating factor in this analysis is whether you are personally liable for the debt or whether it is non-recourse. That distinction makes a significant difference in how the transaction is reported. This requires an analysis of the instruments creating the debt and of state law. If there is no personal liability, there is no debt to be forgiven or discharged and there is no income to report.

When the debt forgiveness comes from a foreclosure or short sale, two parts of the transaction that must be addressed in the return. The first is whether there is gain or loss on the disposition of the asset. This requires a computation of adjusted basis, and if we are dealing with your house a determination of whether it qualifies as your principal residence. The second is the consequence of the discharge of the debt. In addition to these substantive legal considerations there is the further complication of the forms, instructions, and software used to prepare the return.

Reporting FOI on a tax return is no simple matter and this is not a task you should undertake without competent, professional help. You need to get the transaction property reported and documented on your tax returns for federal and state purposes. If you fail to do that, the likelihood of your return being audited goes up considerablyand you may have to address the issues again years later in an audit.

JK Harris

In April of 2009, Texas Attorney General Greg Abbott sued JK Harris and related entities asking that they be enjoined from violating the Texas Deceptive Practices Act.  The complaint alleges that more than 1,000 complaints were received from consumers who had paid for work that was not done; that the JK Harris advertisements represented that tax debts could be compromised when JK Harris well knew that IRS compromises had become extremely difficult to obtain; that JK Harris advertises that it has over 325 offices in the country implying that consumers could sit down with someone who would work on the merits of their case, when in fact, all the work that JK Harris does is handled in a facility in South Carolina and the offices scattered around the country are merely sales offices; that representations were made that cases would be handled by a case manager, but in practice the case managers could seldom be located.  The advertising implies that the work would be done by tax professionals when almost all the work was done by non-credentialed clerical people.

The case was settled and in April 2011 with JK Harris paying more than $1.2 million and agreeing to injunctive relief.  JK Harris has a long history of consumer protection litigation with the state Attorneys General.

TaxMasters

In December 2010 Minnesota Attorney General, Lori Swanson, sued TaxMasters, Inc., a Houston based tax relief company, alleging that the company got consumers to pay advanced fees of $2,000–$8,000 by misstating the help it would provide people with unpaid tax bills.  The Minnesota Attorney General press release states the following:

TaxMasters heavily advertises on late-night television. In 2009 the company spent nearly $14 million on its television, radio and Internet advertising campaigns. Consumers who call TaxMasters talk to a “tax consultant,” who is actually a salesperson. A job ad for this position states: “Previous tax knowledge is not required, but a firm understanding of the sales process and of selling services… is a strong plus.” Salespeople often make unrealistic promises of the company’s ability to help in order to dupe consumers into paying thousands of dollars in advance fees. The company also falsely told some consumers it could put an immediate stop to collection efforts, such as wage garnishments, levies, or liens. The lawsuit alleges that TaxMasters sometimes left people in worse financial shape after paying the company’s advance fees, failing to respond to important deadlines or requests of tax authorities.

Among other things, TaxMasters:

Overstated its ability to reduce or settle peoples’ tax obligations.
Charged consumers thousands of dollars in advance fees for help in reducing tax bills that the company knew or should have known would not be negotiated by the IRS.
Failed to deliver on its promises and sometimes even failed to meaningfully contact the IRS.
Failed to make refunds to consumers who complained that the company did not take the promised action.

Tax Masters is a Nevada corporation with its headquarters in Texas.  The lawsuit was filed in Hennepin County District Court and alleges that the company engaged in consumer fraud and deceptive trade practices.  It seeks restitution for consumers, injunctive relief, and civil penalties.

This lawsuit is the latest in a series of nationwide enforcement efforts in recent months against tax relief companies that charge consumers thousands of dollars in advance fees based on inflated promises. In May, 2010 the Texas Attorney General filed a lawsuit against TaxMasters, which is pending.  In October, 2010 the Federal Trade Commission filed a lawsuit against another tax relief company, American Tax Relief, LLC. In August, 2010 the California Attorney General filed a lawsuit against another large tax relief company, Roni Deutch.

http://www.ag.state.mn.us/consumer/pressrelease/101216taxrelief.asp

Roni Deutch

The backtaxeshelp website reports:   

Months after being sued by California Attorney General for $34 million, Roni Deutch has closed her law firm and surrendered her license.  The “Tax Lady” has made it into the news many times since last August when the court prohibited Deutch from destroying evidence and she proceeded to shred millions of pages of documents at her firm.  Then on April 20th 2011 the California Attorney General asked the court to hold Deutch in contempt of court and imprison her up to 5 days for each violation. In addition to shredding documents, she also violated a preliminary injunction by not issuing $435,000 in refunds to her clients.

http://www.backtaxeshelp.com/tax-blog/tax-news/roni-deutch-tax-lady.html

Shopping for Professional Help

Here are some questions to ask before hiring anyone to handle your case:

Who will handle my case?
In what state are they licensed to practice as an attorney or CPA?
What is their CAF number? (That is the number issued by the IRS to indicate they are enrolled to practice before the IRS and subject to discipline by the IRS.)
Where is their physical office located?
What are my problems?
What will you do for me to solve each of my problems?
What will it cost?
How long will it take?
What exactly are we trying to achieve?
Do you feel confident about being able to achieve these goals?

If you cannot get straight answers to these questions, keep looking. As a minimum the professional should be able to define the problems, outline the steps necessary to solve it and suggest a cost range for their work.

When do you need help with a tax problem?

You need help when you cannot understand the problems and work them out by yourself.  There is no shame in asking for help.  We have a painfully complicated tax system and people whose exposure to it is filing a tax return once a year simply find it confusing.  The people who work for IRS find it confusing. But with work the problems can be figured out and solved.

Audits.  If you have an audit notice, it is because the IRS has determined that there is something wrong with your return. The IRS is going to take your financial life apart and look at it in great detail. You will be confused and under a lot of pressure. You need to be represented by someone who can review your returns, determine the extent of your exposure, and negotiate the best outcome for you.

Collections.  If you have collection notices from IRS, you should start with a review your returns for accuracy.  If the IRS had made up returns for you, it will not have given you credit for the cost of sold, for expenses of a business, or for itemized deductions or exemptions to which you may be entitled. Accurate returns may need to be prepared.

After the questions about accuracy have been answered and the extent of the liability established, you need someone to represent your interests in negotiating how the debt will be handled.  Most of the IRS collection activity is handled by the Automated Collection System (ACS), a computerized collection program staffed by people in call centers all over the country. The ACS people assume your account to be accurate and their sole mission is to collect at the lowest possible cost. They will not ask you about the accuracy of your returns or anything else that might benefit you. They will extract collection information from you and make an arbitrary determination of what you can pay. Their job is to collect the account, not to represent you.  You need a competent representative who can determine the accuracy of your accounts, who can obtain time needed to work through the problems, who can set up a plan for resolving the accounts that works for you, and, most importantly,  who can stand between you and the IRS.

Who can help you with the tax problem?

I outline below some of the professional credentials of the main players in the area, but the most important question in selecting a representative is whether the person you are talking to someone has a history of bringing cases like yours to a successful conclusion.  You need to find someone who works your kind of case on a consistent basis and who should be able to solve your problem at a reasonable cost.  Look at their advertising material.  Do they routinely do the kind of work you need?

Start with me.  If you are here you have read my website.  Email me at kemblewhite@cox.net or call me (805) 682-6165.  I will evaluate your case and give you a proposal for handling it. There is no charge unless we agree on terms and you hire me.

Lawyers.  Lawyers are licensed by states to practice in state courts after they have graduated from law school and passed a bar examination.  A law license qualifies a person to practice in some courts and before the IRS, but does not by itself suggest competence in tax matters.  How does a lawyer become competent in the tax area?  It is normally through a combination of taking tax courses in undergraduate and law school and of work experience in handling tax matters for or against the IRS.

Accountants.  Certified Public Accountants (CPAs) are licensed to practice and hold themselves out as CPAs after having passed all parts of the state CPA examination and having completed the required practical experience. The accounting profession does not have special graduate schools as do lawyers or doctors.  Experience generally comes from work in accounting firms, businesses and government. In addition to CPAs there are also accountants who are not certified and these are often referred to as public accountants.

Enrolled Agents.  The IRS has special examinations for people who do not qualify to practice before the IRS by virtue of being a lawyer or a CPA.  People that take the test and pass are given a CAF number and are authorized to practice before the Internal Revenue Service.  They are described as enrolled agents.

Geography.  With the arrival of the electronic office, geography has diminished as a barrier in the search for professional services.  I like it when clients can come into my office and see me face to face, but I have for a number of years been working with an employee benefits company that sends me clients from all over the country.  It has worked out well.

Pricing.  You may think that you cannot afford a tax lawyer to handle your case.  I have worked on a number of cases in which tax representation firms have done prior work and I have been surprised to find that my price structure is lower than that of the TV advertisers.  Beyond that, I do my own work, I answer phone calls and emails in a timely manner, and I do not have a history of professional complaints.

April 2013 Postscript:

J.K. Harris filed for a Chapter XI bankruptcy in January 2012.  That case has been converted to Chapter 7 (liquidation) and the trustee is trying to recover almost $5 million allegedly looted by Harris.  Here are the links to a Wikipedia article on J.K. Harris and Company (http://en.wikipedia.org/wiki/JK_Harris_%26_Company) and to an article by Stephen Dunn entitled Tax Resolution Scams 101 (http://www.forbes.com/sites/stephendunn/2010/09/07/tax-resolution-scams-101/).  If you need help please contact me.

Kemble White

Eight years ago I limited my practice to tax controversy matters.  Most of the work involves unfiled returns, collection problems, audits and Tax Court litigation.  Restricting the scope of the practice has dramatically increased efficiency and productivity. I work the same problems over and over, and the line from beginning to end gets shorter and straighter.

Technology continues to make things easier.  We are in the process of going paperless. That puts case files at our fingertips, eliminates searches for paper documents, and spares trees.  We have invested in tax return software and that software cuts the time to prepare a tax return in half.

My work is made much easier by the talents of Margarite Mercado who has been working with me for several years.  Margarite arrived with superior computer and secretarial skills and with practice has become better and better at pulling together tax returns and financial statements.  We work on complicated factual and legal problems and being able to delegate and review accelerates the creative process.

Here are some items of general interest:

Offers in Compromise.  Five years ago, 85% of the offers in compromise submitted to IRS resulted in negotiated settlements.  The IRS became overwhelmed with what it regarded as frivolous offers generated by tax representation firms and it effectively closed its offer in compromise window.  Now about 15% of the offers submitted result in successful conclusions.  The Service papers offers to death and looks for reasons to turn them down.  Will this trend change?  We look for signs. In the meantime we turn to other remedies.

ACS.  IRS collection activity starts with the Automated Collection System (ACS), which is a nationwide call center.  It is staffed by low grade people who extract information from taxpayers and try to squeeze as much out of them as possible.  There are long phone waits and no way to talk to the same person twice. I found that it is much easier to work collection cases by appealing IRS collection decisions and getting the case handled by an IRS Appeals Officer who can assemble a paper file, think through the case with you and come to a reasonable conclusion.

Foreign Accounts and Business Interests.  You may have read that IRS has gotten UBS to turn over 4,000–5,000 customer names and has been aggressively pursuing high net worth United States taxpayers who use foreign banks to evade U. S. taxes.  IRS developed a voluntary disclosure policy tailored to undisclosed foreign accounts.  That announced policy had  now expired deadlines and we in the practice try to figure out what the voluntary disclosure policy is going to be for those who did not make a deal before the last deadline.

Taxpayers who have foreign bank accounts are required to check a box on Schedule B of the tax return, disclosing the existence of those accounts; and they are also required to file a separate annual disclosure of those accounts. Taxpayers having interests in foreign corporations and partnerships are required to file annual disclosure statements disclosing their interests.  There are severe penalties for failing to make these filings. The dark side of the IRS enforcement program is that immigrants that have passive accounts or small business interests  in their countries of origin may be subject to large penalties and a great deal of administrative harassment over situations that have little or no substantive tax impact.  I had one client who had close to $1 million in penalties assessed against him when he failed to respond to notices from IRS in respect to his interests in two foreign entities.

Tax Preparation Firms.  We are bombarded with the TV and radio advertisements of tax preparation firms offering to settle tax debt for pennies on the dollar.  This is bait and switch advertising.  If you go to my website, I have an extensive article on lawsuits that have been brought by states Attorneys General against various tax preparation firms. The common complaint is that they spend all their money on TV advertising and sales closers and have nothing left to pay the people that should be doing the work to solve the problems.  The complaints say that these firms take retainer fees and do not complete the work.