FAQs

Am I Going To Jail For This?

I think everyone understands the word "tax", so I won't bore you by attempting my own definition. The word "amnesty" means forgiveness, pardon or leniency by the government. Amnesty is used most often in the context of political offenses or crimes. Quite simply, "tax amnesty" means forgiveness of tax debts by the government.

I credit Dan Pilla for coining the term "tax amnesty". In about 1984, Dan wrote a book called: How Anyone Can Get Tax Amnesty. In his book, Dan uses tax amnesty to describe four programs by which a person can be relieved from tax liabilities. The programs Dan describes in his book are:

1. Chapter 7 Bankruptcy;

2. Chapter 13 Bankruptcy;

3. Offer in Compromise;

4. Being declared "currently uncollectible" by IRS.

In the Practice Areas, I describe the IRS Installment Agreement, but I have not previously described currently uncollectible status. This is not really a tax amnesty program, because the tax debts are not forgiven. The IRS merely determines that they can't collect any money from you right now, because you own no assets that the IRS can seize, and all of your income is used to pay your basic living expenses. Currently uncollectible status doesn't last forever. The IRS usually leaves you alone for about eighteen months, and then they come back to you to reevaluate your financial condition.

I would add one other program to Dan Pilla's list of tax amnesty programs. This program is the audit reconsideration. Audit Reconsideration, which is one of my specialties, is a valuable tool for re-determining tax liabilities in situations where the IRS has arbitrarily denied deductions or increased income, or where the taxpayer failed to substantiate deductions at the audit, or simply didn't participate in the audit. The Audit Reconsideration is also used where the IRS has filed returns for the taxpayer (called "substitute for returns") without the taxpayer being able to claim any deductions or credits. I will provide more details on the audit reconsideration in a later update.

I am very experienced in all of these forms of tax amnesty. Please contact me if you are interested in obtaining amnesty.

Am I Going to Jail for This?

In my practice, I often meet with clients who haven't filed for a number of years, or if they have filed, they owe the IRS a lot of money. Many of these folks are scared because they haven't filed. And nearly every one of the non-filers didn't file because when the filing date rolled around, they didn't have the money to pay the tax. The first question most new clients in this situation ask me is: "Am I going to go to jail for this?"

My answer to the clients who have filed but owe the IRS money is, "Definitely not. You haven't committed any crime." It is almost never a crime to not pay your income tax liability owed on a filed return.

My answer to the clients who have not filed returns in a number of years is: "You have arguably committed the crime of willful refusal to file a required return, but the odds of you going to jail for this are virtually zero." People who are prosecuted for willful refusal to file a return generally fall into two categories.

The High Profile Taxpayer. The first category consists of high profile individuals whose prosecution will make headlines and scare the rest of us into compliance. Prosecution of Joe Blow, twenty-five-thousand-dollar-a-year carpenter, just doesn't make good press. But Leona Helmsley--now that's a different story. Just ask Rudy Giuliani.

The Tax Protestor. The second category at risk for prosecution is the blatant in-your-face style tax protestors. These are people who claim, for various reasons, that they are not required to file returns, there is no law requiring them to file returns, and the "revenuers" don't have the power or the guts to prosecute. There is nothing that makes federal law enforcement officials more resolute than a defiant tax protestor with a copy of the United States Constitution in one hand while the other hand is raised in the "Dallas is No. 1" middle finger salute.

The wisest and best course for everyone is to timely file all returns when due. Even if you can't pay the tax, go ahead and file the return. That way you will steer clear of any criminal problems. But even if you have unfiled returns, you are not likely to do time at Club Fed as long as you are not high profile or a tax protestor. If you think we have a prison overcrowding problem now, just imagine if the government prosecuted every delinquent filer. The Feds would have to rent the whole state of Montana to hold everyone.

If this FAQ strikes a chord with you (you non-filers know who you are), why don't you contact me? Let's talk about your situation. I have helped hundreds of taxpayers deal with delinquent tax returns and liabilities. Imagine how well you'll sleep when you stop worrying about the Feds coming after you.

Can I Get an Extension of Time to Pay My Tax?

Yes. The extension of time to pay tax is obtained by filing Form 1127. The extension will allow you to avoid any late payment penalties, but it will not avoid interest. You should understand that Form 1127 is an obscure form, which the IRS is not likely to tell you about. Let me relate a conversation I recently had with the IRS about their Form 1127 on their toll free help line.

This conversation demonstrates two things clearly:

• First, you can get an extension of time to pay your taxes. The way to do this is to file IRS Form 1127. Don't get me wrong, however, this is not a sure thing. You must have some reasonable excuse for not being able to pay your taxes on time. "The dog ate my homework" will not work! Some examples of reasonable excuses that will work are set forth in the IRS Form 1127 instructions. In addition to the types of excuses set forth in the IRS Form 1127 instructions, it seems to me that such things as loss of an important account, serious illness, family tragedy, and theft would also qualify. You will still be charged interest on the underpayment of tax for the entire extension period, but you will not be charged with any late payment penalty if your IRS Form 1127 request for extension is granted by the IRS.

• Second, the IRS won't tell you about IRS Form 1127. I don't know why the IRS is so coy about the existence of Form 1127. But you don't have to take my word for it. Call them yourself at the toll free IRS information number in the government section of your local phone book and ask whether there is a way to get an extension of time to pay your tax. See if IRS tells you about Form 1127. They have never--in more than a dozen test calls over the last ten years--volunteered any information about IRS Form 1127 to me. Maybe you'll have better luck. After all, we are now dealing with the "kinder and gentler" IRS.

Do I Have A Right To A Hearing Before The IRS Seizes My Assets?

The short, sweet and simple answer to this question is: Yes. But this hasn't always been the case. Before the IRS Reform and Restructuring Act was passed in July of 1998, IRS would routinely seize assets with little or no warning and with no meaningful opportunity for appeal. You've all heard the stories of the relentless, Javert-like IRS Revenue Officer who seizes paperback books, plastic dishes, moth-eaten clothing and other worthless stuff; not to get any money, just to cause hardship for the tax debtor and to generate fear in the hearts of every other taxpayer. Well, most of those stories are pretty much true. The IRS was and still is relentless in its quest to, as my friend Dan Pilla says: "Get the money."

Fear not fellow taxpayers! There is now a provision that allows a taxpayer to have a "due process hearing" before any collection action is taken. What is a due process hearing? In general, it is a hearing before the appellate division of the IRS in which the taxpayer can raise issues such as whether an installment agreement would be better, whether the taxpayer is an innocent spouse, and whether the amount of the tax is correct. This last issue is probably available only if the taxpayer never received a notice of deficiency with respect to the tax.

The best thing about the due process hearing is that it stays the collection process while it is pending, and you can appeal the decision to Tax Court if necessary.

The form for requesting the due process hearing is Form 12153. That form can be downloaded from the IRS's website: irs.gov. If you need to request an IRS due process hearing, don't delay. Contact me today.

Is My Home-Office "Audit Bait"?

At a recent social gathering, a friend of mine cornered me and told me he had just received a notice of audit. My friend wanted to know what triggered the audit. He said:

"I just know it's the home office deduction I claimed. Those deductions and that separate form you have to file to claim it; it's just a giant audit red flag."

I represented my friend in the audit, and it was clear from the start that the home office deduction did not "cause the audit." The audit was probably "caused" by the fact that my friend had made a very large non-cash charitable contribution for which he took a proper deduction. In the audit, I probably spent less than two minutes proving that the home office deduction was legitimate. I spent twice as much time making small talk with the auditor about her family and the weather, but the charitable deduction was much harder.

This experience convinced me that IRS spokesman, Don Roberts, was telling the truth when he said this about the home office deduction: "the audit frequency steadily decreased until by mid-1994 the issue wasn't even in the top 30 and today it's not even being tracked as a frequent audit issue." Roberts also said: "I am not aware of any current program targeting the home office deduction for audit." The home office deduction used to be in the top ten on the IRS's audit hit parade, but that was before there was a separate form (Form 8829) for the deduction. Prior to the separate form, the home office expenses were just lumped in with (IRS would probably say "hidden among") the regular Schedule C business deductions. IRS is now probably more concerned with whether you are entitled to the deduction in the first place than how much you deduct. Form 8829 can be found here: http://www.irs.gov/pub/irs-pdf/f8829.pdf.

Finally, here is my rule for all deductions, including the home office deduction: If you are entitled to the deduction, take it! You should not give the government any more or less in taxes than they are entitled by law to get.

Who Is an "Innocent Spouse"?

The innocent spouse provisions of the Internal Revenue Code may be the most taxpayer friendly provisions in the entire Code. I have used these provisions to save thousands of dollars for my clients. The innocent spouse rules break down into essentially three separate kinds of relief for a spouse's joint tax debts.

First, there is the innocent spouse election which, if approved, will relieve the electing spouse from joint tax liabilities where he or she did not know and had no reason to know that the tax was understated, and it is inequitable to hold the electing spouse liable for the entire joint return liability. I have used this election with some limited success, but it usually won't work where the tax amount was correctly shown on the return but just wasn't paid.

Second, there is the separation of liability election. This election is available for spouses who are no longer married or have not lived together for the preceding 12 months. If the separation of liability election is made, the electing spouse will only be liable for the amount of tax that he or she actually knew about. And best of all, the IRS has the burden to prove that the electing spouse had actual knowledge of the tax deficiency. It has been my experience that giving the IRS the burden of proof is like holding a cross in front of a vampire. The separation of liability election is usually a slam-dunk winner if the facts show that the tax deficiency came from unreported income or overstated deductions attributable to the non-electing spouse, and the non-electing spouse had no clue about the "funny numbers".

Third, if you don't fit within either of the above rules, you can still file for equitable relief. This is the kind of relief you file for if you are liable for community income in a community property state, or where your spouse had the money in hand to pay the tax and told you he paid it, but instead, spent the money for something else. I can't tell you how often a client has told me that the ex-spouse absconded with the tax money and told the other spouse "Don't worry honey, it's been taken care of!"

Under the first two types of relief, the statute says you can appeal to the Tax Court if you are denied relief. Under the equitable relief provision, the statute is silent whether you can appeal or not. I assumed, therefore, that you could not appeal denial of equitable relief to Tax Court. However, in a rare move the stodgy Tax Court has held that it has jurisdiction to hear an appeal on denial of equitable relief, and the IRS has said it will not further contest this ruling. The case is Fernandez v. Commissioner and it is found at Volume 114 of the Tax Court Reports, Case No. 21.

Finally, you can easily avoid becoming liable for your spouse's tax debts: Just don't file a joint return unless you are 100% certain that the tax debt generated by your spouse has been paid in full!! Never sign the return if you're just creating a liability for yourself

If you would like more information about innocent spouse or other tax issues, contact me.

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