Florida Tax Attorney Blog

Do South Florida business owners have to turn over their business accounting software files in an IRS audit? As many taxpayers know in the IRS examination of tax returns over the past few years, the IRS has increasingly requested the electronic files of accounting programs, such as QuickBooks or Peachtree.

However, whether or not an IRS auditor's request for electronic files was proper has been increasingly questioned by taxpayers and tax practitioners. In response, the IRS announced that it was officially expanding its audit capabilities by training its agents to be proficient in auditing information from files of the accounting software often used by small businesses in October of 2010. The IRS also encouraged revenue agents to start requesting electronic files from taxpayers and practitioners during audits.

The IRS cites the following authority in support of a revenue agent's request for original backup files: IRC Section 6001, Treasury Regulation Section 1.6001-1(a), Revenue Ruling 71-20, and Revenue Procedure 98-25. The IRS argues that all of the aforementioned give the IRS broad authority to examine electronic records in order to establish the taxpayer's correct tax liability. In particular, Treasury Regulation Section 1.6001-1(e) requires the taxpayer to make these records available "for inspection." Additionally, Revenue Procedure 98-25 clarified that the IRS has a right to electronic records.

The IRS's authority was further upheld by the U.S. District Court in United States v. Rouse, No. 8:11-MC-00046-T-24AEP (M.D. Fla. 6/27/11). In Rouse, the IRS requested the taxpayer's QuickBooks backup files. The taxpayer refused and the IRS sued to enforce the summons. The judge in the case ordered the taxpayer to comply, citing IRC Sections 6001 (records) and 7602(a) (IRS summons authority). The court held that a "plain reading of section 7602" reveals that the IRS may 'examine books, papers, records, or other data.'" 26 U.S.C. Section 7602(a)(1) (1998) (emphasis added). Furthermore, the Court held that 'other data' under section 7602 includes the electronic backup files at issue, and thus, found the summons was appropriate.

Continue reading "Can the IRS Request Your QuickBooks Files?" »

South Florida taxpayers need to take action against identity theft and tax fraud. Identity thieves can steal thousands of dollars from unsuspecting victims, including you, without you even being aware of it for many months or even years. Generally, you do not find out that you are a victim until a long time after the damage has been done. To get started, all the thieves need is a small amount of information on you - your social security number, birth date, address, phone number, or similar information. If the thief can get one credit card in your name, they can use it to obtain further credit, ultimately adding to their credibility as you.

If, even despite your best efforts to protect yourself, you find that you are a victim of identity theft, the following steps should be followed immediately as you start out on the long journey of clearing your name and credit in the State of Florida.

First and foremost, it is imperative that you act quickly. It will be a long process and the sooner you start, the better it will be for you and your credit. Additionally, keep in mind that as you contact law enforcement officers, creditors, and financial institutions, it is very important to keep a detailed log of who you spoke with, when, and what, if any, action was taken.

Second, contact your local police department to file a report. Under Florida law, the report may be filed in the location in which the offense occurred or the city or county in which you reside. Provide as much documentation as possible, including a notarized ID Theft Affidavit.

Third, contact all three major credit bureaus and report the incident to the fraud department and ask them to place a "fraud alert" on your credit report. Order copies of your credit reports to see if any additional accounts have been opened in your name and request a victim's statement that asks creditors to contact you prior to opening new accounts or making changes to any existing accounts. The contact information for each of the major three credit bureaus can be found below:

Continue reading "That's Not Me! Identity Theft and Tax Fraud in Florida - What To Do Next Part 2" »

South Florida taxpayers beware of tax identity theft! An increase in technology and the free flow of information of this day and age brings with it an increased risk of identity theft, a serious problem for many people in the United States and especially in the State of Florida - people whose names and credits have been destroyed. According to the Federal Trade Commission, Florida had the highest rate of identity theft in the United States in 2011, with Miami at near epidemic proportions. Florida's top complaints resulted from fraud associated with government documents, such as tax returns, and credit card fraud and bank fraud.

Identity Theft or Identity Fraud is the criminal act of taking a person's identity to perform a fraud or other criminal act. Those acts include, but are not limited to, filing for a fraudulent tax refund, filing for employment under the stolen social security number, obtaining credit cards from banks or retailers, stealing money from the victim's existing accounts, applying for loans in the victim's name, establishing new accounts, leasing automobiles or residences, or committing another crime.

Many people are under the misconception that something major has to happen for them to be a victim of identity theft. However, this is simply not the case. You don't have to lose your wallet for identify theft to happen to you. In fact, there are so many sources for your confidential information and personal data that it can actually be difficult to prevent the id theft. Thieves can get your information from a number of places including your doctor, accountant, dentist, school, place of employment, or any other place that has some personal or confidential information about you. The thief could be working in one of these places, steal the information on a visit, or go through the trash. Additionally, much of your personal data and identifying information is available on the internet or in your local courthouse.

Here are some tips that may help to protect yourself against identity theft:

1. Visit Florida's Identity Theft Resource and Response Center, an invaluable resource that provides information regarding how to prevent identity theft and how to report it.

2. Be vigilant in all financial matters and the use of your personal information.

3. Keep aware of the issues and safeguard your information as much as possible.

Continue reading "That's Not Me! Identity Theft in Florida - How You Can Protect Yourself from Tax Fraud! Part 1" »

For those taxpayers contemplating, or in the middle of, a Foreclosure or Short Sale you must act quickly before relief under the Mortgage Forgiveness Debt Relief Act expires on December 31, 2012!

An important and widely-used federal income tax provision providing tax relief on mortgage debt forgiveness is quickly reaching its expiration. Unless this provision is extended, it will expire on December 31, 2012, significantly effecting homeowners who are in the middle of a foreclosure or short sale or who are still facing those processes in the future. Since foreclosures and short sales can take many months, this expiration will affect those who are in the middle of the process, but will not close until next year. Foreclosures and short sales are still the only options for many homeowners. In fact, it has been reported that more than a quarter of a million short sales were completed in the first quarter of 2012 alone. Clearly, this tax relief has proved to be extremely valuable to many U.S. taxpayers.

Generally, the forgiveness of debt, including a mortgage or portion of mortgage the bank forgives in a foreclosure or short sale, is subject to federal income tax. However, the Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17) to provide relief to the many struggling homeowners. This important enactment has been allowing taxpayers to exclude the discharge of debt on their principal residence from their taxable income. The Mortgage Forgiveness Debt Relief Act was a temporary tax provision through 2009, which was extended through the end of this year.

The Mortgage Forgiveness Debt Relief Act sets limits of up to $2,000,000 of foreclosure debt or up to $1,000,000 for married taxpayers filing separately. The relief applies to mortgage restructuring, foreclosures, and short sales when the bank forgives the remaining balance due. To qualify, the taxpayer must have used the debt to buy, build, or substantially improve his or her principal residence and be secured by that residence. Refinanced debt used to substantially improve the taxpayer's principal residence also qualifies. However, debt forgiven on second homes, rental properties, business property, credit cards, or car loans do not qualify.

Continue reading "Fort Lauderdale, Miami and Palm Beach Area Taxpayers Must Act Quickly In Order to Take Advantage of Tax Relief on Mortgage Debt Forgiveness Before It Expires on December 31, 2012!" »

Florida taxpayers must take affirmative actions to comply with the Foreign Account Tax Compliance Act. Originally enacted in 2010, the Foreign Account Tax Compliance Act ("FATCA") targets non-compliance by U.S. taxpayers using foreign accounts. On February 8, 2012, the Treasury Department and the Internal Revenue Service issued proposed withholding and reporting regulations for the next major phase of FATCA.

Under the step-by-step process outlined in the proposed regulations, all foreign financial institutions (FFIs) are required to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest to the IRS.

Under the proposed regulations, a participating FFI will have to enter into an agreement with the IRS to:

(1) Identify U.S. accounts;

(2) Report certain information to the IRS regarding U.S. accounts;

(3) Verify the FFI's compliance with its obligations pursuant to the agreement; and

(4) Ensure that a 30 percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system, which will become available by January 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

The proposed regulations, which become effective January 1, 2013, will ultimately impact current account opening processes, transaction processing systems, and "know your customer" procedures used by both U.S. and foreign companies. It is important for companies to start their compliance risk assessment and make any modifications to their policies and procedures now and not wait until the rules become effective next year.

Continue reading "Action Needed to Comply with Foreign Account Tax Compliance Act Proposed Regulations" »

The IRS's 2009 and 2011 Offshore Voluntary Disclosure Initiatives ("OVDI") have been very successful in terms of having taxpayers come forward to report their offshore accounts. One of the reasons so many have come forward is that within the past few years, the IRS and Department of Justice have been unyielding in their enforcement efforts and continue their investigations into non-U.S. banks that assisted U.S. taxpayers in hiding assets from the IRS.

Once the IRS believes that an offshore bank holds unreported accounts for U.S. taxpayers, it can compel the bank to disclose the name of the account holders. In fact, the IRS has either been working with, or pursuing enforcement action against, many non-U.S. banks for some time now. These actions are no longer limited to the large Swiss banks, like UBS and Credit Suisse, which are automatically brought to mind when talking about offshore accounts.

While the investigations may have started with the Swiss banks, they have since rapidly expanded. Specifically, Israeli, Japanese, and several other European banks seem to be the IRS's target as of the past year. While many mistakenly believed that the IRS would be reluctant to investigate Israeli banks because of Israel's close association with the U.S., Israel and the U.S. actually have a long-standing cooperative arrangement when it comes to tax matters - one that would encourage cooperation from the Israeli banks.

Some of the banks that are under examination and/or investigation include Bank Leumi and Bank Hapoalim in Israel, HSBC, Bank Julius Baer, Wegelin Bank, Liechtensteinische Landesbank (Liechtenstein). While investigations into these banks have been more public, there are likely many more banks in various other countries under the same scrutiny. Many of these banks are urging their U.S. account-holders to come forward to the IRS before they are forced to turn over the account information. If the IRS receives the information from the bank or from any third party source, the U.S. taxpayer will be precluded from entering into the OVDI.

Continue reading "IRS Expands Investigation of Offshore Accounts Beyond Swiss Banks to Israeli, Japanese, and other European Banks " »

Eight Swiss banks recently turned over data on its U.S. clients suspected of tax evasion to U.S. officials. At the Swiss government's request, however, the data was encrypted and will remain so until certain of their own demands are met. According to the Swiss government, the encryption key will not be turned over until Switzerland and the United States reach a broader agreement on information exchange.

Under current Swiss law, non-encrypted data can be transferred only in individual cases under the following circumstances:

(1) U.S. authorities submit a request through the current income tax treaty between the U.S. and Switzerland and

(2) Only if the individual in question has broken Swiss law.

The eleven Swiss banks currently under investigation are: Credit Suisse, Bank Julius Bär, Bank Wegelin & Co., Basler Kantonalbank, Zürcher Kantonalbank, HSBC Private Bank (Suisse), NZB, the Swiss daughter bank LLB, and the Israeli banks Leumi, Hapoalim and Mizrahi. The encrypted data that was transferred includes between 4 and 6 million e-mails between Swiss bankers and their U.S. clients.

Continue reading "Swiss Banks "Cooperate" with U.S. Officials" »

On February 2, 2012, the 6th Circuit Court of Appeals reversed Defendant Timothy Parkes' convictions of bank fraud on all counts and granted his motion for judgment of acquittal. The 6th Circuit held that the district court had incorrectly denied the defendant's motion for acquittal following the jury trial.

Mr. Parkes and his partner, Mr. Mourier, were each charged with ten counts of bank fraud based on loans made to more than ten limited liability companies by Benton Bank. The aggregate amount of these loans totaled millions of dollars. At trial, the government's theory was that Mr. Parkes and the bank's president jointly created the fictitious entries in an effort to disguise some of the bank's earlier, troubled loans to Mr. Parkes. The bank president, also charged with bank fraud, pled guilty. The jury found Co-Defendant Mr. Mourier not guilty on all charges.

Other than the bank fraud counts, Mr. Parkes was also charged with making a false statement to the special agents during the investigation. Mr. Parkes was found guilty on three counts of bank fraud and one count of making a false statement.

The theory of Mr. Parkes' defense was that the president acted alone. However, he was precluded from bringing this defense. He also made a motion for a mistrial after the prosecutor in this case improperly told the jury if they acquitted the defendant, he would get to keep more than $4 million of the bank's money. Mr. Parkes motion for a mistrial was denied. He then timely moved for a judgment of acquittal based on insufficient evidence. The district court further denied this motion and the defendant appealed, challenging the sufficiency of the government's evidence, the exclusion of evidence that the bank's president has previously engaged in identical frauds, and the prosecutor's misconduct.

Continue reading "Parkes Found Guilty of Bank Fraud for Loans to LLCs" »

The Internal Revenue Service (IRS) recently developed a new, optional program called the Voluntary Classification Settlement Program (VCSP) to allow taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes. The VCSP provides taxpayers with this opportunity for future tax periods, with limited federal tax liability for the past nonemployee treatment. The program will enable many employers to resolve past worker classification issues and achieve certainty under the tax laws.

As a part of the "Fresh Start" initiative of the IRS, the VCSP will help taxpayers become compliant with the tax laws. "This settlement program provides certainty and relief to employers in an important area," said IRS Commissioner Doug Shulman. "This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations."

The facts and circumstances common law test governs whether a worker is performing services as an employee or as an independent contractor. Generally, the deciding factor under the test is whether the service recipient has the right to direct and control the worker as to how to perform the services. Under certain circumstances, the determination of the proper worker classification status under the common law may not be clear.

The VCSP is designed to increase tax compliance for employers by providing greater certainty for them, their workers, and the IRS. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed in the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations, and government entities that currently treat their workers as nonemployees or independent contractors erroneously and now want to correctly classify these workers as employees.

Continue reading "Employee v. Independent Contractor? New IRS Program Can Help Floridians Decide" »

Worker classification issues have been the focus of an increasing amount of attention from the IRS within recent months. While these issues have been around for decades, the attention they receive has significantly increased. In September of 2011, the IRS established a new Voluntary Classification Settlement Program, also known as "VCSP," providing "partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees." IRS Announcement 2011-64 (Sept. 21, 2011).

The IRS also entered into a memorandum of understanding with the Department of Labor to share information with regard to the classification, and more importantly, the "misclassification" of employees and independent contractors. Finally, President Obama included a worker classification provision in his plan "Living within our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction."

Worker classification issues tend to boil down to one thing - is the worker an employee or an independent contractor? Determining the status of a worker depends on a common law facts and circumstances test regarding whether the service recipient has the right to direct and control how the services are provided. Too often, the results of this test are unclear. To resolve these issues, the IRS is now offering taxpayers a program that allows for the voluntary reclassification of workers as employees. To participate in the program, a taxpayer must meet certain eligibility requirements; submit an application; and enter into a closing agreement with the IRS.

To be eligible, the taxpayer must: (1) have consistently treated its workers in the past as nonemployees; (2) have filed all required Forms 1099 for the workers for the past three years; and (3) not currently be under audit by the IRS, the DOL, or a state agency concerning worker classification matters. A taxpayer who was previously audited for these issues will be eligible only if the taxpayer has complied with the results of such audit.

Continue reading "IRS Launches New Voluntary Classification Settlement Program for Worker Classification" »

Due to the destruction Hurricane Irene left in her path, the IRS recently announced that it has postponed the deadline for its 2011 Offshore Voluntary Disclosure Initiative (OVDI) to September 9, 2011. Before the extension, taxpayers had been required to complete all requirements for the program, or make a good-faith effort to comply and request a 90-day extension, by August 31, 2011.

Taxpayers who have not yet submitted requests and documents under the program must do so by the new deadline by submitting identifying information to the IRS' Criminal Investigation office and sending a request for a 90-day extension for submitting a complete voluntary disclosure information package to the IRS.

About OVDI

The IRS announced the 2011 OVDI in February. The program is designed to bring money held in foreign accounts back into the U.S. tax system and to help taxpayers with income from offshore accounts to comply with federal tax law. While there are legitimate business reasons for keeping an account outside of the United States, there are no legal reasons not to report those accounts and pay taxes on the money they earn.

Under the initiative, taxpayers who disclose previously undisclosed foreign accounts and comply with the terms of the program can avoid civil penalties and criminal prosecution. There was a similar program in 2009 that resulted in nearly 15,000 formerly undeclared accounts. After the 2009 program ended, thousands of more taxpayers came forward. In response to this demand, the IRS initiated the 2011 OVDI, which began in February and ends now on September 9th.

The largest difference between the 2009 program and the 2011 program is that while the 2009 program levied penalties only on financial assets, the 2011 program levies penalties on all assets kept abroad. The penalties are steep under the OVDI -- up to 25 percent of the value of the assets, assessed on the highest value of those assets over the last eight years. However, taxpayers can avoid even steeper penalties, as well as criminal prosecution if they opt out and are caught later.

Continue reading "Hurricane Causes the IRS to Extend the 2011 OVDI Filing Deadline" »

There are risks associated with owning or having ownership interest in a foreign account (which includes being signatories) and failing to disclose its existence to the IRS. The Foreign Account Tax Compliance Act ("FATCA") was passed requiring foreign banks to disclose information about accounts that are associated with or owned by United States citizens.

As part of the Bank Secrecy Act (Title 31), qualifying individuals must file Form TD F 90-22.1, Report of Foreign Bank Account and Financial Accounts ("FBAR") which was recently revised in March 2011. This Form is separate and in addition to other filing requirements by the IRS.

Form TD F 90-22.1 must be received by the U.S. Department of Treasury by June 30, 2011. Because the FBAR technically is part of the Bank Secrecy Act (Title 31) rather than the Income Tax Code (Title 26), it contains traps for the unwary. Unlike the filing income tax forms which follow the mailbox rule, FBAR forms must be received by June 30, 2011 the due date, not just mailed by it. There is no electronic filing option for the FBAR. The FBAR must be mailed to a special address in Detroit rather than a taxpayer's usual IRS service center.

Another critical distinction is that the due date for filing cannot be extended. As a result any extensions a taxpayer receives for filing an income tax return are not applicable to the FBAR. Unless Congress changes the law, the FBAR due date will remain June 30, which is out of sync with the normal tax deadlines of April 15 and October 15 (for those on extension).

Therefore, taxpayer should be aware that in addition to disclosing foreign accounts on Form 1040, Schedule B, Part III, Form TD F 90-22.1 must be timely filed, i.e. received by the U.S Department of Treasury in Detroit Michigan no later than June 30, 2011.

Continue reading "What Are The Reporting Requirements If You Have A Foreign Bank Account?" »

The Florida Constitution (F.C.) (Article 10, Sec. 4) protects homestead property from levy of creditors of the owner. The F.C. provides that homestead property should be liberally construed in favor of the homesteader against the creditor. The person claiming the homestead exemption must be a Florida resident who establishes that he or she made, or intends to make, the real property his or her permanent residence.

A permanent residence is the address listed on your driver's license, the place from which you register your cars, or file your income tax return or vote. If this property is not your permanent residence, or you are not a resident of Florida, you must notify the Property Appraiser. It is also important to note that only natural persons may claim homestead (not corporations or other like entities). If you are receiving a residency based exemption or benefit in another county, state or country; you are not eligible for exemption.

Homestead must be established before levy of the judgment creditor. However, homestead is subject to forced sales for property taxes, mortgages on the property, and mechanics liens arising from improvements of the property. Homestead inures to the benefit of the surviving spouse and minor children. Homestead consists of a ½ acre of contiguous land including a residence within a municipality. Outside of a municipality one may claim up to 160 contiguous acres. Homestead also protects personal property to the value of one thousand dollars.

If homestead is sold, the proceeds are considered to retain homestead exemption provided the owner has good faith intent to reinvest the proceeds in another homestead within a reasonable time. In other words, if you moved to a new home, the homestead exemption does not transfer automatically. To receive a new or additional exemption, you must make the application before March 1, of this year. If you have moved from another home within the state of Florida and you had homestead on your previous property, you may be eligible to bring your homestead savings with you.

To be eligible you must apply for and receive a homestead exemption on your new property within two years of leaving your previous homesteaded property and submit a (DR-501T) Homestead Assessment Difference form to the Property Appraiser's Office. However, it is important to note that if the homestead is abandoned, the protection may be forfeited.

Continue reading "Are You Eligible For The Florida Homestead Exemption?" »

Whether Florida attorneys' fees are deductible depends on the nature of the underlying claim. If the character of the claim brought is for business purposes, the fees are deductible; if the underlying claim is personal, the attorney fees are not deductible.

To recover attorneys' fees from the opposition, the prevailing party must show that the underlying claim was business related. Otherwise, the attorneys' fees are not deductible. Additionally, the ruling in Commissioner v. Banks, clarifies that even if such fees are deductible, they qualify as itemized deduction, and as such, are subject to the 2 percent floor, mandated by I.R.C. Section 68. 543 U.S. 426 (2005).

However, as part of the American Jobs Creation Act of 2004, Section 62(a)(20) was implemented which allows for attorneys' fees incurred in connection with any action for unlawful discrimination to be deducted. Additionally, this section provides that attorneys' fees incurred for this specific purpose are not considered itemized deductions that would be subject to the 2 percent floor.

Continue reading "Are Your Florida Legal Fees Deductible?" »

In today's society, many Florida taxpayers do not file their tax returns simply because they cannot pay their taxes. However, one of the most serious offenses an individual can commit, with respect to the IRS, is failure to file a tax return. Under Title 26 of the United States Code, Section 7203, it is a federal crime or offense for anyone to willfully fail to file a federal income tax return when required to do so by Internal Revenue laws or regulations. A person's willful failure to supply information or pay tax is also punishable as a crime under Section 7203. In some cases, a person convicted of these crimes may be imprisoned for up to 5 years.

In addition to the risk of criminal prosecution, there are severe civil penalties that are imposed for failure to file a tax return. For example, the failure to file penalty pursuant to Section 6651 is assessed by the IRS at a rate of 5% per month or partial month up to a 25% maximum. The failure to pay penalty is assessed by the IRS at a rate of 0.5% per month or partial month up to a 25% minimum. If both the failure to file and failure to pay penalties are assessed, the failure penalty is reduced by the failure to pay penalty. Hence, penalties are greater when a taxpayer fails to file versus when a taxpayer fails to pay.

Similarly, as mentioned above, there are serious underpayment penalties to taxpayers. One example would be criminal fraud, which is your basic example of tax evasion. This can result in imprisonment, fines, or both. Another example would be civil fraud, where the taxpayer fraud does not rise to the criminal fraud level. If this happens, the penalty can be up to 75% of the portion of tax underpayment which is directly linked to the determined fraud. Moreover, there are penalties for frivolous returns. A frivolous return is where the taxpayer omits or is incorrect with respect to information which is required to determine the taxpayer's tax liability. This can result in a penalty for $500 dollars for each and every frivolous return that is filed with the IRS. Furthermore, in the event a refund is owed to the taxpayer, this refund may be given up if not claimed in time (a specific example of this would be the earned income tax credit).

Moreover, interest on underpayments run from the due date of the tax return, i.e. April 15th of the given year. In other words, taxpayers can expect to pay a lot more than they owe to the IRS once interest accumulates. For example, the interest on unpaid balances is around 4% annual interest on unpaid balances. Interest is updated on a quarterly basis, so this number can fluctuate dramatically.

Continue reading "Death and Taxes in Florida: What Happens When You Don't File Your Tax Return?" »