Tag Archive for: Audits & Tax Issues

Installment Agreements

When the IRS Makes a Deal with You—the Installment Agreement

By Christian Reeves

Tax Attorney


“I owe the IRS $20,000 because I didn’t have enough withheld from my paycheck over the last few years. I’m working full-time, but I have no savings. Is there any way I can pay off my debt?”

Yes. In fact, almost every client I have worked with in the last 10 years, who has requested an installment, has been approved…eventually. The trick is always the same: getting to a number that both you and the IRS can live with.

If you owe taxes to the IRS, but can’t afford to pay it off all at once, and you don’t qualify for (or can’t afford) an Offer in Compromise, then you can usually set up a payment plan, called an “Installment Agreement” in IRS lingo. The amount you will need to pay each month is based on a number of factors, including:

  • Your income;
  • Your assets;
  • The amount you owe;
  • Your actual expenses;
  • Your allowed expenses;
  • The remaining collection statute of limitations; and
  • Whether or not you can afford to pay off the debt in full over the collection statute.

The key to setting up an Installment Agreement is the analysis of these and other factors, and thereby proving to the IRS how much you can afford to pay each month.

Here are the basics of an IRS Installment Agreement.

The IRS will enter a written agreement with you which requires installment payments based on the amount you owe and your ability to pay it within the period of time the Service has to collect from you (the “statute of limitations,” as it is called). The IRS has 10 years to collect from you once you filed a return. When the 10 years are up, the debt is canceled and you get a fresh start. Depending on the amount of tax due, there are different options within the program (see below).

To apply for an Installment Agreement, you usually need to file Form 9465 and Form 433-A or Form 433-F (versions of the IRS Financial Statement, the key form when dealing with IRS collections at any level). If you are self-employed, or own a business, you may also need to file Form 433-B. A few people also need Form 433-D. If your Agreement is accepted, you will be charged a fee of $105 for a new agreement, or $45 for a reinstated agreement.

What is a ‘reinstated agreement,’” you’d ask.

An Installment Agreement is binding. You must pay the amount agreed-upon on time, every month of the year. If you skip a payment, you usually have 30 days to catch up. If you are not able to get current with your payments, the Agreement is canceled. You may apply for a new Agreement, but your new proposal may be met with skepticism and can even be rejected. Worse, you must provide updated financial information, which may have very dire consequences if your income has increased or the person reviewing your data is less accommodating than the prior agent. If you’re lucky and it’s accepted again, then you’ll have a “reinstated agreement.”

There are two types of Installment Agreements, mandatory and discretionary.

A “mandatory” agreement means that the IRS is required to accept the Agreement you propose if:

  • You owe less than $10,000 (exclusive of interest and penalties);
  • You’ve filed your tax returns and paid your due taxes on time during the past five years;
  • You haven’t entered another Installment Agreement during those past five years;
  • You demonstrate that you can’t pay the tax in full;
  • You agree to pay the full amount you owe within a period of three years;
  • You guarantee that you’ll comply with the tax laws during the term of the Installment Agreement.

If you meet all these criteria, the IRS doesn’t have the right to reject your Installment Agreement. An additional advantage of this type of agreement is that it doesn’t require the same in-depth financial verification that a normal application does.

If you owe more than $10,000, you need a “discretionary” Installment Agreement, which means that the IRS can deny you a payment plan if it deems it unsatisfactory. The IRS has to consider your Installment Agreement and will request you to prepare a Financial Statement (Form 433-A or Form 433-F). If the IRS concludes that more information is needed to evaluate the proposal, then it can request you to provide supporting documents or other proof of income and expense. If not supplied, the IRS can reject your application.

During the processing of your Installment Agreement (until you receive the notice about the result of your application) your stress level will lower considerably as the IRS is not allowed to collect from you. If your IRS installment agreement request is rejected, your case will be on hold for 30 days, giving you time to appeal. If you file a timely appeal, then the IRS can’t touch your property or money during the pendency of the appeal.

How much of my debt will I pay through an Installment Agreement?

The answer is that it depends on your ability to pay, the assets you have available, and the collection statute of limitations. If you have sufficient means then the IRS will require a Full-pay Agreement. This is when you pay your tax debt in full, including interest and penalties, over a period of time.

A Full-pay Installment Agreement may be for a fixed monthly amount, or it may increase at predetermined intervals. In each case, it will pay off the debt during the collection statute of limitations.

An IRS Installment Agreement where you pay a fixed amount each month until the debt is paid in full is easy to understand. An Installment Agreement where your monthly payments increase over time takes a bit of explaining.

As you know, your ability to pay the IRS is based in part on your income vs. your allowed expenses. When your actual expenses exceed your allowed expenses, you are generally given time to modify your lifestyle.

For example, you may be given six months to find a lower-cost apartment. If your current apartment exceeds your allowed rental expense by US$400, the IRS may set up an Installment Agreement that will increase by US$400 in six months’ time.

Another example is where your allowed expenses go down. The most common situation is where your automobile will be paid off, thereby reducing your allowed expenses. If your auto payment is $550 and your car will be paid off in eight months, you might set up an Installment Agreement that will increase by $550 in eight months’ time.


Warning: What if you have unexpected repair bills, or need to purchase another car when this one is paid? You might be forced to default on the IRS Installment Agreement and need to start the process over…something everyone dreads.Careful analysis of your current and future finances, along with a solid understanding of IRS practice and procedure, prior to applying for an Installment Agreement can prevent these and other problems.For example, as a result of planning ahead, you might decide to purchase a new car, with a longer payoff period, before submitting your request. 

What if I can’t afford to pay off the IRS in full?

In the case you (1) do not have sufficient income to support a Full-pay Agreement, and (2) have no significant equity in assets or cannot sell or borrow against assets due to the fact that selling them will cause an undue hardship, then the IRS will grant a Partial-pay Agreement and you’ll pay off only a portion of your debt within the statute of limitations, with the remaining debt being canceled.

However, if you are granted a Partial-pay Agreement, you must provide updated financial information every two years to prove your continuing financial hardship. If your income has increased, or your allowed expenses have decreased, you will be required to increase your monthly payment.

Still, there’s a third situation. You pay zero dollars. Is that possible? Sure. Basically, when you cannot afford an Offer in Compromise, you have no assets to use to pay the IRS, and your income equals your allowed expenses, you can’t afford to pay IRS anything.

A taxpayer in an Installment Agreement at zero dollars is referred to as being “temporarily uncollectable,” with temporarily being the operative word here. As with a Partial-pay Installment Agreement, the IRS will review your financial situation periodically to see if it can start collecting from you. If your financial situation doesn’t improve and the statute of limitations runs out, then your debt is eliminated. In other words, if you prove to the IRS that you are uncollectable over the entirety of the collection statute of limitations, you have paid nothing and your debt expires.

IMPORTANT NOTE: While you are making installment payments to the IRS, penalties and interest accrue on the unpaid balance. Essentially, you are locked into a late-payment penalty of one quarter of a percent a month plus interest on the unpaid amount. Taken together, the cost comes at around 10% a year. It’s still less than the interest you pay on your credit card, but you need to think before you commit.

What if my Installment Agreement is rejected?

This may happen in one of the following cases:

  • The information included in Forms 433-A or 433-B is incomplete or untruthful. If the IRS discovers that you have property or income not recorded on the forms then it will reject your application.
    • Your financial statement is signed under penalty of perjury, so it is very important to be truthful and very detailed in the information you provide to the government.
  • The IRS deems some of your living expenses unnecessary. If you owe money to the government but nevertheless send your kids to private schools or drive expensive cars, then be prepared to get no deal at all. The IRS expects you to have quite a frugal life while paying off your debt.
  • You defaulted on a prior Installment Agreement. It’s a matter of trust…if you’ve once defaulted on your payments then the IRS will think twice whether to grant you a second chance.

If your Installment Agreement is rejected, then you can appeal the decision. If the IRS sees your efforts to pay off your debt then your application may be reconsidered.

What if I need professional help with filing an Installment Agreement?

A reputable tax professional masters the art and science of analyzing your tax situation, as well as your income and expenses, preparing a plan of attack, and then filling out the forms necessary for an Installment Agreement. More importantly, he can determine your chances of obtaining the Agreement in the first place, and will help you plan, prepare, and document your application.

At Premier Tax & Corporate, Inc. we will work together with you in order to achieve the best available result for your particular situation. If you are ready, let’s get started

<LINK Get Started>.

For more information, contact us by phone at (800) 581-6716 or by e-mail at sales@taxreliefguaranteed.com. We are here to help.



Collection Standards

The IRS Collection Standards—Friend or Foe?

By Christian Reeves

Tax Attorney

 Chances are that you are reading this because you are considering paying your back taxes through an Offer in Compromise or an Installment Agreement. In the forms you have to fill out in both cases you’ll need to document all your expenses. There’s a lot of common sense here: You cannot owe the government $50,000 and continue living like a king, send your kids to private schools and eat at fine restaurants every day of the week. In the case you are making an Offer in Compromise or an Installment Agreement the IRS gets to set the standard of the lifestyle you are permitted to keep until the debt is paid off.

The collection standards. What are they?

The IRS has developed living expense standards that are used by agents when working out payment plans with taxpayers for overdue taxes. In the IRS lingo they are called “allowable living expenses.”

The “allowable living expenses” include those expenses that meet the necessary expense test.   The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income. These expenses are calculated in at least two different ways. In some cases, as with transportation and housing, the debtor puts his or her own expenses into the calculation, up to the amounts allowed by the IRS guidelines. With food, clothing, personal care, and entertainment, the debtor can put into their budget the full amount allowed for these items by the IRS, even if he or she does not normally spend that much.

But I’m getting ahead of myself…Let’s first examine the basics.

The IRS has established both national and local standards in order to establish the minimum a taxpayer and his family need to live. The “national standards” have been established for six necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, miscellaneous items, and out-of-the-pocket health care. In the case of the first five categories, the standards are derived from the Bureau of Labor Statistics’ Consumer Survey, which collects information on country’s buying habits. As I started mentioning above, for these categories taxpayers are allowed the total national standards’ amount per month for their family size, regardless of the total sum they actually spend. The out-of-the-pocket health care standards have been established for expenses allowed in addition to the amount taxpayers pay for health insurance. The table for health care allowances is based on the Medical Expenditure Panel Survey data for the whole nation and establishes reasonable amounts for health care costs including medical services, prescription drugs, and medical supplies (e.g., eyeglasses, contact lenses, etc.).

The “local standards” are established for two categories of expenses: (1) housing and utilities and (2) transportation. The housing and utilities standards are derived from the census data and are provided for each county within a state. They include mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electricity, water, heating oil, garbage collection, telephone, and cell phone for taxpayer’s primary place of residence. The transportation standards for vehicle owners include ownership costs (amounts for monthly loan or lease payments) and additional operating costs (maintenance, repairs, fuel, registrations, etc.) broken down by Census Region and Metropolitan Statistical Area. If a taxpayer has a car, but no car payment, only the operating costs portion of the transportation standard is used to figure the allowable transportation expense. In both of these cases, the taxpayer is allowed the amount actually spent or the standard, whichever is less. For the taxpayers who are using public transportation there is a single nationwide allowance for mass transit fares for train, bus, taxi, ferry, etc.  Taxpayers with no vehicle are allowed the standard per household, without questioning the amount actually spent.

You may also qualify for what is called “conditional expenses.” These do not meet the necessary expense test, but are allowable if the tax liability, including the penalties and interest accumulated can be fully paid within five years. If you cannot pay within five years, the IRS may allow you the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense.

Remember: Properly analyzing your tax situation (actual income vs. allowed standards) and fully documenting your case are the keys to getting an Offer in Compromise or an Installment Agreement accepted.

At Premier Tax & Corporate, Inc. you’ll find a group of well-trained professionals who will work together with you in order to achieve the best possible result for your particular circumstances. Contact us by phone at (800) 581-6716 or by e-mail at sales@taxreliefguaranteed.com. We are here to help.


Bankruptcy & Taxes

Can I Dump My Tax Debt in Bankruptcy?

Bankruptcy and Tax Debts

By Christian Reeves, Tax Attorney

Personal income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. However, special rules apply to tax debts that make it difficult, if not impossible, for most people to dump their tax debt.

Of course the Federal Government put in special rules to ensure they collect your tax debt ahead of any other type of creditor…did you think it could be otherwise?

The bottom line is this: The IRS usually gets to come after you for two to three years before you can discharge your tax debt in bankruptcy. This means you must set up an Installment Agreement, file an Offer in Compromise, or come to some other agreement that keeps the IRS out of your bank account and paycheck until you are eligible for bankruptcy.

Here are the rules. You must meet all four to qualify for bankruptcy.
1. The due date of the return must be from at least three years before you file for bankruptcy.

The tax debt must be related to a tax return that was due at least three years before you file for bankruptcy. The due date includes any extensions.
For example, your 2008 personal income tax return is due on April 15, 2009. If you did not file an extension, you can usually bankrupt those taxes on April 16, 2012.
2. The return was filed at least two years before you file for bankruptcy.
The tax debt must be related to a tax return that was filed at least two years before you file for bankruptcy. This time is measured from the date you actually filed the return.
So, if you file your delinquent 2002 and 2003 tax returns on October 20, 2009, you can usually bankrupt these taxes on October 21, 2011. Your 2003 return was originally due on April 15, 2004, it has been more than three years since its due date, and you filed your returns at least 24 months before declaring bankruptcy.
3. Your tax assessment has to be at least 240 days old.
Your tax debt must have been assessed for at least 240 days before you file for bankruptcy.
A tax assessment generally refers to two types of tax cases:
1. After an IRS audit runs its course and all of your rights to appeal have been exhausted, then the balance due becomes final. This date is the assessment date.
For example, if your 2005 return is audited and the resulting balance due becomes final on March 30, 2007, you must wait 240 days from this date before bankrupting these taxes.
2. When you don’t file your tax return on time and the IRS computers have data indicating that you might owe money to the IRS, the computers will prepare a “substitute for return” on your behalf. After sending a number of notices to your last known address, the amount due on this substitute return becomes assessed and payable.
a. It is important to note that these substitute returns use the highest tax rate, assume you have no deductions, and are never calculated in your favor. If you owe money to the IRS from this type of assessment, you should file accurate returns before dealing with collections or considering bankruptcy.
b. You must file all delinquent tax returns, including the years involving substitute returns, before declaring bankruptcy.
4. The return is not fraudulent and you are not guilty of tax evasion.
The tax return filed cannot have been fraudulent or frivolous and you can’t be guilty of tax evasion. For the sake of this article, we will assume you filed a reasonable tax return and have not been convicted of tax evasion.

Some Tax Debts Aren’t Dischargeable

Personal income taxes are generally eligible to be discharged in bankruptcy. Personal taxes that are the result of payroll tax or sales tax penalties, known as civil penalties, cannot be discharged.

NOTE: All types of tax debt, including civil penalties, may qualify to be eliminated with an IRS Offer in Compromise, paid off over time with an Installment Agreement, or resolved through other IRS programs.

Bankruptcy to Delay

Bankruptcy will stop all IRS collections and put Installment Agreements on hold until your case is completed. Your bankruptcy case may take weeks, months, or even years, and thus provide you time to get your affairs in order.

However, as stated above, interest and penalties continue to accrue. Also, your collection statute is on hold while you are in bankruptcy. If you are in bankruptcy for 24 months, the collection period is extended by the same period of time.

Collection statute: The IRS typically has 10 years to collect from you once a tax return is filed or tax is assessed. Any time the IRS is prohibited by law from collecting, the collection statute is on hold.

Because there are many remedies available to you within IRS programs, bankruptcy should not be used solely to delay collections. Of course, you may have other debts you wish to discharge, and delay may be an added benefit, but it should not be a primary factor in your decision.

The Effect of These Rules

As a result of these rules, most clients who contact us do not qualify for bankruptcy. Most people can only hide from the IRS for a short time before their bank accounts are drained or their paychecks garnished.

Of those who file bankruptcy to eliminate other creditors, most emerge with a larger tax debt and a more aggressive IRS, because interest and penalties continue to accrue. In most cases we see, bankruptcy leaves only the IRS standing…which is the objective of the rules.

Those of you who are not eligible for bankruptcy must face the tax debt head-on and without delay.

Those who file bankruptcy, and are unable to discharge their tax debt, must keep close tabs on their status and contact the IRS with a complete package of financial information once their bankruptcy has been discharged.

Being proactive and contacting the IRS before they knock on your door is the best and only way to prevent a bank levy or wage garnishment from wiping you out.


Premier Tax & Corporate, Inc. does not offer legal advice and does not provide document preparation or filing for bankruptcy petitions. If you are considering bankruptcy, you should consult an attorney in your area.

IRS Voluntary Disclosure Program Gives Big Breaks to ExPats

IRS Voluntary Disclosure Program is great news for some Expats and dual-nationals

As an ExPat American, you know that you are required to file a U.S. tax return each year and report your foreign bank accounts if you have more than $10,000 offshore. If you have failed to file these forms, and want to get back in to the good graces of the IRS, the IRS Voluntary Disclosure Program may be for you.

Unless you have been living under a rock in Bangladesh, you also know that the IRS has been pushing hard to force disclosure, compliance and payment. The drive for increased revenues started in 2003 when the IRS began investigating offshore credit cards. At that time, it was about compliance. The government had not yet figured out that putting people in jail for tax crimes would generate a lot of news, thus cause many more thousands to come forward, and bring in a truckload of money…and promotions.

In 2008 the U.S. government began its attack on UBS in Switzerland, eventually forcing the Swiss to disclose 4,450 names of U.S. citizens with unreported accounts. The U.S. followed this up by prosecuting a few people in each State or region of the country to ensure maximum news coverage and created the voluntary disclosure program to capitalize on their campaign.

So far, there have been three IRS Voluntary Disclosure Programs allowing people to come forward and voluntarily report their offshore bank accounts. As of June 26, 2012, the IRS brought in over $5 billion in new taxes, interest and penalties.

The third, and current IRS Voluntary Disclosure Program came into effect on September 1, 2012 and has several benefits for what it considers “low-risk” persons. These are U.S. citizens, including dual-citizens, who currently reside overseas, who owe little or no U.S. taxes. The objective is to convince these people to report the value and locations of their money and assets in exchange for not being hit with excessive civil penalties.

These low-risk persons will be able to file three years of delinquent U.S. tax returns (including required information reporting forms) and six years of FBARs without the imposition of program penalties. Whether a taxpayer is “low-risk” will depend on a number of factors, but will primarily require that the tax due is less than US$1,500 for each of the covered years, that the person was living and working outside of the U.S. during these years, and that the person did not take steps to conceal their income from the U.S.

It should be noted that this procedure will provide no protection from the risk of criminal prosecution. The IRS website indicates the following regarding criminal prosecution: “The IRS Voluntary Disclosure Program has a longstanding practice of IRS Criminal Investigation whereby CI takes timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chance of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.”

Because the tax due amount within the IRS Voluntary Disclosure Program takes the Foreign Earned Income Exclusion and Foreign Tax Credit in to consideration, most Expats and foreign residents will qualify as low risk. For example, anyone who is employed in a high tax country (a country with a tax rate equal to or greater than the U.S.), should be in the clear, as will most people earning less than $80,000 to $95,000 per year who are living in a low tax country. Those at risk are entrepreneurs living in low tax countries, high net worth individuals with significant untaxed capital gains or passive income, and just about any self-employed person who was not operating through a foreign corporation and is thus subject to self-employment tax.

There are two groups of ExPats that are excluded from this IRS Voluntary Disclosure Program: 1) if your account is at a bank that is currently under investigation by the U.S., you may not be eligible, and 2) if you attempt to fight the release of your banking information from your foreign bank, you will not be eligible for this program. For example, if the U.S. issues a summons to Bank ABC in Lichtenstein requesting all U.S. accounts, and you fight the request, you are disqualified from this program.

In addition, the IRS may announce that certain groups of taxpayers that have or had accounts at specific offshore banks will be ineligible to participate in the IRS Voluntary Disclosure Program due to pending US government actions in connection with those specific institutions. Details regarding eligibility or ineligibility of specific taxpayer groups connected to such institutions will be posted to the IRS website.

The IRS says: “US persons with undeclared bank accounts are reminded that the 2012 IRS Voluntary Disclosure Program gives taxpayers with unreported foreign bank accounts a chance to come clean while mitigating the risk of criminal prosecution, and that they should consider remedying any past non-compliance with their US tax and information reporting obligations while there is still an opportunity to do so.”

If you are a U.S. citizen who has been living and working abroad, and are willing to disclose your accounts and assets, now is the best time to evaluate your rights.
I recommend the following three step plan of action:

  1. discuss your situation with a qualified tax attorney to evaluate your risks of criminal prosecution,
  2. have your attorney prepare U.S. tax returns to determine the amount of taxes due, and
  3. if you qualify as a low-risk citizen, join the voluntary disclosure program program as soon as possible and before your bank comes under attack or you are disqualified for another reason.

If you do not qualify as a low-risk taxpayer, you may still participate in the current IRS Voluntary Disclosure Program. However, you will be subject to substantial taxes and program penalties, which are more severe than those levied by previous initiatives.

In addition to the standard tax, interest and penalties associated with your delinquent returns, the following penalties will be assessed, and must be paid or you will be disqualified from the program:

  • 20% accuracy-related penalties on the full amount of your offshore-related underpayments of tax for all years;
  • Pay failure to file penalties, which are up to 25% of the unpaid tax, if applicable;
  • Pay failure to pay penalties, which are up to 25% of the unpaid tax, if applicable;
  • Pay, in lieu of all other penalties that may apply to your undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a penalty equal to 27.5% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;

Note that this penalty includes the value of all foreign assets, including real estate.
As you can see, the penalties are very severe if you do not qualify as a low-risk taxpayer. However, getting back in to the system and removing the risk of criminal prosecution will motivate many to come forward, pay up, and sleep better at night knowing that Uncle Sam will not come knocking…not yet, anyway.

If you have unreported accounts or questions about your U.S. Expat taxes, please contact me for for a free and confidential consultation regarding the IRS Voluntary Disclosure Program. I can be reached at (619) 483-1708, or info@premieroffshore.com.

The IRS has no Problem Using Weapons of Mass Destruction

IRS Attacks Forcing High Net Worth Americans out of the Country

The number of American expatriations is at a record high as tens of thousands of Americans a year are moving abroad in search of better lives. A root cause is how the U.S. government is treating its citizens these days.

At least 1,788 Americans officially threw away their U.S. citizenship in 2011, exceeding the totals from 2007, 2008, and 2009 combined. The Internal Revenue Service has been keeping a tally of U.S. citizens driven to renouncing that title since only 1998, but last year’s number has officially raised the bar when it comes to calling America quits.

Out of the 34 countries that belong to the Organization for Economic Cooperation and Development, the United States is the only nation that taxes its citizens no matter where they reside on Earth. As long as a person maintains citizen status, they are expected to send the United States government pennies on every dollar earned no matter where they live. The good old U.S. of A is also one of the only countries in the world that locks up its citizens in boxes for failing to pay up.

As the U.S. government works ever-more-aggressively to find ways to fund the deficit and as their worldwide bullying continues to create a backlash for us Americans trying to diversify offshore, more and more of us Americans who understand the importance of diversifying offshore are considering the idea of saying thanks, but, no, thanks, Uncle Sam. Here’s your passport back.

Just about every call I get now related to expatriation is from someone either battling the IRS or afraid of winding up in a clash with the Government.

Why are so many citizens concerned? I believe it is because the tone of the Internal Revenue Service has changed dramatically in the last five years.

Historically, if an average American failed to report his income accurately and completely it was a civil or a financial issue…he or she had to pay the taxes and penalties. Increasingly, the IRS is turning those sections of the tax code enacted to go after drug dealers and mafia kingpins (think Al Capone) on ordinary citizens, all in the name of increasing revenues.

These weapons of mass destruction (which, in this case, the U.S. government has no trouble finding) put regular people in jail for years for failing to file a form or to report income. They are being used not only to go after multi-millionaires and billionaires with huge accounts offshore, but everyday hard-working Americans, as well.

Here are three examples from my clients. There are hundreds of similar cases being argued throughout the United States right now.

Example #1 – Offshore Account

I know a single father of three who makes about US$80,000 a year as a self-employed consultant. Eight years ago, he moved some money offshore, to diversify and for asset protection. He never filed the necessary IRS forms, and he failed to report the account on his tax return.

Unfortunately for him, the account was at UBS Switzerland. He was reported to the IRS, which has decided to prosecute him.

Here is the rub: He did not have any unreported or untaxed income…which is to say, the account did not earn any interest, and the guy would not have had to pay any additional U.S. tax had he reported it.

That’s irrelevant now. In settlement negotiations, the man is facing up to one year in jail and a fine of US$540,000.
He has little money left and will never be able to pay the fine.
What is the point of the prosecution? The IRS gets to issue a press release showing a conviction in this city. This press release will forget to mention that there is no tax loss in the case, but it may induce many others to come forward…thereby increasing revenues on the back of an everyday citizen who made a mistake.

Example #2 – Cash Transactions

A retired U.S. citizen I know, living in California, age 60, is concerned about a major devaluation of the U.S. dollar. He decided a while ago that he wanted to purchase gold. He owns a condo with some equity and has a few hundred thousand dollars in retirement money.

As a regular guy, he can´t afford to buy large amounts of gold bullion, so he purchased gold coins from a local dealer. He paid cash for these coins so the dealer would not have to wait for a check to clear before handing over the merchandise. He has never sold any of his coins, thus there is no tax issue.

What did he do wrong? He took cash out of his account once or twice a week, always less than US $10,000 at a time, to make the gold purchases. To the IRS, this can qualify as “Structuring,” which is a crime.

The man’s bank sent two suspicious transaction reports to the IRS and closed his account. He had been a client of this bank for more than 30 years, yet the bank made no effort to warn him in advance of the reports they made to the IRS or to offer any assistance. They just turned him in.

As a result, the man is looking at a fine of up to US$100,000 and possible criminal charges that could incarcerate him for up to five years. Add to this a minimum of US$100,000 in potential legal fees, and the reality for this guy is that he and his family could be wiped out. Again, this is all the result of an innocent mistake.
Example #3 – Dual Citizen

Another client is a 55-year-old engineer who has been working at the same job for 20 years. He is a dual citizen of the United States and the United Kingdom. When he moved to the States, he rented out his U.K. home. Ever since, he has deposited this rental income in a U.K. account.

The man has filed tax returns in the U.K. reporting the rental property, but he did not report it, or the U.K. account, to the IRS. Had he reported the property and the related rental income all along, it would not have made any tax difference in the United States.
In fact, reporting the rental could have reduced his U.S. tax, thanks to the depreciation he could have claimed.

In 2009, this man learned of the requirement to file an FBAR form and entered the IRS Voluntary Disclosure Program. As a result, this story has a happier ending than the others. This guy will not face criminal charges.
He will, though, pay a fine of approximately US$22,000.

Cases like these and the hundreds of others currently being argued have changed the way that tax attorneys deal with clients. While we once would say, ‘Come clean, be honest, and let’s get through this,’ now we advise, ‘Be afraid…be very afraid.’

It is this culture of fear that is pushing many Americans to look around the world for places where they might live better, freer, and less fearfully.

I’ll note that these changes are not the result of one political party or another. They represent a permanent change in perspective by the U.S. government in general, in how both parties view their citizens. Changes to the tax laws, and in the ways the laws are interpreted, began under George Bush II with the Patriot Act and continue under Barack Obama with the Bank Secrecy Act and the HIRE Act.

In the face of a troubled U.S. economy and out-of-control spending, the U.S. government desperately needs to expand its tax revenues, and the IRS has decided that it can raise more money with fear and violence than with honey.

It’s a situation that qualifies as dire, and sensible Americans are looking to escape it as quickly as they can.

Attack on the Dollar

IRS Going After Cash Transactions

U.S. Goes After Cash Transactions

The New York Times recently reported that Federal and state authorities are investigating a handful of major American banks for failing to monitor cash transactions in and out of their branches. The government claims that this may have enabled drug dealers and terrorists to launder tainted money, according to officials who spoke on the condition of anonymity.

It is alleged that the primary target of the investigation is the embattled J.P. Morgan Chase. Who, fresh off a scandalous trading loss of $5.8bn, is in no position to stand up to another political firestorm. It is also suggested that the government is looking in to several other big name banks, including Bank of America.

Before I get in to this story, let’s define our terms:

A cash transaction is one where someone withdraws or deposits paper money. This does not include checks or wire transfers. A bank is required to report any cash transaction in excess of $10,000, and any transaction the teller deems to be “suspicious.”

A suspicious transaction is usually a group of transactions that are structured to avoid the reporting requirements. For example, you go in to the bank each day and deposit $9,500, or in to two branches with $6,000 each time. If the teller (or computer) notices, then a Suspicious Transaction Report will be sent to the IRS.

Tellers are also trained to spot signs of generally suspicious behavior. For example, if a customer asks about the reporting requirements or anything related to taxation or the IRS that is suspicious. If the customer seems nervous or otherwise sets of warning bells, a report will be generated.

With that said, let’s get back to the story:

The Comptroller of the Currency, as well as prosecutors from the Justice Department and the Manhattan district attorney’s office are all gearing up to go after these banks in order to protect us from drug dealers and terrorists…YEH! We should all stand up and applaud our government’s diligence!

Well, wait a minute. Who is the actual target here? Is al-Qaeda really transacting giant piles of cash and fooling tellers and computers in to not reporting? Are the internal bank compliance systems, on which these companies have spent millions of dollars, fooled so easily?

As someone who has represented both clients and family members caught up in these currency transaction reports and suspicious transaction reports, I can tell you that banks take them very seriously. I can also tell you that the teller’s credo is report first and ask questions later…CYA all the way.

So, why the sudden focus on cash transactions? In my opinion, it is a new battlefield being tested against average U.S. citizens, with nary a terrorist in sight. Are self-employed persons cashing their checks rather than depositing them to avoid paying taxes? Are they structuring their transactions to avoid a currency report?

With international tax evasion, the IRS has the Foreign Bank Account Form and related penalties. With domestic tax evasion, the government as the Currency Transaction Report to target anyone who lands in their crosshairs. Much like the FBAR, attempting to avoid the filing of a CTR is punishable by up to five years in prison.

As you may recall, it was just six years ago that the Patriot Act came in law under George Bush. The reasoning behind this act, as well as those to follow (HIRE, FATCA, et al.), was to put a stop to terrorist money laundering. Well, the Patriot Act led to the IRS attack on the Swiss bank UBS, $5 billion dollars and counting in new tax and penalty revenues, and the prosecution and imprisonment of hundreds of U.S. citizens…without a terrorist to be found
Now, as the government increases pressure on banks to report anyone transacting in cash, or acting suspiciously, and turns bank tellers in to unpaid IRS Criminal Investigation Agents, a new battle is brewing between the IRS and the average American self-employed person who may be fudging on his or her taxes.

When this is over, two things will come of it: 1) the IRS will persecute a few to collect from many and 2) the number of anonymous cash transactions will be reduced significantly, with business being done by credit card, check or wire, thereby traceable and controllable.