In 2009 the initial partial amnesty program yielded $2.2 billion dollars in taxes, interest, and penalties from 15,000 taxpayers. Even after the program ended, 3,000 more taxpayers came forward to participate.  When the first deferred prosecution program happened in 2009 the United States and UBS AG (UBSN) reached an agreement under which the bank paid back $780 million dollars. Since then the United States has been prosecuting clients of HSBC Holdings Plc, UBS and other banks from around the world.  The basis of an indictment of four European-based bankers at Credit Suisse Group AG in February and a United States civil action against HSBC Holdings Plc. stemmed from the interviews of United States account holders in the voluntary disclosure program.   The voluntary partial amnesty program is just one of the beefed-up enforcement efforts of the Internal Revenue Service. The Department Of Justice is also seeking prosecutions.

 It is believed that because the Internal Revenue Service Agency is focusing on international tax enforcement, that caused more people then what was anticipated to participate in the program to accept penalties and reveal their off-shore accounts. Internal Revenue Service commissioner Douglas Shulman declined to comment on the United States efforts to obtain account information from Swiss banks, other than to confirm that the Swiss government and the United States are discussing the issue.

 Now that the second partial amnesty program has ended, tax attorneys have various opinions on whether the IRS will offer a third one. One attorney believes that a third program will undermine tax compliance and the government would be hesitant to do so.  Another attorney said U.S. authorities are poised to take enforcement action against as many as ten banks, which could possibly yield tens of thousands of previously undisclosed accounts held by U.S. citizens. Most believe this was one of the most successful tax-compliance actions in history.

In a recent study, a tax advisory firm examined over 900 accounts that have been audited. Of this group more than 50% said that they had received letters from the Federal Government with errors found on their taxes. Also almost 40% said that they had received a letter of audit from the state.  Over the next tax season, the increase in audit activity is projected to be up more than 50%. Because of the budget issues, all agencies, including the Federal Government, are taking extra precautions to bridge the shortfalls.  It’s extremely important that all businesses  are aware of the increased potential risk for an audit. With increased scrutiny, it is very possible that those who have always slid by the radar of the tax police just might find themselves with a certified letter from one of the government agencies.  It is becoming obvious that the IRS and state agencies are requiring greater transparency and enforcing more complex reporting requirements. Both the IRS and various states are staffing up with audit personnel to increase audit capacity.

It is important to take the necessary precautions and to ensure that all taxes have been handled properly, before the letter comes of the audit notification. An audit, even if done through the mail, can be a strenuous time and being unprepared makes this an even larger strain.  Companies should regularly audit their own accounting practices, tax returns and internal processes to assess their preparedness for a potential audit. It’s important to  identify the time, documents and people it would require if an audit were to occur.

One thing is for sure, no matter what the type of business or where they are located, there is going to be increased scrutiny on the taxes for both state, and federal. The government and most states have a deficit and a good way to recover that is to take it out on businesses and individuals who are not prepared for the probability of an audit.

Douglas Shulman explained at a public meeting in Washington that by collecting documents earlier, the IRS would be allowed to reject returns that didn’t match records before processing, which would reduce burdens on both the agency and the filers involved.  Shulman said that “a real-time system would significantly improve compliance.”  With more advanced computers and operations, the agency has been allowed to make fundamental alterations to the way taxes are filed. In the upcoming filing season, the IRS expects to process all returns on a 24 hour basis instead of a weekly one.Shulman argues that the IRS needs to speed up the process to a real-time system because consumers nowadays are demanding instant gratification.

Currently, the IRS functions by using a system of evaluating a tax return and then supporting documents only after the return has been filed. If IRS personnel investigate a return, a tax filer must recover all past records subject to possible taxation. Shulman said that by allowing taxpayers to reference information against the returns data reported to the IRS by income sources, the IRS could avoid unnecessary complications.

 Cost savings may be Shulman’s most appealing argument towards making changes in the taxation system, though he did not mention the budget. The IRS is faced with a budget cut by Congress and therefore must be cautious of where they spend their funds. When Shulman spoke  he explained that there would be exponential long term benefits to a real time system and that billions in net revenue and cost savings would result from such a change. The savings would be shared amongst both the government and the tax filers.  When asked about the changes of law by Congress and the financial situation at hand, Shulman replied that it would be awhile before the IRS could institute a real-time system.

 More complicated and controversial methods include setting up an offshore company, trust or foundation in an offshore jurisdiction. Tax evasion, on the other hand, is the willful act of misrepresenting financial information to avoid the tax liability. Common forms of tax evasion are understating income, wages or gains on the sale of property and/or overstating tax deductions.

 What’s the Difference? To keep it simple – think of it this way: Tax avoidance is the maneuvering to avoid the tax liability in the first place. The tax does not exist, because in a legal sense, no income, profit or gain ever existed. Tax evasion is maneuvering to avoid the payment of a tax liability that has already been created. The tax exists because the income, profit or gain already exists. To avoid paying the tax is a criminal act.

 Why Would the Government Allow Tax Avoidance? Obviously, no government could function if all its citizens legally avoided paying taxes. While there are legal means of tax avoidance that every citizen has a right to put into practice, there are also “abusive tax avoidance strategies” that the IRS warns against openly. These include: a. Anti-Tax Law Schemes b. Abusive Home-Based Business Schemes c. Abusive Trust Schemes d. Misuse of the Disabled Access Credit e. Abusive Offshore Schemes f. Employee Plans Abusive Tax Transactions g. Exempt Organization Abusive Tax Avoidance Transactions.

 The IRS tows a hard line with the promotion of Illegal Tax Schemes posing as Legal Tax Avoidance Strategies.

Tax Avoidance has always had its share of hucksters and scam artists who appeal to the “greed mechanism” present in some taxpayers, by selling “get out of paying tax legally” kits and seminars.

 If Your Name is On a List of a Tax Shelter Promoter—The IRS is Watching You. In a recent effort to cut down on abusive tax avoidance scheme, the Department of Justice is now requiring promoters of tax shelters to make their list of clients available to the IRS. If called upon, these promoters must give names as well as details of the transactions. For abusive tax schemes, this provision has proven to be an effective means for the IRS catching not only the promoter…but also the clients.

 Do What’s Right…But Get Legal Help If You’re Unsure. If you’ve participated in a tax avoidance strategy and you find yourself questioning if it was legal, don’t wait to find out “the hard way”.  Remember, even if you’ve been involved in an illegal tax avoidance scheme, you can still make restitution for your actions without it ending up in a jail sentence. But there’s no question that you’ll need competent legal help in this situation.

In fact , in July 2000, not only did the new Federal Payment Levy Program allow the IRS to dip into some Social Benefits paid to you, but it can also take money that you’ve received from:

-Federal employee retirement annuities

-Federal payments made to you as a contractor/vendor doing business with the government (including DEfense contracts)

-Federal employee travel advances or reimbursements

-And some federal salaries

 Is Your IRS Problem Worth Sacrificing Your Health…Or Your Life? Stress can be a killer, literally. Stress can lead to heart attack, hypertension, stroke, cancer, diabetes, depression, obesity, eating disorders, substance abuse, ulcers, irritable bowel syndrome, memory loss, autoimmune diseases (e.g. lupus), insomnia, thyroid problems, and even infertility.

 Procrastinating and hoping that your IRS problems will just go away  is causing you a boatload of stress…But chances are that you may not have considered what that stress is doing to your body on a long-term basis.

 The Effects On Your Marriage. Numerous studies have shown that money problems are the #1 source of arguments in marriage. Money problems caused by credit debt, loss of a job, unforeseen expenses – you name it…all can be stressful on a marriage. But if you toss IRS problem into the mix, you may have a recipe for disaster.

 The IRS has more far-reaching power than any collection agency could. So if money problems cause arguments, IRS problems can cause absolute fallout. Divorce follows as a result, it introduces another whole host of problems emotionally and financially.

You Have One Chance at Life (as far as I know…) Don’t Waste Another Minute Worrying About the IRS. The average life expectancy of an American male is 73 years. If you live this long, and you spend 5 years worrying about the IRS – that means a full 6% of your lifetime was spent in the shadow of an IRS problem.

 That’s too long. Plus, considering the fact that stress and sleep deprivation could actually shorten your lifespan…that 6% number could be greater. If you die at 60 and you spent 5 years worrying about the IRS, that’s over 8% of your lifetime. Don’t you have better things to think about? Of course you do. Although you may have forgotten them in a sea of worry…at one time you had dreams & goals – things you wanted to do in this life before you die.

 An innocent spouse is classified as a person that had no knowledge that his or her spouse was defrauding the IRS by underpaying their taxes.

 Until this change in regulation, there was a two year limit that was applied to any innocent spouse attempting to file a relief request. The change applies to all future requests and will retroactively be applied to previously denied claims.

 The IRS change only applies to the equitable relief provision. This provision absolves the innocent spouse of any liability in paying past due taxes and relieves them of any interest or penalties associated with the unpaid taxes. Innocent spouses must prove that at the time of signing the joint tax return, they had no knowledge of any wrongdoing on behalf of the guilty spouse.

 If a request is approved, the IRS allows the innocent spouse to pay the taxes that they are responsible for, but relieves them of any penalties and fines associated with the misfiling of the taxes.

 The intent of the law was that an innocent spouse would have two years to file a request for relief. However, this law did not take into account spouses that were victims of domestic violence and abuse.

 Many members of congress have been lobbying for a change in the regulation for some time now. The IRS receives 50,000 requests annually for innocent spouse relief. Of those 50,000, 4%, or 2,000, requests are rejected because they are outside the 2 year limit.

 This change in policy will now help 2,000 innocent spouses avoid the penalties and fines for something that they were never aware was happening.

 All future requests will be processed without looking at a term limit. However, if you have had a previous request denied due to the 2 year limit, you must file an IRS Form 8857 “Request for innocent spouse relief”. The IRS will not apply the two year limit in any active litigation.

It’s called an Offer-In-Compromise- and it used to be the only legitimate way to negotiate an actual lowering of the amount of taxes owed to the IRS by a taxpayer…sometimes far less.

However, since the IRS has seen so much “abuse” of this particular method of tax relief in recent years, they have shown by their actions that they are less and less apt to accept an Offer-In-Compromise.

Did You File and Not Pay?

If you did, there’s interest being compounded daily on what you owe, which is the quarterly federal short-term tax rate, plus 3%.  As of this writing, the IRS is charging 8% per year.

In addition to interest, you’re also being charged a Failure-to-Pay Penalty, which is .5% of the tax owed for each month.  There is no maximum for the failure-to-pay penalty.  If you’re sent a number of notices from the IRS and you still don’t pay, the penalty increases to 1%.

What You Should Do If You Filed and Didn’t Pay?

The most obvious answer is to pay the debt.…it’s better to owe anyone other than the IRS.  Why?  Because the IRS has more power to collect in ‘mean and nasty’ ways than any collection agency you’ll ever deal with. 

So what if you just can’t come up with the money? If you just don’t have the money, and you cannot get it, there are legal ways to negotiate with the IRS: Be declared Non-Collectible Status.

Have the debt reduced through an Offer-In-Compromise. Set up a monthly installment agreement plan.  Set up a partial installment agreement (where you pay less than the total owed).  Declare Bankruptcy.

Did You Not File at All?

If you didn’t file taxes this past year (or any other year for that matter), you have bigger problems. You still have the interest that’s being compounded daily on what you owe – the quarterly federal short-term tax rate, plus 3%.

But the penalty gets really harsh for non-filers –You pay the .5% late payment penalty plus a 4.5% late filing penalty, for a combined penalty of 5% for the first month your  return is late.

However, it gets worse: Every month that you don’t file – your penalties double…until 5 months when it caps at 47.5% (22.5% late filing penalty + 25% late payment penalty). 47.5%…Ouch. That’s double what even some of the worst credit cards would charge.