You are hereIRS Tax Penalties

IRS Tax Penalties

By watax - Posted on 15 February 2009

EXCEPT FOR THE ODD SORT OF TAX PROFESSIONALS OUT THERE, NO ONE LIKES TO FILE AND PAY TAX. THE SIMPLE ACRONYM IRS DESCRIBES THE WORD DISEASE TO IT’S TRUE MEANING OF TO BE AT A STATE OF DIS-EASE (TO BE OPPOSITE OF AT EASE OR COMFORTABLE) THE IRS IN IT’S INFINITE WISDOM KNOWS THAT IF IT DOES NOT IMPOSE A MONETARY TAX PENALTY (THE BIG HURT) ON THOSE TAXPAYERS WHO DO, FOR WHATEVER REASON, FAIL IN THEIR CONSTITUTIONAL OBLIGATION TO OBEY THE RULES, THESE RULES WILL BE DISREGARDED AND THE LAST BILL A PERSON WILL PAY IS THEIR TAXES. AFTER ALL A NEW CAR IN THE DRIVEWAY IS A WHOLE LOT MORE SATISFYING THAN THE PAYING OF MONEY OVER TO A GOVERNMENTAL AGENCY WHICH IS GOING TO TURN THAT MONEY OVER TO A BUNCH OF POLITICIANS WHO, BY MOST STANDARDS, WILL WASTE EVERY DIME.

FRIVOLOUS NONFILERS - NONFILER ENFORCEMENT

 

WHEN THE 16TH AMENDMENT TO THE CONSTITUTION WAS RATIFIED (FEBRUARY 3, 1913) GIVING CONGRESS THE POWER "TO LAY AND COLLECT TAXES ON INCOMES" CITIZENS BEGAN ARGUING THAT IT WAS NOT PROPERLY RATIFIED AND INCOME TAXES ARE ILLEGAL. THE COURTS HAVE REPEATEDLY REJECTED THEIR ARGUMENT AS FRIVOLOUS, BUT UNFORTUNATELY, SOME CITIZENS CONTINUE TO RAISE ARGUMENTS IN SPITE OF THE FACT THAT THEY HAVE NO BASIS IN LAW. UNSCRUPULOUS PROMOTERS AND THEIR FOLLOWERS HAVE LONG EMPLOYED FRIVOLOUS ARGUMENTS CONCERNING THE LEGALITY OF THE INCOME TAX AS PRETEXTS TO ENRICH THEMSELVES OR EVADE THEIR TAXES. THEIR MOTIVATION IS USUALLY MONETARY, NOT SOME LEGITIMATE PURPOSE OR BELIEF.
ANTI-TAXATION GROUPS HAVE BEEN AROUND FOR A LONG TIME, SOME USING THE FRIVOLOUS ARGUMENT MENTIONED HERE. THESE GROUPS ARE SMALL BUT VOCAL. IN THE PAST, ORGANIZATIONS LIKE WE THE PEOPLE, THE SAVE A PATRIOT SOCIETY, THE PILOT CONNECTION, AND THE FREEMAN ALL ATTRACTED FOLLOWINGS. THOUGH THE LEADERSHIP OF THESE MOVEMENTS USED DIFFERENT ARGUMENTS TO GAIN FOLLOWERS, THEY ALL SHARE ONE THING IN COMMON; THEY RECEIVED SUBSTANTIAL SENTENCES IN A FEDERAL PRISON FOR THEIR ACTIVITIES. THEIR FOLLOWERS ALSO PAID A STEEP PRICE FOR FOLLOWING BAD ADVICE. SOME WERE PROSECUTED, MANY MORE WERE INVOLVED IN YEARS OF LITIGATION AND ULTIMATELY HAD TO PAY ALL TAXES OWED ALONG WITH PENALTIES AND INTEREST.

THE 16 TH AMENDMENT TO THE CONSTITUTION AND THE STATES THAT RATIFIED IT:
ACCORDING TO THE UNITED STATES GOVERNMENT PRINTING OFFICE, THE FOLLOWING STATES RATIFIED THE AMENDMENT[1]:

RATIFICATION (BY THE REQUISITE THIRTY-SIX STATES) WAS COMPLETED ON FEBRUARY 3, 1913 WITH THE RATIFICATION BY NEW MEXICO (BUT SEE DELAWARE AND WYOMING BELOW). THE AMENDMENT WAS SUBSEQUENTLY RATIFIED BY THE FOLLOWING STATES, BRINGING THE TOTAL NUMBER OF RATIFYING STATES TO FORTY-TWO:
37. DELAWARE (FEBRUARY 3, 1913)
38. WYOMING (FEBRUARY 3, 1913)
39. NEW JERSEY (FEBRUARY 4, 1913)
40. VERMONT (FEBRUARY 19, 1913)
41. MASSACHUSETTS (MARCH 4, 1913)
42. NEW HAMPSHIRE (MARCH 7, 1913, AFTER REJECTING THE AMENDMENT ON MARCH 2, 1911)
THE FOLLOWING STATES REJECTED THE AMENDMENT WITHOUT EVER SUBSEQUENTLY RATIFYING IT:

  1. CONNECTICUT
  2. RHODE ISLAND
  3. UTAH

FOR THOSE TAX PROTESTERS WHO ARE IMPOSED THESE PENALTIES TWO THIRDS OF THE STATES BY 1913 HAD RATIFIED THE 16 TH AMENDMENT. ALSO THE ARGUMENTS GIVEN AS EXCUSES FOR NOT FILING OR PAYING TAX HAS BEEN OVERTURNED BY ALL COURTS UP TO AND INCLUDING THE SUPREME COURT. SO FOR THE UNFORTUNATE TAXPAYER OUT THERE WHO HAVE RELIED ON THE UN SCRUPULOUS PROMOTER OF A TAX SCHEME THESE PENALTIES DO APPLY.
WITHIN THE INTERNAL REVENUE CODE ARE THE FOLLOWING. THESE ARE THE MORE POPULAR PENALTIES AND THE MOST IMPOSED. KEEP IN MIND THAT SOME OF THE SECTIONS INCLUDED MAY NOT BE PENALTIES BUT ADDITIONAL TAX IMPOSED.

FAILURE-TO-FILE PENALTY. IF YOU DO NOT FILE YOUR RETURN BY THE DUE DATE (INCLUDING EXTENSIONS), YOU MAY HAVE TO PAY A FAILURE-TO-FILE PENALTY. THE PENALTY IS 5% OF THE TAX NOT PAID BY THE DUE DATE FOR EACH MONTH OR PART OF A MONTH THAT THE RETURN IS LATE. THIS PENALTY CANNOT BE MORE THAN 25% OF YOUR TAX, BUT IT IS REDUCED BY THE FAILURE-TO-PAY PENALTY (DISCUSSED NEXT) FOR ANY MONTH BOTH PENALTIES APPLY. HOWEVER, IF YOUR RETURN IS
MORE THAN 60 DAYS LATE, THE PENALTY WILL NOT BE LESS THAN $100 OR 100% OF THE TAX BALANCE, WHICHEVER IS LESS. YOU WILL NOT HAVE TO PAY THE PENALTY IF YOU CAN SHOW REASONABLE CAUSE FOR NOT FILING ON TIME. PENALTY ABATEMENTS CAN BE REQUESTED BY LETTER OR BY FILING IRS FORM # 843. IN ADDITION THE IRS MAY, FOR FAILURE TO FILE A RETURN, FILE FOR THE TAXPAYER A RETURN BASED ON INFORMATION IT HAS RECEIVED FROM INFORMATIONAL RETURNS ON RECORD OR IT CAN USE AN AVERAGE OF PREVIOUS YEARS RETURN INFORMATION. EXAMPLE IF A TAXPAYER HAS EARNED AN AVERAGE OF $100,000 OVER
THE PAST THREE YEARS OF FILING AND THE NON FILED YEAR SHOWS $50,000 IN REPORTED EARNINGS (1099’S, W-2 FORMS ETC) AN SFR (SUBSTITUTE FOR RETURN)) MAY BE PREPARED AND TAX ASSESSED BASED ON THE $100,000 AVERAGE. THE IRS THEN HAS THE FOLLOWING OPTIONS:

  1. ASSESS THROUGH NORMAL CHANNELS TAX THEY BELIEVE IS DUE AND TURN THE CASE OVER TO THE COLLECTIONS DIVISION OR THE NEW AND MORE POPULAR METHOD
  2. THE IRS FILES AN “SFR” THEN INSTEAD OF GOING DIRECTLY TO COLLECTIONS THE RETURN GOES TO THE EXAMINATION DIVISION, THE CASE IS AUDITED FOR ACCURACY, BASED ON THE FINDINGS OF THE FILING OFFICER, IT THEN GOES TO THE 30 DAY NOTICE STAGE. IF THE TAXPAYER DOES NOT RESPOND TO THE 30 DAY NOTICE TO ASSESS ADDITIONAL TAX THE CASE WILL BE PLACED INTO THE 90 DAY TAX COURT PETITION PHASE WHERE THE TAXPAYER MAY REQUEST THE CASE BE DOCKETED FOR REVIEW. IF BOTH THE 30 DAY NOTICE AND THE 90 DAY NOTICE GOES UNANSWERED THE TAX IS ASSESSED AS FINAL AND THE CASE GOES TO COLLECTIONS.

THE PROBLEM WITH # 2 IS NO REPLACEMENT FOR AN “SFR” CAN BE FILED AND THE TAX ASSESSMENT IS FINAL. THIS ASSESSMENT CAN THEN ONLY BE APPEALED BY THE FILING OF AN OFFER IN COMPROMISE, DOUBT AS TO LIABILITY FILING.

FAILURE-TO-PAY PENALTY. YOU MAY HAVE TO PAY A PENALTY OF 1/2 OF 1% OF YOUR UNPAID TAXES FOR EACH MONTH OR PART OF A MONTH AFTER THE DUE DATE THAT THE TAX IS NOT PAID. THIS PENALTY CANNOT BE MORE THAN 25% OF YOUR UNPAID TAX. YOU WILL NOT HAVE TO PAY HE PENALTY IF YOU CAN SHOW GOOD REASON FOR NOT PAYING THE TAX ON TIME. AGAIN BY LETTER OR THE FILING OF FORM # 843
APRIL 15TH IS THE DEADLINE FOR MOST PEOPLE TO FILE THEIR INDIVIDUAL INCOME TAX RETURN AND PAY ANY TAX OWED. IF THE DUE DATE FALLS ON A SATURDAY, SUNDAY, OR LEGAL HOLIDAY, THE DUE DATE IS DELAYED UNTIL THE NEXT BUSINESS DAY (I.E., TAX YEAR 2006 IS DUE APRIL 17, 2007). TAX RETURNS ARE CHECKED FOR MATHEMATICAL ACCURACY. IF THERE IS ANY MONEY OWED, YOU WILL BE SENT A BILL. GENERALLY, INTEREST IS CHARGED ON ANY UNPAID TAX FROM THE DUE DATE OF THE RETURN UNTIL THE DATE OF PAYMENT. THE INTEREST RATE IS DETERMINED EVERY THREE MONTHS AND IS THE FEDERAL SHORT–TERM RATE PLUS 3 PERCENT. INTEREST IS COMPOUNDED DAILY. IF YOU FILE ON TIME BUT DON'T PAY ALL AMOUNTS DUE ON TIME, YOU'LL GENERALLY HAVE TO PAY A LATE PAYMENT PENALTY OF ONE–HALF OF ONE PERCENT OF THE TAX OWED FOR EACH MONTH, OR PART OF A MONTH, THAT THE TAX REMAINS UNPAID FROM THE DUE DATE, UNTIL THE TAX IS PAID IN FULL OR THE 25% MAXIMUM PENALTY IS APPLIED. THE ONE–HALF OF ONE PERCENT RATE INCREASES TO ONE PERCENT IF THE TAX REMAINS UNPAID 10 DAYS AFTER THE IRS ISSUES A NOTICE OF INTENT TO LEVY. FOR INDIVIDUALS, WHO FILE BY THE RETURN DUE DATE, THE ONE-HALF OF ONE PERCENT RATE DECREASES TO ONE-QUARTER PERCENT FOR ANY MONTH IN WHICH AN INSTALLMENT AGREEMENT IS IN EFFECT.
PENALTY FOR FRIVOLOUS RETURN. YOU MAY HAVE TO PAY A PENALTY OF $500 IF YOU FILE A RETURN THAT DOES NOT INCLUDE ENOUGH INFORMATION TO FIGURE THE CORRECT TAX OR THAT SHOWS AN INCORRECT TAX AMOUNT DUE TO:

  • A FRIVOLOUS POSITION ON YOUR PART, OR
  • A DESIRE TO DELAY OR INTERFERE WITH THE ADMINISTRATION OF FEDERAL INCOME TAX LAWS.

THIS PENALTY IS IN ADDITION TO ANY OTHER PENALTY PROVIDED BY LAW.
THE FOLLOWING ARE TYPES OF ACTIVITIES WHICH WILL CAUSE A FRAUD PENALTY
CORPORATE FRAUD
CRIMINAL INVESTIGATION IS INVOLVED IN MOST OF THE REGIONAL CORPORATE FRAUD TASK FORCES BECAUSE OF OUR FINANCIAL INVESTIGATIVE EXPERTISE.  ALSO, CORPORATE FRAUD FREQUENTLY INVOLVES VIOLATIONS OF THE INTERNAL REVENUE CODE (IRC) THROUGH FALSIFICATION OF CORPORATE AND INDIVIDUAL TAX RETURNS AND CI HAS EXCLUSIVE INVESTIGATORY JURISDICTION OVER CRIMINAL VIOLATIONS OF THE IRC. 
EXAMPLE:
VENTURA COUNTY MAN PLEADS GUILTY, ADMITTING ROLE IN TAX SCAM THAT COST UNITED STATES OVER $20 MILLION
ON JANUARY 17, 2007 , IN LOS ANGELES, CA, DENIS ARTHUR DUPUIS, FORMER GENERAL MANAGER OF HAAS AUTOMATION AND CNC, INC., PLEADED GUILTY TO CONSPIRING WITH THE COMPANY’S OWNER, GENE FRANCIS HAAS, TO PUTTING BOGUS EXPENSES ON THE COMPANY BOOKS IN AN ATTEMPT TO AVOID PAYING MORE THAN $20 MILLION IN FEDERAL INCOME TAXES.  THE SCHEME BEGAN IN 2000 AFTER HAAS PAID APPROXIMATELY $8.9 MILLION TO SETTLE A PATENT INFRINGEMENT LAWSUIT AGAINST A RIVAL FIRM.  ACCORDING TO COURT DOCUMENTS, HAAS BLAMED HIS LOSS IN THE CASE ON THE FEDERAL JUDGE WHO PRESIDED OVER THE LAWSUIT.  IN SEPTEMBER 2000, HAAS ALLEGEDLY CREATED SEVERAL TAX FRAUD SCHEMES TO RECOVER FROM THE GOVERNMENT THE $8.9 MILLION PLUS LEGAL FEES THAT HE PAID THE RIVAL COMPANY.  DUPUIS ADMITTED THAT HE WAS PART OF A CONSPIRACY WITH HAAS AND OTHERS THAT CREATED BOGUS INVOICES AND PAID THE FICTITIOUS BILLS WITH HAAS AUTOMATION CHECKS.  HAAS ALLEGEDLY PAID MILLIONS OF DOLLARS FOR NON-EXISTENT INDUSTRIAL EQUIPMENT AND DEDUCTED THESE PAYMENTS AS EXPENSES.  ACCORDING TO THE INDICTMENT, THIS BOGUS INVOICE SCHEME ALLOWED HAAS AUTOMATION TO DEDUCT MORE THAN $37.5 MILLION IN FALSE EXPENSES DURING 2000 AND 2001, WHEN IN REALITY NEARLY ALL OF THAT MONEY WAS RETURNED TO HAAS.
MONEY LAUNDERING
MONEY LAUNDERING IS A VERY COMPLEX CRIME INVOLVING INTRICATE DETAILS, OFTEN INVOLVING NUMEROUS FINANCIAL TRANSACTIONS AND FINANCIAL OUTLETS THROUGHOUT THE WORLD. CRIMINAL INVESTIGATION HAS THE FINANCIAL INVESTIGATORS AND EXPERTISE THAT IS CRITICAL TO “FOLLOW THE MONEY TRAIL.”
EXAMPLE:
ACCOUNTANT SENTENCED TO 90 MONTHS IN PRISON
ON MARCH 12, 2007 , IN STATESVILLE, NC, WILLIAM JAMES MARKHAM, AN ACCOUNTANT, WAS SENTENCED TO 90 MONTHS IN PRISON, TO BE FOLLOWED BY THREE YEARS OF SUPERVISED RELEASED AND ORDERED TO PAY $3.2 MILLION TO HIS VICTIM.  MARKHAM PLEADED GUILTY TO ONE COUNT OF MONEY LAUNDERING AND ONE COUNT OF FILING A FALSE TAX RETURN IN JUNE 2006.  ACCORDING TO THE INDICTMENT, MARKHAM ALLEGEDLY PROVIDED ACCOUNTING AND BUSINESS CONSULTING SERVICES TO FAILURE FREE READING, INC., A COMPANY BASED IN CONCORD , NORTH CAROLINA , THAT SEEKS TO TEACH READING SKILLS TO THE LOWEST 20 PERCENT OF THE READING POPULATION, INCLUDING AT-RISK AND SPECIAL EDUCATION STUDENTS.  THE INDICTMENT ALLEGED THAT FROM AT LEAST 1999 THROUGH 2004, MARKHAM EMBEZZLED APPROXIMATELY $3.2 MILLION FROM FAILURE FREE READING .  MARKHAM THEN LAUNDERED THE FUNDS THROUGH HIS PERSONAL CHECKING ACCOUNT AND THE CHECKING ACCOUNT OF HIS ACCOUNTING FIRM AND USED THE FUNDS TO PURCHASE LARGE HOMES, LUXURY BOATS, EXOTIC PETS, AND OTHER PERSONAL EXPENSES.
GENERAL TAX FRAUD
THE EFFORTS OF CRIMINAL INVESTIGATION ARE DIRECTED AT THE PORTION OF AMERICAN TAXPAYERS WHO WILLFULLY AND INTENTIONALLY VIOLATE THEIR KNOWN LEGAL DUTY OF VOLUNTARILY FILING INCOME TAX RETURNS AND/OR PAYING THE CORRECT AMOUNT OF INCOME, EMPLOYMENT, OR EXCISE TAXES. THESE INDIVIDUALS POSE A SERIOUS THREAT TO TAX ADMINISTRATION AND THE AMERICAN ECONOMY.
EXAMPLE:
FORMER IRS REVENUE AGENT AND OWNER OF “GENTLEMEN'S CLUB” SENTENCED FOR MAKING FALSE STATEMENTS ON A TAX RETURN; UNDERREPORTED OVER $1.3 MILLION IN INCOME. ON MAY 16, 2007 , IN BALTIMORE , MD , RONALD C. HEIDEL, A FORMER IRS REVENUE AGENT WAS SENTENCED TO 18 MONTHS IN PRISON FOLLOWED BY ONE YEAR OF SUPERVISED RELEASE FOR MAKING FALSE STATEMENTS ON HIS AND HIS WIFE’S JOINT TAX RETURN FOR THE YEAR 2001.  IN ADDITION, HEIDEL WAS ORDERED TO PAY A $30,000 FINE AND $135,236 IN RESTITUTION TO THE INTERNAL REVENUE SERVICE, AS WELL AS COOPERATE WITH THE IRS TO ESTABLISH THE FULL AMOUNT OF TAXES, INTEREST AND PENALTIES OWED.  ACCORDING TO THE PLEA AGREEMENT AND COURT DOCUMENTS, IN MARCH 1999, HEIDEL PURCHASED THE GENTLEMEN’S GOLD CLUB (GGC), A RESTAURANT AND BAR THAT ALSO FEATURED ENTERTAINMENT BY EXOTIC DANCERS.  HEIDEL SOLD THE CLUB IN JULY 2002.  FROM THE LATTER PART OF 2000 THROUGH MID-2002, HEIDEL ALSO OWNED A VENDING MACHINE BUSINESS NAMED ROSSVILLE VENDING THAT SUPPLIED CIGARETTE AND VIDEO GAME MACHINES TO RESTAURANTS, CLUBS AND BARS AROUND THE BALTIMORE AREA.  AS PRESIDENT OF THE GGC, HEIDEL RECEIVED THE CASH GENERATED BY DOOR ADMISSIONS CHARGES AND SALES OF FOOD AND DRINK AT THE CLUB ON A DAILY BASIS.  BETWEEN MAY 3, 1999 AND DECEMBER 27, 2001, HEIDEL DEPOSITED $1.467 MILLION IN CASH DERIVED IN PART FROM THE OPERATIONS OF THE GGC AND ROSSVILLE VENDING INTO VARIOUS PERSONAL BANK ACCOUNTS, RATHER THAN THE COMPANY’S BANK ACCOUNTS. MANY OF THESE CASH DEPOSITS WERE BETWEEN $7,000 AND $9,000. HEIDEL OFTEN MADE TWO DEPOSITS AT DIFFERENT BRANCHES OF THE SAME BANK OR AT TWO DIFFERENT BANKS ON THE SAME DAY.  BY KEEPING THE AMOUNTS TO LESS THAN $10,000, HEIDEL AVOIDED TRIGGERING THE REQUIREMENT THAT THE FINANCIAL INSTITUTION FILE A CURRENCY TRANSACTION REPORT (CTR) ON THESE TRANSACTIONS.  AS PART OF THE PLEA AGREEMENT, HEIDEL ACKNOWLEDGED THAT HE MADE FALSE STATEMENTS NOT ONLY ON HIS JOINT 2001 TAX RETURN, BUT ALSO ON HIS 1999 AND 2000 TAX RETURNS. AT SENTENCING, THE GOVERNMENT AND THE DEFENSE AGREED THAT HEIDEL UNDERREPORTED HIS INCOME BY A TOTAL OF $1.308 MILLION OVER THESE THREE YEARS, AND THAT HE OWED ADDITIONAL TAXES OF $397,369.
ABUSIVE RETURN PREPARER
TAXPAYERS SHOULD BE VERY CAREFUL WHEN CHOOSING A TAX PREPARER. YOU SHOULD BE AS CAREFUL AS YOU WOULD IN CHOOSING A DOCTOR OR A LAWYER.
EXAMPLE:
BROWARD COUNTY TAX RETURN PREPARER SENTENCED TO 60 MONTHS IN PRISON
ON MARCH 8, 2007 , IN FORT LAUDERDALE , FL , ELLIS JEROME PARKER SR. WAS SENTENCED TO 60 MONTHS IN PRISON, TO BE FOLLOWED BY THREE YEARS OF SUPERVISED RELEASE.  ON NOVEMBER 1, 2006 , PARKER WAS CONVICTED ON 12 COUNTS OF AIDING AND ASSISTING IN THE PREPARATION OF FALSE AND FRAUDULENT FEDERAL INCOME TAX RETURNS AND ONE COUNT OF CONSPIRACY TO MAKE AND PRESENT FRAUDULENT TAX RETURNS TO THE IRS.  EVIDENCE PRESENTED DURING HIS TRIAL SHOWED THAT PARKER, TOGETHER WITH NUMEROUS CO-CONSPIRATORS WHO PREVIOUSLY PLEADED GUILTY, ENGAGED IN A MASSIVE SCHEME TO DEFRAUD THE IRS.  THE EVIDENCE PROVED THAT PARKER ENGAGED IN A PATTERN OF FALSIFYING SCHEDULE A EXPENSES TO OBTAIN FRAUDULENT REFUNDS FOR HIS CLIENTS AND CAUSE THEM TO NOT OWE ANY MONEY TO THE INTERNAL REVENUE SERVICE.  PARKER USUALLY FALSIFIED MEDICAL AND DENTAL EXPENSES, CHARITABLE CONTRIBUTIONS AND EMPLOYEE BUSINESS EXPENSES, KNOWING THAT THESE TYPES OF EXPENSES ARE NOT INDEPENDENTLY REPORTED TO THE INTERNAL REVENUE SERVICE.  THE EVIDENCE ALSO SHOWED THAT HE FORGED HIS CLIENTS’ SIGNATURES ON VARIOUS DOCUMENTS AND INSTRUCTED HIS EMPLOYEES TO FORGE SIGNATURES ON DOCUMENTS THAT WERE SUBMITTED TO THE INTERNAL REVENUE SERVICE.  MANY OF PARKER’S CLIENTS TESTIFIED AT TRIAL THAT THEY WERE UNAWARE THAT HE HAD FALSIFIED THEIR TAX RETURNS BECAUSE THEY HAD NOT REVIEWED OR RECEIVED COPIES OF THEIR COMPLETED RETURNS.  THE VICTIM TAXPAYERS FIRST LEARNED OF THE FALSE EXPENSES WHEN THEY WERE AUDITED BY THE IRS AND HAD TO REPAY THE GOVERNMENT THE FRAUDULENT PORTION OF THEIR REFUND, WITH INTEREST AND PENALTIES.  THE TAX FRAUD SCHEME LASTED MORE THAN THREE YEARS AND INVOLVED HUNDREDS OF TAX RETURNS.
FORMER CPA SENTENCED TO 51 MONTHS IN PRISON
ON MAY 23, 2007, IN PORTLAND , OR, HARRY NELS KYLLO, FORMER CERTIFIED PUBLIC ACCOUNTANT (CPA) WAS SENTENCED TO 51 MONTHS IN PRISON TO BE FOLLOWED BY THREE YEARS OF SUPERVISED RELEASE.  IN JANUARY 2007, KYLLO PLEADED GUILTY TO ONE COUNT EACH OF MAIL FRAUD, TAX EVASION AND IMPERSONATION OF AN IRS EMPLOYEE.  KYLLO WAS A CERTIFIED PUBLIC ACCOUNTANT UNTIL HIS LICENSE WAS REVOKED BY THE OREGON STATE BOARD OF ACCOUNTANCY ON SEPTEMBER 30, 2003 .  AT THE PLEA HEARING, KYLLO ADMITTED THAT FROM ABOUT 2000 TO 2003, HE DEVISED A SCHEME TO DEFRAUD SOME OF HIS TAX PREPARATION CLIENTS, THE IRS, AND THE OREGON DEPARTMENT OF REVENUE.  KYLLO INSTRUCTED HIS CLIENTS TO LEAVE THE PAYEE LINE BLANK ON THE CHECKS THEY PROVIDED TO HIM TO PAY THEIR TAX LIABILITIES.  HE THEN FRAUDULENTLY ENDORSED THE CHECKS AND DEPOSITED THE PROCEEDS INTO ONE OF HIS OWN BANK ACCOUNTS.   ACCORDING TO COURT DOCUMENTS, KYLLO TOLD HIS CLIENTS THAT HE HAND-DELIVERED THEIR TAX RETURNS TO THE IRS IN PORTLAND, WHEN IN FACT, HE DID NOT FILE THEIR RETURNS AT ALL.  WHEN THE IRS SENT NOTICES TO KYLLO’S CLIENTS CONCERNING UNPAID TAXES OR DELINQUENT TAX RETURNS, HE CREATED FALSE LETTERS PURPORTING TO BE FROM THE IRS STATING THAT THE PROBLEM HAD BEEN RESOLVED.  KYLLO THEN MAILED THESE FALSE LETTERS TO HIS CLIENTS, DELAYING THE DISCOVERY OF HIS THEFTS.  KYLLO ALSO PREPARED FRAUDULENT CLIENT TAX RETURNS BY FALSELY REDUCING INCOME OR INFLATING THEIR DEDUCTIONS IN ORDER TO REDUCE THE REPORTED TAX LIABILITY TO ZERO AND FILED THESE RETURNS WITH THE IRS.  THIS IN TURN, STOPPED THE IRS FROM SENDING NOTICES TO HIS CLIENTS.  KYLLO BILLED AND COLLECTED FEES FOR HIS SERVICES BASED ON FALSE REPRESENTATIONS TO CLIENTS THAT HE HAD PROPERLY HANDLED THEIR TAX PAYMENTS.  AS A RESULT OF HIS SCHEME, KYLLO STOLE TAX PAYMENTS TOTALING $1,322,582 FROM 36 VICTIMS.  THE INTERNAL REVENUE SERVICE AND THE OREGON DEPARTMENT OF REVENUE SUFFERED LOST TAX REVENUE BECAUSE OF THE THEFTS.  INDIVIDUAL VICTIM LOSSES RANGED FROM SEVERAL THOUSAND DOLLARS UP TO $390,000.

ABUSIVE TAX SCHEMES
ABUSIVE TAX SCHEME ORIGINALLY TOOK THE STRUCTURE OF ABUSIVE DOMESTIC AND FOREIGN TRUST ARRANGEMENTS.  HOWEVER, THESE SCHEMES HAVE EVOLVED INTO SOPHISTICATED ARRANGEMENTS THAT TAKE ADVANTAGE OF THE FINANCIAL SECRECY LAWS OF SOME FOREIGN JURISDICTIONS AND THE AVAILABILITY OF CREDIT/DEBIT CARDS ISSUED FROM OFFSHORE FINANCIAL INSTITUTIONS.
EXAMPLE:
MAINE MAN WHO ARGUED THAT HE WASN’T LIABLE FOR PAYING TAXES SENTENCED TO 33 MONTH PRISON TERM
ON APRIL 13, 2007 , IN PORTLAND , ME, JOHN ANTHONY WAS SENTENCED TO 33 MONTHS IN PRISON, FINED $7,500 AND ORDERED TO SERVE THREE YEARS OF SUPERVISED RELEASE.  ANTHONY WAS CONVICTED IN OCTOBER 2006 OF FOUR COUNTS OF TAX EVASION.  THE JURY FOUND THAT HE WILLFULLY ATTEMPTED TO EVADE HIS INDIVIDUAL INCOME TAXES FOR THE YEARS 1999 THROUGH 2002.  THE COURT FOUND THAT THE TAX LOSS WAS $203,753.  DURING THE TRIAL, ANTHONY TESTIFIED THAT BASED UPON HIS OWN READING OF THE INTERNAL REVENUE CODE AND OTHER LEGAL MATERIALS, HE DID NOT BELIEVE THAT HE WAS REQUIRED TO PAY TAXES.  HE CLAIMED THAT THE TAX LAWS ONLY APPLIED TO FEDERAL EMPLOYEES AND CITIZENS OF THE DISTRICT OF COLUMBIA .
OFFICER OF FIRST MOUNTAIN BANK SENTENCED TO PRISON IN BIG BEAR AREA ANTI-TAX SCHEME
ON APRIL 9, 2007, IN LOS ANGELES, CA, BRENDA KNUDSON, ASSISTANT VICE PRESIDENT AND BUSINESS DEVELOPMENT OFFICER FOR THE FIRST MOUNTAIN BANK OF BIG BEAR, CALIFORNIA WAS SENTENCED TO 12 MONTHS AND ONE DAY IN PRISON FOLLOWED BY THREE YEARS OF SUPERVISED RELEASE.  ACCORDING TO COURT DOCUMENTS, KNUDSON CONSPIRED WITH OTHERS TO DEFRAUD THE UNITED STATES BY IMPEDING, IMPAIRING, OBSTRUCTING AND DEFEATING THE ASSESSMENT AND COLLECTION OF FEDERAL TAXES BY THE INTERNAL REVENUE SERVICE.  THROUGH THE FREEDOM EDUCATION CENTER , THEY OFFERED “PURE TRUST” DOCUMENTS AND ANTI-TAX BOOKS AND LITERATURE FOR SALE .  KNUDSON ASSISTED WITH OPERATING THE ANTI-TAX ORGANIZATION AND INSTRUCTED INDIVIDUALS ON STRATEGIES THAT THEY CLAIMED WOULD ALLOW THEIR CLIENTS TO LAWFULLY STOP PAYING TAXES.  THE CO-CONSPIRATORS ASSISTED CLIENTS IN FORMING “PURE TRUSTS,” FALSELY CLAIMING THERE WOULD BE NO TAX CONSEQUENCES FOR FUNDS PLACED INTO “PURE TRUSTS.”  THEY FURTHER DIRECTED FIRST MOUNTAIN BANK EMPLOYEES TO OPEN “PURE TRUST” ACCOUNTS USING “TRUST IDENTIFICATION NUMBERS” WHICH THEY CREATED TO APPEAR AS IF THEY WERE TAXPAYER IDENTIFICATION NUMBERS (TINS), ISSUED BY THE IRS.  THE INTENT WAS TO DECEIVE THE IRS AND OTHERS AND TO MAKE IT DIFFICULT, IF NOT IMPOSSIBLE, TO IDENTIFY OWNERSHIP OF $11 MILLION IN FUNDS DEPOSITED INTO THE “PURE TRUST” BANK ACCOUNTS.  FURTHER, THIS TACTIC MADE IT DIFFICULT TO DETERMINE THE REPORTABLE INCOME ASSOCIATED WITH SUCH DEPOSITED FUNDS.  ALL FIVE CONSPIRATORS ADMITTED TO FAILING TO TIMELY FILE INCOME TAX RETURNS REPORTING THEIR EARNED INCOME.
NONFILER ENFORCEMENT
THERE HAVE ALWAYS BEEN INDIVIDUALS WHO, FOR A VARIETY OF REASONS, ARGUE TAXES ARE VOLUNTARY OR ILLEGAL.  THE COURTS HAVE REPEATEDLY REJECTED THEIR ARGUMENTS AS FRIVOLOUS AND ROUTINELY IMPOSE FINANCIAL PENALTIES FOR RAISING SUCH FRIVOLOUS ARGUMENTS.  TAKE THE TIME TO LEARN THE TRUTH ABOUT FRIVOLOUS TAX ARGUMENTS.
EXAMPLE:
OFFICER OF FIRST MOUNTAIN BANK SENTENCED TO PRISON IN BIG BEAR AREA ANTI-TAX SCHEME
ON APRIL 9, 2007, IN LOS ANGELES, CA, BRENDA KNUDSON, ASSISTANT VICE PRESIDENT AND BUSINESS DEVELOPMENT OFFICER FOR THE FIRST MOUNTAIN BANK OF BIG BEAR, CALIFORNIA WAS SENTENCED TO 12 MONTHS AND ONE DAY IN PRISON FOLLOWED BY THREE YEARS OF SUPERVISED RELEASE.  ACCORDING TO COURT DOCUMENTS, KNUDSON CONSPIRED WITH OTHERS TO DEFRAUD THE UNITED STATES BY IMPEDING, IMPAIRING, OBSTRUCTING AND DEFEATING THE ASSESSMENT AND COLLECTION OF FEDERAL TAXES BY THE INTERNAL REVENUE SERVICE.  THROUGH THE FREEDOM EDUCATION CENTER , THEY OFFERED “PURE TRUST” DOCUMENTS AND ANTI-TAX BOOKS AND LITERATURE FOR SALE .  KNUDSON ASSISTED WITH OPERATING THE ANTI-TAX ORGANIZATION AND INSTRUCTED INDIVIDUALS ON STRATEGIES THAT THEY CLAIMED WOULD ALLOW THEIR CLIENTS TO LAWFULLY STOP PAYING TAXES.  THE CO-CONSPIRATORS ASSISTED CLIENTS IN FORMING “PURE TRUSTS,” FALSELY CLAIMING THERE WOULD BE NO TAX CONSEQUENCES FOR FUNDS PLACED INTO “PURE TRUSTS.”  THEY FURTHER DIRECTED FIRST MOUNTAIN BANK EMPLOYEES TO OPEN “PURE TRUST” ACCOUNTS USING “TRUST IDENTIFICATION NUMBERS” WHICH THEY CREATED TO APPEAR AS IF THEY WERE TAXPAYER IDENTIFICATION NUMBERS (TINS), ISSUED BY THE IRS.  THE INTENT WAS TO DECEIVE THE IRS AND OTHERS AND TO MAKE IT DIFFICULT, IF NOT IMPOSSIBLE, TO IDENTIFY OWNERSHIP OF $11 MILLION IN FUNDS DEPOSITED INTO THE “PURE TRUST” BANK ACCOUNTS.  FURTHER, THIS TACTIC MADE IT DIFFICULT TO DETERMINE THE REPORTABLE INCOME ASSOCIATED WITH SUCH DEPOSITED FUNDS.  ALL FIVE CONSPIRATORS ADMITTED TO FAILING TO TIMELY FILE INCOME TAX RETURNS REPORTING THEIR EARNED INCOME.

EMPLOYMENT TAX ENFORCEMENT
EMPLOYMENT TAX EVASION SCHEMES CAN TAKE A VARIETY OF FORMS. SOME OF THE MORE PREVALENT METHODS OF EVASION INCLUDE PYRAMIDING, EMPLOYEE LEASING, PAYING EMPLOYEES IN CASH, FILING FALSE PAYROLL TAX RETURNS OR FAILING TO FILE PAYROLL TAX RETURNS.
EXAMPLES:
LEADERS OF NATIONWIDE ILLEGAL ALIEN EMPLOYEE-LEASING CONSPIRACY SENTENCED
ON DECEMBER 15, 2006 , IN MIAMI , FL , JOZEF BRONISLAW BOGACKI, A NATIVE OF POLAND AND NATURALIZED U.S. CITIZEN, AND JAROSLAW “JERRY” SAWCZUK, A POLISH AND CANADIAN CITIZEN, WERE SENTENCED FOR THEIR ROLES IN A NATIONWIDE EMPLOYEE-LEASING CONSPIRACY THAT EXPLOITED HUNDREDS OF ILLEGAL ALIENS THROUGHOUT THE UNITED STATES.  BOGACKI WAS SENTENCED TO 57 MONTHS IN PRISON AND ORDERED TO PAY A MONEY JUDGMENT OF $950,000 AND TO FORFEIT SIX PIECES OF REAL PROPERTY VALUED AT APPROXIMATELY $500,000.  SAWCZUK WAS SENTENCED TO 51 MONTHS IN PRISON AND IMPOSED A MONEY JUDGMENT OF $950,000.  BOGACKI AND SAWCZUK WERE THE LEADERS OF A SIX-PERSON NATIONWIDE EMPLOYEE-LEASING CONSPIRACY WHICH WAS RESPONSIBLE FOR LAUNDERING OVER $20 MILLION AND DEFRAUDING THE U.S. TREASURY OF AT LEAST $5.7 MILLION.  A THIRD DEFENDANT IN THE CONSPIRACY, PAVEL PREUS, A SLOVAK CITIZEN, WAS SENTENCED ON SEPTEMBER 13, 2006 , TO 37 MONTHS IN PRISON AND THREE YEARS OF SUPERVISED RELEASE. BOGACKI, SAWCZUK AND PREUS HAD ALL PLEADED GUILTY TO CHARGES OF CONSPIRACY TO TRANSPORT, HOUSE AND OTHERWISE ENCOURAGE ILLEGAL ALIENS TO REMAIN IN THE UNITED STATES, AND TO COMMIT VISA, WIRE, MAIL AND TAX FRAUD, AND MONEY LAUNDERING.  ACCORDING TO AN INDICTMENT, THE DEFENDANTS FORMED NUMEROUS SHAM CORPORATIONS IN FLORIDA AND, THROUGH THESE CORPORATIONS, CONTACTED LEGITIMATE BUSINESSES THROUGHOUT THE UNITED STATES AND OFFERED THE SERVICES OF “WORK-AUTHORIZED” LEASED WORKERS. THE DEFENDANTS PROMISED THESE BUSINESSES THAT THE THEY WOULD CONTRIBUTE TO, COLLECT, AND PAY OVER SOCIAL SECURITY AND MEDICARE CONTRIBUTIONS, AND FEDERAL AND STATE INCOME TAXES.  INSTEAD, THE DEFENDANTS SUPPLIED UNAUTHORIZED IMMIGRANT WORKERS AND NEVER MADE THE REQUIRED PAYROLL TAX PAYMENTS, KEEPING OVER $5.7 MILLION IN UNPAID TAXES AND CONTRIBUTIONS FOR THEIR OWN USE.
OHIO  BUSINESS OWNER SENTENCED IN EMPLOYMENT TAX SCHEME
ON JANUARY 24, 2007, IN CINCINNATI, OH, DAVID WEBER WAS SENTENCED TO SERVE ONE YEAR IN PRISON, ONE YEAR OF SUPERVISED RELEASE, AND ORDERED TO PAY $318,385 IN RESTITUTION TO THE INTERNAL REVENUE SERVICE FOR WILLFULLY FAILING TO FILE FORM 941, EMPLOYER’S QUARTERLY FEDERAL TAX RETURNS, WITH THE IRS RELATIVE TO FEDERAL EMPLOYMENT TAXES FOR THE SECOND AND FOURTH QUARTERS OF THE 2003 TAX YEAR.  ACCORDING TO COURT DOCUMENTS AND TESTIMONY, WEBER OWNS AND OPERATES BEST DESIGN, INC., A SILK SCREENING OF TEXTILES BUSINESS IN CINCINNATI, OHIO, WHICH EMPLOYS BETWEEN 18 AND 22 EMPLOYEES.  FROM JANUARY 2001 THROUGH SEPTEMBER 2005, WEBER PAID WAGES TOTALING OVER $1.6 MILLION TO EMPLOYEES OF BEST DESIGN, INC.  AS AN EMPLOYER, WEBER FAILED TO WITHHOLD THE FEDERAL INCOME TAXES ON WAGES PAID TO HIS EMPLOYEES, FAILED TO WITHHOLD THE EMPLOYEE’S SHARE OF THE EMPLOYMENT TAXES, AND FAILED TO PAY OVER ANY EMPLOYMENT TAXES.  AS A RESULT OF WEBER’S FAILURE TO FILE HIS QUARTERLY EMPLOYMENT TAX RETURNS AND NOT PAYING HIS EMPLOYMENT TAXES FOR THE PERIODS JANUARY 2001 THROUGH SEPTEMBER 2005, THE TAX LOSS TO THE IRS WAS $318,385.
NURSING HOME OWNER CONVICTED OF FAILING TO PAY OVER $9.6 MILLION IN PAYROLL TAXES
ON MARCH 7, 2007 , IN SAN FRANCISCO , CA , JACK EASTERDAY WAS CONVICTED BY A FEDERAL JURY ON 107 COUNTS OF WILLFUL FAILURE TO PAY EMPLOYMENT TAXES OWED TO THE GOVERNMENT. EASTERDAY, WHO IS THE OWNER OF NUMEROUS NURSING HOME FACILITIES, WAS CONVICTED OF FAILING TO PAY MORE THAN $9.6 MILLION IN TAXES.  HOWEVER, EVIDENCE AT TRIAL, WHICH WILL BE CONSIDERED FOR SENTENCING PURPOSES, SHOWED THAT EASTERDAY FAILED TO PAY MORE THAN $16 MILLION IN PAYROLL TAXES FROM 1998 TO 2005.  EVIDENCE AT TRIAL ALSO SHOWED THE IRS HAD ATTEMPTED TO COLLECT THE TAXES FROM EASTERDAY FOR YEARS BEFORE THE CHARGES WERE FILED.  HE THWARTED THE EFFORTS OF THE IRS TO COLLECT THE TAXES BY, AMONG OTHER THINGS, PAYING HIMSELF AND HIS WIFE EXORBITANT SALARIES AND DIRECTORS FEES, WHILE HE WAS PLEADING POVERTY TO THE IRS COLLECTION AGENTS
PROGRAM AND EMPHASIS AREAS FOR CRIMINAL INVESTIGATION
CRIMINAL INVESTIGATION HAS CATEGORIZED THEIR INVESTIGATIVE CASES INTO SPECIFIC PROGRAM AND EMPHASIS AREAS OF FRAUD. EXAMPLES OF CASE SUMMARIES WRITTEN FROM PUBLIC RECORD DOCUMENTS WHERE CASES WERE PROSECUTED CAN BE VIEWED ON THE VARIOUS PROGRAM AND EMPHASIS AREA WEB PAGES.

TAX SCAMS - HOW TO RECOGNIZE AND AVOID THEM
TO HELP THE PUBLIC RECOGNIZE AND AVOID ABUSIVE TAX SCHEMES, THE IRS OFFERS AN ABUNDANCE OF EDUCATIONAL MATERIALS. PARTICIPATING IN AN ILLEGAL SCHEME TO AVOID PAYING TAXES CAN RESULT IN IMPRISONMENT AND FINES, AS WELL AS THE REPAYMENT OF TAXES OWED WITH PENALTIES AND INTEREST. EDUCATION IS THE BEST WAY TO AVOID THE PITFALLS OF THESE “TOO GOOD TO BE TRUE” TAX SCAMS.
EXAMPLE:
MOST TAXPAYERS WITH SMALL BUSINESSES ACCURATELY REPORT THEIR INCOME AND EXPENSES. HOWEVER:

  • SCHEMES INVOLVING INFLATED BUSINESS EXPENSES, DEDUCTION OF PERSONAL EXPENSES AND MISUSE OF PURPORTED HOME-BASED BUSINESSES HAVE BECOME PREVALENT.
  • THE IRS HAS BECOME AWARE OF SEVERAL ABUSIVE TAX SCHEMES, WHICH INVOLVE TAXPAYERS ERRONEOUSLY DEDUCTING PERSONAL LIVING OR FAMILY EXPENSES. EXAMPLES OF THESE SCHEMES ARE:
    • BOGUS HOME-BASED BUSINESSES: TAXPAYERS ATTEMPT TO CREATE THE APPEARANCE OF HAVING A HOME-BASED BUSINESS - WHERE NONE ACTUALLY EXISTS - AND DEDUCT PERSONAL, LIVING OR FAMILY EXPENSES.
    • LEGITIMATE HOME-BASED BUSINESSES: TAXPAYERS HAVE A LEGITIMATE BUSINESS OPERATED FROM THEIR HOME BUT ERRONEOUSLY ATTEMPT TO DEDUCT PERSONAL LIVING EXPENSES.
  • THESE SCHEMES HAVE GAINED POPULARITY DUE TO AGGRESSIVE MARKETING BY PROMOTERS WHO SELL SUCH SCHEMES AS A MEANS TO REDUCE TAXES.
  • THESE SCHEMES ARE ABUSIVE BECAUSE THEY MANIPULATE THE INTERPRETATION OF THE TAX LAWS.
  • SOME PROMOTERS MARKET A PACKAGE, KIT OR OTHER MATERIALS THAT CLAIM TO SHOW TAXPAYERS HOW THEY CAN AVOID PAYING INCOME TAXES BUT THE ARGUMENTS USED HAVE NO MERIT.
  • ABUSIVE PROMOTERS TYPICALLY ADVISE TAXPAYERS TO MAINTAIN DETAILED RECORDS OF THEIR ACTIVITIES AND THE EXPENSES THEY INCUR; HOWEVER, DETAILED RECORDS DO NOT CONVERT PERSONAL, LIVING OR FAMILY EXPENSES INTO DEDUCTIBLE BUSINESS EXPENSES.
  • EXPENSES MUST BE "ORDINARY AND NECESSARY" IN RELATION TO A LEGITIMATE BUSINESS ACTIVITY, AND SATISFY ALL OTHER REQUIREMENTS IN ORDER TO BE DEDUCTIBLE BUSINESS EXPENSES ON A TAX RETURN.
  • TAXPAYERS SHOULD BEWARE OF CLAIMS THAT ARE TOO GOOD TO BE TRUE AND SEEK INDEPENDENT PROFESSIONAL TAX ADVICE.

ALL ABOUT CRIMINAL INVESTIGATION (CI)
CRIMINAL INVESTIGATION (CI) IS THE LAW ENFORCEMENT ARM OF THE IRS AND SERVES THE AMERICAN PUBLIC BY INVESTIGATING POTENTIAL CRIMINAL VIOLATIONS OF THE INTERNAL REVENUE CODE AND RELATED FINANCIAL CRIMES IN A MANNER THAT FOSTERS CONFIDENCE IN THE TAX SYSTEM AND COMPLIANCE WITH THE LAW
ACCURACY-RELATED PENALTY. AN ACCURACY-RELATED PENALTY OF 20% APPLIES TO ANY UNDERPAYMENT DUE TO:

  • NEGLIGENCE OR DISREGARD OF RULES OR REGULATIONS, OR
  • SUBSTANTIAL UNDERSTATEMENT OF INCOME TAX.

THIS PENALTY ALSO APPLIES TO CONDITIONS NOT DISCUSSED HERE. EVEN THOUGH AN UNDERPAYMENT WAS DUE TO BOTH NEGLIGENCE AND SUBSTANTIAL UNDERPAYMENT, THE TOTAL ACCURACY-RELATED PENALTY CANNOT EXCEED 20% OF THE UNDERPAYMENT. THE PENALTY IS NOT IMPOSED IF THERE IS REASONABLE CAUSE ACCOMPANIED BY GOOD FAITH.

THIS PENALTY IS GENERALLY ASSESSED BY THE EXAMINATION DIVISION. IT IS A NEGOTIABLE ITEM PRIOR TO ASSESSMENT IF IT CAN BE ARGUED THAT THE TAXPAYER EITHER HAD IGNORANCE OF THE LAW OR A PREPARER CAUSED THE OVER STATEMENT OF EXPENSE OR THE MIS APPLICATION OF INCOME OR EXPENSE.
DEFINITIONS OF FRAUD AND NEGLIGENCE

NEGLIGENCE INCLUDES THE LACK OF ANY REASONABLE ATTEMPT TO COMPLY WITH PROVISIONS OF THE INTERNAL REVENUE CODE.
DISREGARD.DISREGARD INCLUDES THE CARELESS, RECKLESS, OR INTENTIONAL DISREGARD OF RULES OR REGULATIONS.
SUBSTANTIAL UNDERSTATEMENT OF INCOME TAX. FOR AN INDIVIDUAL, INCOME TAX IS SUBSTANTIALLY UNDERSTATED IF THE UNDERSTATEMENT OF TAX EXCEEDS THE GREATER OF:

  • 10% OF THE CORRECT TAX, OR
  • $5,000.

INFORMATION REPORTING PENALTIES. ANY PERSON WHO DOES NOT FILE AN INFORMATION RETURN OR A COMPLETE AND CORRECT INFORMATION RETURN WITH THE IRS BY THE DUE DATE IS SUBJECT TO A PENALTY FOR EACH FAILURE. A PENALTY APPLIES TO INFORMATION RETURNS AS FOLLOWS:

  • CORRECT INFORMATION RETURNS FILED WITHIN 30 DAYS AFTER THE DUE DATE, $15 EACH.
  • CORRECT INFORMATION RETURNS FILED AFTER THE 30-DAY PERIOD BUT BY AUGUST 1, $30 EACH.
  • INFORMATION RETURNS NOT FILED BY AUGUST 1, $50 EACH.

MAXIMUM LIMITS APPLY TO ALL THESE PENALTIES.
THIS APPLIES TO STATEMENTS THAT ARE REQUIRED TO BE FURNISHED TO THE IRS AND THE SOCIAL SECURITY ADMINISTRATION
THIS ALSO APPLIES TO FORMS 1099 SERIES, FORMS W-2 AND W-3 FORMS K-1 SERIES ETC.

FAILURE TO FURNISH CORRECT PAYEE STATEMENTS. ANY PERSON WHO DOES NOT PROVIDE A TAXPAYER WITH A COMPLETE AND CORRECT COPY OF AN INFORMATION RETURN (PAYEE STATEMENT) BY THE DUE DATE IS SUBJECT TO A PENALTY OF $50 FOR EACH STATEMENT. IF THE FAILURE IS DUE TO INTENTIONAL DISREGARD OF THE REQUIREMENT, THE PENALTY IS THE GREATER OF:

  • $100 PER STATEMENT, OR
  • 10% OR 5% (DEPENDING ON THE TYPE OF STATEMENT) OF THE AMOUNT TO BE SHOWN ON THE STATEMENT.

IDENTIFICATION NUMBERS AND OTHER INFORMATION. ANY PERSON WHO DOES NOT COMPLY WITH OTHER SPECIFIED REPORTING REQUIREMENTS, INCLUDING THE USE OF CORRECT IDENTIFICATION NUMBERS (EMPLOYER IDENTIFICATION NUMBERS AND SOCIAL SECURITY NUMBERS), IS SUBJECT TO A PENALTY OF $50 FOR EACH FAILURE.

THE LAW PROVIDES PENALTIES FOR FAILURE TO FILE RETURNS OR PAY TAXES AS REQUIRED.

THIS INCLUDES THE FILING OF FORMS 1099 AND W-2 WITH INCORRECT SOCIAL SECURITY NUMBERS. THOSE NUMBERS WHICH DO NOT MATCH THE TAX PAYERS NAME.

TO RECAP DEFINITIONS
CIVIL PENALTIES

IF YOU DO NOT FILE YOUR RETURN AND PAY YOUR TAX BY THE DUE DATE, YOU MAY HAVE TO PAY A PENALTY. YOU MAY ALSO HAVE TO PAY A PENALTY IF YOU SUBSTANTIALLY UNDERSTATE YOUR TAX, FILE A FRIVOLOUS RETURN, OR FAIL TO SUPPLY YOUR SOCIAL SECURITY NUMBER. IF YOU PROVIDE FRAUDULENT INFORMATION ON YOUR RETURN, YOU MAY HAVE TO PAY A CIVIL FRAUD PENALTY.

FILING LATE. IF YOU DO NOT FILE YOUR RETURN BY THE DUE DATE (INCLUDING EXTENSIONS), YOU MAY HAVE TO PAY A FAILURE-TO-FILE PENALTY. THE PENALTY IS BASED ON THE TAX NOT PAID BY THE DUE DATE (WITHOUT REGARD TO EXTENSIONS). THE PENALTY IS USUALLY 5% FOR EACH MONTH OR PART OF A MONTH THAT A RETURN IS LATE, BUT NOT MORE THAN 25%.

FRAUD. IF YOUR FAILURE TO FILE IS DUE TO FRAUD, THE PENALTY IS 15% FOR EACH MONTH OR PART OF A MONTH THAT YOUR RETURN IS LATE, UP TO A MAXIMUM OF 75%.

RETURN OVER 60 DAYS LATE. IF YOU FILE YOUR RETURN MORE THAN 60 DAYS AFTER THE DUE DATE OR EXTENDED DUE DATE, THE MINIMUM PENALTY IS THE SMALLER OF $100 OR 100% OF THE UNPAID TAX.

EXCEPTION. YOU WILL NOT HAVE TO PAY THE PENALTY IF YOU SHOW THAT YOU FAILED TO FILE ON TIME BECAUSE OF REASONABLE CAUSE AND NOT BECAUSE OF WILLFUL NEGLECT.

PAYING TAX LATE. YOU WILL HAVE TO PAY A FAILURE-TO-PAY PENALTY OF 1/2 OF 1% OF YOUR UNPAID TAXES FOR EACH MONTH, OR PART OF A MONTH, AFTER THE DUE DATE THAT THE TAX IS NOT PAID. THIS PENALTY DOES NOT APPLY DURING THE EXTENSION PERIOD AVAILABLE BY FILING FORM 4868, APPLICATION FOR AUTOMATIC EXTENSION OF TIME TO FILE U.S. INDIVIDUAL INCOME TAX RETURN, IF YOU PAID AT LEAST 90% OF YOUR ACTUAL TAX LIABILITY BEFORE THE ORIGINAL DUE DATE OF YOUR RETURN THROUGH WITHHOLDING ON WAGES, ESTIMATED TAX PAYMENTS, OR A PAYMENT SENT IN WITH FORM 4868.

IF A NOTICE OF INTENT TO LEVY IS ISSUED, THE RATE WILL INCREASE TO 1% AT THE START OF THE FIRST MONTH BEGINNING AT LEAST 10 DAYS AFTER THE DAY THAT THE NOTICE IS ISSUED. IF A NOTICE AND DEMAND FOR IMMEDIATE PAYMENT IS ISSUED, THE RATE WILL INCREASE TO 1% AT THE START OF THE FIRST MONTH BEGINNING AFTER THE DAY THAT THE NOTICE AND DEMAND IS ISSUED.

THIS PENALTY CANNOT BE MORE THAN 25% OF YOUR UNPAID TAX. YOU WILL NOT HAVE TO PAY THE PENALTY IF YOU CAN SHOW THAT YOU HAD A GOOD REASON FOR NOT PAYING YOUR TAX ON TIME. THIS FAILURE-TO-PAY PENALTY IS ADDED TO INTEREST CHARGES ON LATE PAYMENTS.

COMBINED PENALTIES. IF BOTH THE FAILURE-TO-FILE PENALTY AND THE FAILURE-TO-PAY PENALTY (DISCUSSED EARLIER) APPLY IN ANY MONTH, THE 5% (OR 15%) FAILURE-TO-FILE PENALTY IS REDUCED BY THE FAILURE-TO-PAY PENALTY. HOWEVER, IF YOU FILE YOUR RETURN MORE THAN 60 DAYS AFTER THE DUE DATE OR EXTENDED DUE DATE, THE MINIMUM PENALTY IS THE SMALLER OF $100 OR 100% OF THE UNPAID TAX.

ACCURACY-RELATED PENALTY. YOU MAY HAVE TO PAY AN ACCURACY-RELATED PENALTY IF:
1.YOU UNDERPAY YOUR TAX BECAUSE OF EITHER "NEGLIGENCE" OR "DISREGARD" OF RULES OR REGULATIONS, OR
2.YOU SUBSTANTIALLY UNDERSTATE YOUR INCOME TAX.

THE PENALTY IS EQUAL TO 20% OF THE UNDERPAYMENT. THE PENALTY WILL NOT BE FIGURED ON ANY PART OF AN UNDERPAYMENT ON WHICH A FRAUD PENALTY (DISCUSSED LATER) IS CHARGED.

NEGLIGENCE OR DISREGARD. THE TERM "NEGLIGENCE" INCLUDES A FAILURE TO MAKE A REASONABLE ATTEMPT TO COMPLY WITH THE TAX LAW OR TO EXERCISE ORDINARY AND REASONABLE CARE IN PREPARING A RETURN. NEGLIGENCE ALSO INCLUDES FAILURE TO KEEP ADEQUATE BOOKS AND RECORDS. YOU WILL NOT HAVE TO PAY A NEGLIGENCE PENALTY IF YOU HAVE A REASONABLE BASIS FOR A POSITION YOU TOOK.

THE TERM "DISREGARD" INCLUDES ANY CARELESS, RECKLESS, OR INTENTIONAL DISREGARD.

THE PENALTY IS BASED ON THE PART OF THE UNDERPAYMENT DUE TO NEGLIGENCE OR DISREGARD OF RULES OR REGULATIONS, NOT ON THE ENTIRE UNDERPAYMENT ON THE RETURN.

SUBSTANTIAL UNDERSTATEMENT OF INCOME TAX. YOU UNDERSTATE YOUR TAX IF THE TAX SHOWN ON YOUR RETURN IS LESS THAN THE CORRECT TAX. THE UNDERSTATEMENT IS SUBSTANTIAL IF IT IS MORE THAN THE LARGER OF 10% OF THE CORRECT TAX OR $5,000. HOWEVER, THE PENALTY IS REDUCED TO THE EXTENT THERE IS:

  • SUBSTANTIAL AUTHORITY, OR
  • ADEQUATE DISCLOSURE AND A REASONABLE BASIS.

FRIVOLOUS RETURN. YOU MAY HAVE TO PAY A PENALTY OF $500 IF YOU FILE A FRIVOLOUS RETURN. A FRIVOLOUS RETURN IS ONE THAT DOES NOT INCLUDE ENOUGH INFORMATION TO FIGURE THE CORRECT TAX OR THAT CONTAINS INFORMATION CLEARLY SHOWING THAT THE TAX YOU REPORTED IS SUBSTANTIALLY INCORRECT.

YOU WILL HAVE TO PAY THE PENALTY IF YOU FILED THIS KIND OF RETURN BECAUSE OF A FRIVOLOUS POSITION ON YOUR PART OR A DESIRE TO DELAY OR INTERFERE WITH THE ADMINISTRATION OF FEDERAL INCOME TAX LAWS. THIS INCLUDES ALTERING OR STRIKING OUT THE PREPRINTED LANGUAGE ABOVE THE SPACE PROVIDED FOR YOUR SIGNATURE.

THIS PENALTY IS ADDED TO ANY OTHER PENALTY PROVIDED BY LAW.

THE PENALTY MUST BE PAID IN FULL UPON NOTICE AND DEMAND FROM IRS EVEN IF YOU PROTEST THE PENALTY.

FRAUD. IF THERE IS ANY UNDERPAYMENT OF TAX ON YOUR RETURN DUE TO FRAUD, A PENALTY OF 75% OF THE UNDERPAYMENT DUE TO FRAUD WILL BE ADDED TO YOUR TAX.
FAILURE TO SUPPLY SOCIAL SECURITY NUMBER. IF YOU DO NOT INCLUDE YOUR SOCIAL SECURITY NUMBER (SSN) OR THE SSN OF ANOTHER PERSON WHERE REQUIRED ON A RETURN, STATEMENT, OR OTHER DOCUMENT, YOU WILL BE SUBJECT TO A PENALTY OF $50 FOR EACH FAILURE. YOU WILL ALSO BE SUBJECT TO THE PENALTY OF $50 IF YOU DO NOT GIVE YOUR SSN TO ANOTHER PERSON WHEN IT IS REQUIRED ON A RETURN, STATEMENT, OR OTHER DOCUMENT.

FOR EXAMPLE, IF YOU HAVE A BANK ACCOUNT THAT EARNS INTEREST, YOU MUST GIVE YOUR SSN TO THE BANK. THE NUMBER MUST BE SHOWN ON THE FORM 1099-INT OR OTHER STATEMENT THE BANK SENDS YOU. IF YOU DO NOT GIVE THE BANK YOUR SSN, YOU WILL BE SUBJECT TO THE $50 PENALTY. (YOU ALSO MAY BE SUBJECT TO "BACKUP" WITHHOLDING OF INCOME TAX.

YOU WILL NOT HAVE TO PAY THE PENALTY IF YOU ARE ABLE TO SHOW THAT THE FAILURE WAS DUE TO REASONABLE CAUSE AND NOT WILLFUL NEGLECT.

FAILURE TO FURNISH TAX SHELTER REGISTRATION NUMBER. A PERSON WHO SELLS (OR OTHERWISE TRANSFERS) TO YOU AN INTEREST IN A TAX SHELTER MUST GIVE YOU THE TAX SHELTER REGISTRATION NUMBER OR BE SUBJECT TO A $100 PENALTY. IF YOU CLAIM ANY DEDUCTION, CREDIT, OR OTHER TAX BENEFIT BECAUSE OF THE TAX SHELTER, YOU MUST ATTACH FORM 8271, INVESTOR REPORTING OF TAX SHELTER REGISTRATION NUMBER, TO YOUR RETURN TO REPORT THIS NUMBER. YOU WILL HAVE TO PAY A PENALTY OF $250 FOR EACH FAILURE TO REPORT A TAX SHELTER REGISTRATION NUMBER ON YOUR RETURN. THE PENALTY CAN BE EXCUSED IF YOU HAVE A REASONABLE CAUSE FOR NOT REPORTING THE NUMBER.

METHODS OF AVOIDING, MITIGATING ADDITIONAL TAX OR PENALTIES
ADEQUATE DISCLOSURE. YOU CAN AVOID THE PENALTY FOR DISREGARD OF RULES OR REGULATIONS IF YOU ADEQUATELY DISCLOSE ON YOUR RETURN A POSITION THAT HAS AT LEAST A REASONABLE BASIS. SEE DISCLOSURE STATEMENT, LATER.

SUBSTANTIAL AUTHORITY. WHETHER THERE IS OR WAS SUBSTANTIAL AUTHORITY FOR THE TAX TREATMENT OF AN ITEM DEPENDS ON THE FACTS AND CIRCUMSTANCES. CONSIDERATION WILL BE GIVEN TO COURT OPINIONS, TREASURY REGULATIONS, REVENUE RULINGS, REVENUE PROCEDURES, AND NOTICES AND ANNOUNCEMENTS ISSUED BY THE IRS AND PUBLISHED IN THE INTERNAL REVENUE BULLETIN THAT INVOLVE THE SAME OR SIMILAR CIRCUMSTANCES AS YOURS.

DISCLOSURE STATEMENT. THE UNDERSTATEMENT MAY ALSO BE REDUCED IF YOU HAVE ADEQUATELY DISCLOSED THE RELEVANT FACTS ABOUT YOUR TAX TREATMENT OF AN ITEM. TO MAKE THIS DISCLOSURE, USE FORM 8275, DISCLOSURE STATEMENT. YOU MUST ALSO HAVE A REASONABLE BASIS FOR TREATING THE ITEM THE WAY YOU DID.

IN CASES OF SUBSTANTIAL UNDERSTATEMENT ONLY, ITEMS THAT MEET THE REQUIREMENTS OF REVENUE PROCEDURE 96-58 (OR LATER UPDATE)ARE CONSIDERED ADEQUATELY DISCLOSED ON YOUR RETURN WITHOUT FILING FORM 8275.

USE FORM 8275-R, REGULATION DISCLOSURE STATEMENT, TO DISCLOSE ITEMS OR POSITIONS CONTRARY TO REGULATIONS.

REASONABLE CAUSE. YOU WILL NOT HAVE TO PAY A PENALTY IF YOU SHOW A GOOD REASON (REASONABLE CAUSE) FOR THE WAY YOU TREATED AN ITEM. YOU MUST ALSO SHOW THAT YOU ACTED IN GOOD FAITH.

JOINT RETURN. THE FRAUD PENALTY ON A JOINT RETURN DOES NOT APPLY TO A SPOUSE UNLESS SOME PART OF THE UNDERPAYMENT IS DUE TO THE FRAUD OF THAT SPOUSE.

EXAMPLE OF A COMMONLY REFERRED TO PENALTY WHICH IS ACCURATELY AN ADDITIONAL TAX IMPOSED.
PENSIONS AND ANNUITIES: DISTRIBUTIONS, EARLY WITHDRAWALS, 10% ADDITIONAL TAX
YOU MAY BE ABLE TO ELECT OPTIONAL METHODS OF FIGURING THE TAX ON LUMP-SUM DISTRIBUTIONS YOU RECEIVED FROM A QUALIFIED RETIREMENT PLAN.
EXCEPTIONS
THERE ARE SEVERAL EXCEPTIONS TO THE AGE 59½ RULE. EVEN IF YOU RECEIVE A DISTRIBUTION BEFORE YOU ARE AGE 59½, YOU MAY NOT HAVE TO PAY THE 10% ADDITIONAL TAX IF YOU ARE IN ONE OF THE FOLLOWING SITUATIONS.

  • YOU HAVE UNREIMBURSED MEDICAL EXPENSES THAT ARE MORE THAN 7.5% OF YOUR ADJUSTED GROSS INCOME.
  • THE DISTRIBUTIONS ARE NOT MORE THAN THE COST OF YOUR MEDICAL INSURANCE.
  • YOU ARE DISABLED.
  • YOU ARE THE BENEFICIARY OF A DECEASED IRA OWNER.
  • YOU ARE RECEIVING DISTRIBUTIONS IN THE FORM OF AN ANNUITY.
  • THE DISTRIBUTIONS ARE NOT MORE THAN YOUR QUALIFIED HIGHER EDUCATION EXPENSES.
  • YOU USE THE DISTRIBUTIONS TO BUY, BUILD, OR REBUILD A FIRST HOME.
  • THE DISTRIBUTION IS DUE TO AN IRS LEVY OF THE QUALIFIED PLAN.
  • THE DISTRIBUTION IS A QUALIFIED RESERVIST DISTRIBUTION.

OTHER PENALTIES AS DESCRIBED IN THE U.S. CODE
CHAPTER 68 OF TITLE 26 OF THE U.S. CODE DESCRIBES MOST PENALTIES AS FOLLOWS
 

 
 
 

 
 

 
 
 

Tags
Need Help With a Tax Issue?
Contact Us Today!

Washington Tax Services, Taxes - Consultants & Representatives, Seattle, WA

READ OUR TAX BLOG

more