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Written by: Vani Murthy, CPA

Published: 12 April 2018

Consequence of Filing Your Tax Return Late or Failure to Pay Taxes

By: Vani Murthy, CPA, M.S. Tax

Here are some simple steps to avoid a late filing or payment penalty, or both:

1. File an Extension
It gives you an additional six months to get organized and file your taxes. It is as simple as mailing the extension request or submitting electronically. However, an extension request must report the full amount of properly estimated tax. Make sure to file an extension containing the appropriate information, as the penalty for not filing a timely tax return can add up quickly.

2. Pay Your Taxes
An extension to file does not extend time to pay. Taxes are still due on or before the deadline, so make sure you pay the amount owed in a timely manner. If a taxpayer pays at least 90% of the tax due with the extension request, they may not face a penalty for failure-to-pay. However, they must pay the remaining balance by the extended due date, and they will owe interest on the tax paid after the April 17 deadline.

There are several ways to pay tax. For individuals, the IRS offers “IRS Direct pay,” which is a fast, easy and free option to pay directly from your checking or savings account. You can also request a payment plan using the “Online Payment Agreement” tool at IRS.gov. Another popular option is to mail your check with the extension request, in which case it is advisable to use certified mail with return receipt, so you have proof of timely mailing. Such proof is accepted by the IRS to demonstrate timely compliance.

3. No Penalties if There is Reasonable Cause
Sometimes there are situations that are beyond a taxpayer’s control which may affect the ability to timely file a tax return. In such an event, the taxpayer will not be subject to penalties for failure-to-file or failure-to-pay if they can show reasonable cause.

According to the IRS, the following are some of the examples of reasonable cause for not filing a tax return on time:

• Fire, casualty, natural disaster or other disturbances.
• Inability to obtain records.
• Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family.
• Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.
• Lack of funds is not a reasonable cause for failure-to-file your tax return. However, the reasons for lack of funds may meet reasonable cause criteria for failure-to-pay penalty waiver.

Reasonable cause is based on facts and circumstances. A taxpayer is responsible for providing documentation to demonstrate reasonable cause. Hospital records, court records or documentation of any casualties or other events is helpful when the IRS evaluates an explanation for failure-to-file a return or failure-to-pay taxes.

Forgetting to file a tax return or claiming forgetfulness or an oversight by another party is not in line with ordinary business care and prudence standard and so cannot be used as a basis for reasonable cause. It is taxpayer’s responsibility to timely file their tax return and make timely payments.

According to guidance provided by the IRS on its website and in IRS publications, the following factors are considered to evaluate conditions for reasonable cause:

• What happened and when did it happen?
• What facts and circumstances prevented you from filing your return or paying your tax during the period of time you did not file or pay your taxes timely?
• How did the facts and circumstances affect your ability to file your return or pay your taxes or perform your other day-to-day responsibilities?
• Once the facts and circumstances changed, what actions did you take to file and pay your taxes?
• In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?

Consider the points above when you prepare documentation to support your position when explaining inability to comply timely.

Note that a successful demonstration of reasonable cause will waive penalties, but not any interest due to the IRS. Interest will be reduced or removed to the extent associated with a penalty charge that is reduced or removed, but not on the tax itself. If you continue to owe taxes, interest will accrue until you have fully paid your taxes.

In the US, the self-assessment system of tax liability and payment is based on the principle of voluntary compliance. This means taxpayers must make a good faith effort to meet tax compliance obligations. According to the IRS, penalties support voluntary compliance by assuring compliant taxpayers that tax offenders are identified and penalized.

The penalty for filing a frivolous tax return is $5,000. Do not be persuaded to take a frivolous tax position, or listen to frivolous arguments suggesting you do not have to not file a tax return or pay taxes. Every year the IRS rolls out its “Dirty Dozen” tax scams list which includes taxpayers using frivolous tax arguments to avoid paying taxes. Some of the most common frivolous tax arguments are also listed in its “The Truth about Frivolous Tax Arguments” document.

“Taxpayers should steer clear of tax-avoidance arguments and the unscrupulous promoters of such schemes,” said former IRS Commissioner John Koskinen. “Taxpayers tangled up in these scams end up paying back taxes and often stiff penalties as well.”

Vani Murthy, CPA, M.S. Tax, is a tax manager in the Chicago office of CBIZ MHM. She has 10 years of experience in business and individual tax matters, non-profits, international tax compliance and tax research.

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Written by: T. Steel Rose, CPA

Published: 26 March 2018

Coinbase, America’s largest platform exchanging bitcoin into U.S. dollars serving 5.9 million customers, has complied with a narrowed IRS summons for 14,355 account holders. The IRS is seeking specific information regarding accounts with at least $20,000 in any one transaction in any year from 2013 to 2015. Coinbase admitted that this request covered 8.9 million transactions and initially refused to comply with the narrowed summons.

Notice 2014-21 provides that virtual currencies are property for tax purposes. Capital gain or loss from property transactions, including from virtual currency, is reported on Form 8949, which is attached to Schedule D, Capital Gains and Losses.

In support of its belief that virtual currency gains have been widely underreported, the IRS stated that only between 800 and 900 people electronically filed a Form 8949, that included a property description that was “likely related to bitcoin” in each of the years 2013 through 2015.

District Court ruled the summons, as further narrowed by the court, serves the legitimate purpose of investigating account holders with Coinbase who may have failed to pay federal taxes on their virtual currency profits.

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Written by: Robert E. McKenzie, J.D.

Published: 26 March 2018

The IRS is testing expanded criteria for streamlined processing of taxpayer requests for installment agreements. The test was scheduled to run through September 30, 2017 but has now been extended a year by the IRS.

During this test, more taxpayers will qualify to have their installment agreement request processed in a streamlined manner. Based on test results, the expanded criteria for streamlined processing of installment agreement requests may be made permanent.

During the test, expanded criteria for streamlined processing will be applied to installment agreement requests submitted to SB/SE Campus Collection Operations. This includes the Automated Collection System (ACS). Expanded criteria will not be applied to installment agreement requests submitted to W&I Accounts Management, SB/SE Field Collection or through the Online Payment Agreement application.

One expanded criterion being tested immediately is this: Individual taxpayers with an assessed balance of tax, penalty and interest between $50,000 and $100,000 may experience accelerated processing of their installment agreement request. This will occur if the taxpayers' proposed monthly payment is the greater of their total assessed balance divided by 84 – or – the amount necessary to fully satisfy the liability by the Collection Statute Expiration Date.

For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest of $50,000 or less.

The test criteria discussed above also applies to all out of business debts up to $25,000 and all out of business sole-proprietorship debts up to $50,000. For in-business taxpayers, test criteria apply to income tax only debts up to $25,000.

For individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest between $50,001 and $100,000.

The test criteria discussed above also applies to all out of business sole-proprietorship debts between $50,001 and  $100,000.

Requests to Modify or Terminate An Installment Agreement

After an installment agreement is approved, you may submit a request to modify or terminate an installment agreement. This request will not suspend the statute of limitations on collection. While the IRS considers your request to modify or terminate the installment agreement, you must comply with the existing agreement. An installment agreement may be terminated if you provide materially incomplete or inaccurate information in response to an IRS request for a financial update.

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Written by: Robert E. McKenzie, J.D.

Published: 19 March 2018

If the IRS is bugging you about your unpaid taxes, what if it is a private debt collector collecting for the IRS? When President Obama signed the 5-year infrastructure spending Bill. It added private IRS collectors as part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” What does a private IRS have to do with highway funding, you might ask? The answer is money.

Congress wants more of it collected from taxpayers, especially what the IRS considers to be hard to collect tax bills. In fact, for some hard to collect bills, the law now requires—rather than just permits—the IRS to use private collectors. Many people think that having the IRS farm out collection work to private contractors is a bad idea. Last year, National Taxpayer Advocate Nina Olson advocated against it in a letter. She said the 2006-2009 program using private collectors didn’t even raise revenue.

The IRS has gone in for private collectors twice over the last 18 years. And although those programs were not especially successful, Congress has gone back to it in a big way. Congress included it in the FAST Act, and the President signed it into law. Here are 10 things you should know:

1. First, the private collector usually will contact the taxpayer by letter.

2. If the taxpayer’s last known address is incorrect, the private collector searches for the correct address. Next, the private collector will telephone the taxpayer to request full payment.

3. If the taxpayer cannot pay in full right away, the private collector offers an installment deal for up to five years.

4. If the taxpayer is unable to pay even over five years, the collector asks for taxpayer financial information to see what sort of deal the taxpayer should get. There are controls on financial data, but there is considerable worry about having taxpayer data in private hands.

5. Private collectors cannot accept payments. Do not pay them directly!

6. The Fair Debt Collection Practices Act applies to private collectors. This is the same law that applies to collectors in other circumstances.

7. There are many reports required under the law. Congress and the Treasury Department are trying to determine if private collection is efficient and how well it works.

8. In some cases, the IRS is actually required to use private collectors, where:
• The tax bill is not being collected because of a lack of IRS resources or the IRS’ inability to locate the taxpayer.
• More than 1/3 of the statute of limitations has expired, and no IRS employee has been assigned to collect it; and
• The tax bill has been assigned for collection, but more than a year has passed without any interaction.

9. Some tax bills cannot go to private collectors, as where:
• There is a pending or active offer-in-compromise or installment agreement.
• It is an innocent spouse case.

Comments of National Taxpayer Advocate

DEBT COLLECTION (PDC): The IRS Is Implementing a PDC Program in a Manner That Is Arguably Inconsistent With the Law and That Unnecessarily Burdens Taxpayers, Especially Those Experiencing Economic Hardship

Problem

In 2015, Congress enacted legislation requiring the IRS to assign certain tax receivables to private collection agencies (PCAs). Under the law, PCAs are permitted to offer taxpayers installment agreements (IAs) not to exceed five years. The IRS plans to implement the PDC program in ways that are arguably inconsistent with the law and plans to assign to PCAs the accounts of taxpayers the IRS itself would not subject to Federal Payment Levy Program (FPLP) levies.

Fair Debt Collection Practices Act Prohibited Conduct

The Act prohibits certain types of "abusive and deceptive" conduct when attempting to collect debts, including the following:

• Hours for phone contact: contacting consumers by telephone outside of the hours of 8:00 a.m. to 9:00 p.m. local time. Additionally, if certain hours are inconvenient for consumers during the allowable time (those who work at night and sleep during the day) they may not be contacted during those times.

• Failure to cease communication upon request: communicating with consumers in any way (other than litigation) after receiving written notice that said consumer wishes no further communication or refuses to pay the alleged debt, with certain exceptions, including advising that collection efforts are being terminated or that the collector intends to file a lawsuit or pursue other remedies where permitted

• Causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously: with intent to annoy, abuse, or harass any person at the called number.

• Communicating with consumers at their place of employment after having been advised that this is unacceptable or prohibited by the employer

• Contacting consumer known to be represented by an attorney

• Communicating with consumer after request for validation has been made: communicating with the consumer or the pursuing collection efforts by the debt collector after receipt of a consumer's written request for verification of a debt made within the 30-day validation period (or for the name and address of the original consumer on a debt) and before the debt collector mails the consumer the requested verification or original creditor's name and address

• Misrepresentation or deceit: misrepresenting the debt or using deception to collect the debt, including a debt collector's misrepresentation that he or she is an attorney or law enforcement officer

• Publishing the consumer’s name or address on a "bad debt" list

• Seeking unjustified amounts, which would include demanding any amounts not permitted under an applicable contract or as provided under applicable law

• Threatening arrest or legal action that is either not permitted or not actually contemplated • Abusive or profane language used in the course of communication related to the debt

• Communication with third parties: revealing or discussing the nature of debts with third parties (other than the consumer's spouse or attorney) (Collection agencies are allowed to contact neighbors or co-workers but only to obtain location information; disreputable agencies often harass debtors with a "block party" or "office party" where they contact multiple neighbors or co-workers telling them they need to reach the debtor on an urgent matter.)

• Contact by embarrassing media, such as communicating with a consumer regarding a debt by post card, or using any language or symbol, other than the debt collector’s address, on any envelope when communicating with a consumer by use of mail or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business • Reporting false information on a consumer's credit report or threatening to do so in the process of collection

Required Conduct

The Act requires debt collectors to do the following (among other requirements):

• Identify themselves and notify the consumer, in every communication, that the communication is from a debt collector, and in the initial communication that any information obtained will be used to effect collection of the debt.

• Give the name and address of the original creditor (company to which the debt was originally payable) upon the consumer's written request made within 30 days of receipt of the §1692g notice.

• Notify the consumer of their right to dispute the debt (Section 809), in part or in full, with the debt collector. The 30-day "§1692g" notice is required to be sent by debt collectors within five days of the initial communication with the consumer, though in 2006 the definition of "initial communication" was amended to exclude "a formal pleading in a civil action" for purposes of triggering the §1692g notice, complicating the matter where the debt collector is an attorney or law firm. The consumer's receipt of this notice starts the clock running on the 30-day right to demand verification of the debt from the debt collector.

• Provide verification of the debt. If a consumer sends a written dispute or request for verification within 30 days of receiving the §1692g notice, then the debt collector must either mail the consumer the requested verification information or cease collection efforts altogether. Such asserted disputes must also be reported by the creditor to any credit bureau that reports the debt. Verification should include at a minimum the amount owed and the name and address of the original creditor.

• File a lawsuit in a proper venue. If a debt collector chooses to file a lawsuit, it may only be in a place where the consumer lives or signed the contract. Note, however, that this does not prevent the debt collector from being sued in other venues for violating the Act, such as when the consumer moves outside the venue and a letter demanding payment is forwarded to the new address, even if the debt collector is unaware of such a change in residence.

Enforcement of the FDCPA

The Federal Trade Commission originally had the authority to administratively enforce the FDCPA using its powers under the Federal Trade Commission Act. However, under the sweeping reforms of the 2010 Dodd-Frank Act, the FDCPA is enforced primarily by the Consumer Financial Protection Bureau.

Aggrieved consumers may also file a private lawsuit in a state or federal court to collect damages (actual, statutory, attorney's fees, and court costs) from third-party debt collectors. The FDCPA is a strict liability law, which means that a consumer need not prove actual damages in order to claim statutory damages of up to $1,000 plus reasonable attorney fees if a debt collector is proven to have violated the FDCPA. The collector may, however, escape penalty if it shows that the violation (or violations) was unintentional and the result of a "bona fide error" that occurred despite procedures designed to avoid the error at issue.

Alternatively, if the consumer loses the lawsuit and the court determines that the consumer filed the case in bad faith and for the purposes of harassment, the court may then award attorney's fees to the debt collector.

Robert E. McKenzie of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrates his practice in representation before the Internal Revenue Service and state tax agencies. He previously served as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner from 2009 to 2011.