Tag Archives: IRS voluntary disclosure

Playing Games With Employees: IRS May Come Knocking

IRS Wants to Know: Are You Playing Games with Your Employees?

IRS Wants to Know: Are You Playing Games with Your Employees?

The Treasury Inspector General of For Tax Administration recently issued a report entitled Employers Do Not Always Follow Internal Revenue Service Determination Rulings that indicated the employers just do not get it when it comes to treating workers correctly for tax purposes.  This report sheds more light on non-compliance and will result in more audits of small businesses who have miss-classified workers as independent contractors.  So employers beware!

Employers illegally treating employees as independent contractors can come clean through a program called the Voluntary Classification Settlement Program (VCSP).  To explore in more detail the merits of this VCSP program and how it works, readers should look at Risky Business: Playing Fast and Loose with Worker Classification.  Basically, this program allows employers to voluntarily correct erroneously classified workers from independent contractors to employees in exchange for paying less taxes and penalties than if audited by the IRS.  Recently, the IRS provided some needed clarifications of this standard VCSP program under IRS Announcement 2012-46:

  • An employer can now be eligible for this program even if being audited by the IRS, except for a payroll tax audit.
  • An employer that is part of an affiliated group can not use the VCSP program where an employment tax audit involves one of its group members.
  • An employer that is in court contesting classification of workers from a previous audit by the IRS or Department of Labor is not eligible for the VCSP program.
  • An employer no longer has to agree to extend the limitation period on employment tax assessments as part of the closing agreement.  Under the original VCSP program, employers had to extend the statute of limitation for three years for the three taxable years after the date of the closing agreement.  This is no longer required under the standard VCSP program.

Additional Information and Insights:

For those interested in gaining greater insight into this problem and a lot more, please give a listen to my guest appearance on Money For Lunch.  We discuss not only the VCSP program but also explore the allowable “piercing of the corporate veil” by the IRS to impose individual personal tax liability on shareholders and officers for corporate tax obligations under Section 6672 of the Internal Revenue Code.  We also discuss related criminal tax implications.  So please click on the triangle to hear our discussion:

Money for Lunch

Bottom Line:

Employers should objectively and carefully review their employment policies.  If they are playing fast and loose with their classification of employees it could blow up in their face down the road.  The voluntary payments under this special program could be far less than the cost of an IRS employment tax audit for all open years resulting in the required payment of back taxes, interest and penalties.  With the IRS audit presence in this area, this may end up being a costly and in some cases a fatal gamble for a business and its shareholders or owners.  The sure thing is to use the current or the temporary VCSP to clean up a looming and expensive tax problem.


Quiet Disclosures of Offshore Foreign Accounts

Quiet Disclosures: Telling the IRS Quietly May Not Be A Good Idea

Quiet Disclosures: Telling the IRS Quietly May Not Be A Good Idea

Taxpayers with foreign accounts are in a tight spot now.  They can take advantage of the current voluntary disclosure program  (as discussed Foreign Offshore Accounts: IRS Third Amnesty Program) to minimize their tax exposure and to resolve these looming and unresolved problems.  However this disclosure program brings IRS scrutiny and potential civil penalties, and in the most serious situations criminal penalties. In light of these exposures, some taxpayers with interests in foreign assets have tried to sidestep these issues by employing a strategy called a “quiet disclosure.”

The quiet disclosure is implemented by simply amending a previously filed tax return to show the foreign accounts, report the income associated with the account and paying the tax with the amended return.  The problem with this strategy is that the IRS has made clear that this strategy is not acceptable.  The IRS clearly states in its Questions and Answers of May 6, 2009 that quiet disclosures do not satisfy reporting requirements.  On June 1, 2011, IRS announced that it would be opening up examinations against such taxpayers who have employed this strategy.  They have made clear from Q&A #10 of 2009 and Q&A #15 of 2011 of their disclosure programs that such taxpayers who have made quiet disclosures would be best served to come forward to take advantage of the penalty framework of the voluntary disclosure programs.

Be aware that the civil and criminal penalties for foreign bank accounting reporting (hereinafter referred to as FBAR) violations are in most cases based on the intent of  the taxpayer.   (For more on these reporting requirements see Foreign Bank Account Reporting.) Where a taxpayer is aware of the FBAR requirements and the disclosure programs but knowingly attempts a quiet disclosure, the IRS may argue and a judge or jury may decide that this strategy is indicative of negligent, reckless, or perhaps willful conduct.

Equally important to note is that quiet disclosures may be  lacking in other ways.  Although amended returns (quiet disclosures) report income, taxes, and related interest, they do not show accuracy related penalties.  More importantly the amended return may not show the information required by the FBAR form (Form TD F 90-22.1) .

For taxpayers with foreign accounts they need to seek tax counsel to decide the proper course of action in this messy area.  But it would seem that using the quiet disclosure strategy would only compound the problem.  To take advantage of the IRS current amnesty program and to see the operative rules please read Foreign Offshore Accounts: IRS Third Amnesty Program.

Tax Practitioner Warning:  For those accountants subject to SSTS No.1, Tax Return Positions the following sobering warning should be kept in mind:  Tax advisors should “not take a questionable position based on the probabilities that the client’s return will not be chosen by the IRS for audit.”  Additionally, the various criminal and civil penalties under the Internal Revenue Code for tax practitioners should be taken very seriously in this context.  In light of these exposures, practitioners should take pause before  recommending a quiet disclosure.

Employers Playing Tax Games with Worker Classification: Part II: Employee or Independent Contractor?

Our previous post discussed the IRS new Voluntary Worker Classification Settlement Program (VCSP) offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see our just published article at my website at the following link:  http://www.sjfpc.com/IRS_Payroll_Taxes_VCSP.html.  Many have inquired as to what distinguishes an employee from an independent contractor.  For a discussion of this issue and the IRS and case law criteria involved please see our article entitled Employee or Independent Contractor? at http://sjfpc.com/IRS_tax_rules_employee_versus_independent-contractor.html.  Both of these articles can be seen at our website  (www.sjfpc.com).

New Tax Alert: Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean

The IRS has just introduced a new Voluntary Worker Classification Settlement Program offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see my just published article at my website at the following link: http://www.sjfpc.com/IRS_Payroll_Taxes_VCSP.html at my website (www.sjfpc.com).

Hidden Offshore Bank Accounts: IRS Offers A Second Chance To Come Forward

The Internal Revenue Service announced on February 8, 2011 a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes.  Here are some of the basic provisions of this program.

1. Deadline To Come Forward: August 31, 2011

This second new voluntary disclosure initiative will be available to taxpayers through Aug. 31, 2011.

2. 2011 Offshore Voluntary Disclosure Initiative Makes Raises Penalty Charges and Makes Other Changes to the 2009 OVDP

The new IRS program is called the 2011 Offshore Voluntary Disclosure Initiative (OVDI). It includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting.

3. New Penalty Framework

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 12.5 or 5 percent penalties instead of the 25% penalty. Please see the discussion below for such exceptions.

4. Back Taxes Must Be Paid

Participants also must pay back-taxes and interest for up to eight years.

5. Additional and Usual Penalties Imposed

Taxpayers must pay accuracy-related penalties. No reasonable cause arguments can be made to avoid the such penalties. The IRS will also assert failure to file and failure to pay penalties.

6. Returns To Be Filed By August 31 Deadline

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

7. Special 12.5% Category Instead of 25% Penalty

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

8. Special 5% Category Instead of the 25% Penalty

If a taxpayer meets all four of the following conditions, then the offshore penalty is reduced to 5%:

 (A) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);

(B) has exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address;

(C) has, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and

(D) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

9. Special 5% Category for Foreign Resident

If a taxpayer is a foreign resident who was unaware that he or she was a U.S. citizen, then the offshore penalty is reduced to 5%.

10. Benefits of 2011 Initiative: Avoid Higher Penalties and Possible Criminal Prosecution

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

Copyright © 2011, Steven J. Fromm.  All rights reserved. No part of this article may be reproduced or used in any form or fashion without the written permission of Steven J. Fromm.

Failing To Update Retirement Plans: How to Avoid IRS Plan Disqualification & Penalties by Using VCP

Retirement-Plan-Remedial-ProcedureIn our fast paced world, many retirement plans are drafted and then often neglected.  In extreme cases, plans are put aside without ever being updated.  Some plan sponsors have failed to restate their plans for years or even decades.  For many individuals, retirement plan accounts represent the largest portion of their wealth.  As the following discussion will illustrate, the failure to protect this most valuable and important asset by keeping the retirement plan in full compliance with applicable retirement plan laws could result in some very nasty, costly and unforeseen financial repercussions.

The retirement plan laws have always required that plans be updated for tax law changes.  Before 2003, the IRS allowed plans to be periodically restated for tax law changes that occurred over many years.  This resulted in large, periodic major plan restatements.  However, since 2003 the IRS has required amendments to retirement plans for each new tax law resulting in more frequent “interim amendments.”  [For those of you interested in a more detailed discussion of these required interim amendments since 2003, please go to my questions answered at my Linked-In profile.]  For many plans, the deadlines for many of these plan restatements or interim amendments have now expired.  Current rules provide that plans that have not been redrafted to comply with required prior restatements or interim amendments cease to be qualified as of their applicable deadlines.

In the worst case scenario, the IRS may demand that the plan be retroactively disqualified.  If the IRS is successful in disqualifying the plan, the plan sponsor’s tax deductions for contributions taken in the year of disqualification and in later years would be disallowed.  The taxes owed by the plan sponsor due to the disallowance of previously claimed retirement plan deductions plus applicable interest and penalties could be enormous.  In addition, participants of the plan would have to treat as taxable income the value of their plan account as of the date of such disqualification.  The taxes, interest and penalties to the participants from the date of plan disqualification could be equally exorbitant. This would be a truly disastrous and harsh result for both the employer plan sponsor and participants in the disqualified plan.

However, in most cases, the current policy of the IRS is to impose monetary penalties instead of the more severe penalty of plan disqualification.  Even so, when the IRS raises these failures as the result of an audit the penalties can be quite severe.   Penalties can range from $2,500 to $80,000 depending on the failures involved and the size of the plan.  It is worth noting that in recent years, the IRS has increased its auditing of retirement plans.

 Here is Good News: How to Solve This Looming Problem 

The IRS has a voluntary remedial program called the VCP (voluntary compliance program) to correct these plan document deficiencies.  The IRS position is that retirement plans may be re-qualified only by having the plan sponsor voluntarily come forward before an IRS audit by submitting the newly drafted delinquent restatements and/or interim amendments to the IRS in accordance with some very detailed procedures and documentation pursuant to Revenue Procedure 2008-50.  Once the IRS reviews and hopefully approves the application and the newly drafted required documentation, the plan is deemed to be in full compliance with applicable law and such plan is retroactively tax qualified.

Instead of paying a steep monetary penalty, the VCP submission results in the paying of a filing fee to the IRS.  Sometimes, if the violation is quite limited the filing fee can be as low as $375.  (Remember, you will still need to pay for documentation services associated with plan restatements and interim amendments.  However, these costs would have been incurred in any event to keep your plan in full compliance with the law.)  The important point here is that the use of the VCP program avoids the risk of plan disqualification or the imposition of a large monetary penalty.

 How We Can Help:

Numerous VCP program applications under the applicable Revenue Procedure 2008-50 have been submitted by this office.  This application along with the needed plan restatements and interim amendments must be carefully drafted to ensure efficient negotiations and a successful outcome with the IRS.

The Bottom Line:

Plan sponsors should immediately and voluntarily move to correct plan deficiencies pursuant to the more taxpayer friendly and cheaper VCP program before the IRS audits your plan.  Once the IRS commences an audit, the VCP submission strategy is no longer an option and your plan is exposed to disqualification and/or severe monetary penalties.

Looking forward, you must establish a program with your plan adviser to ensure that your plan is kept in compliance with the laws concerning plan restatements, interim amendments and the changing IRS submission requirements and deadlines.  This will avoid having to deal with all of these problems again in the future.  In fact, the Revenue Procedure requires a disclosure in the VCP application as to what new procedures the plan sponsors will use to avoid this problem in the future.

 Do Not Wait

Do not wait for the IRS to audit your retirement plan as it then will be too late to get the cheaper and less painful VCP deal.

Copyright © 2009 and 2015, Steven J. Fromm