As attorneys, we see a variety of legal issues and novel legal theories each day.  Sometimes, our prospective clients have their own ideas of good legal theories.  In the tax realm, there seems to be an abundance of websites and paid consultants to “help” the misguided taxpayer.  Here are our top five frivolous tax arguments guaranteed to get you in hot water with the IRS:

1.       Filing and Paying Income Tax is Voluntary:  The argument goes that the IRS itself, even in its own publications, states that filing a tax return is voluntary.  Unfortunately, the “voluntary” nature of our tax law is simply that the taxpayer gets to initially determine the amount of tax owed.  The penalty for these arguments includes imprisonment, fines, and penalties.  For example,   Royal Hardy was sentenced to a 13 year prison term for, among other things, selling a tax evasion scheme asserting that income tax laws were voluntary.  In addition, Hardy was also ordered to pay the IRS for $197,555.  See 2005 TNT 169-12 (Aug. 31, 2005).

2.       No “OMB” Control Number Appears on the Instructions: The argument is that a control number does not appear on the tax form as required by the Paperwork Reduction Act, so we don’t need to worry about filing a tax return.  Wrong.  Not only would it be odd that Congress would enact a law that would make it difficult to spend more money, but courts have uniformly found this argument frivolous. 

3.       Tax is Unconstitutional:  The line of reasoning behind the “unconstitutional income tax” is that the Sixteenth Amendment does not authorize a direct non‑apportioned income tax and therefore paying income tax is unconstitutional.   Unfortunately, the U.S. Supreme Court (who interprets the Constitution) stated that the “sixteenth amendment authorizes a direct nonapportioned tax upon United States citizens throughout the nation.”  Brushaber v. Union Pac. R.R., 240 U.S. 1, 12-19 (1916). 

4.       Strawman Argument:  The argument goes, that if you spell my name William L. Henry IV, then I am liable for tax.  If you capitalized it, WILLIAM L. HENRY IV, then I am not liable for tax.  This “strawman” argument is frivolous and will not relieve you of paying taxes.  Taxpayers asserting the stawman argument can face civil and criminal penalties.

5.       The IRS Must Prepare a Tax Return for a Taxpayer if the Taxpayer does not File: First, one has to ask why you would want the IRS to prepare your tax return.  Second, Section 6020, provides the IRS a mechanism to determine your tax liability so that they may ultimately take enforcement actions against the taxpayer.  The courts have uniformly stated that a taxpayer is responsible for filing a tax return.

A full list of frivolous taxpayer arguments can be found on the IRS’s website at http://www.irs.gov/taxpros/article/0,,id=159853,00.html.   Also, Robinson & Henry maintains a list of helpful tax information on our website at www.robinsonandhenry.com.  If you are behind on your taxes, or are subject to an IRS levy or lien, the IRS has methods that attorneys can employ to help resolve your back tax debt.  Frivolous tax arguments will not help you resolve your tax debt, and any promoter of a fraudulent tax scheme is not trying to help you.  Contact an attorney to discuss solutions to your tax problems.  

Disclaimer:

This newsletter is intended to supply general information to the public. We try to insure the accuracy of this information, but cannot guarantee that this information is accurate. Laws change quickly, and the reader should always insure that legal information of any sort is up-to-date and accurate before relying on it. The legal information provided at this site is general, and not specific. The reader should never assume that this information applies to his or her specific situation without consulting competent counsel in his or her state. This newsletter is not intended to be advertising, solicitation, or legal advice. Thus, the reader should not consider this information to be an invitation for an attorney-client relationship, should not rely on information provided herein, and should always seek the advice of competent counsel in the reader’s state. We do not intend links on our website to be referrals or endorsements of the linked entities. We do not wish to represent anyone desiring representation based upon viewing this website in a state where this website fails to comply with all laws and ethical rules of that state.

 IRS CIRCULAR 230 DISCLOSURE STATEMENT: The advice, if any, contained in this website and its attachments or enclosures is not intended or written to be used, and cannot be used, for the purposes of (1) avoiding penalties arising from the U.S. Federal tax laws or (2) promoting, marketing, or recommending to another party any plan or arrangement addressed herein.

Contact:   Bill Henry, Attorney At Law, Robinson & Henry P.C. 757 Maleta Lane, Castle Rock, Colorado 80108

4850-5328-3844, v.  1

Every mortgage loan has two parts, a note and a deed of trust.  The note is your debt to the mortgage company.  The deed of trust is the document secures the debt with your home. 

If you get behind on your payments, the mortgage company may foreclose on your home and sell it at an auction.  The difference between your loan amount and what the mortgage company sold it for can create a deficiency. (For example, if you have a $300,000 mortgage loan and the house sells for $200,000 at a foreclosure auction, there is a $100,000 deficiency.)

 The mortgage company may choose to forgive your debt.  In our example, the mortgage company could forgive $100,000 deficiency after the foreclosure sale.

When the mortgage company chooses to forgive a loan, it normally is a taxable event.  In tax terms, it is called discharge of indebtedness income or cancellation of indebtedness income.  The borrower who no longer has to repay the loan must pay tax on that amount.  In our example the taxpayer would be deemed to have received receive $100,000 of income.

Because of the recent foreclosure problems, congress has passed the Mortgage Forgiveness Debt Relief Act of 2007.  This act allows taxpayers to exclude any discharge of indebtedness income on their principal residence.  This exception does not apply to second homes or investment properties.

For more information on how Robinson & Henry can help taxpayers nationwide with their tax problems, visit us at www.wlhenry.com or contact us at (303) 688-0944.  Robinson & Henry has extensive experience in defending and advising homeowners facing foreclosures including in Rule 120 proceedings, loan modifications, and bankruptcy.  Visit our foreclosure defense website at http://www.blockcoloradoforeclosure.com/

The IRS recently released its annual enforcement figures for its 2008 fiscal year.   The bottom line–$56.4 billion in enforcement revenue collected.

Collecting the billions required the IRS to issue over 2.6 million tax levies (IRS garnishments and bank levies) and 750,000 tax liens on taxpayers’ property.  Many of these levies and liens occurred after taxpayers failed to file their tax returns or pay tax. 

Tax levies and lien normally occur after numerous notices from the IRS.  Taxpayers can stop tax levies and tax liens from occurring by negotiating with the IRS.  In certain circumstances, penalties, interest and the underlying tax liability can be significantly reduced. 

For more information, go to www.wlhenry.com or contact us at (303) 952-5064 to learn how we can help you with your tax debt problems.   Visit our tax blog at http://wlhenry.com/tb/.

Yes.  Failing to file taxes is a serious problem.  Under Colorado law, for example, a person who “willfully attempts in any manner to evade or defeat” any tax or the payment thereof is guilty of a class 5 felony pursuant to Colorado Revised Statute 39-21-118.   So, what does that mean:  that means that you can be sentenced to three years in jail or fined up to $100,000 in some cases. 

Visit www.wlhenry.com for more information or contact us at (303) 952-5064 to learn more.

Every business is allowed to take “ordinary and necessary” business expenses.  But is the activity a hobby or a business?

Under the “hobby loss rule,” a taxpayer can only take business deductions if the activity is engaged in for profit and carried on for a trade or business.  An activity is presumed to be carried on for profit if it makes a profit in at least three of the last five tax years, including the current year.  For breeding, showing, or training race horses, a profit must be achieved in two of the last seven years for the presumption arises.

If the presumption does not arise, a list of non-exclusive factors must be examined to determine if the activity is a hobby or a business.   Failure to properly classify the activity may result in denied deductions and cause the IRS to impose underpayment penalties or accuracy related penalties. Because the IRS may not audit your return for years, penalties and interest associated with the hobby loss rule can be significant.

The IRS will not impose penalties if a tax lawyer gave the taxpayer a written opinion stating that the activity was a business.  However, the IRS will only accept a properly written opinion meeting certian criteria before it will waive penalties, so ensure the lawyer or other professional has the experience in providing written tax opinion.

For more information, visit Robinson & Henry’s tax practice webpage at http://www.wlhenry.com/practice_area_taxation.php  or contact us at  (303) 688-0944 .

Thousands of taxpayers across the country receive a notice of intent to levy from the IRS each year.  Many of those taxpayers, however, do not know what that notice means or what they should do. A notice of levy is the IRS’s way of telling the taxpayer that they are going to garnish the taxpayer’s wages or levy the taxpayer’s bank accounts. 

If the IRS chooses to levy a bank account, it can levy all money in the bank account up to the amount of tax that the IRS says that it is owed.  All of the taxpayer’s outstanding checks will bounce if the money in the bank account is not sufficient to cover the IRS levy and the outstanding checks.  When an IRS levy occurs, taxpayers often do not have sufficient funds to pay their mortgage or rent payments (not to mention the bank fees!).

If you get a notice of levy, it is extremely important that you do not ignore it.  A notice of intent to levy means that the IRS has started the collection process and will not stop until the debt is satisfied. An IRS tax lawyer should immediately work on preventing a levy from occurring or reducing any damage that has occurred while he or she negotiates with the IRS on your behalf.    

For more information, please visit the tax section of Robinson & Henry, P.C., at http://www.wlhenry.com/practice_area_taxation.php or contact us at   (303… .

As an employer, you act as a fiduciary withholding money from your employee’s paychecks and depositing the money with the IRS.  It’s not your money, so the IRS takes employment tax problems very seriously.  The IRS can assess a special penalty and hold you personally responsible for not depositing employment taxes. You can avoid the penalty if you can demonstrate reasonable cause not caused by willful neglect. 

Because of the seriousness of employment taxes problems, all employers should take immediate action if they fall behind on depositing employment withholdings.   Do not ignore the IRS!

Charles O’Byrne, Chief of Staff to New York Governor David Paterson, failed to pay or file his personal tax returns for 2001 – 2005.  He owed nearly $300,000 in back taxes, penalties, and interest.

The reason?  According to his lawyer, Richard S. Kestenbaum, he has “late-filing syndrome” (also called called nonfiling syndrome or failure-to-file syndrome).  This disorder, however, is not recognized as a psychiatric condition according to the American Psychiatric Association.

So, if you suffer from late-filing syndrome and have failed to file your tax returns or pay taxes we can help.  We can help reduce penalties and interest, stop wage garnishments and bank levies, and possibly reduce the underlying tax liability. Unfortunately, a psychiatrist probably can’t. 

Here is a breakdown of Mr. O’Byrne’s tax liability.  As you can see, everyone is human and makes mistakes.

FEDERAL TAXES

$127,018 in back taxes

$50,836 in penalties

$34,005 in interest

STATE TAXES

$51,303 in back taxes

$16,711 in penalties

$12,905 in interest

Please call us for a free consultation if you think we can help (303) 952-5064 or info@robinsonandhenry.com

Bill Henry

According to the IRS, the tax gap is “the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time.”   So, if you have failed to file taxes or you have failed to pay on time, then you are in the tax gap.

The IRS’s ability to collect tax debts exceeds those remedies of other creditors.  Unlike other creditors (like credit card companies), the IRS can levy your bank accounts and garnish your wages administratively.  That means that after the IRS fulfills procedural requirements it merely sends a letter to the bank or your employer and the money must be sent to the IRS—the IRS does not need to go to court.

How to get out of the gap?

The IRS provides several ways to negotiate a debt, including penalty abatement; collection arrangements including offers in compromise based on doubt as to liability, doubt as to collectability, and effective tax administration; and payment arrangements.   

The key to having your offer or abatement letter approved is understanding how the IRS makes its decisions.  That includes understanding the Internal Revenue Code, Treasury Regulation, and case law.  Making a strong argument—with case law and regulation to support it—are the cornerstones of a good offer letter.