Tag Archives: Taxpayers

Gains from Sale Or Exchange of a Residence are Sometimes Taxable

By: Coleman Jackson, Attorney & Certified Public Accountant
June 12, 2022

Gains from Sale Or Exchange of a Residence are Sometimes Taxable

The residential real estate market has been hotter than a Texas Summer for more than three years now. Principal residences have been flying off the shelf for just as long throughout Texas and practically everywhere else in the United States. First time home buyers, others and investors too have been bidding up the prices; seemly, with no end in sight to higher and higher prices. I heard recently that the pace of home sales in the North Texas area has begun to slow a bit; but the prices have not modulated that much. Prices are up; and residential residence sellers are still in the power seat; some continue to flip their homes like flipping pancakes on a hot griddle. Lots of money is being made by home owners. What does the federal tax laws have to say about gains from sale or exchange of principal residences?

Gain Exclusion for Single Taxpayer Filers:

Internal Revenue Code Sec. 121(b)(1) provides for exclusion from gross income for federal tax purposes up to $250,000 of gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, the property was owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

Gain Exclusion for Husbands and Wives Filing Joint Tax Returns:

Internal Revenue Code Sec. 121(b)(2) provides for exclusion from gross income for federal tax purposes up to $500,000 of gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, if

Either spouse owned the property during the 5-year period ending on the date of the sale or exchange and either spouse used the property as their principal residence for periods aggregating 2 years or more;
Both spouses meet the 2-year use requirement; and
Neither spouse is ineligible for the principal residence gain exclusion because one or both of them were involved in the sale or exchange of prior principal residence during the 2-year period ending on the date of the current sale or exchange.

Some Special Rules or Applications in Various Different Situations:

Physical or Mental Incapacity:

Taxpayers can become ill and incapacitated and spend long stresses of time in nursing homes or other long-term care facilities. If such unfortunate events, such as, physical or mental incapacity occur, the taxpayers qualify for the exclusion of gain on the sale of their principal residence, so long as, they own the property for a five-year period and reside in the property as their principal residence for a period aggregating 12 months

Ill Health, Change of Employment Unforeseen Circumstances:

In the event the5-year principal residence ownership period or the 2-year principal residence use period are not met due to ill health, change of employment or otherwise unforeseen circumstances. The burden rest on the taxpayer to marshal the facts and evidence to show that they qualify for this exception to the 5-year ownership requirement and the 2-year principal residence use requirement of the statute.

Survival and Divorce Situations:

The 5-year property ownership and 2-year principal residence use period includes the 5-year property ownership and 2-year use period the survival’s deceased spouse held the property for purposes of exclusion of the gain on sale of principal residence. Property used by a former spouse pursuant to a divorce decree or marital separation agreement counts towards the individual’s 2-year use of the property as a principal residence for the purposes of exclusion of gain on sale or exchange of a principal residence.

Uniformed Services, Foreign Service, and Intelligence Community:

Uniformed service members, United States foreign service employee and employees of the U.S. intelligence community can elect to extend the 5-year ownership period for up to 10 years and suspend the 2-year use period while they or their spouse is serving the U.S. in their official capacities as a member of the U.S. uniformed services, or U.S. foreign service or employee of the U.S. intelligence community.

Expatriation to Avoid Tax (Former Citizens of the United States):

Internal Revenue Code Sec. 877 provides that gain on the sale or exchange of property by an expat is included in their gross income for federal tax purposes. The exclusion rules of Internal Revenue Code Sec. 121(a) are not applicable to expats.

With respect to the high real estate prices and rapid flipping of residential real estate now-a- days, the tax issue is this one: how many homeowners selling their residences will have recognized gains for federal tax purposes? If none of the special situations and rules discussed above apply, these gains from sale of residential property could be taxable at the taxpayer’s ordinary tax rates.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

IRS Cautions Taxpayers About Fake Charities and Scammers Targeting Immigrants

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By Coleman Jackson, Attorney & Counselor and CPA
August 01, 2021

IRS Cautions Taxpayers About Fake Charities and Scammers Targeting Immigrants
The IRS continues to observe criminals using a variety of scams that target honest taxpayers. In some cases, these scams will trick taxpayers into doing something illegal or that ultimately causes them financial harm. In this blog we will discuss about Fake Charities and Immigrant Fraud which are part of the “Dirty Dozen” of tax scams list in 2021.

Fake charities

Taxpayers should be on the lookout for scammers who set up fake organizations to take advantage of the public’s generosity. Scammers take advantage of tragedies and disasters.

Scams requesting donations for disaster relief efforts are especially common over the phone. Taxpayers should always check out a charity before they donate, and they should not feel pressured to give immediately.

Taxpayers who give money or goods to a charity may be able to claim a deduction on their federal tax return by reducing the amount of their taxable income. However, to receive a deduction, taxpayers must donate to a qualified charity. To check the status of a charity, they can use the IRS Tax Exempt Organization Search tool. It’s also important for taxpayers to remember that they can’t deduct gifts to individuals or to political organizations and candidates.

Here are some tips to help taxpayer avoid fake charity scams:

Individuals should never let any caller pressure them. A legitimate charity will be happy to get a donation at any time, so there’s no rush. Donors are encouraged to take time to do their own research.
Confirm the charity is real. Potential donors should ask the fundraiser for the charity’s exact name, website and mailing address, so they can confirm it later. Some dishonest telemarketers use names that sound like well-known charities to confuse people.
Be careful about how a donation is made. Taxpayers shouldn’t work with charities that ask for donations by giving numbers from a gift card or by wiring money. That’s a scam. It’s safest to pay by credit card or check – and only after researching the charity.

Immigrant fraud

IRS impersonators and other scammers often use threats and intimidation to target groups with limited English proficiency.

The IRS phone impersonation scam remains a common scam. This is where a taxpayer receives a phone call threatening jail time, deportation or revocation of a driver’s license from someone claiming to be with the IRS. Recent immigrants often are the most vulnerable. People need to ignore these threats and not engage the scammers.

A taxpayer’s first contact with the IRS will usually be through mail, not over the phone. Legitimate IRS employees will not threaten to revoke licenses or have a person deported. These are scare tactics.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

Here’s Why People Filing Taxes Should Be Careful When Selecting A Professional Tax Return Preparer | LEGAL THOUGHTS

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Coleman Jackson, P.C. | Transcript of Legal Thoughts Podcast
Published March 10, 2021.

Legal Thoughts is a podcast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation and immigration legal matters.

This particular episode of Legal Thoughts is a podcast where the Attorney, Coleman Jackson is being interviewed by Reyna Munoz, Immigration Legal Assistant of Coleman Jackson, P.C. The topic of discussion is ““Here’s why people filing taxes should be careful when selecting a professional tax return preparer.” You can listen to this podcast by clicking here:

You can also listen to this episode and subscribe to Coleman Jackson, P.C.’s Legal Thoughts podcast on Apple Podcast, Google Podcast, Spotify, Cashbox or wherever you may listen to your podcast.

TRANSCRIPT:

ATTORNEY: Coleman Jackson
Legal Thoughts
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY: Coleman Jackson

Welcome to Tax Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.
Our topic for today is: “Here’s why people filing taxes should be careful when selecting a professional tax return preparer.”
Other members of Coleman Jackson, P.C. are Yulissa Molina, Tax Legal Assistant, Leiliane Godeiro, Litigation Legal Assistant, Reyna Munoz, Immigration Legal Assistant and Mayra Torres, Public Relations Associate.
On this “Legal Thoughts” podcast our public relations associate, Mayra Torres will be asking the questions and I will be responding to her questions on this important tax topic: Here’s why people filing taxes should be careful when selecting a professional tax return preparer.”

Interviewer: Mayra Torres, Public Relations Associate

Good morning everyone. My name is Mayra Torres and I am the public relations associate at Coleman Jackson, P.C. Coleman Jackson, P.C. is a law firm based right here in Dallas Texas representing clients from around the world in taxation, litigation and immigration law.
Attorney today we are discussing a very important tax topic because filing taxes is on folks minds these days. Many people may be filing taxes for the first time this year because of the recovery rebate credit issues involving their economic impact payments and other Covid-19 relief received during 2020.
In this Podcast, we will be discussing the safest, easiest and perhaps cheapest way folks can file their tax returns.

Question 1:

Attorney let’s start with the cheapest way folks can file their taxes for 2020! What options exist for people who do not want to pay a professional tax return preparer? I mean, can people file their tax returns for free?

Attorney Answers Question 1:

Good morning Mayra.
First people can always prepare and file their tax return themselves without hiring and paying anyone.
Second people can go to IRS.gov and select a number of brand-name tax software providers who will permit certain eligible taxpayers to use their software to prepare and electronically file their individual tax return for absolutely free. This particular free tax preparation option might be an excellent option for some taxpayers. Typically, the software providers require people to meet certain income, age and state residency requirements. The software vendors’ individual qualifying requirements can be found at IRS.gov. Most of the free vendors software is in English, but a few are in Spanish. This free file option is certainly an option that taxpayers should explore.
Third people can use possibly find free tax preparer clients hosted by various accounting and legal societies throughout the community. Some churches and business and law schools also provide minimum fee tax advice and counsel. People should contact the professional schools in their communities to inquire whether students in tax law training provide such services to the community. When I attended SMU School of Law, I participated in their tax clinic that provided free or minimum fee tax controversy services by enrolled students under the supervision of the tax clinic professor. People should make inquiries at professional societies, schools, and places of worship to see what’s available.
So to summarize; Mayra, as you can see there are a number of options available for people to get their tax returns prepared at little to no costs.

Interviewer: Mayra Torres, Public Relations Associate

That is an excellent summary of the free or low-cost tax return preparation and filing options that might be available to people this year:

people can prepare and file their returns without using anyone to help them;
People can go to IRS.gov and select a brand-named software provider to prepare and file their return if they meet the provider’s qualification requirements, and
People can search for a free or low-cost professional tax return preparer at local places of worship, or professional accounting or law societies or local law school tax clinics and accounting schools.

Question 2:

Attorney, some people can’t qualify for one of these free or low-cost tax preparation services. Some people just think taxes are very complex; they can’t prepare these complicated tax returns themselves, and they just want to hire someone to prepare the return and file it for them. What characteristics and qualifications should people look for when hiring a tax return preparer?

Attorney Answers Question 2:

Mayra, that is a very good question since people are responsible for the accuracy of their tax return regardless of whether they prepare and file it themselves or hire someone else to prepare and file their return.
These are some of the things that people might should consider when selecting a tax return preparer:
1. Indicial of educational training in tax law and tax accounting. This might be evidenced by a degree from college in taxes, accounting, law, finance, or some related business degree. Return preparer might be qualified with only certificates but with increasing complexity of the tax issues involved, should cause taxpayers to exercise more exacting screening of a tax return preparer before they hire them to work on their return.
2. Professional Tax Identification Number (or PTIN). The PTIN is an annual credentialing issued by the Department of Treasury to professionals authorized to practice before the Internal Revenue Service as paid tax return preparers. To obtain a PTIN, a tax professional must be an attorney in good standing with a State Bar Association, a licensed Certified Public Accountant in good standing with a state CPA licensing authority, an enrolled agent in good standing with the Internal Revenue Service, or a registered tax return preparer under the defunct IRS Registered Tax Return Preparer Program. Taxpayers should look for these types of credentialing when selecting a tax return preparer. In recent years, the annual PTIN fee has been suspended due to Court challenges regarding the IRS’ attempt to regulate tax practice. The IRS’ stated goal when instituting the PTIN program was to improve the integrity and quality of the tax preparation industry. Some tax professionals challenged this attempt in Court. Nevertheless, PTIN credential could be a good metric for the public to use when selecting a tax return preparer. The bottom line is this— when the professional does not have a current PTIN Card; It is possibly a bright red alert to the taxpayer that they could be taking unnecessary risk by hiring an unqualified tax return preparer. Taxpayers are responsible and liable for the accuracy of their tax returns regardless of who prepares or files the return for them.
3. Experience in tax return preparation is critical factor when selecting a tax return preparer. Tax law is constantly changing from year to year, and it is very important that the tax return professional maintains competencies in tax law on an annual basis. The more experience that the tax return preparer has with the type of return involved the better. For example, if you have foreign accounts, you should think long and hard before hiring any return preparer who has never worked with taxpayers with foreign accounts or offshore assets. Over the years, our law firm has seen many taxpayers who have been greatly harmed by tax return preparers who failed to properly counsel and advise them with regards to proper tax accounting for offshore assets and accounts.
4. So to summarize: taxpayers should look for relevant tax law and accounting education, IRS Tax Professional PTIN certificate and tax experience relevant to tax issues related to their particular situation when selecting a tax return preparer.
It is very important to make a wise selection choosing which tax return preparer to hire because taxpayers can be subject to civil penalties and even criminal exposure for inaccuracies and materially false statements and tax positions taken on their tax returns and in their claims for refunds.

Interviewer: Mayra Torres, Public Relations Associate

Bright Red Alert! Before hiring anyone to do your tax return, look at the tax return professional’s educational background… like where did they go to school and where did they learn tax and accounting; look at whether they have a current IRS Tax Professional PTIN certification, and look at whether they have the right type of tax experience to prepare your tax return!
If any of these three things are missing; it’s a bright red alert folks! Attorney, thanks for answering my question so clearly concerning what characteristics people should look for when selecting a tax return preparer.
Did I get the bright red alerts right, Attorney?

Question 3:

Attorney, it sounds like taxpayers can get in very serious trouble on their taxes if they hire an unqualified, incompetent, or dishonest tax return preparer.

Is there any where a taxpayer can turn for help when they suspect that they have been harmed by their tax return preparer?

Attorney Answers Question 3:

The Internal Revenue Service has been given the authority by Congress to maintain the public’s confidence in the federal tax system. Under that authority the IRS maintains advisory committees who establish practices, procedures and policies of the oversight offices designed to enforce regulations governing those authorized to practice before the IRS. The IRS is required under these regulations to maintain a list of individuals and companies who have been disbarred from practice before the IRS; list practitioners with monetary sanctions, and a list of practitioners who have otherwise been sanctioned by the IRS.
In addition to the IRS oversight that I have mentioned; professionals such as attorneys and certified public accountants are accountable to their respective professional licensing authorities in their states. These various professional licensing boards have specific complaint procedures where injured taxpayers can file an official complaint.
Finally, taxpayers harmed by tax return preparers can also turn to the courts for redress by filing a lawsuit for professional liability or other claim.
I should caution here that every tax position taking on a particular tax return may not rise to the level incompetence or malfeasance on the part of the tax return preparer. Judgment is an inherent part of being a tax professional. That intangible characteristic of confidence and trust in your tax professional cannot be overstated.

Interviewer: Mayra Torres, Public Relations Associate

Question 4:

What about the people that have an approved family-sponsorship petition outside of the United States?

Attorney Answers Question 4:

The Internal Revenue Code imposes an entire laundry list of civil penalties and criminal penalties on Tax Return Preparers who are incompetent or engage in disreputable conduct. The names and descriptions of these various penalties can be very informative as what goals the IRS is attempting to achieve in terms of protecting the public, protecting the public’s confidence in the tax system, and maintaining the overall integrity of the U.S. federal tax system. So that I don’t overly complicate this for our none-tax professional listeners, I am going to leave out any references to the specific Internal Revenue Code Section or Treasury Regulation where these penalties are codified. Most of our listeners probably don’t really care to know the actual tax code section and treasury regulation reference numbers for these penalties.
This is a list of some of the types of penalties that the IRS can impose on Tax Return Preparers. Taxpayers should just thing about the item on the list and look beyond what is right in front of them to what the IRS is trying to accomplish by imposing these penalties on incompetent preparers or those engaged in disreputable conduct:
1. Civil Penalties imposed on tax return preparers for failure to meet due diligence requirements for determining eligibility for certain tax benefits, such as, child tax credit, head of household, and earned income credit. Often times, taxpayers take these tax positions in error or with bad advice from tax preparers.
2. Penalties imposed on tax return preparers for failure to sign the return and penalties for failing to supply identifying numbers such as, PTIN etc. Again, often, returns prepared by paid tax preparers appear to be self-prepared.
3. Various penalties imposed against tax preparers for giving false or misleading information to the Department of the Treasury or any of its officers, employees, or agents.
4. Various penalties imposed against tax preparers for aiding, advising or abetting others in violating federal tax law by suggesting or aiding in an illegal plan to evade the proper application and administration of U.S. tax laws or payment of U.S. taxes.
Items three and four can result in civil negligence and civil accuracy related penalties; and willful or reckless violation of U.S. Tax laws could lead to criminal referrals and prosecution of the tax return preparer and the taxpayer.

Penalties imposed on tax return preparer for failure to give the taxpayer a copy of their tax return.
Penalties imposed on the tax return preparer for failure to maintain a copy of the prepared tax return.
Penalties imposed on the tax return preparer for failure to maintain a record of who prepared the return.

Items five through seven is designed to create a contemporary record and to provide a chain of responsibility. Tax return preparer operations are subject to IRS examination and investigation.
These are only a few of the penalties that the IRS could impose on incompetent tax return preparers and those engaged in disreputable conduct.
Taxpayers must be careful when tax return preparers over promise, make claims of abilities to obtain certain refund amounts or tax results, or seek to negotiate taxpayer refund checks. Sometimes dishonest preparers claim that the taxpayer has companies, farms, and factories that the taxpayer themselves never knew they had. Remember you are responsible for the numbers and data on your tax return and the IRS will look for you first to timely pay the correct amount of taxes. Your tax return preparer may or may not ever be held accountable. So, a word to the wise: be careful when you select your tax return preparer.
All these penalty areas that I have mentioned in this podcast should help taxpayers to exercise wisdom and discretion when selecting a tax return preparer. Look for professionals with character and experience even though it might cost you more to have your taxes done. It may cost more in the long run if you choose an incompetent tax preparer, or one engaged in disreputable acts.

Interviewer: Mayra Torres, Public Relations Associate

Attorney, thanks for such a thorough response to my questions about characteristics, qualifications, and other things that people should consider when selecting a tax return preparer. Character and experience always matter!
That’s all the questions I have for now with respect to being wise and prudent when selecting a tax return preparer. It sounds like it’s very dangerous to select the wrong person or firm to prepare your tax return.

Attorney Comment:

Well, those were all excellent questions, Mayra. And I am glad we were able to discuss the importance of exercising wisdom and being prudent when selecting a tax return preparer.

Mayra Torres’s Concluding Remarks:

Attorneys thank you for this comprehensive and informative presentation on selecting a tax return preparer.
Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever they listen to their podcast. You can follow our blogs by going to our law firm’s website at cjacksonlaw.com. Everybody take care for now! Come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., which is located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.
English callers: 214-599-0431; Spanish callers: 214-599-0432 and Portuguese callers: 214-272-3100.

Attorney’s Concluding Remarks:

THIS IS THE END OF “LEGAL THOUGHTS” FOR NOW

Thanks for giving us the opportunity to inform you about the “why people filing taxes should be careful when selecting a professional tax return preparer.
If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C. Stay tune! Watch for a new Legal Thoughts podcast in about two weeks and check our law firm’s website at www. cjacksonlaw.com to follow our blogs. We are here in Dallas, Texas and want to inform, educate, and encourage our communities on topics dealing with taxation, litigation and immigration. Until next time, take care.

Taxpayers with Significant Tax Debts Can Lose Their U.S. Passports

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By Coleman Jackson, Attorney, Certified Public Accountant
August 21, 2019

Ever heard of the Fixing America’s Surface Transportation (FAST) Act of 2015? Well, under FAST the IRS has the authority to notify the State Department of taxpayers certified as owing the federal government. A significant tax debt is currently defined as a delinquent tax bill of $52,000 or more. The FAST requires the State Department to revoke the delinquent taxpayer’s U.S. passport and limit the taxpayer’s ability to travel outside the United States.

Taxpayer’s who intend to travel outside the United States must negotiate with the IRS to get the delinquent tax certification lifted. Until that happens the taxpayer could become stranded outside of the U.S. with a revoked passport, or be blocked receiving a passport for the first time or on renewal leaving them unable to travel out of the country for any reason.

The IRS has identified several ways taxpayers can avoid having the IRS notify the State Department of their seriously delinquent tax debt as follows:

Paying the tax debt in full;
Paying the tax debt timely under an approved installment agreement;
Paying the tax debt timely under an accepted offer in compromise;
Paying the tax debt timely under the terms of a settlement agreement with the Department of Justice;
Having a pending collection due process appeal with a levy; or
Having collection suspended because a taxpayer has made an innocent spouse election or requested innocent spouse relief.

The practical tip: taxpayers who have to travel abroad must responsibility deal with their federal tax obligations long before they need to travel; because other than option one, above (paying the tax debt in full), the suggested options take months and some of them even take years to resolve in negotiations with the IRS.

The following types of taxpayers have been exempted from the delinquent taxpayer certification requirements under FAST:

Taxpayers in bankruptcy proceedings;
Identity Theft Victims;
Taxpayers whom the IRS has deemed non-collectible;
Taxpayers located within a federal declared disaster area;
Taxpayers with pending Installment Agreement request;
Taxpayers with pending Offer in Compromise with the IRS; or
Taxpayers with an IRS accepted adjustment that will satisfy the debt in full; and
Taxpayer’s serving in a combat zone is not exempt from the certification rules, but the certification is postponed while they do their tour of duty in the combat zone.

Taxpayers with plans to travel abroad simply need to be aware of the fact that their plans can be totally upended if they owe the federal government $52,000 or more in back taxes. The $52,000 could be owed on personal income taxes or business taxes where the individual taxpayer has been found be to be a responsible party, such as in payroll taxes with respect to the trust fund penalty that usually applies to delinquent taxpayer who owns the business or even employees of the business responsible for deciding what vendors and suppliers get paid and when. Also the $52,000 certification threshold can be reached for a single tax period or multiple tax periods combined. Example No 1, the taxpayer owes the IRS $2,000 for 2009, $14, 000 for 2015, and $40,000 for 2018. In this example the taxpayer is seriously delinquent and the IRS under FAST can certify them as seriously delinquent to the U.S. State Department. Example No. 2, the taxpayer owns a windmill manufacturing company with twenty employees; their business slowed to a whisper in the third quarter 2019 and the business owner decided to pay office rent, utilities, employees and suppliers and not the IRS payroll taxes. The IRS learns of this decision and finds the owner the responsible party under the germane tax section and access a $52,000 trust fund penalty on the owner. In this case, the owner/taxpayer could be certified by the IRS as a seriously delinquent taxpayer under FAST. The owner’s passport could be revoked or their passport renewal could be denied by the U.S. State Department.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

EXPANSION OF PAID TAX RETURN PREPARER DUE DILIGENCE ELIGIBILITY REQUIREMENTS

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By Coleman Jackson, Attorney and Certified Public Accountant
August 10, 2018

Paid Tax return preparers must exercise due diligence when preparing and assisting taxpayers in complying with federal tax laws. Internal Revenue Code Sec. 6695 (g) imposes a civil penalty on paid tax return preparers who fail to comply with due diligence eligibility requirements under the tax statute. Originally, IRC Section 6695(g) only applied to determinations of a taxpayer’s eligibility for the earned income credit (EIC). But the U.S. Congress has gradually amended IRC Sec. 6695 (g) to impose these due diligence eligibility requirements in more and more tax areas. By the 2016 tax filing season, Congress had expanded IRC Sec. 6695(g) due diligence requirements to cover not only earned income tax credit eligibility determinations but also child tax credit eligibility determinations, additional child tax credit eligibility determinations and American opportunity tax credit eligibility determinations. And in late December 2017, Congress expanded IRC Sec. 6695 (g) to cover head of household eligibility determinations. There are civil penalties imposed on paid tax return preparers who violate IRC Sec. 6695 (g).

Under the mandatory paid tax return preparer due diligence requirements of Internal Revenue Code Sec 6695(g), all paid tax return preparers must timely perform the following eligibility due diligence procedures when advising or assisting taxpayers in taking the American opportunity tax credit, earned income credit, child tax credit, additional child tax credit; and for returns filed in 2018, head of household status on any federal tax return:

Prepare and submit to the IRS with the underlying tax return a due diligence checklist (e.g. Form 8867 or some equivalent eligibility checklist), and keep the checklist for three years. There is a separate penalty under IRC Sec. 6695(g) for failing to prepare the checklist (Form 8867), or for failing to submit the checklist (Form 8867) to the IRS or for failing to keep the checklist (Form 8867) at the tax return preparer’s business establishment for three years.

Return preparers must have actual knowledge of the taxpayer’s eligibility to qualify for the earned income credit, child tax credit, additional child tax credit, American opportunity tax credit; and for tax returns filed in 2018, head of household filing status. Actual knowledge of the tax return preparer must be based on credible information obtained from the taxpayer or reasonably obtained by the return preparer from some other credible source; such as, information obtained from an educational institution, financial institution or governmental agency. Moreover the actual amount or computation of the applicable credit must be derived from completion of appropriate tax worksheets and be consistent with all applicable guidelines, regulations and rulings of the Internal Revenue Service relating to each credit type, return or refund application rules. There is a separate penalty under IRC Sec. 6695(g) for each and every credit claimed where the tax return preparer lacks or failed to obtain credible knowledge of the facts and circumstances governing a particular taxpayer’s eligibility for a particular credit or head of household filing status. There are also civil penalties associated with failing to complete the computation worksheets or failing to maintain them.

Tax return preparers cannot ignore obvious facts or turn a blind eye to facts that are reasonably available to them in determining whether a taxpayer is eligible for the applicable credit or tax filing status. Due diligence requires the tax return preparer to ask reasonable questions, look around the trees and not get lost in the forest to make sure tax returns are prepared based on accurate information, complete information and congruent information while accurately applying applicable tax laws pursuant to Treas. Reg. Sec. 1.6695-2T(b)(3). Tax return preparers, must under the Treasury Regulations, establish the identities of the parties (children and parents, for example); the return preparers must establish the relationships between the parties (children and parents, for example); return preparers must establish the taxpayers eligibility for the tax position (head of household, for example); and tax return preparers must determine the correct quantum allowed under the regulations. Paid tax return preparers satisfying these due diligence eligibility requirements are merely acting as an informed reasonable tax return preparer would under like circumstances. There are separate penalties under IRS Sec. 6695 (g) if tax return preparers fail to meet ‘the reasonable and well informed tax return preparer knowledgeable in tax law’ standard of behavior.

Treasury Regulations implementing IRC Sec. 6695(g) require that the tax return preparer (a) maintain for three years all checklists (Form 8867, for example), (b) maintain all computation worksheets calculating the tax credits, and (c) maintain documentation identifying the source of the information used to establish the eligibility of the taxpayer to claim head of household, the earned income credit, the American opportunity tax credit, the child tax credit, and the additional child tax credit. The tax regulations require that this due diligence documentation be maintain in good form and made available to IRS examiners’ in event of an IRS compliance review of the tax return preparer’s business facilities.

Accumulated IRC Sec. 6695(g) penalties can become substantial monetary burdens for any tax return preparer that lacks and understanding of preparer obligations and responsibilities under U.S. federal tax law; or ignores the rules or otherwise find themselves falling short of expectations under IRC Sec. 6695(g). In recent years, it appears that the U.S. Congress is placing more-and-more responsibilities on paid tax return preparers to improve the quality of overall tax compliance. As this blog points out more and more tax positions are being placed under the Internal Revenue Code Section 6695(g) tax return preparer due diligence umbrella. There is potential criminal exposure to tax return preparer’s under the Internal Revenue Code as well; but, our intent is not to cover criminal violations of the tax code in this particular blog. Watch our blogs for further discussions, like this one. For now we will simply end this blog with our discussion of the civil penalty waiver.

As with other civil penalties under the tax code, penalties assessed under IRC Sec. 6695 can be waived if the tax return preparer can make a credible showing that their tax practice has implemented reasonable procedures to comply with tax rules; that those procedures are consistently and routinely followed and that these current violations of IRC 6695(g) are inadvertent, unintentional and isolated. The basic rules and professional care exercised when documenting, marshaling and presenting any typical reasonable cause defense must be followed when making a credible argument to the agency or courts for waiver of the tax return preparer due diligence penalties under Internal Revenue Code Sec. 6695.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

IRS to End the 2014 Offshore Voluntary Disclosure Program on September 28, 2018

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By: Coleman Jackson, Attorney, CPA
March 27, 2018

Have you heard the news! On Monday, March 13, 2018 the IRS announced that it will end the Offshore Voluntary Disclosure Program on September 28, 2018.

It is likely already too late for all those people who are taking their chances and have not already made steps to enter the OVDP. Practitioners from all over the country have experienced extreme delays in getting taxpayers pre-cleared into the 2014 OVDP for months. Pre-clearance requests are taking more than 6 months these days. IRS representatives have stated that the preclearance processing unit of the IRS has long backlogs in even logging in new OVDP preclearance requests. The unit has about a 9 to 12 month back log in pre-clearance requests… so we have been told.

Taxpayers who have not taken advantage of the 2014 OVDP must act quickly. Repeat it is possible that it is now too late to act. The U.S. Treasury has been receiving directly or indirectly information from foreign financial institutions concerning U.S. persons with foreign bank accounts for about two years now. They probably already know those U.S. persons who hold foreign bank accounts. The chances of being detected with respect to foreign bank holdings are probably extremely high. In fact it might be impossible to hide from detection; and, possible federal prosecution of violators could rise.

Violators of FBAR rules by failing to timely report offshore bank accounts are subject to civil fines and criminal prosecution. Foreign Bank Accounts are reported annually on April 15^th by filing Form 114 with the Financial Crimes Network. Delinquent FBARs put taxpayers in legal jeopardy. There may also be federal income tax issues involved also if the taxpayer has under-reported its income or unfiled federal tax returns. Tax fraud and delinquent FBARs are serious crimes which can result in violators spending years in federal prison upon conviction.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432