Relief from Penalties Imposed by Section 6707A

The Small Business Jobs Act of 2010 (“SBJA”), signed into law in September of last year provides enormous relief for those who would have suffered penalties from not disclosing certain tax shelters to the IRS.  Internal Revenue Code section 6707A imposes strict penalties for nondisclosure of tax shelters and transactions it considers “abusive,” whether previously “listed” as abusive by the IRS or not.   “Listed” transactions carry the highest penalties when not disclosed on a Form 8886.  Prior to the passage of the SBJA, the penalty for each year of nondisclosure was $100,000 for an individual and $200,000 for a corporation or other entity. 

New Caps for Penalties

The SBJA decreases the penalties to a minimum of $5,000 for individuals and $10,000 for corporations.  Fortunately for taxpayers, the penalties will be capped at 75% of the tax benefits the shelter would have given the taxpayer if it was allowed by the IRS.  Also, this change is retroactive and will apply to any penalties imposed after December 31, 2006.

Victims were Often Unknowing Taxpayers

Many of those penalized for not disclosing allegedly abusive tax shelters were not purposefully trying to commit tax fraud or “scam the system.”  Small businesses or high-income individuals were sold pension plans, for instance, that both their insurance agents and CPAs deemed acceptable, only to find out that because the plans were funded by life insurance they should have been disclosed.  But unknowing taxpayers are subject to harsh penalties even if they didn’t know the transaction was “listed” or “substantially similar” to a listed one. 
Section 6707A does not allow the IRS to reduce or waive the penalty in most cases.  Even the IRS’ Revenue Agents thus have their hands tied when they want to extend mercy to unknowing taxpayers who had been fallen victim to abusive tax shelters.

Waiting on the IRS

The IRS is working to implement these new 6707A penalties and is reopening cases with penalties assessed beginning in 2007 in order to retroactively change the amount.  As with many IRS processes, it can be a lengthy ordeal for many waiting taxpayers.  If you are waiting to pay your penalty until the new amount has been assessed under the SBJA, you can consider the advantages and disadvantages to paying any estimated amount due as the IRS may be calculating interest from the date of the first assessment.

The experienced tax lawyers at the Law Office of Steve Moskowitz, LLP can help you understand whether the changes under the SBJA favorably impact your tax situation.  Call us today for a free attorney-client privileged consultation if you have this or any other tax issue.  We can help you.

San Francisco’s Real Estate Watchdog Program

In an effort to recover some of the millions of dollars lost to San Francisco from tax evasion, City Supervisors passed an ordinance in 2006 to award those who report others who are cheating on their property taxes.  While the historic Proposition 13 protects property owners from large increases in property taxes each year, it still allows for a tax reassessment when property changes hands.  The amount of property tax due can skyrocket when property ownership changes after several years because of rising property values.  Some new property owners commit tax evasion by avoiding disclosing a change of ownership so they don’t pay higher property taxes. 
The “Real Estate Watchdog Program,” instituted in 2006, provides a process whereby people can report on those evading property taxes and potentially be awarded 10% of the money reclaimed, up to $500,000.  The largest payout during the past five years was $60,000 to a person who reported an apartment building owner who evaded $1.34 million in property taxes.  The program expired on February 16th of this year but Supervisor David Chiu introduced an ordinance on January 25th to continue the program and reduce the maximum award amount from $500,000 to $100,000.  That ordinance passed on March 8, 2011.

Should Others Adopt Whistleblower Programs?

The Internal Revenue Service (“IRS”) has a whistleblower office that processes tips from individuals who are aware of potential tax evasion by business or individuals.  Whistleblowers may be awarded up to 30% of the amount the IRS collects if the amount in dispute exceed $2 million or, in the case of an individual tax evader, his or her annual income exceeds $200,000.

Passed in 1970, the Bank Secrecy Act (BSA) was the first set of laws specifically designed to combat money laundering.  In fact, it is sometimes referred to as the “Anti-Money Laundering Law (AML)” or “BSA/AML.”  The BSA has been amended over the years by the addition of other anti-money laundering laws, including the Patriot Act.  The BSA requires business and financial institutions to keep records and/or file reports of certain transactions and activity.  The records and reports are especially useful to government and law enforcement activities in detecting money laundering, tax evasion, terrorism and other criminal activities.

As a practical matter, the government knows everything that you do with a bank. The government requires banks to have sophisticated computer programs in place that are monitored by experienced knowledgeable people that look for every kind of possible wrong doing; whether the possible wrong doing is done with one branch of one bank, or different branches of the same bank, or done on different days or done with multiple banks.  The bottom line is that whatever scheme you can think up has already been thought up and guarded against and trying any of them will only result in the bank reporting you and your transactions to a variety of government agencies who can prosecute you on very serious felony charges which can result in many long years of imprisonment and extremely large monetary penalties.
 
Bank Reporting Requirements

While the BSA mandates reports or records from certain individuals and businesses, much of the law institutes reporting and recording requirements for banks and other financial institutions.  Every currency deposit, withdrawal, exchange of currency or other payment or transfer involving more than $10,000 must be reported on a Currency Transaction Report (CTR). While there are certain exemptions, such as transactions between a bank and other banks, governmental agencies or entities on the NYSE, etc., the financial institution is required to file a designation of exemption. 
 
Banks also must report any suspicious transactions or attempted transactions.  A Suspicious Activity Report (SAR), found here, must be filed if one or several related transaction involves $5,000 in non-fact to face transactions and $2,000 in face to face transactions and the bank knows or believes that the transaction:

• Involves funds from illegal activities, or
• Is intended to hide or disguise funds or assets from illegal activities in order to violate or evade any federal law or regulation or to avoid a transaction reporting requirement, or
• Is designed to evade the regulations created under the BSA, or
• Has no business or lawful purpose or is not the kind of transaction a particular customer normally engages in and, after looking at the background, facts, and possible purpose of the transaction, the bank cannot reasonably explain it.

Penalties for failing to Report Suspicious Acts

Financial Institutions are required to file these reports.  A fine of the greater of $25,000 or the amount of the transaction (not to exceed $100,000) will be imposed upon a bank that fails to file a CTR or SAR.  Even negligence on the part of a bank may cause it to be fined $500 for one violation or $50,000 for a pattern of negligence.  Conversely, there is no penalty for reports that are not necessary.

Privacy Issues

In 1986, as part of the Money Laundering Control Act, Congress stated that a financial institution would not be held liable for the sharing of information relating to suspicious activity.  As concerns grow regarding money laundering and terrorism, privacy rights become diminished.  Financial institutions report a client’s name, address, social security number, driver’s license number and more.  Any transaction of $10,000 or more will require that a customer’s information be shared.  Also, the language of the regulation may make it necessary to report totally legal transactions of $5,000 or more because the transaction is not the kind the customer normally engages in.  The reports are filed with the Treasury Department’s Financial Crimes Enforcement Network and thereafter they are available to the FBI, Secret Service, Customs Service, every U.S. Attorney’s Office and several other law enforcement agencies.  Agencies can access the reports without the normal evidentiary requirements that would normally need to be shown before gaining access to the information.

By now most people have heard something about the massive healthcare overhaul that will occur due to the passage of section 9006 of the new Health Care Reform Bill.  Many companies are trying to figure out how the bill will affect their medical plans and related expenses.  However, they may not be aware of another change resulting from the bill that will have a major impact on the financial record keeping of businesses and has little or nothing to do with health care.  

Under current law, businesses, only in certain circumstances, have to file 1099s when payments of $600 or more are made.   Unless the Health Care Bill is repealed or otherwise changed, as of January 1, 2012, businesses will be subject to several new requirements.  For one, small businesses that provide goods or services will be required to send 1099s to every entity (individual or corporation), with whom it does more than $600 worth of business.  This will have some accounting and tax related issues discussed below.

How Will This Affect Me?

As a business owner, you will have to make sure that you keep very detailed accounting records for all your company expenses, including obtaining the tax identification number of every person and entity with whom you do business.  You will have to determine which individuals, corporations, partnerships, etc. were paid more than $600 by you throughout the year for goods and/or services.  Finally, you will have to prepare a 1099 for each and every one of those entities (with the exception of certain tax-exempt entities).

For example:   

If you travel often for work in a company vehicle for business, you probably have a gas station or two that you visit frequently.  When this new law goes into effect, you will have to carefully monitor how much money you spend at that station throughout the year.  If you spend more than $600 then you will have to send them a 1099 at the end of the year and a copy of that form to the IRS.  If you have a restaurant that you frequent with business clients, and you pass the $600 threshold you have to issue 1099s for them too.  Also, on the reverse side, anyone that buys more than $600 of product or service from you will have to send you a 1099 form.  You will then have to keep track of extra 1099s going out and coming in.  These 1099 forms will also have tax implications. 

Why Would They Do This?

Many people are upset about the new 1099 requirements, and some think it is just a poorly thought-out plan lost in the pages associated with the Health Care Reform Bill.  Advocates of the change, however, believe the benefits outweigh the potential negative impact the changes could have.  The Health Care Reform Bill must be properly funded, and the 1099 changes are aimed at bringing in more tax money by limiting the number of fraudulent expenses claimed by businesses.  In addition, the changes are designed to reduce the amount of revenue that goes unreported by allowing the IRS to ensure that an entity receiving payment properly claims the income.

Most people will find these new changes to be overly burdensome.  No matter what your opinion is on the matter, unless the Health Care Reform Bill is repealed or amended, they will go into effect on January 1, 2012 so you better be ready.

Recent downturns in the economy and consumer spending have caused a decrease in the amount of Sales and Use Tax collected by the California Board of Equalization (BOE).  According to the most recently published annual report on the BOE’s website, the total Sales and Use Tax revenues for the 2007-2008 fiscal year was $44.3 billion—down 1.5% from the previous year’s Sales and Use Tax revenue of $45.1 billion.  Like most governing bodies, the State of California is looking for stricter enforcement of the current laws and possible expansion of the Sales and Use Tax. 

Audit Enforcement

One way to increase Sales and Use Tax revenues is through audit enforcement.  The BOE compliance staff collected over $800 million in delinquent Sales and Use Taxes for the 2007-2008 tax year.  While this may be an intimidating thought for anyone receiving a notice of a pending audit, there is some good news.  The purpose of the BOE audits is to ensure that businesses report neither more nor less tax than required.  Last year, for example, taxpayers received Sales and Use Tax refunds of more than $116.1 million.

Businesses cannot always look for good news from the BOE.  Penalties and/or additional interest may be imposed for a number of different reasons, including but not limited to:

• Failure to file when the BOE determines that you should have filed,
• Late tax return filings, late payments or late prepayments,
• Failure to remit Sales or Use Tax collected from customers,
• Improper use of a resale certificate, 
• Operation of business without proper permits or licenses, 
• Accuracy related penalties.

Penalties

The penalties and interest vary based on the type of violation, whether tax was intentionally avoided and the amount of time that has passed.  A moderate 10% penalty will apply to all those that fail to file a return, send in late payments, file their return late, or are determined to be negligent.  Also, failure to pay the correct amount will result in a 10% penalty on any additional tax due.  Heavier penalties will apply for fraud and attempts to evade paying the required Sales and Use Tax.  General fraud and tax evasion will result in a 25% fine while one’s attempt to evade the necessary taxes by registering a vehicle, vessel, or aircraft outside of California will result in an additional 50% fine, not to mention potential criminal implications.

Online Retailers and New Legislation

Another way to increase revenue is by requiring more collection and payment of sales tax.  A recently proposed bill in the California legislature targeting online retailers - AB 2078 - would have mandated collection of sales tax from any online retailer that was part of a larger group if one other member of that larger group was required to collect sales tax as a retailer doing business in California.  It would also have required online retailers to notify their customers that they are responsible to pay California sales tax on their own if the online retailer was not required to collect it.  You can read the bill here: http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_2051-2100/ab_2078_bill_20100624_amended_sen_v95.pdf

Even though this bill did not pass and was placed in the inactive file, online retailers should not rest easy quite yet.  Democrats in the California legislature have revived talks of writing a new law that would require out-of-state online retailers to collect and remit sales tax for all items advertised by California-based websites.  They believe that it could add needed revenue to help close the budget gap.  Opponents, however, believe that companies would simply stop using California-based advertising firms—decreasing revenue and potentially causing the unemployment rate to increase even further.  Whether or not this bill ever comes to fruition, we can be sure that the government will continue looking for ways to increase revenue through Sales and Use Tax.

We routinely represent individuals and businesses with pending and in anticipation of State of California tax matters.   Please contact me and/or my firm to discuss your matter.   

Senior Partner, Law Offices of Stephen Moskowitz, LLP

California Penal Code Section 186.11 is known as the 'Freeze and Seize Law.'  This law allows a court to preserve a criminal defendant's assets in order to pay restitution to victims and any fines imposed for their misdeeds.  Any money in bank accounts, assets controlled by other financial institutions and even real property can be frozen or seized when the initial complaint or indictment is filed-even before a conviction or a judgment is entered.

What the Prosecution Must Show

A court is able to freeze and seize assets under Section 186.11 when the prosecutor alleges that a person has committed two or more related felonies (involving fraud or embezzlement) which involve a pattern of related felony conduct.  This means that at least two of the felonies must have a similar “purpose, result, principals, victims, or methods of commission, or are otherwise interrelated by distinguishing characteristics, and…are not isolated events.”  Section 186.11 is an enhancement - known as the “aggravated white collar crime” enhancement - that will result in 2, 3 or 5 additional years in prison if plead to or proven at trial.

The Means Used to Seize Property Under Section 186.11

A person charged with the aggravated white collar crime enhancement may have frozen or seized any asset or property in his control, or any asset or property that was transferred to a third party after commission of an alleged criminal act.  (Note there is an exception for an innocent party who purchases property without notice of any other party's claim to the title of that property.)  The prosecution has the ability to seek a temporary restraining order or preliminary injunction in order to prevent any further transfer or disposition of property.  The prosecution may file for the appointment of a receiver to care for the assets or ask for any other measure necessary to maintain the status quo.

Third-Party Claimant's Protection

A thirty-day window is available to a third party who has an interest in the preserved assets.  Within the thirty days, the third party must file a verified claim with the superior court (and serve the complaint on the Attorney General or district attorney) regarding the nature and amount of the party’s interest in the protected property.  The third-party claimant has the burden of proof to establish their interest in the property.

Recent Examples of the Use of Section 186.11

In May of 2009 San Francisco District Attorney Harris announced new charges against Edwin Parada regarding alleged mortgage fraud and investment scams, including charges based on Section 186.11.  It was reported that Mr.  Parada may have to pay nearly $3,000,000 in restitution, in addition to fees.  You can read the San Francisco DA Press Release by selecting the following link:  http://www.sfdistrictattorney.org/News.asp?id=517

On September 22, 2010, Michael and James Nuciforo, two owners of D&J Drywall & Painting, Inc. were sentenced to jail and probation after being convicted of felony workers’ compensation premium fraud.  The defendants paid $517,433 in restitution to victims in order to mitigate their sentences.  Months before sentencing, the Ventura County District Attorney’s Office announced that it had frozen 1.5 million of the defendants’ assets, even though the estimated loss in the case was only $500,000.

The freeze and seize law may be applied in less newsworthy cases as well.  An unpublished opinion filed September of this year in the California Court of Appeals discusses the case of a woman who embezzled money from her employer.  The court seized and sold two residential properties that she had interest in with two former spouses.  The ex-husbands were found to be innocent spouses who were able recover their interests in the seized funds.  People v.  Mahdavi-Cummings, Doc. G041367 (Filed 09/24/10).  You can read this unpublished opinion by selecting the following link: www.courtinfo.ca.gov/opinions/nonpub/G041367.DOC

If the government is attempting to impose the freeze and seize law upon you, we want to help.  We have extensive experience working with prosecutors and the courts in dealing with the application of Section 186.11 in cases involving alleged fraud and misrepresentation.  Call me for your free attorney-client privileged consultation about how we can help you avoid if you are involved in this nasty imposition or if you believe that you might become subject to this.

Senior Partner of the Law Offices of Stephen Moskowitz, LLP

The Bush Tax cuts will expire if Congress does not act by the end of this year.  Their expiration would have an across-the-board impact that would be felt by many Americans.  Perhaps the best way to prepare for the impact of their potential expiration is by understanding exactly what the Bush tax cuts are.

 Two major tax-cutting bills - the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and the Jobs Growth Relief Reconciliation Act of 2003 - make up the Bush tax cuts.  Together, these laws lowered the income tax rates, cut capital gains and dividends, addressed the so-called marriage penalty, phased out and eventually eliminated itemized deductions and personal exemptions for higher income earners, doubled the child tax credit and phased-out and eventually repealed the estate tax.  Each of these areas are discussed further below.

Income Tax Rates
Thanks to EGTRRA, the current income tax brackets are 10%, 15%, 25%, 28%, 33% and 35%.  Should the Bush tax cuts be allowed to expire, the 10% tax bracket would disappear and taxable income below $34,550 annually would jump up to the 15% bracket.  Everyone else would pay either 28%, 31%, 36% or 39.6% in annual income tax. 

Capital Gains and Dividends
The Bush tax cuts created a 15% ceiling on the rate of long-term capital gains and qualified dividends.  If allowed to expire, that ceiling for long-term capital gains would move up to 20% while the rate for qualified dividends would soar to 39.6%. 

Marriage Penalty
The marriage penalty is a tax liability that occurs when one or both people in a marriage pay more in taxes due to combining their earnings than they would had they stayed single.  For example, suppose a wife and husband both make $30,000 annually prior to marriage.  When they marry and file jointly, they report $60,000 which carries a higher overall tax liability for both of them.  The marriage penalty can also hurt married couples in scenarios where combining salaries pushes one or both of them into a higher bracket.  
 
Thanks to the 2003 portion of the Bush tax cuts, married couples filing jointly are entitled to deduct double the amount a single filer is entitled to deduct.  If the Bush tax cuts are left to expire, married couples would not be entitled to this deduction and would thus pay more in taxes than they did before they were married. 

Itemized Deductions and Personal Exemptions

The Bush tax cuts also allows higher-income earners to keep more of their money in the form of deductions and exemptions.  If the cuts expire, people with adjusted gross incomes above $170,000 who take itemized deductions will be hit hard come January 1, 2011.  This is because about 80% of the itemized deductions for people in this income level (for things like mortgage interest, state and local taxes, and charitable donations) would go away.  Additionally, higher-income earners would say goodbye to their personal exemption deductions.

Child Tax Credit
The Bush tax cuts doubled the child tax credit from $500 to $1,000 per child.  This deduction would return to $500 per tax year if Congress does nothing. 

Estate Tax
Part of the Bush tax cuts included a gradual decrease in the estate tax over time and a complete repeal of that tax in 2010.  However, the estate tax is scheduled to come back with a vengeance in 2011.  As of January 1, 2011 estates valued under $1 million would remain exempt but estates valued over $1 million would be hit with rates that top out at 55%. 

Clearly the expiration of the “tax cut” as set forth EGTRRA of 2001 and the Jobs Growth Relief Reconciliation Act of 2003, will have a financial impact on most individual taxpayers.   Please contact our firm if you would like to discuss your tax planning going forward.   The Law Offices of Stephen Moskowitz, LLP has over thirty years of broad-based tax experience.   We represent many individuals and businesses from many industries, including but not limited to, real estate management, construction, professional service firms, medical practices, manufacturing, retail, technology development, etc.   We provide comprehensive tax litigation, planning, and defense representation.   I invite you to contact our firm to discuss your legal questions.   Please feel free to use our contact form or phone us at (415) 394-7200.