Posted on 11/23/2010
FALSE TAX ASSUMPTIONS ARE DANGEROUS
By Robert S. Steinberg, Attorney, CPA, CVA
November 19, 2010
ASSUMPTIONS IN LIFE
We live our lives amidst a world of assumptions, the things we take for granted, not because they have been proved, but, because we simply believe them to be true. Sometimes we later find that we have made a false assumption like having once naively believed all politicians are candid. Lemony Snicket in “The Austere Academy” says:
Assumptions are dangerous things to make, and like all dangerous things to make—bombs, for instance, or strawberry shortcake-if you make even the tiniest mistake you can find yourself in terrible trouble.
FALSE INFERNCES, CONVICTIONS AND MISTAKEN IDENTITY
False assumptions can be false inferences or generalizations, false convictions or mistaken identities. Believing to be true what is false can lead one to foolishness, disappointment, unhappiness or danger.
False Inference: In David Benioff’s comic-tragic novel, “City of
False Conviction: In Pulitzer Prize recipient Philip Roth’s latest short novel “Nemesis” a promising young park counselor comes to believe he is the carrier of polio who has spread the dreaded disease to his playground charges. As a result he forsakes his dearly beloved fiancé and lives out the remainder of his life in guilt ridden unhappiness.
Mistaken Identity: Middle aged advertising executive Roger Thornhill (Carey Grant), mistaken for a spy, in turn, mistakes Eve Kendall (Eva Marie Saint) for a foreign collaborator. He is pursued across the country surviving a deadly crop duster and the dramatic heights of
SOME COMMON FALSE ASSUMPTIONS ABOUT INCOME TAXES AND THE IRS
In over 40 years of practice I have represented many clients in trouble with the IRS. Many times the trouble emanated from a false assumption about how the tax system works. Although Albert Einstein said, “We can’t solve problems by using the same kind of thinking we used when we created them,” that is exactly what many try to do. Some examples of false assumptions about the tax system are:
1. It is best not to file my return until I can pay the tax due. Here is an example of one poor decision leading to another based on a false assumption. Poor decision No. 1: Not paying sufficient estimated tax or having sufficient tax withheld. No. 2: Waiting to file Form 1040 until able to pay the tax. Result: Best case: 5% per month penalty for late filing (25% maximum) instead of 0.5% penalty per month for late payment. Worst case: Criminal charge for willful failure to file a return (sentence up to one year and fine up to $25,000). The return should be filed by April 15. An extension may not be valid if the tax due is not paid on April 15.
2. It is best to file an extension stating that the tax liability is zero when I cannot pay the tax actually known to be due. The false assumption here is twofold: (1) The extension is valid when it is not because the tax has not been reasonably estimated and paid, and (2) This is OK to do when it is not. Although the extension is not a return filed under penalties of perjury like Form 1040, the extension so prepared is a false document knowingly submitted to IRS and could be construed as a tax crime carrying a sentence of up to one year in jail and a fine of up to $10,000.
3. My spouse cheated on me and I am therefore an innocent spouse for tax purposes. Your spouse may have cheated on you and on the IRS but filing a joint return carries with it joint and several liability, unless you qualify for one of three narrow and technical exceptions commonly referred to as “innocent spouse.” The only way to guarantee that you won’t be liable for your spouse’s tax indiscretions is to file a separate return. Thus, if you suspect that your spouse is flaunting the tax law, don’t sign a joint return, and file as a married person filing separately. Caveat: This is a financially disadvantage tax status in most cases. Therefore, don’t file separate from your spouse unless you have good cause to believe the joint return presented is false or that the tax will not be paid.
4. I owe the IRS money but I’m OK not having heard from them. Wrong, you don’t have to actually receive a notice from IRS to be charged with having received the notice. For example, if you were divorced in January 2010 and filed a 2009 joint return with the address listed as the marital residence (same as the address on your 2008 return) IRS will mail the notice and demand letter and collection due process notice to the marital address. If your former spouse does not give you the notice, your appeal rights will be circumscribed, liens filed will adversely impact your credit rating and enforced collection action may ensue before you can offer alternative collection proposals. Therefore, always file Form 8822 when you change your residence address before filing a tax return with IRS reporting the new address.
5. I can settle my tax debt for pennies on the dollar using one of the so called tax dispute resolution companies: I wish this was true but the statement is another false premise for all but those having virtually no assets or income. Most find virtually useless the Offer in Compromise process as a means of settling tax debts. IRS accepts very few Offers in Compromise because the structure is very rigid and Revenue Officers have little discretion for making exceptions to the law or rules in the Internal Revenue Manual. Moreover, it is safer to their careers to simply follow the guidelines to the letter. The FTC recently put out of business American Tax Relief LLC, one of many scam operators promising to settle tax debts for pennies on the dollar.
6. I’ll send IRS $100 per month to keep them off my back. Wrong again, like Offers in Compromise, obtaining an installment payment agreement for amounts over $25,000 is very arduous. IRS in determining the amount you must remit monthly starts with your gross income and deducts taxes and allowable necessary living expenses based on national and regional averages for various categories. For upper income taxpayers or those in high cost localities like
7. I own nothing but my home which is my homestead that creditors cannot take. Wrong once more, as IRS is not like other creditors. State creditor exemptions do not apply to IRS.
8. I’ll prepare my own return and claim any mistake was due to a tax software error. Lots of luck to you. In Au v. Commissioner (TC memo 2010-247, the Tax Court rejected the taxpayer’s so called “Turbo Tax Defense” and upheld the 20% penalty assessed by IRS for erroneous deductions in the return.
9. I’ll blame the tax preparer if deductions are disallowed or income is left off my return. No matter who prepares your tax return, you are ultimately responsible for all of the information on your tax return. Read the declaration at the bottom of page two of Form 1040 before signing and never sign a blank return or one that contains errors or missing information. Blaming the tax preparer in a criminal tax case is a dangerous strategy because he or she will take the stand and bury you.
10. I’m self employed and only have to report income for which I’ve received a Form 1099. Very, very wrong, as IRS has several court accepted methods of reconstructing your income even if they do not uncover the specific payment. These include bank deposit analysis plus cash expenditures and net worth analysis plus cash expenditures for living expenses. In knowingly under-reporting income you subject yourself to substantial civil penalties (20% accuracy related penalty or 75% civil fraud penalty) and potential criminal sanctions.
11. I’m not worried about criminal tax charges because I can always settle and agree to pay what I owe. Wrong again as the IRS criminal tax enforcement program is not focused on collecting the tax. It is intended as a deterrent to scare other taxpayers into compliance. In the criminal case, IRS will seek jail time and restitution of the dollar loss to the government. Afterwards, IRS will assess the civil tax liability (there being no statue of limitations if fraud is proved) and civil fraud penalty.
Venerable Buddhist sage Ajahn Chah asks “I can observe anger and work with greed, but how does one observe delusion? Answer: You’re riding a horse and asking “Where’s the horse? Pay attention.” Life would be terribly frustrating without the common assumptions we live with. How could we drive our automobiles if we didn’t assume that other driver’s will obey the traffic laws? This is probably not such a good example in
Originally published in author’s e-newsletter Steinberg Talks Tax ™ VOL 4, NO. 9 (November 21, 2010)
Copyright 2010 by Robert S. Steinberg, All rights reserved.