When taxpayers find themselves at odds with the IRS, they will typically find themselves facing judgment with the U.S. Tax Court. These recent cases highlight why it’s important to file your income taxes correctly – and to update your address after you move.
In the first case, a married couple moved from Jersey City to Rutherford, New Jersey in late June 2015. They had requested an extension to file their annual income taxes using the new address, and in October of that year, timely filed their annual return. There was a problem; however. They used the old address when completing their tax return.
Then, when the IRS sent the couple a notice of deficiency, by IRS rule the letter was sent to the last known address – in Jersey City. Since the couple didn’t receive the letter within 90 days, they were unable to petition the Tax Court for relief of their deficiency notice. The IRS successfully argued that the couple did not provide clear and concise information regarding an updated address. The issue of which address was the correct one would have been confusing; but the timing was also unfortunate. Had the couple received the letter just a few days sooner, they would have fallen under the IRS’s 90-day timeframe to petition the Tax Court for relief.
Lessons Learned: Update your mailing address for all correspondence, and double check the address you use when filing tax returns. Additionally, set up a mail forwarding service for at least 90 days after you move. Read the full case here.
In a second case involving the IRS, a deli owner from Connecticut learned the hard way to properly account for all business income and taxes due. At the heart of this tax evasion case was that the taxpayer kept some of the cash receipts from his business, used the business account to pay personal expenses, and deposited large sums of money into a personal investment account without reporting the funds. Then, the taxpayer bought personal investment properties with the unreported money. The last piece of this tax fraud case was an intentional underreporting of income – to the tune of more than $638,000 over two tax years. When the taxpayer kept some of his business’s cash receipts, he used some of the money to fill an in-store ATM.
The penalty is a maximum prison term of five years, up to $440,000 fine, and payment of back taxes plus interest and penalties.
Lessons Learned: Other than the obvious – report accurate income and pay all taxes due – keep business and personal accounts separate. And know that the IRS will usually find out if a taxpayer is submitting false information, sooner or later. This case is from the 2012 and 2013 tax years, and the taxpayer was only recently sentenced. Paying the taxes due now will cost much less than paying interest and penalties later, plus fines or jail time.
And in other tax fraud and tax identity theft news, sensitive personal and financial information can be obtained at relatively low cost. The dark web, which allows hackers to function anonymously, can only be accessed by special software. And when it comes to tax identity theft, you’d be surprised at how much of your information is up for grabs, at relatively low cost.
A report by a cybersecurity firm found that W2s and 1040s cost as little as $1.04, and names, social security numbers, and birthdates can be bought for $.019 to $62. Authenticated access to bank accounts can be bought, too. This would enable a fraudster to file fraudulent returns and claim any refund and the taxpayer and bank would be none the wiser, until it’s too late. Since there are now how-to guides for accessing and cashing out tax refunds, a fraudster doesn’t even have to possess specialized skills to steal thousands of dollars. Read more about how the dark web is making it easy for hackers to commit tax identity theft.
Periodically, we’ll continue to bring you updates from the Tax Court and IRS criminal investigations, as well as ways to protect your financial information and safeguard your tax returns against identity theft.
Do you have a question about tax strategy for your personal or business finances? Contact us today.