How to Suvive an IRS Audit.

Taxpayers in general have about 1% chance of being audited by the IRS each year.  You beat the odds and your tax return has been selected for an audit.  What does this mean and what do you do?

An IRS tax audit means that the IRS is examining your tax return carefully for the accuracy with intent to verify the correctness.  Your return may have been selected (i) based on the IRS’s computer program that scores returns based on certain red flags the IRS has identified (e.g., Schedule C filers, cash basis businesses, excessive deductions), (ii) based on information received from third-party documentation, such as Forms 1099 and W-2 that do not match the information reported on your return, or (iii) to address questionable treatment of an item and to study the behavior of similar taxpayers in that market segment in handling the tax issue.

It is helpful to understand the statute of limitation under which the IRS audit is conducted.  In most cases, the IRS has 3 years from the date the tax return is filed to assess any additional tax.  Typically, this means the IRS will issue an audit notice 12 to 18 months after the tax return
is filed and have 1 to 2 years to complete the audit.  If the audit is not completed within the 3 year period and the IRS does not timely assess additional tax liability, the taxpayer is generally not liable for the additional tax.  However, if the taxpayer (is found to have) underreported
income on the tax return by 25% or more, then the IRS has 6 years to audit and assess tax deficiency from the date the return is filed.  In the case of fraud, the IRS has unlimited time period to audit the tax return.

The audit may be conducted by mail, in taxpayer’s place of business or preferably at its representative’s office (to minimize the IRS’s access to documents and information), or in the IRS offices.  The IRS will typically request information and documents to review, and may ask to interview the taxpayer.  The law requires you to retain records used to prepare your tax return, and generally you should keep them for three years from the date the tax return was filed.

During the audit process, taxpayers have certain rights:  (i) the right to professional and courteous treatment by the IRS employees, (ii) right to privacy and confidentiality about tax matters, (iii) right to know why the IRS is asking for information, how the IRS will use it and what will happen if the requested information is not provided, (iv) a right to representation by oneself or an authorized representative, and (v) right to appeal.

The audit may conclude with: (i) no change to the return because all of the items under review were substantiated, (ii) taxpayer agreeing with the IRS’s proposed changes to the tax liability, or (iii) taxpayer disagreeing with the IRS’s proposed changes.

If you agree with the IRS proposed changes, you can sign the examination report, and if money is owed, several payment options maybe available.

If you disagree with the IRS findings based on the tax law, a conference with a manager may be requested for further review of the issue.  If an agreement cannot be reached with the examiner’s supervisor, the examiner will forward your case for processing and you will a letter (known as a 30-day letter) notifying you of your right to appeal the proposed changes within 30 days.  A formal written protest within 30-days is usually required to appeal the case to the IRS Appeals division.  The IRS Appeals division is separate and independent of the IRS Examination division which conducts the audit, and is designed to settle most disputes without going to court.  If is important to repond timely to the 30-day letter if you want to appeal your case.

If you do not respond to the 30-day letter (or if you do not reach an agreement with the IRS Appeals Officer), the IRS will send you a letter (known as a 90-day letter), notifying you of your right to file a petition with the United States Tax Court within 90 days.  Alternatively, you may take your case to the United States Court of Federal Claims or the United States District Courts.

Generally, the Tax Court hears your case before any tax has been assessed and paid.  If you do not file your Tax Court petition on time, the proposed tax will be assessed, a bill will be sent to you and you have to pay your taxes or collection can proceed.

The District Court and the Court of Federal Claims hear tax cases only after you have paid the tax and filed a claim for a credit or refund with the IRS on Form 1040X.  Generally, you must file a claim for a credit or refund within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.  If the IRS rejects your claim, you can file suit for a credit or refund in the District Court or in the Court of Federal Claims within 2 years from the date IRS rejects your claim.  You can also file suit for credit or refund if the IRS has not delivered a decision within 6 months since you filed a claim.

The IRS Appeals Office will normally consider any case petitioned to the United State Tax Court for settlement before the Tax Court hears the case.  You may be able to recover reasonable litigation or administrative expenses to defend your position with the IRS if you are the prevailing party, exhaust all administrative remedies within the IRS, your net worth is below certain limit and other requirements are met.

If you owe any additional taxes, you must pay interest on the additional tax, and interest is generally calculated from the due date of your return to the date of your payment.  Interest, however, may be suspended or abated under certain specific circumstances.

If you owe any additional taxes, various civil tax penalties provisions could apply, including the 20% accuracy related penalty on the total
understatement of tax, failure to file penalty, failure to pay penalty, and civil fraud penalties equal to 75% of any federal tax due to fraud, plus interest on penalties.  Worst case, possible criminal charges (misdemeanors and felonies) could arise in applicable cases.

When faced with an IRS (or a state) audit, the goal is to limit the scope of the auditor’s review and limit your financial impact, and settle any disputes early as possible during examination or appeals process.  The first thing you should do is to consult a tax counsel who can assist you especially if you have complex or sensitive issues, since settlement of disputes often involve legal analysis of the tax law and great understanding of the tax procedure.  You should consult a tax counsel if you have potentially sensitive tax issues that might involve criminal tax matters.

Attorney Heather Lee is available to discuss any matters related to your individual or business federal or state tax audit.  She can be reached at (203)221-3100 or by email hlee@mayalaw.com.

Court Issues $20,000 Monthly Alimony Award in Stamford Divorce

In Cunningham v. Cunningham, Superior Court, Judicial District of Stamford-Norwalk at Stamford, Docket No. FA094017494S (March 9, 2011, Shay, J.), the plaintiff wife and defendant husband were married for approximately twenty-two years, and had two minor children.  At the time of the divorce, one child was enrolled in college and the other was in high school. The parties both lived in Stamford, Connecticut.

The husband was fifty-five years old and in good health.  He held both a bachelor’s degree and master’s degree from Southern Methodist University, and had been fully employed since graduation. Commencing in 1984, and throughout the marriage, the husband was employed as a principal in a consulting business.  The Court noted that he was required to retire at the end of the fiscal year in which he turned 62. The Court also noted that the husband received a regular draw, as well as quarterly distributions.

At the time of the divorce, the wife was fifty-four years old, and although she experienced some health issues during the marriage, she was also in good health.  The wife was a graduate of Stone Hill College, and throughout the course of the marriage, was employed as a flight attendant. She worked a full schedule for most of the marriage, with the exception of two maternity leaves of ten months each, and a furlough of one and one-half years following September 11, 2001.

The Court found that during the course of the marriage, the parties enjoyed a very comfortable lifestyle, which included extensive travel, yard maintenance, and in-home help, and amassed a substantial estate including an investment account having an approximate value of $1,460,000.00, as well as a deferred income account and several retirement vehicles. The Court further found that based upon the parties’ financial affidavits the husband’s net monthly income was $62,629.00, and that the wife’s net monthly income was $1,574.51.

With respect to alimony, the Court ordered that commencing February 1, 2011 and monthly thereafter, the husband shall pay to the wife the sum of $20,000.00 as and for periodic alimony, until the death of either party, the remarriage of the wife, the entry into a civil union by the wife, or January 31, 2018, whichever shall sooner occur. The Court specifically designated the term of alimony as non-modifiable, and granted the wife a safe harbor with respect to her future earnings up to $36,000 per year.

If you have any questions relating to alimony or divorce proceedings, please feel free to contact Michael D. DeMeola, Esq. by telephone at (203) 221-3100 or by e-mail at mdemeola@mayalaw.com

 

Court Enters 10 Year Alimony Award in Wilton Divorce

In Brush v. Brush, Superior Court, Judicial District of Stamford-Norwalk at Stamford, Docket No. FA104019594S (Dec. 15, 2011, Shay, J.), the plaintiff wife and the defendant husband were married for approximately 21 years, and were the parents of two minor children.  During the divorce, the children- ages ten and fifteen- resided in the marital home in Wilton, Connecticut pursuant to a bird nesting arrangement which the parties agreed upon as part of a parenting plan.

At the time of the divorce, the wife was 47 years old, and suffered from various medical conditions, from chronic Lyme Disease to depression and anxiety.  She held a Bachelor of Science degree in Fashion Design and Resource Management, and prior to the parties’ marriage, worked in the clothing industry in Connecticut, New York, Maine and Massachusetts. The Court found that the wife was a very talented designer and seamstress who at one point during the marriage developed and fabricated her own line of children’s clothing.  After two years, however, the wife closed her business when it became apparent that it would not be profitable. At the time of the divorce, she was a full-time homemaker.

The husband was 46 years old, and held a Bachelor of Science degree in Psychology as well as a Masters degree in Industrial and Labor Relations.  He described his health as “good,” although he told the court that he took medication for a hereditary thyroid condition as well as for high blood pressure. He also suffered from occasional stress, but indicated that none of the conditions adversely affected his ability to work.  The Court noted that the husband worked for a variety of corporations in Kansas, Texas, Ohio and New York.  At the time of the divorce proceedings, he was Chief Human Resources Officer and his annual base salary was $242,000.00 plus an annual bonus, an automobile allowance, and certain non-cash benefits including stock options.

With respect to the cause of the breakdown of the marriage, the parties cited various factors including different parenting styles, lack of intimacy, loss of interest in each other, personality conflicts and different approaches to personal finances.  The Court ultimately found that both parties contributed to the breakdown of their relationship.  Regarding finances, the Court found that the husband’s net income was $4,403.00 per week, and the wife had no income.

With respect to support, the Court ordered that commencing the first day of the first month following the husband’s vacation of the marital home, but no later than March 1, 2012, and monthly thereafter, the husband shall pay to the wife 35% of his gross cash compensation from employment as and for unallocated, periodic alimony and child support, until the death of either party, the remarriage of the wife, the entry into a civil union by the wife, or December 31, 2022, whichever shall sooner occur.  The Court designated the term of alimony as non-modifiable, and granted the wife a safe harbor up to $40,000 per year.  However, the Court also capped the wife’s alimony at 35% of the husband’s income up to $400,000 per year.

Should you have any questions relating to alimony or divorce proceedings, please feel free to contact Michael D. DeMeola, Esq. by telephone at (203) 221-3100 or by e-mail at mdemeola@mayalaw.com.

Court Awards Wife Lump Sum and Periodic Alimony

In Portas v. Lapresa, Superior Court, Judicial District of Stamford-Norwalk at Stamford, Docket No. FSTFA094017271S (Jan. 28, 2011, Wenzel, J.), the parties were married for approximately twelve years.  Having married in Buenos Aires, Argentina, they moved to the United States in January of 2000, and purchased a condominium in Stamford, Connecticut soon after their arrival.

At the time of trial the Husband was forty-one years old and in generally good health.  He was a certified public accountant in Argentina, and, therefore, qualified for certain accounting positions within the United States.  The Court found that during the marriage he held a number of different positions with various financial and international firms in the area of internal audits.  Although he was unemployed at the time of trial, the Court noted that he was actively seeking employment and looking at a broad range of jobs.

At the time of trial the Wife was forty years old.  Due to her immigration status, she was unable to seek employment in the United States until 2009.  However, due to a very serious medical condition, from which she continued to suffer even at the time of trial, she was never able to work.  There were no children of the marriage, and the parties’ only significant asset was the marital residence.

The Wife alleged that the parties’ relationship began to change when the Husband had an affair with another woman.  However, the Court attributed the breakdown of the marriage to the fact that the Wife experienced significant and continuing health problems which, combined with the Husband’s inability to maintain steady employment, resulted in significant financial difficulties and prolonged periods of separation.

After fashioning orders regarding the division of marital property, the Court ordered the Husband to pay the plaintiff lump sum alimony in the amount of $10,000, and periodic alimony in the amount of $1,250 per month for a period of five years. The Court further ordered that the periodic alimony would increase upon the defendant’s employment to the greater of $l,250 or thirty percent of the first $100,000 of his income; fifteen percent of all amounts in excess of $100,000 but less than $200,000; and ten percent of all amounts over $200,000.  The Court also specified that any alimony paid over the amount of $3,000 a month would be reduced at the rate of $.50 for each dollar of net income earned by the Husband.

If you have any questions relating to alimony or divorce proceedings, please feel free to contact Michael D. DeMeola, Esq. by telephone at (203) 221-3100 or by e-mail at mdemeola@mayalaw.com

Court Awards Wife Alimony for a Term of Seven Years

In Murdoch v. Murdoch, Superior Court, Judicial District of Stamford-Norwalk at Stamford, Docket No. FSTFA094016342S (July 12, 2011, Wenzel, J.), the plaintiff and defendant were married for approximately ten years.  At the time of trial the plaintiff husband was 52 years old and in generally good health, yet unable to work due to a prior cardiac condition.  The husband had previously worked for over 30 years as a locomotive engineer with the Metropolitan Transit Authority, but at the time of trial was collecting both a disability pension from the MTA, and railroad retirement benefits totaling $1,859.00 per week, or $96,668.00 per year.  The defendant wife was 51years old and, with the exception of relatively serious back problems, was also in generally good health.  The wife was a college graduate employed with the Town of Greenwich earning $67,095.00 per year.  The parties had one child, who, at the time of dissolution, was still a minor.

Prior to the plaintiff’s voluntary departure from the marital residence, the parties resided in New Canaan, Connecticut.  The Court noted that the marital residence had been purchased by the defendant’s parents prior to the marriage, and that the defendant received a one-third (1/3) ownership interest in the marital estate in 1987 as a gift from them.  The Court also noted that during the pendency of the proceedings, the husband utilized significant marital assets and income to acquire, furnish and occupy a new residence located in New Fairfield, Connecticut.  The Court found that his conduct in that regard was in clear violation of its automatic orders.

After fashioning orders regarding property division, the Court ordered the husband to pay to the wife $433.33 per month in periodic alimony for a period of seven years.  The Court ordered the term of the alimony non-modifiable, but the amount of alimony modifiable upon a substantial change in circumstances.  The Court further ordered that payments would terminate upon the death of either party or the remarriage of the wife.

If you have any questions relating to alimony or divorce proceedings, please feel free to contact Michael D. DeMeola, Esq.  He welcomes inquiries and can be reached in the firm’s Westport office by telephone at (203) 221-3100 or by e-mail at mdemeola@mayalaw.com.