IRS penalty- Settle or proceed to litigation?

[Anonymous]

How much is it going to cost to litigate?

Honestly I would probably just pay the 20k. The irs is a hot mess right now. If litigating involves first paying 40k and then attorney fees, I wouldn’t mess around with that. Pay the 20k and be done

[Anonymous]

Anonymous wrote:Don't make a decision by crowd-sourcing with to a bunch of nobodies. You have competent counsel. Rely on them.

I am crowd-sourcing because I've also realized that the CPA and the Tax Attorney, both have made mistakes too. The CPA didn't send the letter when he was supposed to and I got a really alarming "we will take your house" letter from the IRS. The Tax Attorney sent the abatement request form to the wrong department, which provided the address to the Office of Independent Appeals. Both CPA and Tax Attorney seem to be figuring things out as they go too. It surprised me that they have made mistakes too.

I am also surprised that the CPA also calls an IRS 800 number to represent their client. So far that was my only bang-for-my-buck moment because it took them 2 days to get to an actual IRS agent... then when the call came through, they were able to talk long enough to get a case number and the line got cut. Then they couldn't reach the agent anymore since the agent's voicemailbox was full.

[Anonymous]

Anonymous wrote:Is it the 3250 to disclose a gift from a foreign person? Has there been any case law on this? If you go to litigation, is there a chance the IRS tax counsel will settle for less? Plus you will have your attorney’s fees. Is there a way your attorney can push back at Appeals? I can’t imagine that the Appeals Officer wants to have this go to litigation but who knows.

OP here. (I should say that at every response.. I can't figure out how to do multi quotes)

Yes, this is an FBAR and 3520 situation.

My Tax Attorney says that if we go to litigation, I first have to pay the $40k, but since litigation will force the IRS to have actual attorneys to review the case (rather than just CPAs), there's a 70% chance that I can get the full $40k back. If that happens, then I pay my Tax Attorney $9k for a success fee.

So it's a gamble. I have to front $40k to litigate. I can lose the entire $40k, or I can get everything back and pay $9k to the Tax Attorney.

The Tax Attorney can negotiate at Appeals. That's why I am crowd-sourcing advice here on how/what to negotiate.

[Anonymous]

Anonymous wrote:Also how big was the gift? I may be in a similar situation.

The gift was over 100k. I can't remember the threshold of the 3520- I think it's $80K

[Anonymous]

Anonymous wrote:FBAR ? do you have a lot of money to report?
We missed this form also for a few years but have never heard from IRS, we have a relatively small balance Around 50k

OP here.
You have to report anything over $10k.

[Anonymous]

Anonymous wrote:Help me think this through and make a decision. 

Background: Four years ago, I made a first-time honest mistake in the 25+ years that I've been a taxpayer.  I was supposed to submit 2 forms to the IRS- one that was due on April 15 and the other one due on Oct 15. I got the deadlines mixed up and didn't realize until I was about to submit the Oct 15 form that the first one had to be submitted first.  I had not used a CPA before because my taxes were fairly simple.  This concerns an international matter, I was reporting a gift that had occurred overseas.  

As soon as I realized my mistake, I consulted a CPA who said I should go ahead and submit the 1st form and "see what happens, you might get about a $10k fine, just let us know when you hear back and we'll help you out." 

The IRS wrote me back 1.5 years after I had submitted my late form, with a 40k fine (including interest). CPA wrote a letter on my behalf saying this was a first-time mistake, also explaining that even their accounting firm only processes these kinds of forms very rarely and that regular citizens would find it confusing. The letter got rejected. IRS still wants to impose the $40k fine. 

I consulted with a Tax Attorney who has 40+ years of experience in international compliance law. Tax Attorney said this should be a simple matter, and submitted another form requesting for an abatement of the penalty because I qualified based on my clean record from the last 3 years, along with other attorney-speak. The tax attorney said he is very confident that I'd get a full abatement. 

IRS referred us to an Independent Appeals Officer and we had our discussion in a phone conference. The point of the conference was to go over the facts and see if the law applies to my situation.  The Appeals Officer is not part of the IRS and their job is to settle cases out of court. This Officer is a CPA, not an attorney.  The Appeals Officer said he'd have to consult with his Coordinator (who is with the IRS and probably not an attorney) to make sure they are in agreement.  

Their decision:  They are reducing the penalty to 20k.  

My options: 
1) Pay the 20k  
2) Go to litigation 
3) Try to negotiate 

If I pay the 20k, I'm done.  The Appeals Officer will not provide a justification for how the law was applied. That will only be explored if this case goes to court.  My Tax Attorney doesn't think I should agree to the 20k, which I agree with as well. 

If we go through litigation, I first have to pay the $40k, then sue for a refund. Tax Attorney estimates a 70% chance of getting a full refund because if the case goes to court, it will be reviewed by attorneys who will see that I do qualify for the abatement.  Neither the Appeals Officer nor the Coordinator is an attorney.  My Tax Attorney will cap his success fee at $9k. If we lose the case and I had to pay the $40k, my Tax Attorney gets zero. So far, I have spent $4k on the Tax Attorney, and about $1k on the first CPA who wrote the letter.

What would you do? 
If you were going to negotiate, how would you negotiate?
For those who have experienced IRS litigation, how did it turn out for you?

Thank you for reading and listening, and for your collective input, DCUM. I really appreciate your support.

WOW ! OP: You are dealing with people who do NOT know their business--at least with respect to proceeding to court regarding an IRS tax assessment / penalty dispute. You do NOT have to pay first to proceed with your claim in Tax Court. You would only need to do so to file in the Court of Claims or in Federal District Court.
Run away as far and as fast as you can from any advisor who told you that you must pay first. This is basic H&R Block tax knowledge. Any CPA or Tax Attorney who doesn't know this is incompetent.

https://lataxattorney.com/choice-of-forum.html

[Anonymous]

Anonymous wrote:

Anonymous wrote:Is it the 3250 to disclose a gift from a foreign person? Has there been any case law on this? If you go to litigation, is there a chance the IRS tax counsel will settle for less? Plus you will have your attorney’s fees. Is there a way your attorney can push back at Appeals? I can’t imagine that the Appeals Officer wants to have this go to litigation but who knows.

OP here. (I should say that at every response.. I can't figure out how to do multi quotes)

Yes, this is an FBAR and 3520 situation.

My Tax Attorney says that if we go to litigation, I first have to pay the $40k, but since litigation will force the IRS to have actual attorneys to review the case (rather than just CPAs), there's a 70% chance that I can get the full $40k back. If that happens, then I pay my Tax Attorney $9k for a success fee.

So it's a gamble. I have to front $40k to litigate. I can lose the entire $40k, or I can get everything back and pay $9k to the Tax Attorney.

The Tax Attorney can negotiate at Appeals. That's why I am crowd-sourcing advice here on how/what to negotiate.

Settle.

[Anonymous]

I’d pay the $20k. So that you can have some background basis I have very complex finances. My typical personal federal tax returns (not including any of the returns for my dozen plus businesses) is generally 200-300 pages. If I get a letter from the irs any year telling me that I owe them less than $10k I just pay it and when I get one I’m almost always positive that they are objectively wrong. When it is for more than $10k I have my accountant write a letter. It is usually successful. If not, I just pay it. I don’t think I’ve ever gotten a bill for more than $20k something and my personal returns usually show tax of $1M- 1.5M owing with peak years of $3M owing.

My taxes are very clean. I don’t take any deductions that I am not entitled to take and if I were fully audited they likelihood of my owing the IRS is equivalent them owing me. But there is value in closing out the tax year.

I do think you were entitled to the abatement, but I would pay the $20k and be done with it.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Help me think this through and make a decision. 

Background: Four years ago, I made a first-time honest mistake in the 25+ years that I've been a taxpayer.  I was supposed to submit 2 forms to the IRS- one that was due on April 15 and the other one due on Oct 15. I got the deadlines mixed up and didn't realize until I was about to submit the Oct 15 form that the first one had to be submitted first.  I had not used a CPA before because my taxes were fairly simple.  This concerns an international matter, I was reporting a gift that had occurred overseas.  

As soon as I realized my mistake, I consulted a CPA who said I should go ahead and submit the 1st form and "see what happens, you might get about a $10k fine, just let us know when you hear back and we'll help you out." 

The IRS wrote me back 1.5 years after I had submitted my late form, with a 40k fine (including interest). CPA wrote a letter on my behalf saying this was a first-time mistake, also explaining that even their accounting firm only processes these kinds of forms very rarely and that regular citizens would find it confusing. The letter got rejected. IRS still wants to impose the $40k fine. 

I consulted with a Tax Attorney who has 40+ years of experience in international compliance law. Tax Attorney said this should be a simple matter, and submitted another form requesting for an abatement of the penalty because I qualified based on my clean record from the last 3 years, along with other attorney-speak. The tax attorney said he is very confident that I'd get a full abatement. 

IRS referred us to an Independent Appeals Officer and we had our discussion in a phone conference. The point of the conference was to go over the facts and see if the law applies to my situation.  The Appeals Officer is not part of the IRS and their job is to settle cases out of court. This Officer is a CPA, not an attorney.  The Appeals Officer said he'd have to consult with his Coordinator (who is with the IRS and probably not an attorney) to make sure they are in agreement.  

Their decision:  They are reducing the penalty to 20k.  

My options: 
1) Pay the 20k  
2) Go to litigation 
3) Try to negotiate 

If I pay the 20k, I'm done.  The Appeals Officer will not provide a justification for how the law was applied. That will only be explored if this case goes to court.  My Tax Attorney doesn't think I should agree to the 20k, which I agree with as well. 

If we go through litigation, I first have to pay the $40k, then sue for a refund. Tax Attorney estimates a 70% chance of getting a full refund because if the case goes to court, it will be reviewed by attorneys who will see that I do qualify for the abatement.  Neither the Appeals Officer nor the Coordinator is an attorney.  My Tax Attorney will cap his success fee at $9k. If we lose the case and I had to pay the $40k, my Tax Attorney gets zero. So far, I have spent $4k on the Tax Attorney, and about $1k on the first CPA who wrote the letter.

What would you do? 
If you were going to negotiate, how would you negotiate?
For those who have experienced IRS litigation, how did it turn out for you?

Thank you for reading and listening, and for your collective input, DCUM. I really appreciate your support.

WOW ! OP: You are dealing with people who do NOT know their business--at least with respect to proceeding to court regarding an IRS tax assessment / penalty dispute. You do NOT have to pay first to proceed with your claim in Tax Court. You would only need to do so to file in the Court of Claims or in Federal District Court.
Run away as far and as fast as you can from any advisor who told you that you must pay first. This is basic H&R Block tax knowledge. Any CPA or Tax Attorney who doesn't know this is incompetent.

https://lataxattorney.com/choice-of-forum.html

My post is not intended to be legal advice.

I do not know the full particulars of your situation.

Broadly, speaking, a second opinion might be in order since you wrote that your advisors had both made mistakes in this matter. I wonder if the way that they proceeded somehow locked you out of proceeding in Tax Court.

[Anonymous]

OP here.

$20k is a lot for me.

I did mentally prepare for the $10k that the CPA told me. I thought $10k (although still very painful) is still a tough price to pay for a first-time honest mistake. I am extremely diligent with deadlines- so I am really knocking myself on how I could have messed this up.

It is a bit unclear to me how much dialogue the Tax Attorney and the Appeals Officer will have, and if I should ask to be part of that conversation.

My thinking right now is to instruct my Tax Attorney to negotiate:

Offer 5k first. If no, then offer 8k. If no, then offer 10k.

My mental preparation was at 10k. Add the $4K fee to the Tax Attorney and the $1k fee to the CPA, and that brings my total mistake to $15k.

If Appeals says no to the 10k, my gut feeling is to go through with litigation.

The Tax Attorney said that if we go through with litigation, he can:

-Present the law that covers the abatement
-Present the "honest-mistake theory" (I didn't know that this is really a thing).
-Provide background info on my diligence in doing the right thing, and reporting the error as soon as I realized it. I have given them a timeline, along with my email timestamps. I studied the filing process of the 3520 and FBAR very thoroughly- but again, mistake on the deadline of one of them.

If I litigate and get the refund, I'd be out... 9k for the success fee, 4k for the Tax Attorney (so far), and 1k for the CPA. That's $14k total.

[Anonymous]

OP, I was in a very similar situation several years ago and decided to litigate. The IRS frequently lacks sufficient grounds and evidence for pursuing these sorts of cases. Moreover, there are countless precedent cases of this type that have been argued in favor of the defendants. Mine was dismissed and I was further awarded all legal fees and punitive damages to the tune of $5M. Absolutely you should push back on this! Will recommend my attorney, if you’re interested.

[Anonymous]

I’m the one who guessed it was a 3250. I agree with the pp that you should get a second opinion from someone who is an expert in international tax before deciding what to do. I have a feeling that your attorney does not deal with these forms on a regular basis and that is why the Appeals Officer is taking such a hard line. Similarly, your accountant should have known what to do to report a foreign gift if they handle any type of international issues. Do you have penalties for your FBAR? If your return was extended, your FBAR should have been extended. Definitely get a second opinion. You can have a CPA go with you to Appeals.

To the pp who skipped an FBAR for several years: you may not want to ignore that. You may want to contact one of the accounting firms that specialize in international tax and see if one of the IRS’s streamlined programs can help you get caught up. The IRS has access to foreign bank’s information so it is better to voluntarily disclose than for the IRS to contact you. The threshold for disclosure is 10,000 of your total aggregate balances. So if you have 5 accounts with balances of $3,000 each, you have an FBAR filing requirement.

[Anonymous]

Okay. I have read some more. Penalty is minimum of $10,000 or 5% of the GIFT per month up to a maximum penalty of 25% of the gift.

At this point, the $20,000 looks reasonable. If you fight it and are successful, then you pay $10,000 to IRS and $9,000 to a tax attorney (see how the tax attorney arrived at the $9,000 fee?).

NOT INTENDED TO BE LEGAL ADVICE.

[Anonymous]

Anonymous wrote:OP here.

$20k is a lot for me.

I did mentally prepare for the $10k that the CPA told me. I thought $10k (although still very painful) is still a tough price to pay for a first-time honest mistake. I am extremely diligent with deadlines- so I am really knocking myself on how I could have messed this up.

It is a bit unclear to me how much dialogue the Tax Attorney and the Appeals Officer will have, and if I should ask to be part of that conversation.

My thinking right now is to instruct my Tax Attorney to negotiate:

Offer 5k first. If no, then offer 8k. If no, then offer 10k.

My mental preparation was at 10k. Add the $4K fee to the Tax Attorney and the $1k fee to the CPA, and that brings my total mistake to $15k.

If Appeals says no to the 10k, my gut feeling is to go through with litigation.

The Tax Attorney said that if we go through with litigation, he can:

-Present the law that covers the abatement
-Present the "honest-mistake theory" (I didn't know that this is really a thing).
-Provide background info on my diligence in doing the right thing, and reporting the error as soon as I realized it. I have given them a timeline, along with my email timestamps. I studied the filing process of the 3520 and FBAR very thoroughly- but again, mistake on the deadline of one of them.

If I litigate and get the refund, I'd be out... 9k for the success fee, 4k for the Tax Attorney (so far), and 1k for the CPA. That's $14k total.

The IRS is trying to prevent money laundering.

To assess competency, ask about proceeding in Tax Court.

Ask if MINIMUM PENALTY is set by statute or other law. determine minimum penalty. This should help guide your thoughts.

[Anonymous]

Anonymous wrote:I’d pay the $20k. So that you can have some background basis I have very complex finances. My typical personal federal tax returns (not including any of the returns for my dozen plus businesses) is generally 200-300 pages. If I get a letter from the irs any year telling me that I owe them less than $10k I just pay it and when I get one I’m almost always positive that they are objectively wrong. When it is for more than $10k I have my accountant write a letter. It is usually successful. If not, I just pay it. I don’t think I’ve ever gotten a bill for more than $20k something and my personal returns usually show tax of $1M- 1.5M owing with peak years of $3M owing.

My taxes are very clean. I don’t take any deductions that I am not entitled to take and if I were fully audited they likelihood of my owing the IRS is equivalent them owing me. But there is value in closing out the tax year.

I do think you were entitled to the abatement, but I would pay the $20k and be done with it.

Op here.
I do not even have one million and my taxes had been very straightforward.
I would love to have clean taxes moving forward- and have used a CPA yearly right after this incident happened.