Bernard Madoff, the IRS, and Tax Masters

The Bernard Madoff story has created some ripples that are growing into waves, threatening to further damage the economy and potentially negatively impact IRS revenues. With losses related to the alleged Ponzi scheme estimated at $50 billion, many direct and hedge fund investors have been floored by what is shaping up to be one of the largest Ponzi schemes in history. Investors are scrambling to find ways to recover their losses and the SIPC (Securities Investor Protection Corp.), which may be able to provide partial refunds for some investors, said last week that it may take six months to unravel the complex mess they found in Bernard Madoff’s books.

IRS Revenue Will Drop as a Result

If the $50 billion estimated losses are accurate, the IRS will feel the pinch one way or the other. Some investors stung by Madoff investments may get partial refunds, some may even be forced to pay back fraudulently earned gains, but the massive size of loss associated with this investor fraud case will leave most investors with significant losses. It’s important to recognize that no statements have yet been made by the IRS concerning these losses. Undoubtedly, some taxpayers will attempt to report lost investments related to Madoff as theft losses. Some may even file replacement returns to claim any gain as fictitious income. There are lots of rules that govern each of those options that I’ll not get into here, but suffice it to say that the IRS is going to get hit by this one way or the other. Some experts are estimating this could reduce an already down revenue collection period by another $15 to $17 billion. And that’s on top of the estimated $200 billion tax revenue loss associated with what is now defined as a recession that’s been going on for at least the last 12 months (www.economy.com).

Investor Fraud, Unreported Losses, and IRS Audit Work

Investor fraud is not all that uncommon. What is bizarre about the Madoff case is the size of the loss and the fact that it involves serious players on Wall Street. Normally we see this as a result of small-time hustlers that scam average folks. The fact that high-end investors got taken by Madoff means more attention will get put on investor fraud and scams for at least a little while. The regulatory impact may be substantial much as it was with the Enron and WorldComm debacles. At Tax Masters, we find a surprising number of investor fraud scams and unreported losses when we defend clients against IRS tax audits. You need to know that you are entitled to claim your legitimate losses if you were a victim of investor fraud. There are several ways to obtain refunds of taxes paid using the losses you sustained. There are also several types of losses you can sustain. One option is to file an amended return to eliminate any taxable gains previously reported. This has a three year limitation on how far back you can go. If you have been paying taxes on this kind of Ponzi scheme for more than three years, the situation is more complicated.

Whatever option works best for you to try and minimize your losses in an investor fraud situation, plan on being audited by the IRS. You can be certain that it is highly likely you will be audited when you file any tax return claiming losses associated with this kind of Ponzi scheme. The reason for the audit is not that you are not entitled to claim your losses, but that most people do not calculate their losses correctly. The IRS can and will take aggressive positions with people who prepare their own tax returns in these matters. You can also assume that if you calculated the loss in their favor, they won’t be kind enough to tell you. If your local tax preparer has not prepared this kind of tax return, which is very likely to be the case, you can be sure that he or she also will not know how to handle the IRS audit that will follow.

Tax Masters Has Proven Method for Defending Audits Involving Investor Fraud and Scams

Tax Masters has experience defending IRS audits for people claiming losses from investor Ponzi schemes similar to the Madoff case. We have also observed that the losses were calculated incorrectly in the original returns more often than not. There are several aspects of the loss that most people, including most tax preparation services, fail to account for in determining the amount of loss you are entitled to claim. The methodology of this is beyond the scope of this blog and also somewhat proprietary in that we have developed this method over the course of IRS audits we have handled for our audit defense clients.

Opportunists that scam investors and people who don’t know how to handle this kind of tax matter are out there. Beware. Tax Masters can help. We can help calculate the loss and get you in a position where you face the best possible chance of a favorable outcome in an IRS audit on a Ponzi scheme investment loss.

One more thing on this topic. Tax Masters handles more IRS audits in a week than most CPAs handle in their entire career.

A Final Thought for Those Not Directly Impacted By Investment Fraud, Scam, and Ponzi Schemes

At Tax Masters, we realize the economy is in trouble and we also understand that the timing of the Madoff case could hardly be worse for the IRS, already facing a sizable tax gap and growing revenue shortfalls. We’re afraid that the economic situation and revenue shortfalls will leave the IRS with little choice but to go after dramatically more taxpayers in an effort to gain back revenue. The news last week of the IRS saying they would try to make it easier for homeowners to refinance or sell their homes to pay tax debt went around our office like wildfire. I must admit that our excitement about that possibility is now tempered by the realization that the IRS is going to face ever-increasing pressure to collect more revenue.

If you have tax debt as of today, call Tax Masters for tax representation and get a settlement or payment plan in place sooner rather than later. If you have unfiled returns, you need to seriously consider calling us to get those returns filed before the government contacts you - and they will contact you. The IRS is already increasing notifications and all our intelligence points to more of the same in 2009.

Until you need us,

Patrick Cox, Tax Masters

End of Year Things to do to Avoid Unfiled Tax Returns

The turkey has either been thrown out or is now taking on a peculiar aroma in the back of refrigerators all over the US. The college football Bowl Championship Series has entered its annual question, irritation, and complaint period. 2009 is only two weeks away. In Houston, it was 34 degrees this morning and it snowed last week.

Being that I’m in the IRS tax relief business, when the weather turns cold and the year nears an end, my thoughts turn to paying taxes and the potential need for tax representation. I thought I’d mention just a couple of tips for things you can do now to make sure you’re ready to file your 2008 taxes and avoid the back tax trap.

Organize Receipts and Records Now

One of the most important things you can do to protect yourself from the IRS is to keep good records and keep them organized. As a tax representation firm, we get to know lots of people with lots of difficult and complex tax problems. We’ve realized from watching the tendencies of our thousands of clients that keeping good records helps taxpayers do more than save time. If a taxpayer has all records together, he or she is much more likely to file on time and avoid getting into a situation where he or she winds up with unfiled tax returns. As the year winds down, taxpayers need to collect and organize all relevant receipts, finalize mileage and log books, and buy new materials for keeping good tax records in 2009. This is a fairly simple exercise that can take as little as 30 minutes and can save you days of legwork and looking through a jumble of records in March or April.

Resist the Back Tax Trap and Unfiled Returns

Filing tax returns on time is critical to staying out of the IRS collections process. And the worst part about missing one filing deadline is that it makes it easier to miss the next, and the next, and the next, particularly if you think you owe more than you can pay. If you have one or more unfiled tax returns, I strongly encourage you to file those unfiled returns before the IRS contacts you. And if the IRS sent you notification that they have filed an SFR (substitute for return) on your behalf, you need to act immediately to file that past-due return so you can claim the deductions you have coming.

Tax Masters Solves Tax Problems

At Tax Masters, we don’t judge you for any past mistakes or decisions. We will listen to you describe your tax problem and let you know exactly what you need to do to resolve it. We are particularly good at filing past-due tax returns to get you back into compliance with the IRS, and in most cases, save you money. Call us today if you have unfiled tax returns so we can give you the tax relief you need. And get your receipts, logbooks, and documentation together now before the end of the year. At the very least, it will save you time in the spring. But more important, a little planning can keep you from sliding into the back tax trap with unfiled tax returns.

Until you need us,

Patrick Cox Tax Masters

Tax Planning is From Mars, Back Taxes are from Venus-Patrick Cox, TaxMasters

I was going over some things in the front office this morning and half listening to a television talk show playing in the back. Taxes were the issue. The anchor was interviewing someone about wise tax moves to make before the end of the year, talking about how the current economic downturn could have personal tax liability benefits. All the standard advice for saving on taxes was there along with some timely items–converting traditional IRAs to Roth IRAs, maximizing deductions, making sure that withholdings are accurate, even taking a portion of investment loss straight off the top of your income. All interesting items and worthy of note, for sure. But my thoughts turned to those of you watching that segment who have a real tax problem. It seemed to me like a preacher talking to the choir, if you’ll pardon the expression, with absolutely no regard or consideration for what is a growing segment of the taxpayer population. As the economy gets worse, delinquent taxes will increase, the IRS will work harder to collect, and the back tax trap will continue to snare the unwary.

Notification of Back Taxes

That first back tax letter from the IRS is a scary thing. You open it and realize you’ve been identified by one of the most powerful American institutions as being delinquent on paying your taxes. IRS debt is not like credit card debt or bank loans in that you simply cannot default on back tax debt. Once you have it, you have to address it, no matter the reason and no matter the cause. The IRS might even be wrong, but back taxes will not go away without you doing something about it. Even if you’re no longer living, the IRS often pursues your loved ones to make sure they get the revenue they believe is theirs.

Preempt IRS Efforts to Collect Back Taxes

Most people with tax debt come to the realization fairly quickly that they have to do something to address their back taxes. The problem is they just don’t know where to start. There are several strategies you can use, and all involve dealing directly with the IRS, or employing the services of a good tax resolution firm like TaxMasters to represent you. If there is any negotiating that needs to be done with the IRS, I strongly encourage you to seek tax representation. Back taxes are no joke. Don’t wait for collections efforts to catch up with you. One thing we understand well at TaxMasters is that every day you choose not to act to resolve your tax problem gives the IRS another opportunity to ratchet up their efforts to collect.

If you have a tax problem, be it with back taxes or something else, give us a call and let us talk to you about your options. If, on the other hand, you are one of the fortunate who don’t have back tax problems, please continue to plan appropriately and stay on the right side of the IRS.

Until you need us,

Pat Cox