Electronic Arts Founder Stuck with Huge Tax Bill

A judge recently ruled that Trip Hawkins, founder of Electronic Arts, cannot rely on his personal bankruptcy to erase his tax debts. Trip reportedly owes more than $20 million resulting from “exotic strategies” to offset capital gains.

From TheEscapist.com:

There was a time when Trip Hawkins was a very wealthy man. In the mid-90s, he boasted a net worth of roughly $100 million, nearly all of it in EA stock. But in 1994 he started selling it off to fund the 3DO, a videogame console that came out in 1993 but never gained traction with the masses, and that's when his troubles began.

The sale of EA shares resulted in a serious capital gains tax bill, which accounting firm KPMG told him he could dodge by using "exotic strategies to create the appearance of large capital losses without the real risk of loss," including the use of "offshore corporations, options and investments in offshore companies like UBS AG to artificially generate a high tax basis." I have no idea what that means but from 1996 to 2000, Hawkins claimed $56 million in capital losses.

The IRS wasn't buying it, though, and in 2001 it challenged the legitimacy of such tax shelters and also began an audit of Hawkins. As if that wasn't bad enough, 3DO finally sputtered to a halt, going bankrupt in 2003. In 2006, Hawkins and his wife filed for personal bankruptcy; their debts were discharged by the court but, thanks to a provision in the law prohibiting the discharge of tax debts in cases where people have "willfully" attempted to evade paying, the IRS and the California Franchise Tax Board both successfully challenged the ruling.

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Bankruptcy and IRS Tax Debt

It is not uncommon that the people who come to me for back tax help have already deeply considered filing for bankruptcy. It is common to wonder if bankruptcy will solve all debt issues, including an IRS bill. The answer is: Well, sometimes bankruptcy will, but it all depends. (How’s that for a lawyer’s answer?) In any case, you must be careful because while bankruptcy might stop the IRS from filing a tax lien or pursuing collection activities, in most cases, penalties and interest are still accruing! Also, bankruptcy extends the amount of time the IRS has to collect on your debt—tax law normally limits the IRS to 10 years to collect against you. So all in all, after bankruptcy, your IRS tax debt may still be lurking around—and may even have more zeros tacked on.

The type of bankruptcy you file is a factor in whether or not your tax debt will be “discharged”. There are so many rules and exceptions when it comes to bankruptcy and unpaid tax debts. I recommend that if this is something you are considering that you talk to a professional—do not attempt to do this on your own.

For more information, check out this article I recently read on the topic of bankruptcy and taxes: http://bit.ly/dvn5h9.

IRS Injured Spouse Relief

My law firm’s Tax Relief Blog posted a very informative new article earlier this week discussing IRS Injured Spouse relief. Unfortunately, there are thousands of taxpayers across the country who have run into IRS debt problems because of their spouse or ex-spouse and the IRS has established certain programs – like Injured Spouse Relief – to help these taxpayers. You can find a snippet of the blog entry below, but be sure to read the full article on the Tax Relief Blog.

Dealing with a back tax debt of your own can be stressful enough, but being held responsible for the back tax liability of a spouse – or former spouse – can be even more trying. Fortunately, there may be relief from being held responsible for your spouse’s or ex- spouse’s back tax liability.

The general rule is: when a couple files a joint federal tax return, the IRS will hold both taxpayers responsible for any unpaid tax debts. The IRS will even keep any refund available and apply it to a past due tax liability—even if the couple later begins to file separately but incurred the original debt while filing jointly. Some taxpayers might file separately to avoid a withheld refund, but this can cause the couple to miss out on valuable tax advantages for married taxpayers. This blog entry will explain the basics of the IRS’s Injured Spouse Relief program.

What is an Injured Spouse and what is the Relief the IRS Provides?

For federal tax purposes, an Injured Spouse is someone that is denied a tax overpayment refund or a portion of a refund because the funds were applied to off-set a past-due obligation of a spouse or ex-spouse. This obligation can be a past-due federal tax, state income tax, child or spousal support or even a federal “non-tax” debt, such as a student loan. In this case, the spouse is injured because they do not have a legal obligation to the past-due amount but by having their overpayment applied to the liability, the IRS is in fact holding the person responsible for the debt.

Continue reading at RoniDeutch.com…

FAQs About IRS Offers in Compromise

My law firm’s Tax Relief Blog published a useful entry on the 10 most commonly asked questions about the IRS’ Offer in Compromise program. You can find a section of the article below, but be sure to read all 10 items at the Roni Deutch Tax Relief Blog.

1. What is an Offer in Compromise?

An OIC is an IRS tax resolution program that allows a taxpayer to settle their IRS back tax liability by paying less than they owe. The amount of a taxpayer’s needs to pay will vary depending on the taxpayer’s unique financial situation, as well as his or her original liability amount. However, it is usually significantly less than the tax debt owed. The IRS will only accept a taxpayer’s OIC if it is equal to or greater than the reasonable collection potential, which is the IRS’s measurement of the taxpayer’s ability to pay their debt. Most taxpayer’s will not qualify for this program.

2. How do I submit an Offer in Compromise?

You will need to complete and submit an OIC to the IRS. The OIC package generally consists of the following documents:

• IRS Form 656 – Offer in Compromise Form
• IRS Form 656-A – Income Certification for Offer in Compromise, if you believe you are not required to submit an application fee or payments based on your family unit size and income.
• Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals
• Form 433-B – Collection Information Statement for Businesses (if applicable)
• $150.00 Application Fee
• 20% payment

3. Can I hire someone to help prepare an Offer in Compromise?

Yes, you can hire a tax lawyer or a tax resolution professional to prepare and submit an OIC for you. However, submitting an OIC does not guarantee that it will be accepted. You must meet certain financial and other criteria in order to qualify. Additionally, you will need to have filed all necessary tax returns for both yourself and any business you own, and you cannot be a debtor in bankruptcy proceedings. Thus, be wary of any company sales representative that tells you your OIC will be accepted.

The IRS Needs to Better Manage the Tax Debt Collection Process

Last week, the Government Accountability Office published a report asserting that the IRS needs to do a better job of managing the tax debt collection process. I have included a segment of their report below, but you can download the full PDF at “Tax Debt Collection: IRS Needs to Better Manage the Collection Notices Sent to Individuals.”

According to the IRS, $23 billion in unpaid individual income tax debt existed in 2001, its most recent estimate. The notice phase is the first of IRS’s three-phase process to collect unpaid debt. IRS annually sends notices to millions of individual taxpayers about billions of dollars of unpaid tax debt.

Congress and others have questioned IRS’s collection process’s effectiveness. As requested, GAO is reporting on (1) how well IRS has established objectives, performance measures, and responsibility for reviewing notice-phase performance, and (2) how well IRS’s business rules for sending notices to individuals help assure that the collection notice phase is achieving desired results at the lowest costs. To address these objectives, GAO compared the evidence obtained from IRS documents and responsible IRS collection officials to applicable guidance for internal control standards.

Although the notice phase is a key part of IRS’s approach and strategy for resolving billions of dollars of individuals’ unpaid tax debt, IRS lacks certain internal controls to assure that notices to individuals are achieving the most benefits—such as debt collected or unpaid debt cases otherwise resolved—with the resources being used. Management controls like clearly defined objectives, performance measures, and clear responsibility for reviewing program performance help provide reasonable assurance that the objectives of an agency are being achieved effectively and efficiently. However, IRS has no documented objectives for the notice phase and no performance measures to indicate how well the phase is performing in resolving debt cases or achieving other potential desired results. Further, IRS has not established responsibility for reviewing the performance of the complete notice phase.

IRS lacks documentation for and evaluations of its business rules for notices to individuals to assure that the collection notice phase is achieving desired results. According to IRS officials, to make the best use of collection resources, IRS uses its business rules to—based on certain dollar thresholds and individual tax debt case characteristics—vary the number and types of notices sent to taxpayers and determine whether unresolved cases will be sent for further collection action or further action will be deferred. However, as shown in the table, in almost all cases, for the five business rules that IRS identified as affecting the most taxpayers, IRS did not have information on the date the rules were established, the rationale for the rule, or data supporting the rationale. IRS collection officials also lacked documentation describing the business rules and how they operate. Further, even though IRS officials estimated that the business rules had been established for years, IRS had documentation for an evaluation of only one of the five business rules. Without relevant evaluations IRS lacks assurance that the notice phase achieves desired collection results at the least cost.

Hiring A Tax Attorney vs. Negotiating with the IRS on your Own

Earlier this week we posted a new entry to my law firm’s Tax Relief Blog describing the benefits and advantages of hiring a tax attorney versus negotiating a settlement with the IRS on your own. You can check out a snippet of the blog entry below, or check out the full version at the Roni Deutch Tax Relief Blog.

Being faced with a huge back tax liability can be scary to say the least. The IRS can use aggressive collection tactics such as bank levies and wage garnishments to take your money. Fortunately, the IRS has a number of settlement programs designed to help taxpayers resolve their IRS tax debts including Offers in Compromise and placement into Currently Not Collectible status. Although taxpayers have the right to negotiate directly with the IRS, it is often a good idea to hire a professional, such as an attorney, to represent you in the negotiations. However, there are some instances where a taxpayer may be better off working directly with the IRS.

Knowledge and Experience

The biggest reason to consider hiring a tax lawyer to negotiate a tax debt settlement with the IRS is because of the knowledge and experience they bring to the table. Tax attorneys may spend years studying the IRS tax code and honing their negotiation skills. They usually have experience in successfully helping taxpayers resolve their debts. Negotiating a settlement will require a lot of knowledge of complicated IRS laws and tax codes. Therefore, if you are going to do it on your own, then you will need to spend a decent amount of time researching tax law before you begin. You might even want to purchase a few books on tax debt resolution so that you can be as familiar as possible with the process.

Convenience

Another reason to consider hiring a tax attorney is the convenience it brings. Not only can negotiating with an IRS agent be stressful, but it also requires a lot of work. In order to qualify for most tax settlement programs, you will need to present the IRS with full financial disclosure and convince them you cannot afford to pay for basic living expenses in addition to a tax payment. Compiling all of this data, calculating the correct expenses, and presenting a case to the IRS is a very complicated process, and can easily take weeks of effort to complete.

The only exception is if you are trying to get placed on a Streamlined Installment Agreement, which does not require a financial disclosure as long as the taxpayer’s debt is under $25,000 and they intend to repay the entire tax liability within five years. Therefore, if you meet the conditions for a Streamlined Installment Agreement then you may be able to negotiate your own settlement. However, if you are hoping to qualify for an Offer in Compromise or a standard Installment Agreement then you might want to consider speaking with an attorney.

Cage Owes $6,617,550.84 in Tax Debts

Earlier in the year I put together list of the 5 biggest celebrity tax evaders of 2009, and although Nicolas Cage was already at the top of my list, recent reports have emerged claiming that he owes more then everyone had originally thought. According to TMZ, in addition to the $6,257,005 he owed in unpaid taxes from 2007, he also owed for the following tax years.

2002 -- $70,190.05

2003 -- $179,738.23

2004 -- $110,617.56

That brings his total tax debt to an astounding $6,617,550.84. Associated Content also claims that Cage owes another $2 million to the East West Bank. With all the money he makes form his films, many are wondering how Cage could get into such a financial mess. Well, blame the real estate industry. He reportedly owns dozens of properties across the United States and Europe, including an 11th century German castle called Schloss Neidstein that he recently sold. However, with real estate values down all across the world Cage is reportedly having difficulty selling his properties to repay his debts.

Common Reasons Taxpayers get into Debt

My team shot another video last week for out tax tips video series. In this episode Edward Lester discusses some common reasons taxpayers get into tax debt. You can watch the embedded video below and be sure to head over to my YouTube channel and subscribe to my videos.

Full House Star Dave Coulier Owes Back Taxes

According to WalletPop.com there is a new addition to the list of 2009’s biggest celebrity tax evaders. Earlier in the week it was discovered that 90’s sitcom star Dave Coulier is in serious debt to the IRS. His debts reportedly total over $50,000 and the both the IRS and his home state of California have both issued liens against Coulier to collect the unpaid tax debts.

The state of California filed an $11,793 lien against him on May 4 in the Los Angeles County Recorder of Deeds office. The IRS filed a $37,063 lien against him on March 17, 2008, in Los Angeles County.

Checking up on Dave Coulier's Official website, I found no mention of his little tiff with the taxing authorities. He does however, indicate that he'll be visiting close to my home in Wisconsin next month. I also checked Dave's Twitter feed to see if he tweeted about the situation. He hasn't yet mentioned his back taxes on Twitter, but he does indicate that becoming a senator may be one way to pick your nose in peace - or not.

This much I can tell you for certain; It's better to pay our taxes when they are due, than it is to try retrospectively prying the IRS off our backs. I always suggest leaving tax form preparation to a professional tax accountant, because being able to talk in comical voices won't make a tax audit one bit funnier.

Old Debts Under $100 Don't Matter Under FICO '08

From Consumerist.com:

An update to how the new FICO '08 scoring system got revamped this year:

Collection amounts where the original debt was under $100 will be totally disregarded, MarketWatch reports. Back in Feb we reported that they would still be taken into account but only matter less. Also, FICO'08 has been rolled out to all three credit bureaus since last month. Before it was only being tested at one and there was some disagreement over whether all the bureaus would accept it.

However, Freddie Mac and Fannie Mae haven't adopted FICO '08 yet. So if you're getting a traditional conforming mortgage backed by one of them, lenders are still going to judge you under the old FICO system.

No matter what flavor of FICO gets applied to you, you can do better at the credit score game by paying your bills on time, maintaining low debt to income ratios, high available credit to debt ratios, keeping old credit cards open, and disputing erroneous items from your credit report.

Bankruptcy and IRS Tax Issues

Every month thousands of taxpayers call my law firm for help with IRS back tax debts. We get hundreds and hundreds of questions on a weekly basis, but one of the most common is whether tax debts can be discharged through bankruptcy or not. Although the exact “yes” or “no” answer will depend on your unique financial situation, the attorneys of my law firm have put together the following helpful article on bankruptcy and IRS tax issues.

Chapter 7 vs. Chapter 13

The two common types of bankruptcy for individuals are Chapter 7 (liquidation) and Chapter 13 (readjustment of debts). Although each are governed by their own set of requirements and conditions, tax debts are generally treated similarly under both proceedings. However, the basic concepts behind each bankruptcy type will dictate how the debts are settled.

In general – under Chapter 7 –if the debts meet all of the conditions below, then they can be discharged during the bankruptcy proceedings, but if even one qualification is not met, then the debts will remain after the bankruptcy. However – under Chapter 13 – there is almost always a distribution to creditors. Therefore, the court appointed trustee must negotiate with the IRS and decide on a settlement.

Qualifications for Discharge

Although many taxpayers are under the impression that tax debts cannot be discharged, some actually can! However, in order for tax debts to qualify to be discharged, they must meet a hefty list of requirements. According to bankruptcy laws, the follow conditions must be met:

1. Tax Return Filed

Even if you are unable to pay the taxes due, you must still file a tax return before a tax debt can be considered for discharge. Additionally, the tax return for the tax debt that you want discharged must have been filed at least two years prior to the bankruptcy filing, regardless of when the returns were originally due.

Continued at Roni Deutch.com…

Even More Celebrity Tax Evasion

Just the other day, I posted this entry about three new celebrities who owe taxes either to the IRS or the state of California. Now, according to new reports, another handful of famous taxpayers can be added to the list of celebrities with tax problems.

Steve Austin

Retired wrestler Steve Austin, known as “Stone Cold” Steve Austin to his fans, reportedly owes the State of California over $22,000 in unpaid taxes. The state even filed a lien against his property last month. Austin’s agent could not be reached for comment, so the reason for his tax debt is still unknown.

David Brenner

Famed comedian David Brenner owes the IRS a staggering $68,222 in delinquent taxes. Brenner, who filed for bankruptcy in 2004, does not deny that he owes the taxes, and states that he has already negotiated a payment plan to pay his debts off over time. When asked how he incurred the debt, Brenner jokingly explained, "I lost a bet that President Bush would learn how to pronounce the word 'nuclear,'"

Anna Kournikova

Although her total tax debts are less than the rest of the celebrities on the list, I was especially surprised to see that tennis star Anna Kournikova has tax problems with the state of California. Just last week the filed a $6,381 tax lien against her for unpaid tax debts. When reached, the athlete’s agent could not comment as to where the tax debt came from.

Lea Thompson

Lea Thompson, famous for her role playing Marty McFly’s Mom in the popular “Back to the Future” films probably wishes she could go back to the future and pay her taxes correctly. Earlier in the week it was revealed the actress owes $8,691 in unpaid state taxes.

Al Sharpton’s Tax Case Heats Up

According to NY Post.com, thing are getting interesting in Rev. Al Sharpton’s tax case. The IRS began sending out numerous subpoenas to Sharpton’s top donors. Below is a snippet of the article.

“Anheuser-Busch, the brewer of Budweiser and Michelob, confirmed yesterday that it received a federal subpoena in connection to its charitable giving to Sharpton's National Action Network. ‘We have received a subpoena and are cooperating with the IRS,’ the company said in a statement.

Sharpton blasted the subpoena as a ‘fishing expedition’ and said his donors are proud of their financial support. The St. Louis-based corporation donated between $100,000 and $499,000 to NAN in 2007 alone, according to its Web site, but declined further comment about its relationship with Sharpton. A knowledgeable source said several other corporate donors received or would soon receive subpoenas.

Sharpton himself, his business entities and his nonprofit civil-advocacy group owe millions in back taxes, documents show. The IRS and the US Attorney's Office in Brooklyn have an ongoing probe into Sharpton's finances going back to his 2004 run for president and stewardship of NAN.

Last year, state Attorney General Andrew Cuomo began a probe of NAN because it failed to follow state financial-disclosure regulations for nonprofits. Cuomo's office has since turned over its NAN file to the US Attorney's Office. As of 2006, the most recent year that financial documents for the group are publicly available, it owed $1.9 million in payroll taxes and penalties.”

Milwaukee Brewers First Baseman Owes the IRS $409,149

Yesterday Detroit News broke the story that Prince Fielder, who plays for the Milwaukee Brewers, owes $409,149 to the federal government in unpaid taxes. Prince is the son of former Detroit Tiger great, Cecil Fielder, who currently manages the independent league Atlantic City Surf baseball team.

The apple apparently does not fall far from the tree as Cecil had financial problems of his own four years ago. According to public records, he lost $47 million through bad business decisions. However, Cecil and Prince have not spoken in years after Prince accused his father of money extortion.

Even Celebrities Owe Back Taxes

On October 11th, 2007 the California Franchise Tax Board published their annual list of the top 250 taxpayers with back taxes owed to California. Included in this list of delinquent taxpayers is three celebrities, one of which claims to have no regular income whatsoever.

The publishing of this information is part of the California government’s attempt to use publicity to get the money they are owed. As with all persons owing back taxes, everyone on this list have been contacted numerous times by the Franchise Tax Board in effort to collect the debts. Specifically, before publishing the list they notify each taxpayer via certified letter reminding them of the liability. But I guess when you owe the IRS millions of dollars it’s probably going to take more then just a letter to get the money.

Out of the list of 250 delinquent taxpayers there are three celebrities that stand out. Firstly there’s singer Dionne Warwick who owes California over $2.6 million, and she’s been dodging the tax collectors for over ten years. Maybe she’s hoping the statute of limitations will run out, but if I were her I wouldn’t hold my breath.

Next on the list of celebrities is 90’s comedian Sinbad, who hasn’t had a hit anything for years but still managed to rake up a tax debt of over $2.1 million dollars. His liability has been outstanding since December of 1993. When I see numbers like this it makes me wonder… How in the world did Sinbad manage to get so far in debt to the California government? He had a few hits back in the early 1990’s but in order to get that far in debt he probably never paid taxes in full. It constantly amazes me when I see these celebrities who think they don’t have to pay their taxes. Too bad he didn’t have a better tax lawyer, or at least a decent advisor to tell him to pay his taxes. I’m betting he doesn’t have the extra cash just lying around to pay in full. But can you imagine his lawyer calling into the IRS to negotiate an offer in compromise and telling the IRS agent it’s for Sinbad? What I’d give to listen into those negotiations.

The last celebrity on the list owes the least out of all the celebrities, but for some one who claims in court to have no income what so ever he sure has a pretty high income tax liability. The star in question? The notorious O.J. Simpson, who owes California over $1.4 million in personal income taxes that have been outstanding since 1999. I wonder if he even intends to pay that debt down? I doubt it. He’ll probably just ignore it and let it add on to the millions of dollars he owes countless other people.

The lesion to be learned from all of this? As the old saying goes the only things in life that are certain are death and taxes. Every one has to pay income taxes, even has-been celebrities who haven’t worked in decades.

Revisions to Offer in Compromise Application Form

On Monday the IRS announced they had revised the application for an Offer in Compromise, Form 656 package. IRS Commissioner Mark W. Everson notes, "we hope that these changes help more people who qualify satisfy their tax obligations." The changes were made as a result of the Tax Increase Prevention and Reconciliation Act of 2005 and some of the changes include new payment terms and submission rules. For more details on the changes visit the IRS’s website.

Tax Incentives For Whistle Blowers

According to the IRS the difference between what taxpayers are supposed to pay in federal taxes and what they actually pay is around $345 billion per year. In order to help combat this ever-growing shortfall of revenue congress and the President have enacted a measure to give people more motivation to report others who are abusing the tax system. There are even plans to offer rewards for those who report abuse. The rewards will only go to informants who provide specific and useful information. For more on the whistle blowing incentives visit this article at The Star Ledger.