On March 30, 2020, the California Franchise Tax Board (FTB) issued Notice 2020-02.  Based on Governor Newson’s March 12, 2020, executive order authorizing the FTB to use its administrative powers to grant extensions, the notice extends the deadline for filing claims for refund, protests of Notices of Proposed Assessment (NPA), appeals and petitions for rehearing to the Office of Tax Appeals (OTA), and issuing NPAs.

Refund Claims:  A taxpayer’s claim for refund is timely if filed within the later of four years of the date the return was filed (if timely), four years from the original due date for the return, or one year from the date of payment.   Where the statute of limitations on a refund claim expires between March 12 and July 15, 2020, the refund claim will be considered timely if filed on or before July 15, 2020.

Protests:  Protests of a NPA are normally due within 60 days.  Where the time for filing a protest expires between March 12 and July 15, 2020, the protest is timely if filed on or before July 15, 2020.

Appeal and Petitions for Rehearing to OTAA taxpayer can file appeal to the OTA within thirty days from a Notice of Action on a protest of an NPA and within 90 days from the denial of a refund claim.  Any appeal due between March 12, 2020, and July 15, 2020, is timely if filed by July 15, 2020.  A petition for rehearing from a decision by the OTA that was to be filed between March 12, 2020, and July 15, 2020, is timely if filed by July 15, 2020.

Issuance of NPAs:  If the statute of limitations on issuing an NPA was to expire between March 12, 2020, and July 15, 2020, the NPA is timely if issued by July 15, 2020.

This action follows OTA Legal Notice 2020-01, issued March 18, 2020.  That notice automatically extended by 60 days all briefing and other filing deadlines that fall between March 12 and May 18, 2020, by 60 days.

The FTB’s authority to extend deadlines is contained in Revenue & Taxation Code sec. 18572, which incorporates IRC sec. 7508A.  Besides authorizing the Secretary of the Treasury to extend the date for filing returns and paying taxes in the case of a federally declared disaster, sec. 7508A authorizes the Secretary to extend the time for, among other things: a) filing Tax Court petitions, b) allowing claims for credit or refund; c) filing suit upon a claim for credit or refund, and d) filing suit by the Government in respect of any tax liability.  Secretary Mnuchin has already extended the time for filing returns and paying tax from April 15, 2020 to July 15, 2020.  Given the coronavirus pandemic and its effect on the public, the IRS and the Tax Court, will he also extend the time for filing Tax Court petitions, refund claims and refund suits?

The FTB has not yet issued guidance similar to the IRS’s recently released “People First Initiative” regarding suspension of collection actions. IR-2020-59, March 25, 2020. Accordingly, it is unclear whether the FTB has suspended the issuance of new Notices of State Income Tax Due or subsequent enforced collection actions.  The CDTFA has also recently released guidance regarding collection relief in the form of a 90 day relief for taxpayers in payment plans.

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

The U.S. real property market has always been attractive to foreign investors, not just for it’s potential for profit, but also because of the country’s robust financial and legal system in case investors need to efficiently liquidate their ownership or if a dispute arises.

For the 12 months ending in March 2016, NRAs purchased $43.5 billion of U.S. property.

Tax compliance in this area has historically been limited.   While there have been improvements in this area for tax compliance and reporting, it is not yet sufficient for the U.S. Treasury and IRS.

The Large Business & International Division (LB&I) of the IRS recently launched a new compliance campaign on rental income of nonresident aliens (NRAs).  IRS campaigns are intended to improve tax compliance with respect to certain ”hot” tax issues. This new campaign will target taxpayers through several treatment streams, from soft letters (pre-audit notices to taxpayers identifying potential campaign issues and encouraging compliance) to issue-based examinations. It also contemplates education and outreach to promote tax compliance. The LB&I has indicated that the majority of the future examination workload will be selected using various campaigns.[i]

Relevant Law and Reporting Obligation

A nonresident alien’s US taxable income is divided into the following two categories:

(i) Income that is effectively connected to a trade or business in the United States

(ii) Income that is not effectively connected to a trade or business in the United States (“FDAP income”)

Income that is effectively connected to a U.S. trade or business, after allowable deductions, is taxed at the graduated rates applicable to U.S. citizens and resident aliens, while income that is not effectively connected to a U.S. trade or business is subject to tax at a flat rate of 30% that is withheld at the source.[ii]

Nonresident aliens who own U.S. property that generates rental payments are subject to the flat 30 % withholding tax on the gross rent unless the nonresident alien makes an election to treat the rental income as effectively connected to a U.S. trade or business.[iii]  Nonresident aliens who make this election can reduce their rental income by offsetting rental income with expenses pertaining to the rental activity.

For those that make the election they must report  on Schedule E of Form 1040NR. For those that do not make the election, the withholding agent is responsible to remit the  30 % withholding tax. They must submit a Form W-8BEN to the withholding agent.

A withholding agent is a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding.[iv]  A withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.[v]  Thus, in the real estate context, a withholding agent would be either the tenant or the property manager since they have control and custody over the property owned by the NRA.

TIGTA Report[vi]

This campaign is in part influenced by a Treasury Inspector General  for Tax Administration (TIGTA) report published in August 2017. The  report pointed out the failure  to  identify NRAs  who failed to report U.S. property rental income. The TIGTA conducted a random stratified sample of 149 filers from over 33,000 Tax Year 2013 Form 1040 NR Schedule E filers who were first-time filers that year.[vii]  The random stratified sample was conducted to determine whether or not taxpayers were in compliance with the IRC §871(d)(1) election and Treasury Regulation §1.871-10 (statement that accompanies the election to have the income be effectively connected income with a  U.S. trade or business).[viii] The TIGTA report noted a considerable number of NRAs were claiming net income treatment on annual Forms 1040NR despite never making the appropriate election to treat the income as effectively connected income. Only 47 (32%) of the 149 taxpayers complied with the reporting requirements of rental income by NRA and included the mandatory election statement in accordance with IRC §871(d)(1).[ix]  Only six of the election statements included all of the elements required by the Treasury Regulation §1.871-10.[x] The 68% that did not attach the election statement still reported their rental income as effectively connected to a U.S. trade or business. These taxpayers should have been subject to the flat 30% tax on gross income, which would have yielded the IRS approximately $534,000 in income taxes (30% of $1.78 million).[xi] When this is projected over the entire population, the TIGTA estimates that the IRS loses about $56 million per year.[xii] The TIGTA report also found that some NRAs taking inconsistent positions – e.g. deducting rental expenses and subjecting remaining net income to IRC §1 tax rates while not reducing their basis of property when later disposing of the property. Other issues that  TIGTA discovered are some NRAs never filing Form 1040NR and never notifying withholding agents that they should be subject to a 30% tax rate on gross income.

Furthermore, based on a reported sample data from 5 counties in four states, 13% of foreign property owners failed to pay tax in 2013.[xiii] The TIGTA estimated that 5,600 NRAs may not have complied with filing requirements in those counties.

Conclusion

The Commissioner of the IRS has stated  that the IRS will have a much greater presence on enforcement  and that “we will be in every neighborhood that we can be.”[xiv] The new LB&I campaign makes clear that if you  are a NRA landlord, the IRS will be visiting your neighborhood.   With the extra focus now on NRA taxpayers by the IRS , it is important for   taxpayers and withholding agents to  review  their compliance or otherwise face costly deficiencies, penalties, and interest.

Steven Toscher is a Principal at Hochman Salkin Toscher & Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.

Tenzing Tunden is a Tax Associate at Hochman Salkin Toscher Perez P.C. Mr. Tunden recently graduated from the Graduate Tax Program at NYU School of Law and the J.D. Program at UC Davis School of Law. During law school, Mr. Tunden served as an intern at the Franchise Tax Board Legal Division and at the Tax Division of the U.S. Attorney’s Office (N.D. Cal).

[i] IRS Advisory Council 2017 Public Report at 31-32. Available at https://www.irs.gov/pub/irs-utl/2017-irsac-public-report.pdf.

[ii] IRC §1 for income that is ECI and IRC §871(a) for income that is not ECI.

[iii] IRC §871(d).

[iv] IRS Publication 515 at 3.

[v] Id.

[vi] Treasury Inspector General For Tax Administration, Additional Controls Are Needed to Help Ensure That Nonresident Alien Individual Property Owners Comply With Tax Laws, August 23, 2017, available at https://www.treasury.gov/tigta/auditreports/2017reports/201730048fr.pdf.

[vii] Id. at 7.

[viii] Id.

[ix] Id.

[x] Id.  The election statement includes: (A) a complete schedule of all real property, or any interest in real property, of which the taxpayer is a titular or beneficial owner, which is located in the U.S. (B) an indication of the extent to which the taxpayer has direct or beneficial ownership in each such item of real property, or interest in real property (C) the location of real property or interest therein (D) a description of any substantial improvements on any such property and (E) an identification of any taxable year or years in respect of which a revocation or new election under this section has previously occurred.

[xi] Id. at 9.

[xii] Id.

[xiii] Id. at 17-18.

[xiv] Joshua Rosenberg, Rettig’s Vow To Have IRS in Every Neighborhood A Tall Order, LAW360 Tax Authority, Nov. 7, 2019 (comments from his speech at various tax law conferences). Also see Daniel Hood,  IRS Commissioner: You’re Going to Be Seeing A Lot of Me, Accounting Today, June 10, 2019.

Serial Non-Filer Pleads Guilty to Tax Evasion[i]

From 2009 through 2016, Daryl Brown received taxable income. Nonetheless, Mr. Brown did not file his tax returns to report his income nor did he pay the taxes he owed on such taxable income.  Mr. Brown did, however, take steps to evade his tax obligations, such as opening bank accounts and lines of credit in nominee names and using credit and debit cards from those accounts to pay for personal expenses. Additionally, he bought money orders with cash, directed others to buy money orders for him, and structured his purchase of money orders–sometimes from several locations on the same day–to avoid triggering reporting requirements that would have flagged his activity to the Internal Revenue Service (IRS).[ii]  Mr. Brown pled guilty to a charge of tax evasion and now faces a sentence of five years in prison.[iii]

While the recent press release in the above criminal tax case specifically referenced Mr. Brown’s failure to file his federal tax returns for multiple years, it is important to note that this case was not simply about his lack of filing timely tax returns. Rather, this case is about the intentional “affirmative” steps Mr. Brown took to conceal and misrepresent his financial dealings that resulted in his attempted evasion of his taxes.  In simple terms, it was the affirmative acts, not Mr. Brown’s serial non-filing of his tax returns, that resulted in the government charging him with tax evasion and which now has Mr. Brown facing five years in prison.[iv]

Does that mean the federal government can’t prosecute someone based only on evidence of an intentional failure to comply with a legal duty to file a timely (and honest) tax return?  The simple answer is – No.  While the willful failure to file a tax return is a misdemeanor, the government will bring failure to file charges in appropriate circumstances which can result in incarceration for the non-filer.  For example, actor Wesley Snipes was sentenced to 3 years in prison for his conviction for intentionally failing to file his tax returns[v] with the IRS for the years 1999, 2000 and 2001[vi], and  singer and actress Lauryn Hill was sentenced to 3 months in prison and 3 months of home detention in connection with her guilty plea for intentional failure to file tax returns for the years 2005, 2006, 2007, 2008 and 2009.[vii]

According to the IRS’s most recent published statistics which relate to the fiscal year 2016, 206 non-filer criminal tax investigations were opened and 157 non-filer tax cases were charged,[viii] while the overall criminal tax investigations and charged cases for that same year were reported to be 3,395 and 2,761, respectively.[ix]  Doing the math, that calculates to about 17% of the annual criminal tax cases involving non-filers.  The Commissioner’s recent announcement focusing on high income non-filers[x] should be a signal that more than ever that a willful failure to file will be vigorously pursued by the IRS, even if you are not a high profile taxpayer like Mr. Snipes or Ms. Hill.

For those who intentionally fail to file their tax returns in a timely fashion, particularly those “serial non-filers” like Mr. Brown who find themselves being prosecuted, there is often more going on. What is often going on is a series of intentional acts to defraud or conceal from the IRS information that would evidence an individual’s correct tax obligations.  Such affirmative acts not only moves a taxpayer into the realm of greater exposure for a criminal tax investigation and prosecution, but also increases the likelihood that such investigation will involve a charge of felony tax evasion

Tax evasion, which is shorthand for a crime of willfully attempting to evade or defeat the assessment or payment of a tax, requires the government to prove that the individual engaged in some affirmative conduct for the purpose of misleading the IRS or concealing tax liability or assets.[xi] While a common method used to attempt to evade or defeat assessment of a tax is the filing of a false tax return that understates tax liability, either by omitting income, claiming deductions to which the taxpayer is not entitled, or both, the filing of a false tax return is not the only way in which a taxpayer can attempt to evade or defeat taxes or the payment thereof.  Failing to file a return, coupled with an affirmative act of evasion and a tax due and owing, which is known as Spies[xii]-evasion, qualifies as tax evasion.  A mere failure to file a return, standing alone, cannot constitute an attempt to evade taxes.[xiii]

So what constitutes an “affirmative willful attempt” to evade?  Here is a list of examples provided by the Supreme Court[xiv]: keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.  That means, the acts, or attempts, by which defendants can attempt to evade are virtually unlimited.

Although the IRS reserves the right to investigate and prosecute those who intentionally don’t file or pay taxes, the IRS is focused on tax compliance—its ultimate mission– and would rather work to encourage those individuals to come forward voluntarily or work out a payment plan instead of filing charges.  In other words, if you cooperate and come in before the IRS finds you, you’re less likely to be prosecuted.  On the other hand, the more blatantly fraudulent a taxpayer’s actions are, the more likely it is that the IRS will pursue prosecution.

Sandra R. Brown is a principal at Hochman Salkin Toscher Perez P.C. Prior to joining the firm, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.

[i]   https://www.justice.gov/opa/pr/serial-non-filer-pleads-guilty-tax-evasion.

[ii]  Id.

[iii]  Id.

[iv]  26 U.S.C. § 7201.

[v]  26 U.S.C. § 7203.

[vi]https://www.justice.gov/archive/tax/usaopress/2008/txdv08_20080806_SnipesProsecutionCost.pdf

[vii] https://www.justice.gov/usao-nj/pr/singer-and-actress-lauryn-hill-sentenced-prison-failing-file-tax-returns-more-23-million

[viii] https://www.irs.gov/compliance/criminal-investigation/statistical-data-nonfiler-investigations

[ix] https://www.irs.gov/compliance/criminal-investigation/current-fiscal-year-statistics

[x] https://www.irs.gov/newsroom/irs-increases-visits-to-high-income-taxpayers-who-havent-filed-tax-returns

[xi] 26 U.S.C. § 7201.

[xii] Spies v. United States, 317 U.S. 492, 499 (1943).

[xiii] Id.; United States v. Hoskins, 654 F.3d 1086, 1091 (10th Cir. 2011); United States v. Nelson, 791 F.2d 336, 338 (5th Cir. 1986).

[xiv] Spies, 317 U.S. at 499.

The IRS unveiled a new “People First initiative” today in IR-2020-59 as part of a continued COVID-19 relief effort for taxpayers.  While a primary feature of the announcement is a targeted and significant suspension of collection enforcement and other compliance functions, the People First Initiative provides a rare opportunity for non-filers and procrastinators to get into compliance.

Opportunities for Non-Filers

The benefits of the initiative are particularly unique because of the confluence of two events.  First, the IRS is suspending lien and levy activity until July 15th.   These are two of their primary enforcement tools to collect taxes.  While the initiative leaves in an exception when warranted, this is a very significant relief provision.  The relief permits of the filing delinquent returns together with an installment request or other collection alternative with a completely different dynamic of suspended enforced collection.  Second, a significant part of the recent economic stimulus is being administered through the IRS so the filing of a 2019 return, or prior returns, may result in a refund, or at least an offset due to the relief provisions as summarized in our recent blog.  As noted in the announcement, “[m]ore than 1 million households that haven’t filed tax returns during the last three years are actually owed refunds; they still have time to claim these refunds.”

Complex Collection Cases

For more complex ongoing collection cases, the People First Initiative also provides an extraordinary opportunity to re-approach collection solutions in a new environment.  As we noted in our blog last week, the financial statements reported to the IRS in recent months have substantially changed.  Often taxpayers working with the IRS Collection Division or Collection Appeals are in the process of selling a home or a business, or perhaps securing a loan.  Many of these transactions have stopped entirely, if any businesses are even still operating under cessation orders issued by various states.  Taxpayers can now work through these realities with a suspended levy and lien framework.

For taxpayers struggling to meet installment obligations that were agreed to before their new post-COVID-9 reality, the announcement permits Taxpayers who are currently unable to comply to suspend payments until July 15th.  The IRS will not default Installment Agreements during this period, although interest will continue to accrue on unpaid balances.

For taxpayers with pending offers in compromise, the IRS extended information request due dates until July 15th, and will not close pending requests without taxpayer consent.  Additionally, Offer In Compromise payments on accepted offers may be suspended until July 15, 2020.  This can be particularly relevant for taxpayers who made deferred payment offers over a two year period.  Finally, while delinquent return filings can default an offer in compromise, the announcement provides that the IRS will not default offers for taxpayers delinquent on their 2018 return filings, provided their 2018 and 2019 returns are filed before July 15, 2020.

A key component to any collection case is current compliance, as taxpayers need to be current on return filing and estimated payment obligations in order to qualify for alternatives such as offers in compromise or installment agreements.  The Treasury’s recent extension of filing and estimated tax payment deadlines until July 15, 2020, combined with the suspension of liens and levies, provides a unique opportunity to be eligible for collection alternatives to pay some or all of their tax liabilities over time while potentially also qualifying for significant tax stimulus benefits.

IRS Examination Functions

Under the People First Initiative, the IRS will generally not start new examinations, although the IRS will make an exception if the statute of limitations may expire in the near future.  Moreover, if your client recently received a statute of limitation request in an ongoing audit, be aware that a decision to the not extend the statute of limitations will often result in the issuance of a Notice of Deficiency.  The United States Tax Court has announced that the statutory deadlines for filing a Petition to the Tax Court for a Notice of Deficiency (typically 90 days) are still in place and timely filing of a Tax Court Petition must be  proven by the taxpayer.  Use verified mail.  Please note that the United States Tax Court building remains closed and trial sessions through June 30, 2020 are canceled.

Revenue Agents continue to work their existing examinations remotely, where possible, although in person meetings will be suspended.  Taxpayers’ representatives should continue to review and attempt to respond to document requests but should communicate any difficulties to the Revenue Agents, or their managers if necessary.

While the IRS quickly initiated this People First Initiative today, and FAQs regarding the 2019 filing and payment deadline extensions yesterday, the announcement notes that the People First Initiative may be modified or expanded based on circumstances going forward.

CORY STIGILE – For more information please contact Cory Stigile – stigile@taxlitigator.com  Mr. Stigile is a principal at Hochman Salkin Toscher Perez P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes Federal and state controversy matters and tax litigation, including sensitive tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. His practice also includes complex civil tax examinations. Additional information is available at www.taxlitigator.com

The Internal Revenue Service (IRS) began sending contact letters this week reminding certain taxpayers that it has their information relating to deductions claimed for micro-captive insurance arrangements. The letters also asked taxpayers who stopped claiming deductions to provide certain information under penalty of perjury, including the final year a micro-captive deduction was claimed.  As for those taxpayers continuing to participate in micro-captive insurance transactions, the IRS recommends that the taxpayer consult an independent competent tax advisor on the proper treatment of past and future tax years and consider best options for any improperly claimed deductions, including the filing of amended returns.  The IRS refers to these as Letter 6336 (3-2020) on its web page and provides a hotline number to call for assistance.

Letters similar to these were generally expected after the IRS roll-out of its time-limited settlement offer made to certain taxpayers under examination, followed by its stern warning to the public on January 31, 2020 that the IRS will continue to vigorously pursue those involved in these and other similar abusive micro-captive transactions going forward.

We consider these letters, however, as an opportunity to revisit the legitimacy of the tax benefits claimed with respect to captive transactions.  Moreover, for appropriate taxpayers, these letter may present an opportunity to take proactive, corrective measures that may assist in avoiding onerous examinations and steep penalties that could otherwise be asserted against them.

Why are Micro-Captive Insurance Letters Issued?

The letter explains why the IRS is writing this letter and what steps are requested of the taxpayers.

The IRS states that:

         Why we’re writing to you

We have information that you’ve taken a deduction or other tax benefit related to micro-captive insurance on a prior year tax return and disclosed pursuant to Notice 2016-66 and Notice 2017-08.

Several recent U.S. Tax Court decisions have confirmed that certain  micro-captive  arrangements  are not eligible for claimed Federal tax benefits. We’re notifying you regarding IRS compliance activity in this area so you can make informed  decisions  about claiming  tax deductions for micro-captive insurance premiums. The IRS is increasing enforcement activity in this area and has deployed several examination teams to open additional examinations of returns that included micro-captive insurance transactions. Examinations may result in full disallowance of claimed micro-captive insurance deductions, inclusion of income by the captive entity, and imposition of applicable penalties.

What information is the IRS Requesting?

The letter requests that if a taxpayer is no longer claiming deductions or other tax benefits it should notify the IRS in writing  of:   (1) The last tax year in which the taxpayer claimed deductions or other tax benefits for micro-captive insurance premiums, and, if applicable, (2) the date the taxpayer ceased participating in the micro-captive insurance transaction.

If a taxpayer continues to participate in a micro-captive insurance transaction covered under Notice 2016-66, the letter states the taxpayer must continue to disclose participation in the transaction.  The letter also cautions that before filing the 2019 Federal income tax return, the IRS recommends the taxpayer consult an independent, competent tax advisor on the proper treatment for past and future tax years and consider the best options for any improperly claimed deductions or other tax benefit, including filing amended returns.

If there is a need to file amended tax returns for individual filers, the letter states write “Microcaptive”  at the top of the first page of the Form 1040X and mail the amended return to:

Internal Revenue Service
2970 Market Street
Philadelphia, PA 19104

For business filers using paper returns write “Microcaptive” at the top of the amended return and mail to the address listed on the instructions to the amended return.  Business filers filing electronic amended returns should list “Microcaptive” as the reason for filing the amended return.

The letter further  states that “We’ll take your actions in response to this letter into account when considering future compliance activity related to your micro-captive insurance arrangement.” and that it does not consider this letter an examination under the Internal Revenue Code or an audit of a tax return.

The IRS warns that if the IRS does not hear from the taxpayer by the “respond by” date it may refer the returns for examination.

Prior IRS Announcement – IR-2020-26

These letters follow the IRS announcement on January 31, 2020 stating that IRS enforcement activity in this area will be significantly increased.  On that date, the IRS informed  that it will deploy additional resources, which includes starting up 12 new examination teams comprised of employees from the IRS Large Business and International (LBI) and Small Business/Self-Employed (SB/SE) divisions that will address abusive transactions and open additional exams.   The IRS Announcement warned that examinations impacting micro-captive insurance transactions of several thousand taxpayers will be opened by these teams in the coming months.   Potential outcomes can include full disallowance of claimed captive insurance deductions, inclusion of income by the captive entity and imposition of all applicable penalties.

The Letter May Present an Opportunity to Potentially Avoid Protracted Examination and Penalties.

While typically receiving an inquiry from the IRS is never a good thing, the letter does raise the question whether taking proactive steps, such as reversing the transactions  on amended tax returns, could avoid an onerous examination that many individuals and captive entities endured, along with the steep penalties asserted in these examinations.  We are hopeful that it would.

We would like to think that when the IRS invites taxpayers to file amended tax returns and states it will take the taxpayers actions into account when considering future compliance activity, it will consider these corrective actions as good faith gestures warranting the elimination  of penalties.  Moreover,  the IRS should  treat amended returns filed in response to these letter as Qualified Amended Returns, warranting penalty mitigation.

On the other hand, ignoring the letter is rarely the correct response.  Even those taxpayers with sound micro-captive transactions positions should fashion a response that addresses the merits of their position, and offers an explanation for the micro-captive benefits claimed.  Many individuals and businesses have legitimate reasons for micro-captive insurance arrangements.  In this COVID-19 new reality we all are facing, one can now plainly see the benefits of additional or gap insurance, such as business interruption insurance or the like.  However, absent a detailed explanation, the IRS may require the taxpayer to expend considerable resources before the legitimacy of the captive insurance plan is known to it.

Moreover, it is possible that for those taxpayers who respond appropriately, the IRS would at a minimum offer terms similar to the time-limited settlement initiative afforded to those under examination, in lieu of opening a full-blown examination against the taxpayer.   Importantly, the time-limited settlement initiative protected the IRS’ interests for years closed by statute, and it is likely that the IRS would want closed years considered as part of any resolution with the taxpayer. As such, amended tax returns alone may not fully address all of the concerns by the IRS.

As the IRS works through these cases, only time will tell how the IRS will respond.   For the time being, taxpayers have 45-days from the date of the letter to sort these issues out and respond accordingly.

For more information regarding this topic please contact Michel Steinms@taxlitigator.com   Mr. Stein is a principal at Hochman, Salkin,  Toscher & Perez, P.C. He is a former Attorney-Adviser of the U.S. Tax Court and is a Certified Specialist in Taxation Law by the State Bar of California, Board of Legal Specialization.  Mr. Stein represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. He has extensive experience with micro-captive insurance, voluntary disclosures and foreign account and asset reporting, and he frequently lectures throughout the country on these and other tax related topics.  Additional information is available at www.taxlitigator.com .

President Trump signed the Families First Coronavirus Response Act on March 18, 2020.  Division G of the Act provides for employers to be reimbursed dollar-for-dollar for coronavirus-affected paid sick leave and paid child care leave via payroll tax credits.  On March 20, the Treasury Department, the IRS and the Department of Labor announced plans for implementation of these provisions of the Act in IR 2020-57.

These provisions apply to businesses with fewer than 500 employees.  A business will receive a refundable tax credit to reimburse it dollar-for-dollar for providing coronavirus-related paid leave to employees.  Coronavirus-related leave is leave taken by employees who cannot work due to coronavirus-related Federal, State or Local quarantine or has been advised to self-quarantine, or because they have coronavirus symptoms or is seeking a medical diagnosis, or employees who are caring for an individual who is quarantined or self-quarantined, or the employee is caring for a son or daughter whose school or care facility is closed, or whose care provider is unavailable, due to COVID-19.

For each employee who is on coronavirus-related leave, the employer can receive a refundable credit for up to 80 hours for full-time employees. The credit is equal to the sick-leave paid the employee at his or her regular rate of pay up to a maximum of $511 a day and $5,110 in aggregate for a total of ten days.  For an employee who is caring for someone or for a son or daughter, the credit is equal to 2/3rds of the employee’s regular pay up to a maximum of $200 per day and $2,000 in the aggregate for 10 days.

In addition to the sick leave credit, if an employee cannot work because of the need to care for a child whose school or child care facility is closed or whose child-care provider is unavailable due to coronavirus, the employer can receive a refundable child care leave credit equal to 2/3rds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate for a maximum of up to 10 weeks.  This is in addition to the sick-leave credit.  A business with  less than 50 employees are eligible for an exemption from this provision if the viability of the business is threatened.

Eligible employers are entitled to an additional tax credit based on the cost of health insurance for the employee during the leave period.

The employer can claim the credit by retaining an amount of payroll tax that would normally be paid to the IRS.  If the the payroll taxes are insufficient to cover the cost of qualified sick leave and child-care leave, the employer will be able to file a request for an accelerated payment from the IRS.  The IRS anticipates processing these requests in no more than two weeks.  Self-employed individuals are entitled to similar credits under similar circumstances that can be claimed on their income tax returns and will reduce estimated tax payments.

The tax credit is available for eligible paid sick and eligible paid child-care leave for the period March 20 through December 31, 2020.

Contact Avram Salkin at salking@taxlitigator.com or 310-281-3200.  Mr. Salkin is “The Tax Lawyer’s Tax Lawyer” and a founding member of the firm with more than 50 years of extensive experience in resolving complex Federal and state tax controversies and disputes, in structuring and negotiating complex transactional matters (including the acquisition and disposition of real estate and businesses), family wealth planning, estate planning and probate. Avram Salkin is a Certified Specialist in both Taxation and Estate Planning, Trust and Probate Law, by The State Bar of California Board of Legal Specialization.  Mr. Salkin is a recipient of the Joanne M. Garvey Award from the Taxation Section of the California Lawyers Association in recognition of his lifetime achievement and outstanding contributions in the field of tax law, and of the UCLA Bruce I. Hochman Award in recognition of his outstanding proficiency in tax law. 

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

Since our Blog post earlier this week regarding the initial tax payment (but not filing deadline) relief announced by Treasury Secretary Steven Mnuchin, the government has gone further.  As particularly important for busy tax preparers, the normal tax payment and filing deadline of April 15, 2020 have now both been extended until July 15, 2020.  The Treasury Secretary’s tweet on this point referenced both the filing deadlines and payments, without a reference to the prior relief limitations of $1,000,000 for individuals and $10,000,000 for corporations.

While this blog post is an update on this filing deadline with commentary, as opposed to a comprehensive update on the quickly developing and substantial legislative tax relief, below are links to both state and federal resources related to tax relief from CalCPA and the AICPA.

As preparers take a breath for perhaps half a day as the deadline is extended, their next step will be to absorb the substantial tax and other relief provisions, much of which is administered on the shoulders of the IRS and other state tax agencies.

Many of the continuing education programs for tax attorneys and tax preparers over the last few years have been focused on understanding Tax Cuts and Jobs Act, and the Qualified Business Income Deduction in particular.  With the economic outlook temporarily turned on its head, the optimistic Qualified Business Income Deduction provisions take on a new light.  The focus for many taxpayers may now be on losses in 2020.  The latest proposed relief provisions are already considering Net Operating Loss limitations that were added to the Tax Cuts and Jobs Act.  Additionally, the Senate has remembered the relief provided after the economic and real estate crash in 2008 and 2009, when they supercharged the net operating losses and the ability to carry them back.  As the legislation is in flux, we will see where the specific relief provisions settle.  In summary, an initial glimpse of the legislative stimulus is that it provides some of the “best hits” from the last 20 years and may apply many of them at once.

CORY STIGILE – For more information please contact Cory Stigile – stigile@taxlitigator.com  Mr. Stigile is a principal at Hochman Salkin Toscher Perez P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes Federal and state controversy matters and tax litigation, including sensitive tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. His practice also includes complex civil tax examinations. Additional information is available at www.taxlitigator.com

Treasury Secretary Steven Mnuchin stated Tuesday that individual taxpayers who owe the IRS up to $1 million and corporations that owe the IRS up to $10 million would be provided with an additional 90 day period to pay federal income taxes due April 15, although returns currently still need to be timely filed.  Failure to pay penalties and interest will not accrue on such taxes during this 90-day period.  Last Friday, California also provided relief by extending the date for tax return filing and payment for 60 days for individual returns and 90 days for partnership and LLC returns (they were due this week) until June 30, 2020.

As background and for historical context, California Wildfire Victims in 2019 were eligible for relief from various filing/payment deadlines that fell between November 2018 and April 30, 2019.  Thus, they had additional months to pay individual, corporate, S-Corporation, partnership, and estate and trust tax returns and payments.  Relief also included payroll tax and income tax estimated payments.

Once the President declares a major disaster to be present, the Treasury/IRS is permitted to postpone certain deadlines.  Specifically, under IRC Section 7508A, in the case of a taxpayer determined by the Secretary to be affected by a federally declared disaster, the Secretary may specify a period of up to 1 year that may be disregarded in determining, under the internal revenue laws, in respect of any tax liability of such taxpayer, whether the taxpayer timely filed any return or paid any tax, or filed a timely Tax Court petition, among other acts.  The specifics of relief for this filing season are still being issued, but a clear signal has been by provided by both federal and state governments that relief is appropriate.

IRS Collection Consequences

As the scope of relief becomes clarified, taxpayers currently addressing IRS administrative collection actions will need to continue to review their current compliance obligations.  Relief in this critical time may provide an opportunity to “catch up” and make timely (with the extension) filings and tax payments.  The failure to be currently compliant removes eligibility for many taxpayers for Installment Agreements or Offers in Compromise, so this imminent relief may provide opportunities when taxpayers may not have other otherwise achieved compliance.

While our country works together to get through this crisis, the prompt relief may permit some taxpayers to worry about one less thing.  It is unclear whether the IRS will issue a type of Collection Moratorium, which it often does during December to permit some relief during the holidays.  In any event, the facts and circumstances of the world and the financial condition of taxpayers may be drastically different than they were last month.  Any Form 433-A (the IRS financial statement) that was prepared in recent months probably just became irrelevant.

I contacted the IRS Practitioner Hotline when writing this blog and noted that the anticipated wait time was only two minutes.  As you review each client’s situation, consider whether the temporary relief provides an opportunity for your client to get compliant.  Please note that the IRS call centers can be used in unexpected ways to help around the country as we respond to natural disasters, but there was no wait his morning.  As noted above though, they appear to currently be open for business.  This week, a Revenue Officer faxed a payment confirmation, so we knew that the IRS received and processed the payment in a timely manner.

We are still waiting to see the scope of other tax relief as the Senate mulls the House’s Coronavirus Response Act.  In the interim, consider the administrative relief noted above and see how you can immediately provide financial relief for your clients.

CORY STIGILE – For more information please contact Cory Stigile – stigile@taxlitigator.com  Mr. Stigile is a principal at Hochman Salkin Toscher Perez P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes Federal and state controversy matters and tax litigation, including sensitive tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. His practice also includes complex civil tax examinations. Additional information is available at www.taxlitigator.com

You could be forgiven for thinking that law enforcement officers have to identify the location to be searched accurately when asking a judge to sign a search warrant.  The Fifth Circuit decided on March 4, 2020, that missing the address by ½ and not even describing the actual premises to be searched, aren’t big enough problems to throw out evidence obtained during the search.

Robert Scully co-owned (with his nephew and a third man) and operated a frozen-meals business that imported shrimp from Thailand.  Scully and his nephew arranged for relatives to inspect shrimp in Thailand, paid the relatives, and then skimmed some of the inspection commissions and didn’t report the receipt of the skimmed commissions on his tax returns.  The third owner uncovered the skim and reported Scully to the authorities.

Seeking evidence of tax and wire fraud crimes, the IRS Special Agent prepared and submitted a search warrant for Scully’s house at 1015 East Cliff Drive in Santa Cruz, California.  The SA really wanted to search Scully’s home office, which wasn’t connected to the house but was instead a separate structure behind the house.  The search warrant was defective in two important (although apparently not that important) ways: (1) had the SA checked utility records or with the post office, he would have learned that the home office had a different address than the residence: 1015 ½ East Cliff Drive; and (2) although the SA knew that the home office was unconnected to the house and he had even checked satellite images of the property, the SA didn’t even include the home office within the “premises to be searched” in the search warrant.  It isn’t fair to put all of the blame on the SA for the second error, as the local U.S. Attorney’s Office reviewed the search warrant before submitting it to a Magistrate Judge, and the Magistrate Judge reviewed it before signing it.  The second problem was obvious from the face of the warrant, as the SA described the home office as well as its importance in his affidavit in support of the search warrant, yet neither the AUSAs nor the Magistrate Judge noticed that the warrant itself (frequently the only document that agents assisting in the search will read) failed to mention the home office.

Recognizing that including the wrong address on the search warrant and not even mentioning the home office were both problems, the government paid lip service to the argument that the warrant was accurate, but fell back on the “good faith” defense to search warrant errors.  This defense is designed to save searches that were done in good faith reliance on the warrant that a Magistrate Judge had signed.  Appellate law has a low bar for the government to clear: so long as the search didn’t involve a “deliberate, reckless, or grossly negligent violation,” any evidence seized in a later-invalidated warrant can still be admitted against a defendant.

Taking up the two errors in the warrant, the Court of Appeals brushed past the government’s argument that the warrant sufficiently described the premises – no surprise, given that the address was wrong and the warrant didn’t mention the home office that yielded the evidence at issue – and marshalled facts to show that the errors weren’t deliberate, reckless, or grossly negligent.  The saving grace appears to have been that the SA who signed the search warrant affidavit (and made the aforementioned mistakes) briefed his fellow agents and personally took part in the search, permitting him to guide his fellow agents to the home office, avoid another structure on the property that was rented to someone else, and ensure that agents searched the right premises.  Further, the affidavit described the home office, so there was little doubt that the Magistrate Judge actually found probable cause to search the home office; the defect was just in the warrant and not in the affidavit and the warrant, which presumably would have been more troubling for the Court.  Left unsaid is that the agents did, in fact, search the right premises.  If they had searched and seized evidence of a crime at the wrong premises, such as the additional structure on the property rented to a third party, then the result could have been different.  It’s hard to ignore the effect of hindsight in situations like this.

The decision also underscores that trimming, as opposed to expanding, an indictment in response to post-indictment knowledge, is generally acceptable.  Here, prosecutors learned through deposing witnesses in Thailand that an allegation in the Indictment was incorrect, and they superseded the Indictment to eliminate that allegation and charges against the nephew, who died while awaiting trial.  The Court focused on whether the defendant had been prejudiced, and found none. Additionally, and not surprisingly, the Court rejected the defendant’s Speedy Trial violation argument, noting that the vast majority of the years-long trial delay was due to the defendant’s requests for more time.

The overall takeaway from the case?  The Affiant for any search warrant should brief his or her fellow agents and participate in any search to blunt the effect of any errors in the warrant.  On the flip side, the absence of the Affiant should be highlighted by any defense counsel seeking suppression.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman Salkin Toscher Perez PC.  He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division of the where he handed civil and criminal tax cases and 11 years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator.  Among other awards as a prosecutor, the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards. 

Mr. Davis represents individuals and closely held entities in criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud.

You could be forgiven for thinking that law enforcement officers have to identify the location to be searched accurately when asking a judge to sign a search warrant.  The Fifth Circuit decided on March 4, 2020, that missing the address by ½ and not even describing the actual premises to be searched, aren’t big enough problems to throw out evidence obtained during the search.

Robert Scully co-owned (with his nephew and a third man) and operated a frozen-meals business that imported shrimp from Thailand.  Scully and his nephew arranged for relatives to inspect shrimp in Thailand, paid the relatives, and then skimmed some of the inspection commissions and didn’t report the receipt of the skimmed commissions on his tax returns.  The third owner uncovered the skim and reported Scully to the authorities.

Seeking evidence of tax and wire fraud crimes, the IRS Special Agent prepared and submitted a search warrant for Scully’s house at 1015 East Cliff Drive in Santa Cruz, California.  The SA really wanted to search Scully’s home office, which wasn’t connected to the house but was instead a separate structure behind the house.  The search warrant was defective in two important (although apparently not that important) ways: (1) had the SA checked utility records or with the post office, he would have learned that the home office had a different address than the residence: 1015 ½ East Cliff Drive; and (2) although the SA knew that the home office was unconnected to the house and he had even checked satellite images of the property, the SA didn’t even include the home office within the “premises to be searched” in the search warrant.  It isn’t fair to put all of the blame on the SA for the second error, as the local U.S. Attorney’s Office reviewed the search warrant before submitting it to a Magistrate Judge, and the Magistrate Judge reviewed it before signing it.  The second problem was obvious from the face of the warrant, as the SA described the home office as well as its importance in his affidavit in support of the search warrant, yet neither the AUSAs nor the Magistrate Judge noticed that the warrant itself (frequently the only document that agents assisting in the search will read) failed to mention the home office.

Recognizing that including the wrong address on the search warrant and not even mentioning the home office were both problems, the government paid lip service to the argument that the warrant was accurate, but fell back on the “good faith” defense to search warrant errors.  This defense is designed to save searches that were done in good faith reliance on the warrant that a Magistrate Judge had signed.  Appellate law has a low bar for the government to clear: so long as the search didn’t involve a “deliberate, reckless, or grossly negligent violation,” any evidence seized in a later-invalidated warrant can still be admitted against a defendant.

Taking up the two errors in the warrant, the Court of Appeals brushed past the government’s argument that the warrant sufficiently described the premises – no surprise, given that the address was wrong and the warrant didn’t mention the home office that yielded the evidence at issue – and marshalled facts to show that the errors weren’t deliberate, reckless, or grossly negligent.  The saving grace appears to have been that the SA who signed the search warrant affidavit (and made the aforementioned mistakes) briefed his fellow agents and personally took part in the search, permitting him to guide his fellow agents to the home office, avoid another structure on the property that was rented to someone else, and ensure that agents searched the right premises.  Further, the affidavit described the home office, so there was little doubt that the Magistrate Judge actually found probable cause to search the home office; the defect was just in the warrant and not in the affidavit and the warrant, which presumably would have been more troubling for the Court.  Left unsaid is that the agents did, in fact, search the right premises.  If they had searched and seized evidence of a crime at the wrong premises, such as the additional structure on the property rented to a third party, then the result could have been different.  It’s hard to ignore the effect of hindsight in situations like this.

The decision also underscores that trimming, as opposed to expanding, an indictment in response to post-indictment knowledge, is generally acceptable.  Here, prosecutors learned through deposing witnesses in Thailand that an allegation in the Indictment was incorrect, and they superseded the Indictment to eliminate that allegation and charges against the nephew, who died while awaiting trial.  The Court focused on whether the defendant had been prejudiced, and found none. Additionally, and not surprisingly, the Court rejected the defendant’s Speedy Trial violation argument, noting that the vast majority of the years-long trial delay was due to the defendant’s requests for more time.

The overall takeaway from the case?  The Affiant for any search warrant should brief his or her fellow agents and participate in any search to blunt the effect of any errors in the warrant.  On the flip side, the absence of the Affiant should be highlighted by any defense counsel seeking suppression.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman Salkin Toscher Perez PC.  He spent 11 years as an AUSA in the Office of the U.S. Attorney (C.D. Cal), spending three years in the Tax Division of the where he handed civil and criminal tax cases and 11 years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator.  Among other awards as a prosecutor, the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years, the last three of which he was recognized with Outstanding Attorney awards. 

Mr. Davis represents individuals and closely held entities in criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud. 

 

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