Posted by: Robert Horwitz | March 14, 2018

Two IRS Pronouncements on Penalties by Robert S. Horwitz

When it comes to taxes, Congress is penalty happy. There are over 150 separate penalties that can be imposed for various infractions of the Internal Revenue Code.  Two recent IRS pronouncements address penalties.

First Time Abatement Relief

Among the myriad of penalties, the Internal Revenue Code provides for the penalties for:

  1. Failure to file a tax return by the due date;
  2. Failure to pay tax shown due on a return by the due date;
  3. Failure to deposit tax;
  4. Failure to file a partnership return by the due date; and
  5. Failure to file a S-corporation return by the due date.

In 2001, the IRS adopted a “first time abatement” policy for these penalties. Under the policy, a taxpayer could receive relief for these penalties if it is shown that (a) the taxpayer was never previously required to file a return or has no prior penalties for the three preceding years; (b) has filed (or filed an extension) for all currently due returns; and (c) has paid or arranged to pay any tax that is due.  The taxpayer who meets these requirements can have the penalty abated for a single tax period.  The IRS normally abates the earliest tax period that meets the abatement criteria.

Historically, the IRS only granted first time abatement relief where the taxpayer either asserted reasonable cause or specifically requested first time abatement relief. The Treasury Inspector General for Tax Administration (TIGTA) criticized the IRS for not informing taxpayers of the availability of first time abatement relief and for not addressing the negative impact upon taxpayers who also qualify for abatement for reasonable cause.

An internal IRS memorandum was recently published providing that the IRS will automate the first time abatement process so that all taxpayers who meet the criteria for first time abatement will be granted relief. The IRS estimates that automating the process will increase the number of penalties waived from approximately 350,000 per year to approximately 1.7 million a year.

Besides automating the first time abatement process to ensure that all eligible taxpayers get relief, the memorandum is notable for other reasons. First, it clarifies that the three-year look back period means if you obtained relief in the past and you compliant for three straight years, you can qualify for a later failure.  Second, it notes that “civil tax penalties exist for the purpose of encouraging voluntary compliance.” Third, it highlights the fact that the Commissioner has broad discretion to “choose not to impose a penalty on a particular class of taxpayers if he believes that doing so will enhance overall tax compliance.”

Adequate Disclosure to Avoid Penalties

On January 29, 2018, the IRS issued Revenue Procedure 2018-11, to identify the circumstances in which a taxpayer’s return will be deemed to have adequately disclosed an item or position to avoid the understatement penalty imposed by Internal Revenue Code sec. 6662(d) and the preparer penalty under Internal Revenue Code sec. 6694(a).

The understatement penalty under 6662(d) applies if there is a “substantial understatement” of income tax. For an individual a “substantial understatement” is the greater of a) 10% of the tax required to be shown on the return or b) $5,000.  For a corporation an understatement is substantial if it exceeds the lesser of a) 10% of the tax required to be shown on the return or b) $10 million.

The preparer penalty under 6694(a) is imposed on a return preparer who prepares a return or refund claim reflecting an understatement of a tax liability due to an “unreasonable position” that the return preparer knew or should have known about. A position is unreasonable unless there is or was a) substantial authority for the position or b) the position was properly disclosed and had a reasonable basis.

The minimal information to constitute adequate disclosure is:

  1. A description of the item and the verifiable dollar amount ;
  2. If the item is not one described on a line of the return (i.e., rent, wages), the item must be clearly described and the amount – “other expenses” doesn’t cut it;
  3. If the return does not provide enough space for an adequate description, the description must be continued on an attachment.

The Revenue Procedure discusses in detail what must be provided for purposes of a) Form 1040 itemized deductions and certain trade or business expenses; b) Form 1165; c) Form 1120; d) Form 1120-L; e) Form 1120-PC; f) Form ll20-S; g) foreign tax items; and g) other tax items.

Of course, all bets are off for the sec. 6662(d) penalty no matter how detailed the disclosure if the position taken does not have a reasonable basis as defined in Treas. Reg. sec. 1.6662-3(b)(3), or is attributable to a tax shelter item or is not adequately substantiated by the taxpayer. For purposes of the preparer penalty, no relief is available if the position taken involves a tax shelter or a “reportable transaction.”

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Department of Justice Trial Attorney and former Assistant United States Attorney in the Tax Division of the U.S. Attorney Office in Los Angeles. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending clients in criminal tax investigations and prosecutions. Additional information is available at

In recent years, the United States Supreme Court has wrestled with the issue of whether time limits for bringing administrative and judicial actions against the Federal Government jurisdictional. In Sebelius v Auburn Regional Medical Center, 568 U.S. __, Justice Ginsburg, writing for the majority, stated:

Characterizing a rule as jurisdictional renders it unique in our adversarial system. Objections to a tribunal’s jurisdiction can be raised at any time, even by a party that once conceded the tribunal’s subject-matter jurisdiction over the controversy. Tardy jurisdictional objections can therefore result in a waste of adjudicatory resources and can disturbingly disarm litigants. See Henderson v. Shinseki, 562 U. S. ___, ___ (2011) (slip op., at 5); Arbaugh v. Y & H Corp., 546 U. S. 500, 514 (2006). With these untoward consequences in mind, “we have tried in recent cases to bring some discipline to the use” of the term “jurisdiction.” Henderson, 562 U. S., at ___ (slip op., at 5); see also Steel Co. v. Citizens for Better Environment523 U. S. 83, 90 (1998) (jurisdiction has been a “word of many, too many, meanings” (internal quotation marks omitted).

In Duggan v Commissioner, No. 15-73819 (9th Cir. Jan. 12, 2018), the taxpayer received two CDP determination notices, both dated January 7, 2015. The notices stated that the taxpayer could “file a petition with the United States Tax Court within a 30-day period beginning the date after the date of this letter.”  Interpreting this as meaning that the 30-day period began to run on January 8, 2015, the taxpayer filed his petition on February 7, 2015.  The Tax Court dismissed on the ground that the petition was untimely.

The Ninth Circuit affirmed. The question before it was whether the thirty-day time limit contained in 26 U.S.C. sec. 6330(d)(1) is jurisdictional. If it is, there can be no waiver or equitable tolling and the failure to comply deprives the Tax Court of jurisdiction.

Because of the severity attached to making a filing deadline jurisdictional, the Ninth Circuit noted that the Supreme Court has emphasized that the statute must clearly state that the time limit is jurisdictional. No special words are required.  If, under traditional rules of statutory construction it is clear that Congress “imbued a procedural bar with jurisdictional consequences” then the time limit is jurisdictional.   Additionally, stare decisis may “counsel against overturning a well-settled law interpreting a deadline as jurisdictional, especially where Congress has acquiesced in the interpretation.”  Section 6330(d)(1) provides:

(1) Petition for review by Tax Court — The person may, within 30 days of a determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).

After discussing a Second Circuit case holding that similar language in the innocent spouse statute made timely filing jurisdictional, the Ninth Circuit held that since sec. 6330(d)(1) “expressly contemplates” the filing deadline “in the same breath as the grant of jurisdiction” it makes timely filing a condition of jurisdiction. Therefore the taxpayer’s petition was one day late and the Tax Court lacked jurisdiction to consider the case.

The reason why this blog has the heading it does is the language of sec. 6213, which allows a taxpayer to petition the Tax Court for redetermination of the deficiency. It states:

  1. Time for filing petition and restriction on assessment — Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Except as otherwise provided in section 6851, 6852, or 6861 no assessment of a deficiency in respect of any tax imposed by subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day or 150-day period, as the case may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. Notwithstanding the provisions of section 7421(a), the making of such assessment or the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court, including the Tax Court, and a refund may be ordered by such court of any amount collected within the period during which the Secretary is prohibited from collecting by levy or through a proceeding in court under the provisions of this subsection. The Tax Court shall have no jurisdiction to enjoin any action or proceeding or order any refund under this subsection unless a timely petition for a redetermination of the deficiency has been filed and then only in respect of the deficiency that is the subject of such petition. Any petition filed with the Tax Court on or before the last date specified for filing such petition by the Secretary in the notice of deficiency shall be treated as timely filed.

Note that the only mention of Tax Court jurisdiction in this statute relates to an action to enjoin assessment or collection where a timely petition is filed. There is nothing in the statute that makes the ninety-day period jurisdictional.   Section 6214 gives the Tax Court jurisdiction to redetermine tax, but there is nothing in that section conditioning the grant of jurisdiction on the filing of a timely petition.  Thus the question:  is the 90-day period for petitioning the Tax Court in a deficiency case jurisdictional?  A court may look to stare decisis to answer that the 90-day period is jurisdictional, but the outcome is not certain.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Department of Justice Trial Attorney and former Assistant United States Attorney in the Tax Division of the U.S. Attorney Office in Los Angeles. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending clients in criminal tax investigations and prosecutions. Additional information is available at

On February 8, President Donald J. Trump announced the intent to nominate Charles P. Rettig of Hochman, Salkin, Rettig, Toscher & Perez, PC, to be the next Commissioner of Internal Revenue for the remainder of a term of five years beginning 11/13/17. If confirmed by the Senate, Chuck would be the 49th IRS Commissioner, the first “tax person” to assume the position since 1997 and only the second confirmed Commissioner to be from California. 

In support of this announcement, Steven Toscher stated “we could not be more pleased and honored that the President will nominate our close friend and long-time member of our firm to be the next Commissioner of Internal Revenue. Chuck is the person who can protect taxpayers’ rights, help improve taxpayer service, and oversee the modernization of the ailing IRS information technology infrastructure. He is most capable to lead the IRS in its important mission of properly serving and protecting the rights of taxpayers and insuring the fair, efficient and impartial enforcement of our tax laws. There is no more qualified nominee to lead the IRS and insure accountability at this very critical time for tax administration. As a longtime, strong supporter for the integrity our system of tax administration, Chuck will hold both Government and private tax practitioners accountable to the public. His ongoing efforts and concern for the fair treatment of all taxpayers have earned him tremendous respect throughout the Government and private tax practitioner communities.”

Avram Salkin, co-founder of Hochman, Salkin, Rettig, Toscher & Perez, PC, added “the Commissioner of Internal Revenue is one of the most important positions in our Government and having known and worked closely with Chuck for over three decades, I have been honored and privileged to watch him become one of the most respected tax lawyers in our country with impeccable integrity and judgment.”

Dennis Perez, further added that “Chuck will be sorely missed by all of us and I know it has been an extremely difficult decision for Chuck to leave what has been his home for his entire professional career. However, this country and the IRS are deserving of his focused leadership and dedicated service and for that we are extremely proud of him and his strong commitment toward enhancing our system of tax administration.”

As previously stated in the Chambers USA: America’s Leading Lawyers for Business, “According to peers, Charles Rettig of Hochman Salkin Rettig Toscher & Perez is ‘phenomenal, just phenomenal.’ Further, he “is regarded by market sources as a ‘brilliant and gifted lawyer . . . a real star and a national leader'” who “enjoys a superb reputation and benefits from ‘great presence.’” Chambers USA has further stated “Fantastic controversy tax lawyer” Charles Rettig is “knowledgeable and very intelligent . . . a force to be reckoned with . . . a driving force in policy making at the national level with great client skills when it comes to sensitive matters.”

During his 35+ year professional career with Hochman, Salkin, Rettig, Toscher & Perez, PC, Chuck Rettig has represented numerous taxpayers before every administrative level of the Internal Revenue Service as well as in matters before the Tax Division of the U.S. Department of Justice, and various other taxing authorities. Chuck served as Chair of the IRS Advisory Council (IRSAC suggests best practices and operational improvements for taxpayer services at the IRS as well as current or proposed IRS policies, programs, and procedures); for almost 20 years, he has served as a Member of the Advisory Board for the California Franchise Tax Board and was previously a Member of the Advisory Council of the California State Board of Equalization. Previously, he chaired the 4,000+ member Taxation Section of the California Bar and is currently Vice-Chair, Administration for the 12,000+ member Taxation Section of the American Bar Association, and Vice-President of the American College of Tax Counsel.

Chuck has been an invited participant at various United States Tax Court Judicial Conferences,  has served as Chair of various national, state and local professional organizations, is a frequent lecturer before such professional organizations, and is a regular columnist and author in various national tax-related publications. Notably, he has served as Chair of the UCLA Extension Annual Tax Controversy Institute for more than 20 years, has Chaired the Ethics, Compliance and Enforcement Subcommittee of the USC Institute on Federal Taxation since 2003, and has served on the Advisory Board and Chaired the “Tax Controversies” sessions for the New York University Institute on Federal Taxation since 2007. Further, he has often participated in presentations on behalf of the AICPA, the California Society of CPAs, and the Hawai’i Society of CPAs.

Chuck is a Certified Specialist both in Taxation Law and in Estate Planning, Trust & Probate Law (the State Bar of California, Board of Legal Specialization) admitted to practice law in California, Hawai’i and Arizona (inactive). Chuck received his LL.M. (in Taxation) from the School of Law at New York University, his J.D. from the School of Law at Pepperdine University, and his B.A. (in economics) from UCLA.

Among his many activities on behalf of others, Chuck co-founded the UCLA Extension VETS COUNT Scholarship Fund – Vets Count is designed to provide financial assistance for active duty and retired military personnel who are working to realize their career goals in tax, accounting, wealth management, and other areas of the financial services industry. For further information, see


The Government routinely seeks a restitution order in criminal tax cases. When a defendant pleads guilty to a tax crime, the U.S. will either require the taxpayer to agree to a restitution amount or acknowledge that the U.S. can request restitution as part of the sentence.  Once the restitution order is entered, the defendant cannot challenge it in later proceedings in the sentencing court or in a civil tax case.  See 26 U.S.C. sec. 6201(a)(4).

In Choi v. United States, Crim. No. RDB 12-0066 (D. MD. Jan. 30, 2018), the defendant pled guilty to one count of tax evasion.  The court sentenced him to 18 months imprisonment and ordered him to pay restitution in the amount of $739,253.98 for the 2006-2009 tax years.

After Choi was released from prison, he settled his civil tax case with IRS Appeals for $132,991. In December 2016, Choi filed for habeas corpus relief to get the court to reduce the amount of restitution by claiming ineffective assistance of his criminal defense counsel.  According to Choi, his criminal defense counsel should have gotten a restitution order similar to the amount of the settlement with Appeals.  Choi lost.

The federal habeas statute, 28 U.S.C. sec. 2455, provides that “A prisoner in custody under sentence of a court established by Act of Congress” can seek habeas relief. The problem is that, as interpreted by the U.S. Courts of Appeal, a defendant can only use habeas to challenge a custodial sentence, not fines or restitution orders. The court therefore denied Choi’s motion for relief.

The court then addressed the merits of Choi’s ineffective assistance of counsel claim. There is a two-prong test to show ineffective assistance of counsel: 1) the defendant must establish that his attorney performed below an objective standard of reasonableness and 2) counsel’s substandard performance denied the defendant a fair trial.  Choi failed to satisfy either prong.

First, Choi signed a plea agreement that said he was satisfied with his attorney. At his sentencing he told the court he discussed the probation report, which recommended $739,253.98 restitution, with his counsel and was satisfied with his counsel’s explanation and the report.  In a colloquy with the court prior to imposition of sentence, Choi did not indicate that he was dissatisfied with either his counsel’s performance or with the restitution amount.  Thus he failed to establish the performance prong.

Second, Choi did not show prejudice. A settlement with Appeals is not a determination of the correct civil tax liability.  Choi never presented any evidence to establish that the restitution amount was wrong.  Thus, even if he could show substandard performance, he could not prove prejudice.

In a criminal tax case the defendant’s first objective is not to be convicted.  If convicted, his goal is to get the shortest possible term of incarceration.  As a result, to some degree, restitution might be a bit of an afterthought where the defendant’s primary focus is not on gathering evidence to reduce the tax loss. This can result in a taxpayer being faced with a restitution amount that is several times more than what is actually owed.  And once the restitution order is entered, you cannot get it reduced.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Department of Justice Trial Attorney and former Assistant United States Attorney in the Tax Division of the U.S. Attorney Office in Los Angeles. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending clients in criminal tax investigations and prosecutions. Additional information is available at


The Federal Sentencing Commission keeps track of sentencing in federal criminal cases. Its recently released Data Report gives an idea of sentences in criminal tax cases and how they stack up against sentencing in other types of federal criminal cases.  First, some basics.

The report is for the fourth quarter of 2017. Since the U.S. is on a fiscal year ending September 30, the report is for the period July 1 through September 30, 2017.  During those 92 days sentences were handed down in 66,412 cases by federal district courts.  The three largest categories were drug cases (trafficking, facilitating or possessing), with over 20,500 cases sentenced (30.9%), immigration with 20,334 cases sentenced (30.6%) and firearms violations with 8,024 cases (12.1%).  So almost 75% of federal criminal cases involved drug, guns or immigration violations.  Where do taxes stand? Sentences were handed down in only 428 tax cases, a measly 0.6%.

The Sentencing Commission statistics tell you more than just the number of cases sentenced in each category. It breaks cases down by race:

Race                      White        Black          Hispanic            Other

All Cases               21.5%         21.1%            53.3%               5.4%

Tax Cases              60.2%         23.5%            10.8%               4.2%


It breaks cases down by gender (but only male and female are listed):

Gender                 Male                            Female

All Cases              86.7%                            13.3%

Tax Cases            73.1%                             26.9%


The IRS is a greater believer in gender equality than other federal agencies.

Now the naughty bits: the periods of incarceration. The average sentence in tax cases was 13 months and the median sentence was 10 months.  This is a lot better than in other classes of criminal cases where overall the average sentence was 48 months and the median sentence was 21 months.  So if you are convicted of a tax crime, you’ll probably spend less time in prison than if you trafficked in drugs (70 months average, 55 months median).  Immigration violations average 12 months incarceration with a median of 8 months.

Prior to the Supreme Court’s decision in Booker, holding that the guideline ranges were advisory, almost all cases were sentenced within the guideline range. How many are within the guideline range, above the guideline range and below the guideline range?  Here’s how it breaks down:

Below                 Below

Guidelien Range   Above                  (Gov’t Request)   (No Gov’t Request)

All              49.1%                   2.9%                  27.8%                 20.1%

Tax             25.2%                   1.6%                  24.7%                 48.5%

Courts are less likely to give sentences within the guideline range for tax cases than for almost any other class of case and they are far more likely to sentence below the guideline range where the Government does not sponsor a below guideline range sentence than in almost every other class of cases. Of course, where the Government sponsored a below guideline range sentence in a tax case the incarceration rate was -0-.  No one was sentenced to prison in a tax case where the Government asked the court to give a below guideline range sentence.  How does this compare with cases where the Government did not sponsor a below guideline range sentence?  The median sentence was 1 month incarceration.  Yes, you read that correctly: ONE MONTH.

Things didn’t look so good in the 7 tax cases where the court gave an above guideline range sentence: the median sentence was 45 months.

Bottom line: the courts continue to give lighter sentences in tax cases than in most other types of federal criminal cases.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and 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


On November 20, 2017, the Tax Court issued its opinion in Graev v. Commissioner, 149 T.C. __, reversing a prior decision that sustained a 20% accuracy penalty.  The issue before the Court was whether the IRS has to prove that it complied with Internal Revenue Code §6751(b)(1) in order to sustain a penalty in a deficiency proceeding.  That section requires that certain penalty assessments have to be “personally” approved in writing by the “immediate supervisor” of the IRS employee who initially determines the penalty.  In its earlier opinion, the Tax Court held that the question of compliance was not appropriate for review until after the IRS assessed the penalty, which occurs after deficiency proceedings. Graev v Commissioner, 147 T.C. __ (Nov. 20, 2016).

In March 2017, the Second Circuit in Chai v. Commissioner, 851 F. 3rd 190, held that the IRS, as part of its burden of proving that a taxpayer is liable for a penalty, must prove it complied with §6751(b)(1).  Because Graev is appealable to the Second Circuit, the Tax Court vacated its earlier opinion.  In its most recent opinion in Graev, the Tax Court a) adopted the reasoning of the Second Circuit in Chai and held that the IRS must prove compliance with §6751(b)(1) in a deficiency case, b) made the decision applicable to all cases, not just those appealable to the Second Circuit, and c) determined that the IRS complied since the supervisor of the IRS attorney who approved the notice of deficiency signed off on asserting the 20% accuracy penalty.

The ramifications of the latest opinion in Graev have already been felt.  In four cases that were tried before Judge Holmes that are awaiting decision the IRS moved to reopen the record to present evidence of compliance.  On the day the Graev opinion was issued, Judge Holmes entered orders in all four cases denying the motion.  As he succinctly put it, “What happens if a party with the burden of production on an issue fails to introduce sufficient evidence at trial to meet that burden?  Well, he loses.”  So the penalty won’t be sustained in those four cases.

What does the decision mean for other taxpayers? If they have a case pending in Tax Court that has not yet gone to trial, the IRS will offer into evidence the form approving the penalty, which is easy enough if the IRS complied with the law.  If it can’t produce the paper, the Court will not sustain the penalty.  In cases awaiting decision, the IRS will seek to reopen the record to present evidence of compliance.  It remains to be seen whether other Tax Court judges will follow Judge Holmes’ lead.

What about taxpayers who already lost a penalty issue in Tax Court? Following the Chai decision, a number of taxpayer started raising the issue of compliance with §6751(b)(1) in collection due process cases.  They won’t be able to do so if the penalty was asserted in a notice of deficiency or the taxpayer had the chance to appeal the IRS’s proposed penalty before it was assessed.

So is it a win for taxpayers? Not really.  In his concurring opinion in Graev, Judge Holmes said he’d prefer that the case was decided under the Golsen rule.  Under Golsen, the Tax Court will follow an circuit court’s decision on a rule of law in cases appealable to that circuit, but is free to apply a different rule in cases appealable to other circuits.  Thus, the IRS may raise the issue in cases appealable to other circuits.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and 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


Posted by: Robert Horwitz | January 16, 2018

Tax Court to IRS: You’re Too Late Baby! by Robert S. Horwitz

As part of its crackdown on taxpayers who were not reporting income from overseas assets, in 2010 Congress enacted Internal Revenue Code sec. 6038D. That section requires a taxpayer to provide information about “specified foreign financial assets.”  It applies to tax years beginning after March 18, 2010.  The IRS developed Form 8938, Statement of Specified Foreign Financial Assets, for taxpayers to comply with sec. 6038D.

To show it means business, Congress included penalties for failure to provide the required information: a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets. That’s not what this blog is about.  Congress also extended the statute of limitations on assessment to six years for taxpayers who fail to include over $5,000 of gross income attributable to one or more assets required to be reported under sec. 6038D.

The six-year statute of limitations is contained in Internal Revenue Code sec. 6501(e)(1)(A)(ii). It provides that the IRS has six years within which to assess tax if a taxpayer omits gross income and

(ii) such amount—

(I) is attributable to one or more assets with respect to which information is required to be reported under section 6038D (or would be so required if such section were applied without regard to the dollar threshold specified in subsection (a) thereof and without regard to any exceptions provided pursuant to subsection (h)(1) thereof), and

(II) is in excess of $5,000…

This provision was enacted in 2010 and applies to returns filed after March 18, 2010, and to returns for which the normal statute of limitations had not expired. This is where Mehrdad Rafizadeh comes in. Rafizadeh v. Commissioner, 150 T.C. No. 1 (January 2, 2018).

For tax years 2006, 2007, 2008 and 2009, Mr. Rafizadeh had income of more than $5000 from specified foreign financial assets. In March 2010, before the effective date of the statute, the IRS served a John Doe summons.  The summons was resolved in November 2010.  Mr. Rafzideh was one of the taxpayers the IRS learned of as a result of the summons. In December 2014, the IRS issued a notice of deficiency asserting tax and penalties:

Year             2006           2007           2008           2009

Deficiency    $9,045        $10,934      $4,117        $1,619

Penalty         $1,809        $2,187        $823           $324

Mr. Rafizadeh petitioned Tax Court and moved for summary judgment on the ground that the statute of limitations for assessment had run on the 2006, 2007, 2008 and 2009 tax years. He won.

The Tax Court looked to the rules of statutory construction, which requires a court to construe the language of a statute giving the words their ordinary meanings and so that no part of the statute is superfluous, void or insignificant. Section 6501(e)(1)(A)(ii) applies only if the unreported income is from assets for which information “is required to be reported under section 6038D.”  Since there was no reporting requirement for specified foreign financial assets when the returns for 2006 through 2008 were filed, those returns did not fail to report income from such assets.

The Tax Court rejected the IRS’s argument its reading of the statute made the effective date a nullity. The Court pointed out that the provisions regarding effective date applies to all items on a return for which a specified reporting requirement, some of which predate the statute, is not complied with.  Thus its reading of sec. 6501(e)(1)(A)(ii) did not render the effective date a nullity.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and 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




This is the first in a series of blogs that will analyze the IRS’s Fiscal Year 2017 Annual Report. This blog will focus on the shift away from easy cases in favor of harder cases such as foreign-account and hidden-income cases that most consider the core of IRS criminal enforcement. Later blogs will take a deeper dive into specific focuses of IRS-CI, to better know what’s coming down the pike in the next few years.

When most people think of an IRS criminal investigation, they think of special agents finding hidden income or going after non-filers. But for many years the typical IRS case instead involved low-level criminals who filed dozens or even hundreds of bogus tax returns to get tax refunds. For example, in 2014, about half of the IRS’s investigations involved non-tax (e.g., money laundering) and drug crimes, and of the half that involved tax crimes, a large percentage were false-return cases. The common perception of a run-of-the-mill IRS criminal case didn’t match with reality.

Recognizing that the IRS’s Criminal Investigations has the same number of agents that it had 50 years ago – when the US population was around 200 million versus 325 million now – the IRS’s new Chief of Criminal Investigation, Don Fort, has appropriately shifted the investigative focus to the more traditional targets of tax investigations which should positively impact overall tax compliance. Fort took over in June 2017, after having spent nearly three years as the second-in-command in CI. Before Fort started setting priorities, the IRS had pushed its scarce resources toward identity-theft and data-breach cases. Unlike most tax cases, identity-theft and data-breach cases can involve multiple defendants and can be relatively “low hanging fruit” when compared to individual income-tax prosecutions. It’s also easy to run up higher numbers of prosecutions when you charge a dozen defendants at a time.

In identity theft cases, organized criminals and individuals traditionally took advantage of a massive security hole in the IRS’s computer system to obtain millions of dollars of fraudulent refunds every year using fake or stolen social security numbers. The IRS has worked to eliminate that hole, which was the inability of the IRS computer system to quickly match up reported payments on tax returns to payments received by the IRS. To get refunds in the hands of taxpayers quickly, the IRS would assume that tax returns were accurate, pay refunds, and then match up W-2s filed by employers to those attached to tax returns to determine which returns were fake. This approach led to billions of dollars per year being paid out in fraudulent refunds, and the IRS tried to prosecute its way out of the problem for many years. That didn’t work, as the computer system was the fix, not prosecutions. Starting in 2018, W-2 forms will include a new verification code to speed up the authentication process. Partly because of the IRS’s improved matching system as well as a surge of indictments against false-return mills, the IRS is touting “significant progress” against identity theft. ID Theft cases alone dropped 75% from 2013 to 2017. Though the number of false returns has dropped, the problem remains a multi-billion dollar hit to the public fisc. The IRS could continue to focus on these cases and cut down on false returns, as even with the reduction in bogus filings losses remain in the billions per year. A more-cynical view of events is that the IRS is simply declaring victory and moving on to more-interesting cases.

Although the improved matching system should cut down on fraudulent W-2s – either fake SSNs or fake W-2s using real SSNs – the IRS hasn’t locked down how it will stop the burgeoning and more-sophisticated source of fraudulent returns: data breaches. Using “spoofing” and “spear-phishing” techniques, fraudsters trick HR departments, tax professionals, and executives into providing accurate W-2 information and race to file fraudulent tax returns and scoop up refunds ahead of real taxpayers. These crimes are the flip side of the same data-breach coin that the IRS and many other data aggregators have faced in recent years; although the IRS stood up two cybercrime units in 2014 in LA and DC, their portfolio is so large that it can’t expect to put more than a dent in any of its emphases, including data breaches.

The upshot of the decline in agents and the shift away from easy cases has led to an expected decline in cases referred by CI for prosecution and cases opened for investigation. However, if Don Fort has anything to say about it, the only tax criminals who will be rejoicing are the ID Theft fraudsters, not traditional tax criminals such as those with hidden offshore accounts, money launderers, and false-return filers. Instead, as will be addressed in the next blog, Fort is bringing data-mining to bear on these targets to select the most-egregious offenders. There’s no silver lining to the decline in IRS cases for many of the traditional targets of tax investigations.

EVAN J. DAVIS – For more information please contact Evan Davis – or 310.281.3288. Mr. Davis is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax 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 money laundering and health care fraud. He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (OVDP, Streamlined Procedures and otherwise).

If you’re planning a vacation overseas in 2018 and you owe more than $50,000 in taxes, penalties and interest to the IRS, you have another thing coming. Beginning January 2018 the IRS will start implementing Internal Revenue Code section 7345.  That section was enacted in December 2015.  It says “If the Secretary receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.”  You’re “seriously delinquent” if you owe more than $50,000 in assessed tax, penalties and interest and the IRS has either a) filed a notice of federal tax lien and your collection due process rights have lapsed or been exhausted or b) the IRS has begun levy action.

There are a couple of exceptions – the IRS cannot certify you for passport revocation or denial if

  • you entered into an installment agreement to pay your tax,
  • collection action has been suspended because of a collection due process proceeding
  • you requested innocent spouse relief.

Certification can be reversed if the tax is paid in full, if the statute of limitations has lapsed, if the taxpayer has requested innocent spouse relief or the taxpayer has entered into an installment agreement or offer in compromise. Certification is also reversed if it was erroneous.  A taxpayer can sue the IRS in district court or Tax Court for a determination that certification was wrong or should be reversed.

The IRS is required to notify a taxpayer if it has requested the State Department to revoke or deny a passport. Notice will be sent on letter CP508C.  If certification is reversed, notice will be sent to the taxpayer on letter CP508R.

So if you owe the IRS more than $50,000 don’t start planning that trip to the South of France just yet. First, pay your past due tax.

Robert S. Horwitz – For more information please contact Robert S. Horwitz – or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and 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

The Perils of Civil and Criminal Tax Penalties: What You Need to Know

The Knowledge Group  

January 11, 2018 – Noon – 1:30 pm (Pacific)

On January 11 at Steve Toscher, Curtis Elliott, Jr. and Steve Mather will be hosting a Knowledge Group Webinar “The Perils of Civil and Criminal Tax Penalties: What You Need to Know.” The Internal Revenue Service is increasingly asserting civil penalties for domestic and international taxpayers and the recent IRS Criminal Investigation Annual Report criminal tax enforcement regarding traditional tax cases is on the rise as well.

This presentation will cover major civil penalties – including international reporting penalties; best practices in (hopefully) avoiding the civil fraud penalty and sanctions for criminal tax fraud and the differences between the two; handling sensitive IRS audits and how to avoid a prosecution referral to the Criminal Investigation Division. The presentation will also discuss the major criminal tax violations, including the pending U.S. Supreme Court case of Marinello dealing with Obstruction of IRS Administration and the role of the Federal  Sentencing  Guidelines in Criminal Tax Enforcement.

Registration information is available at:

Steve Toscher has been representing clients for more than 35 years before the Internal Revenue Service, the Tax Divisions of the U.S. Department of Justice and the Office of the United States Attorney (C.D. Cal.), numerous state taxing authorities and in federal and state court litigation and appeals.

Mr. Toscher enjoys a unique combination of solid criminal defense experience and extensive substantive tax experience to assist individuals and entities subject to sensitive government inquiries.  He has considerable experience as lead counsel in defending criminal tax fraud investigations (both administrative and Grand Jury investigations) as well as in defending criminal tax prosecutions (both jury and non-jury).

Recently, Steve Toscher received a judgment of acquittal in a matter involving allegations of a conspiracy between the client, the client’s independent certified public accountant and others relating to the clients personal taxes as well as those of the clients son and his business enterprise, including the use of a foreign bank account and a foreign trust. Others included in the indictment previously pled guilty and the former accountant testified at trial as a cooperating witness for the Government. This is believed to be among the first unsuccessful prosecutions relating to the use of matter involving use of foreign trusts and foreign financial accounts in the Government’s ongoing, extensive international enforcement efforts.

For more information please contact Steve Toscher –

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