Posted by: Steven Toscher | April 13, 2018

Tax Problem for Departing Aliens by Steven Toscher

The regulations[1] require that no alien, whether resident or non-resident, can depart from the United States unless he or she first procures a certificate that he or she has complied with the obligations imposed upon him or her by the income tax laws.[2] Failure to do so may result in a termination assessment.

Certain types of individuals, however, are not required to obtain a certificate of compliance. These include:

(1)        employees of foreign governments or international organizations;

(2)        alien students and industrial trainees admitted on F or H-3 visas, respectively, who have limited income (as defined by the regulations); and

(3)        other aliens temporarily in the United States.

The last category includes an alien visitor for pleasure admitted solely on a B-2 visa; an alien visitor for business admitted on a B-1 visa; an alien in transit to the United States or any of its possessions on a C-1 visa; an alien admitted to the United States on a border-crossing identification card or regarding whom passport visas and border identification cards are not required, if that alien is a visitor for pleasure, if that alien is a visitor for business who does not remain in the United States or its possessions for a period exceeding ninety days during the taxable year, or if that alien is in transit through the United States or its possessions; an alien military trainee admitted to the United States; and, finally, an alien resident of Canada or Mexico who commutes between that country and the United States at frequent intervals for employment and whose wages are subject to the withholding of tax.[3]

Note that holders of a Permanent Resident Card (“ a Green Card”) are not excused from this regulation.

Except for the above individuals, every alien departing the country must obtain a certificate of compliance wherein the district director determines whether the alien’s departure jeopardizes the collection of any income tax. If the district director finds that the departure of the alien will result in jeopardy, the taxable period of the alien will be terminated and the alien will be required to file returns and make payment for the shortened tax period. If the district director finds that the departure of the alien does not result in jeopardy, the alien will be required to file a statement on Form 2063, U.S. Departing Alien Income Tax Statement,[4] but will not be required to pay income tax before the usual time for payment.[5]  See I.R.S. Publication 519 (U.S. Tax Guide for Aliens) for more details.

The intended departure of an alien who is a resident of the United States or a U.S. possession and who intends to continue that residence will not be treated as resulting in jeopardy and, therefore, will not require a termination of the alien’s taxable year, unless the district director has information indicating that the alien intends by his or her departure to avoid payment of income taxes. With a non-resident alien or a resident alien discontinuing residence, the fact that the alien intends to depart from the United States will justify termination of the taxable period unless the alien establishes that he or she intends to return to the United States and that his or her departure will not jeopardize the collection of any taxes. The determination is to be made on a case-by-case basis. Evidence tending to establish the nonexistence of jeopardy from the departure includes showing that the alien is engaged in a trade or business in the United States or that the alien leaves enough property in the United States to secure payment of his or her income tax for the taxable year.[6]

Every alien required to obtain a certificate of compliance, whether a resident or a nonresident, whose taxable period is terminated upon departure because of jeopardy is required to file with the district director a return in duplicate on Form 1040C, U.S. Departing Alien Income Tax Return,[7] for the short taxable period resulting from the termination. Income received and reasonably expected to be received through the taxable period, during and including the date of departure, must be stated. Moreover, other income tax returns due but not filed must be submitted.[8]

Upon compliance with the foregoing requirements and payment of the income tax required to be shown on the return and of any income tax due and owing for prior years, the departing alien will be issued a certificate of compliance. The departing alien can postpone payment of the tax required to be shown on the return until the usual time of payment by furnishing a bond.[9]

STEVEN TOSCHER – For more information please contact Steven Toscher – Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing 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. Additional information is available at


[1] Treas. Reg. § 1.6851-2.

[2] See Pub. 519 (U. S. Tax Guide for Aliens).

[3] Id.

[4] Available at

[5] Treas. Reg. § 1.6851-2(b)(1).

[6] Id.

[7] Available at

[8] Treas. Reg. § 1.6851-2(b)(3)(iii).

[9] Id.


Generally, when a taxpayer files a tax return, the federal tax laws afford the Internal Revenue Service (“IRS”) with a limit of only three-years within which it must act to examine and assess additional taxes and penalties on any unreported income. While the Internal Revenue Code provides various exceptions to this three-year limit[i], on January 2, 2018, the Tax Court in Rafizadeh v. Commissioner[ii], not only narrowed one of those exceptions, but did so in the context of the IRS’s ability to assess tax on unreported income derived from an undisclosed foreign bank account.

In February 2009, the United States entered into a deferred prosecution agreement with Switzerland’s largest bank, UBS AG, in connection with the bank’s facilitation of the creation and use of non-disclosed foreign bank accounts by U.S. taxpayers. The agreement was unprecedented and resulted in the IRS obtaining secret bank account information on tens of thousands of U.S. taxpayers.

The landmark settlement with UBS was further exemplified by the concerted efforts of the Department of Justice and the IRS to not only utilize its criminal powers but also its civil tools to obtain additional secret foreign bank account information, such as the filing of a John Doe summons action, whereby the IRS received thousands of additional undisclosed foreign accounts and the Offshore Voluntary Disclosure Initiative, an administrative compliance program which resulted in over 14,700 additional taxpayers coming forward to report previously-undisclosed foreign bank accounts.

Notably, at the time the government was involved these efforts, which can fairly be described as very public actions to obtain information about what were previously viewed as “secret” foreign bank accounts, the U.S. tax laws did not impose a separate filing obligation on U.S. taxpayers, under Title 26, with respect to such interests in foreign bank accounts. Congress, on March 18, 2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act, created this additional filing obligation by enacting Section 6038D. Section 6038D imposes a duty on U.S. taxpayers to file a report of information relating to an interest in a “specified foreign financial asset,” e.g., foreign bank accounts, where the aggregate value of such asset(s) exceed $50,000.  This newly enacted reporting obligation applied only to tax years ending after December 19, 2011.[iii]  Thus, for tax years ending after 2011, the tax laws required that U.S. taxpayers – in addition to the underlying obligation to report all income from all sources – separately report, on Form 8938, their interests in foreign bank accounts. Form 8938 is then required to be submitted with the U.S. taxpayer’s income tax return.[iv]  

In imposing the new Form 8938 reporting requirement on taxpayers, Congress determined that the IRS should be entitled to additional time to examine and assess a tax related to the foreign bank account information now required to be disclosed directly to the IRS under Section 6038D. As a result, Congress, under HIRE, also enacted Section 6501(e)(1)(A)(ii), which provided a six-year statute of limitations for the IRS to assess a tax deficiency, rather than the more narrow three-year limit, in cases involving omitted gross income attributable to assets required to be reported under Section 6038D, where the amount of omitted gross income exceeded $5,000.

This brings us to Mr. Rafizadeh. For the tax years 2006 through 2009, Mr. Rafizadeh, a U.S. taxpayer, owned a foreign bank account, the gross income of which he did not disclose when he filed his tax returns for those years. Prior to his attempt to submit an offshore voluntary disclosure, the bank at which the taxpayer owned this account received a John Doe summons from the IRS. As a result, the IRS determined that the taxpayer was not eligible for the administrative compliance program. The IRS then proceeded to examine not only the taxpayer’s foreign account issues for 2006 through 2009, but also his income tax returns for those same years.

On December 8, 2014, the IRS, relying upon the six-year statute of limitations under Section 6501(e)(1)(A)(ii), issued a notice of deficiency to the taxpayer asserting tax deficiencies as well as the accuracy-related penalty for each of those years. The additional tax assessed for each year, other than 2009, exceeded $5,000.  The taxpayer petitioned the Tax Court, asserting the three-year statute of limitations to assess additional tax for the years 2006-2009 had expired and the six-year statute upon which the IRS had relied was inapplicable to these tax years as Section 6038D, unambiguously on its face, did not impose a duty on him to file the Form 8938 for these tax years.

The IRS in response, after conceding the inapplicability of Section 6501(e)(1)(A)(ii) to 2009 on grounds that the amount in issue for that year was less than $5,000 (an additional factor mandated for the application of the six-year statute of limitations), asserted the six-year statute extension should be interpreted to apply to not only years in which the Form 8938 was required but years, such as 2006-2008, in which the omitted gross income involved the type of assets required to be reported under Section 6038D as long as the statute of limitations on the underlying income tax return was still open.

The Tax Court, relying upon Supreme Court precedent[v], noted that it “must presume that a legislature says in a statute what it means and means in a statute what it says there” found that absent a preexisting obligation to file a report under Section 6038D (akin to the statute’s unambiguous $5,000 threshold), the six-year statute of limitations did not apply.[vi]  As such, the Tax Court found the notice of deficiency for 2006, 2007, and 2008 to be untimely.[vii]

In short, while the holding in Rafizadeh serves to limit the IRS’s ability, under Section 6501(3)(1)(A)(ii), to extend the general three-year statute of limitation for years prior to 2011, where the taxpayer’s omission of income from any source, including but not limited to a “specified foreign financial asset” exceeds 25% of the gross income reported on the return or is the result of fraud, the IRS doesn’t need that statute to extend its time to six years, or even, to forever. At least in the context of the IRS’s use of its civil tools. Of course, the IRS’s criminal tools are a whole different story . . .

Sandra R. Brown is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., and 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. Prior to joining the firm, she 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 may be reached at or 310.281.3217.

[i] 26 U.S.C. §6501, et seq.

[ii] Rafizadeh v. Commissioner, 150 T.C. No. 1 (2018).

[iii] Treas. Reg. §1.6038D-2(g).

[iv] Treas. Reg. §1.6038D

[v] Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253-254 (1992).

[vi] Rafizadeh, 150 T.C. No. 1, at 7.

[vii] Id. at 12-13.


As we approach the tax return filing deadline of April 17 this year, taxpayers are scrambling for documents to substantiate their expenses and basis in assets. Tax practitioners are always asked low long should one keep records.  Three years?  Seven years?  Forever?  If you find yourself without records, all may not be lost thanks to early 20th century Broadway writer, producer, director George M. Cohan.[i]

Andrew Shank[ii] withdrew over $27,000 from his IRA and did not report any of it on his tax return despite receiving a Form 1099-R.  At trial he credibly testified that he opened the IRA in the 1990s when he was a high earner and therefore could not deduct the contributions.  The Court found it understandable that Mr. Shank didn’t have records from the 1990s and combined with his credible testimony used the Cohan rule to estimate his basis.  Although the Court ultimately determined a basis of only $4,760, there are several important lessons from this case.

First, although documentary evidence might be the best evidence to prove basis, testimony is evidence and credible testimony is valuable evidence. IRS Revenue Agents, Appeals Officers, and even lawyers frequently get tunnel vision and only look at documentary evidence and ignore the taxpayer’s words.  If a taxpayer can credibly tell his or her story the Court will consider it even where recordkeeping is light.  As a practitioner, you need to build your case around your client’s story to offer as much support as possible.  Cohan is not automatic.  You must establish a reasonable evidentiary basis.

Second, this case serves as a reminder that the Cohan rule does not only apply to expenses, but also basis. Taxpayers are frequently trying to prove their basis in stocks purchased years ago, or the cost of home improvements.  These issues are ripe for the Cohan rule, assuming you can establish a reasonable evidentiary basis.

Finally, when it comes to keeping records, if it deals with basis, it is wise to keep records for several years after you dispose of the asset. Without records you may not end up with zero basis, but even with Cohan, it is unlikely to be what you think you deserve.

Jonathan Kalinski specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world.  He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.

[i] Cohan was famously portrayed by James Cagney, who won an Oscar for Yankee Doodle Dandy.

[ii] Shank v. Commissioner, T.C. Memo. 2018-33.

There’s been a recent uptick in state and federal prosecutions of restaurants who use sales-suppression software (also known as “zappers”) that delete transactions on computerized point-of-sale systems, as governments have finally woken up to the fact that they are losing tens of billions of dollars per year in underreported sales and income taxes. These zapper programs are a modern update to an age-old practice in cash businesses – keeping one set of “real” books and another, showing lower sales, to give to the tax collectors. In the past few years, the IRS has teamed up with state taxing agencies on cases, training, and software to detect businesses – primarily restaurant so far – that are submitting false sales and income figures.

In the article, my brother Kirk, a Seattle attorney who defended a low-level zapper salesperson in the first prosecution of a zapper distributor, and I tracked the increasing frequency of zapper prosecutions. Kirk’s client’s case resulted from a federal-state partnership, whereby a restaurant owner was prosecuted by the State and Kirk’s client was prosecuted by the US Attorney’s Office. As we noted, what started out as one zapper prosecution every decade has increased to one prosecution every few months. We also discussed that states are sending their tax investigators to zapper training, hoping to detect and nab businesses who are using the software.

As if on cue, two months after our article, the next case dropped. On March 9, 2018, the Washington Attorney General filed charges against the owner of seven Tacos Guaymas restaurants for zapping more than $5.6 million in sales tax under a 2013 Washington law that specifically outlaws using zapper software. The AG touted the case as “potentially the largest in the country,” which very well may be true. Washington’s sales tax rate is roughly 10 percent, so the restaurants allegedly zapped more than $50 million of sales.

It’s worth noting this case was brought in Washington State. Washington is on the forefront of investigating and prosecuting zapper cases, and it appears they now have the expertise – using undercover agents as well as computer forensics – to investigate the cases without the IRS’s help. The IRS isn’t mentioned in the press release, which in the world of law enforcement would be a major faux pas if the IRS were involved. This development should make cash businesses in Washington as well as other states that have devoted training and agent resources to zapper cases – including Connecticut, Illinois, and California – nervous.

If you’d like to learn more, please forward an email requesting a copy of the article referenced above.

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).


Did you ever fail to keep complete and accurate records? Pay someone in cash? Not give an accountant all your records? Deposit a business check in a personal account? Thanks to the Supreme Court’s March 21 decision in Marinello v United States, 584 U.S. ___, you won’t have to worry that these acts can lead to your being charged with a tax crime (at least if they didn’t occur while you  knew you were the subject of an IRS audit or investigation).

The tax obstruction statute, Internal Revenue Code sec. 7212(a), makes it a crime to use force or threats of force against a federal employee in order to obstruct the “due administration” of the Internal Revenue Code. The omnibus clause of that statute criminally penalizes anyone who ʺcorruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration ofʺ the Internal Revenue Code in ways not addressed by other specific provisions of the statute.  For many years the omnibus clause was rarely used in criminal tax prosecutions.  This changed in the mid 1990s, when it became a way to beef up a tax prosecution.

A case in point: Carlos Marinello, who operated a courier service. He lived off of income from his business.  From 1992 to 2010 he failed to file individual or corporate income tax returns. He destroyed bank statements and business records.  In the early 2000s the IRS began an investigation of Marinello but closed the case because it could not determine whether he owed tax.  Marinello never learned of this investigation.

In 2009, the IRS reopened its investigation of Marinello. Special agents showed up at his home and he consented to an interview.  He admitted not filing returns, living off income from his business and destroying records.  A slam-dunk case of willful failure to file tax returns.  The problem from the Government’s point of view is that willful failure to file is only a misdemeanor.  And the IRS apparently failed to gather enough evidence to prove felony tax evasion.

To fix the problem, the Government indicted Mr. Marinello on 8 counts of willful failure to file and one count of violating the omnibus clause. The acts that supported the omnibus clause count: a) failing to keep business books and records; b) shredding bank statements; c) cashing checks from business clients; d) paying employees in cash; e) failing to provide his accountant with complete books and records; f) putting business income in his personal bank account; and g) putting assets in nominee names.

A jury convicted Marinello on all nine counts. The trial judge rejected Marinello’s proposed instruction that to convict for violation of the omnibus clause count the Government must prove he was aware of an IRS investigation when he committed these allegedly obstructive acts.  The trial judge sentenced the 69-year-old Marinello to 36 month in prison, one year supervised release and payment of over $350,000 restitution.  The Second Circuit affirmed.  Joining the First, Ninth and Tenth Circuit, and rejecting the reasoning of the Sixth Circuit in US v. Kassouf, 144 F.3rd 952 (6th Cir. 1998), the Second Circuit held that the Government does not need to show that the defendant was aware of an on-going IRS audit or investigation in order to convict under sec. 7212(a).

Because of a split in the circuits, the Supreme Court granted Marinello’s petition for certiorari. In a 7-2 opinion, the Supreme Court reversed the Second Circuit.  The Court put the question before it and the answer in the following terms:

The question here concerns the breadth of that statutory phrase. Does it cover virtually all governmental efforts to collect taxes? Or does it have a narrower scope? In our view, “due administration of [the Tax Code]” does not cover routine administrative procedures that are near-universally applied to all taxpayers, such as the ordinary processing of income tax returns. Rather, the clause as a whole refers to specific interference with targeted governmental tax-related proceedings, such as a particular investigation or audit.

The Court looked to its decision in United States v. Aguilar, 515 U.S. 593 (1995), which involved similar wording in the obstruction of justice statute.    In Aguilar the Court held to convict under that omnibus clause of the obstruction of justice statute the Government must prove the defendant intended to influence a judicial or grand jury proceeding and that his acts had a temporal, causal or logical relationship with the proceeding.  The reasons for its narrow reading in Aguilar were deference to Congress and concerns about giving “fair warning … of what the law intends to do if a certain line is crossed.”

The Court observed that the words “obstruct or impede” are broad. The objective phrase is “due administration of this title.”  The omnibus clause occurs in the context of language dealing with the obstruction of an officer or employee or the forcible rescue of property after seizure, acts “against individual, identifiable persons or property.”  According to the Court the omnibus clause is a “catchall” to the types of obstructive conduct set out in sec. 7212(a), not to all interference with what the Government termed “the continuous, ubiquitous and universally known” administration of the internal revenue laws.

Following its textual analysis, the Court turned to the legislative history of sec. 7212(a). It found that both House and Senate Reports made it clear that Congress meant to limit the scope of sec. 7212(a)’s omnibus clause.  The Court could find nothing in the legislative history to indicate an intent to make the omnibus clause a catchall for routine filing, return processing and similar activities under the Internal Revenue Code.

The Court also expressed concern that application of the omnibus clause to the full panoply of the Internal Revenue Code would potentially transform misdemeanors into felonies. The Government’s broad reading would create overlaps and redundancies and run the risk of potentially applying to such actions as paying a babysitter without withholding tax, not keeping all receipts for charitable contributions, or failing to give all records to an accountant.  Limiting the reach of the omnibus clause to acts done “corruptly” wouldn’t help since corruptly means “acting with the specific intent to obtain an unlawful advantage.” The Court said it could not image a person willfully violating the Code without intending to gain some advantage.  In the world of taxation no one is altruistic, I guess.

The Court rejected the Government’s argument that it could rely on prosecutorial discretion. Not only had the Government expanded the use of the omnibus clause since the 1990s, but relying on prosecutorial discretion would place too much power in the hands of prosecutors and police, lead to inconsistent application of the law and allow the law to be used arbitrarily.

The Court concluded:

… to secure a conviction under the Omnibus Clause, the Government must show (among other things) that there is a “nexus” between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. That nexus requires a “relationship in time, causation, or logic with the [administrative] proceeding.” Aguilar, 515 U. S., at 599 (citing Wood, 6 F. 3d, at 696). By “particular administrative proceeding” we do not mean every act carried out by IRS employees in the course of their “continuous, ubiquitous, and universally known” administration of the Tax Code. Brief in Opposition 9. While we need not here exhaustively itemize the types of administrative conduct that fall within the scope of the statute, that conduct does not include routine, day- to-day work carried out in the ordinary course by the IRS, such as the review of tax returns. The Government contends the processing of tax returns is part of the administration of the Internal Revenue Code and any corrupt effort to interfere with that task can therefore serve as the basis of an obstruction conviction. But the same could have been said of the defendant’s effort to mislead the investigating agent in Aguilar. The agent’s investigation was, at least in some broad sense, a part of the administration of justice. But we nevertheless held the defendant’s conduct did not support an obstruction charge. 515 U. S., at 600.  In light of our decision in Aguilar, we find it appropriate to construe §7212’s Omnibus Clause more narrowly than the Government proposes. Just because a taxpayer knows that the IRS will review her tax return every year does not transform every violation of the Tax Code into an obstruction charge.

In addition to satisfying this nexus requirement, the Government must show that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant. See Arthur Andersen, 544 U. S., at 703, 707–708 (requiring the Government to prove a proceeding was foreseeable in order to convict a defendant for persuading others to shred documents to prevent their “use in an official proceeding”). It is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually. To use a maritime analogy, the proceeding must at least be in the offing.

Associate Justice Thomas, joined by Associate Justice Alito, dissented. They opined that the majority reading transformed the meaning of the text from obstructing “the due administration of” the Code to “the due administration of some of” the Code.  The plain language of the text made the omnibus clause applicable to the entire Code, from to information gathering to return preparation to return processing to assessment, collection, audit and investigation, not just a to few specific provisions of the Code.  That a broad reading may be redundant is irrelevant.  Since the omnibus clause doesn’t require that a specific proceeding be ongoing, the dissent believed that the majority erred in reading it into the statute.  It would have affirmed the Second Circuit.

So you can sleep easier tonight even if you didn’t issue a 1099 or W-2 to your babysitter or paid cash for a meal or dumped some receipts. Unless of course you know that the IRS is auditing or investigating you.

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 | 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


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