On November 20, 2018, the IRS rolled out its new updated procedures for taxpayers who wish to make voluntary disclosures.  The notice emphasizes that the voluntary disclosure procedures are designed for taxpayers who could face potential criminal prosecution.  Taxpayers who do not face potential criminal prosecution but failed to report all income from foreign sources or to file all forms to report foreign accounts or assets can come into compliance through the Streamlined Filing Compliance Procedures, the delinquent FBAR submission program, or the delinquent international information return submission procedures.  Other taxpayers who do not face potential criminal prosecution “can continue to correct past mistakes” by filing amended or past due tax returns.  To determine whether to apply for admission into the voluntary disclosure program, a taxpayer should consult with an attorney experienced in criminal tax cases who can advise on whether the taxpayer could face criminal prosecution.

The new program applies to any voluntary disclosures received after the date the 2014 Offshore Voluntary Disclosure Program closed, September 28, 2018.  Any taxpayer wishing to make a voluntary disclosure after that date must request preclearance from Criminal Investigation by either fax (267-466-1115) or by mail addressed to “IRS Criminal Investigation/Attn: Voluntary Disclosure Coordinator/2970 Market St./1-D04-100/Philadelphia, PA 19104.”  If CI grants preclearance, a taxpayer is then required to submit all required voluntary disclosure documents using an updated Form 14457, which will require detailed information from the taxpayer.  A copy of the current Form 14457 is here.  If CI preliminarily accepts the taxpayer’s voluntary disclosure, the case will then go to Large Business & International in Austin, Texas, which will route the case for civil examination.

Civil examiners are to apply a “civil resolution framework” to all cases.  The framework will require a taxpayer to file returns and reports and be examined for a six-year period.  This compares with the eight year period under the 2014 OVDP.  A taxpayer who makes a voluntary disclosure will be subjected to a 75% fraud penalty under either §6651(f) (fraudulent failure to file) or 6663 (fraudulent return) for the year with the largest tax liability.  If the taxpayer failed to file FBARs, willful penalties will be imposed in accordance with the guidelines in IRM 4.26.16 and 4.26.17.  These guidelines allow a penalty equal to 50% of the highest aggregate account balance and, where there are multiple years for which a willful penalty applies, an amount of up to 100% of the highest aggregate account balance.  The IRS examiner, at his or her discretion, can assert fraud penalties for more than one year “based on the facts and circumstances of the case” and can also assert penalties for failure to file information returns, again based on facts and circumstances.  If the taxpayer “fails to cooperate and resolve the examination by agreement” the examiner can apply a fraud penalty for more than six years.  IRS managers are to ensure that “penalties are applied consistently, fully developed and documented” in every case.  Taxpayers who fail to cooperate with civil disposition of the case can have preliminary acceptance revoked.

The text of the civil framework is:

  1. a) In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years. Disclosure and examination periods may vary as described below:
  2. In voluntary disclosures not resolved by agreement, the examiner has discretion to expand the scope to include the full duration of the noncompliance and may assert maximum penalties under the law with the approval of management.
  3. In cases where noncompliance involves fewer than the most recent six tax years, the voluntary disclosure must correct noncompliance for all tax periods involved.

iii. With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period. Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).

  1. b) Taxpayers must submit all required returns and reports for the disclosure period.
  2. c) Examiners will determine applicable taxes, interest, and penalties under existing law and procedures. Penalties will be asserted as follows:
  3. Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
  4. In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.

iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.

  1. Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under IRM 4.26.16 and 4.26.17.
  2. A taxpayer is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties. Given the objective of the voluntary disclosure practice, granting requests for the imposition of lesser penalties is expected to be exceptional. Where the facts and the

law support the assertion of a civil fraud or willful FBAR penalty, a taxpayer must present convincing evidence to justify why the civil fraud penalty should not be imposed.

  1. Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.

vii. Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.

viii. Taxpayers retain the right to request an appeal with the Office of Appeals.

  1. d) The Service will provide procedures for civil examiners to request revocation of preliminary acceptance when taxpayers fail to cooperate with civil disposition of cases.
  2. e) All impacted IRM sections will be updated within two years of the date of this memorandum.

The original OVDP was criticized by National Taxpayer Advocate Nina Olsen for its “one-size-fits all” cookie-cutter approach that treated taxpayers who made honest mistakes the same as those who acted willfully.  As Ms. Olsen noted in a recent NTA Blog, “the IRS’s initial failure to design programs for benign actors probably eroded trust for the IRS, posing risks to voluntary compliance.”  The new voluntary disclosure program, with its emphasis on fraud penalties and FBAR willful penalties, is designed for those taxpayers Ms. Olsen would designate as truly bad actors.

While the IRS will update its IRM sections impacted by the new guidelines, the basics of its voluntary disclosure practice will remain in place: a) the disclosure must be truthful, complete and timely, b) the taxpayer must cooperate with the IRS to determine his or her correct tax liability, c) the taxpayer must pay or makes good faith arrangements to pay in full any tax, interest and penalties owed, and d) voluntary disclosure does not apply if the taxpayer had income from illegal sources.  And, as in the past, a voluntary disclosure will not immunize a taxpayer from criminal prosecution, although the IRS will probably not recommend criminal prosecution where the taxpayer complies with the program.

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

The Treasury Inspector General for Tax Administration (“TIGTA”) is always on the lookout for the IRS’s flaws.  They hit the agency with both barrels last month, finding in consecutive audit reports that: (1) the IRS effectively ignores currency transaction reports (“CTRs”) in IRS civil cases; and, (2) even when civil auditors use bank-filed CTRs and suspicious activity reports (“SARs”) to identify possible tax cheats, most criminal referrals wither on the IRS-Criminal Investigations vine.

Under the Bank Secrecy Act (“BSA”), banks and other financial institutions are legally obligated to report cash transactions exceeding $10,000 in CTRs.  These same institutions are also required to file – in secret, without telling the taxpayer – SARs when the institutions identify suspicious patterns or activity, such as unusual cash transactions or repeated deposits of $9,900.  Avoiding the CTR reporting by always depositing less than $10,000 is itself a crime (structuring), but the reporting is also to try to detect illegal-source income and terrorist financing.  The CTRs and SARs are filed with another arm of the Treasury Department, the Financial Crimes Enforcement Network (“FinCEN”), but the IRS’s civil auditors and criminal investigators can access CTRs and SARs.

One might think that using SARs to identify viable civil audit targets and criminal investigations is like fishing with dynamite: a bank has already told the government that something looks fishy about the taxpayer.  The problem is the number of SARs filed: more than 2 million in 2017.   https://www.fincen.gov/reports/sar-stats.  The number of CTRs presumably is much higher, so the IRS has struggled with ensuring that CTR and SAR data is integrated with other tax data.

TIGTA warned the IRS in 2010 that it was missing the boat regarding using CTRs to identify tax non-filers.  The IRS pledged to do better, and TIGTA conducted a progress checked in eight years later.  In its September 21, 2018 report, https://www.treasury.gov/tigta/auditreports/2018reports/201830076fr.pdf, TIGTA noted little improvement.

When it is conducting BSA examination under Title 31, not the Title 26 tax code, the IRS can’t use the BSA exam as a pretext to do a tax examination.  However, if the BSA examination happens to reveal a possible tax violation, the BSA group refers the matter to IRS civil auditors in the Small Business/Self-Employed Division.  TIGTA wanted to find out what happened with the 3,000 or so referrals between 2015 and 2018.  TIGTA’s findings:

  • First, for most of the period, the IRS didn’t bother establishing procedures to process the referrals. In an organization so wedded to process, this caused referrals to fall into the expected bureaucratic black hole.  No one knew how long it was taking to process the referrals, and no tracking means no consequences for delay.  In the overworked IRS, this pushes the referrals to the bottom of the work pile.  Some referrals sat for three years between receipt and forwarding for possible audit.
    • The IRS agreed in response to TIGTA’s findings that it should start tracking BSA referrals, not surprisingly.
  • Second, one third of IRS auditors didn’t review CTRs before issuing no-change determinations, even when doing so would have revealed more than $100,000 of currency transactions.
    • The IRS disagreed with the percentage of missed CTRs but agreed with TIGTA’s recommendation to update the Internal Revenue Manual to emphasize that auditors should consult CTR information.


In the second report, issued three days later, TIGTA took the IRS to task for the terrible return-on-investment demonstrated in BSA cases, which included cases involving Forms 8300 (essentially CTRs for businesses, not banks).  https://www.treasury.gov/tigta/auditreports/2018reports/201830071fr.pdf


Given that its budget has been cut to – and even into – the bone, the IRS tries to get the most bang for its criminal enforcement buck.  If that’s true, the IRS should pull the rip cord on its BSA enforcement efforts and move the resources to more-lucrative cases.

The title of TIGTA’s report says it all: “The IRS’s Bank Secrecy Act Program has Minimal Impact on Compliance.”  Why did it reach that conclusion?

  • Referrals from the IRS back to FinCEN for Title 31 (BSA) penalty cases go through long delays and don’t seem to change BSA compliance;
  • The BSA program spent nearly $100 million to assess (let alone collect) approximately $40 million (an abysmal rate, given that spending on tax assessments is always a good deal for taxpayers), in part because the IRS lets many violations slide and just issues warning letters instead of penalties because FinCEN and not the IRS has exclusive penalties authority;
  • Those tasked with BSA compliance called their efforts “a waste of time” because the IRS didn’t track whether anyone complied with the IRS’s warning letters, and the frequency of repeat offenders who suffered no consequences, was stark evidence of this fact;
  • The few (about 5 cases per year) referrals to IRS-CI for BSA prosecutions were mostly declined by IRS-CI, showing they don’t prioritize these cases; and
  • The IRS continues to separate virtual currency from BSA work, when it should be integrated with other Title 31 BSA work, and it only opened about 10% of a small number of virtual currency cases were even assigned to a BSA examiner (the upshot being that virtual currency violations remain nearly untouched by the IRS).

The upshot of the report is that it appears no person at the IRS has taken responsibility to ensure that the BSA program gets results.  Therefore, there have been no consequences for failure, no rewards for success, and no incentives for efficiency.  The lack of leadership equals lack of focus and results.

Will the new IRS Commissioner kill the BSA program in the name of directing scarce resources to higher-impact cases, or improve it as recommended by TIGTA?  It’s too early to tell.  Having both prosecuted legal-source structuring and, more recently, having represented targets of legal-source BSA investigations, I am of two minds as to the best outcome for the IRS and taxpayers.  The IRS has a lot of priorities and needs to direct its resources to get the most bang for the buck, but BSA violations can be the tip of an important iceberg of criminal activity and the IRS will never know how deep the criminal conduct goes without investigating.

EVAN J. DAVIS – For more information please contact Evan Davis – davis@taxlitigator.com or 310.281.3288. Mr. Davis is a principal at Hochman Salkin Toscher Perez, 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 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 (Streamlined Procedures and otherwise).


When a partnership wants to sell real property it sometimes has a problem: some of the partners want to cash out while others want to do a like-kind exchange and remain invested in real property.  The “drop and swap” transaction was designed to address this problem.  Prior to the sale, the partnership distributes, in exchange for their partnership interests, tenancy-in-common (TIC) interests to partners who want to do a like-kind exchange.  At the close of escrow, the partners will get cash distributed to them.  The former partners will do a like-kind exchange through a qualified intermediary.  To ensure that those partners who want to do a like-kind exchange do not prolong or disrupt a sale by not agreeing to terms the partnership finds acceptable, these transactions are normally structured so that the TIC interests are distributed after the partnership and the buyer have entered into a contract.

For several years, the Franchise Tax Board has scrutinized “drop and swap” transactions and, in late 2016, in In re Giurbino, a non-precedential decision, the Board of Equalization upheld the FTB’s determinations that such a transaction did not qualify as a like-kind exchange and that the taxpayers were liable for an accuracy penalty.

The newly-constituted Office of Tax Appeals has done an about face and held for the taxpayer in a drop and swap transaction in Appeal of Mitchell (8/2/2018).  The facts in the case are similar to those in In re Giurbino.  The partnership, Con-Med, owned rental property.  It began negotiations with the lessee, which offered to buy the property for $6 million.  Con-Med and the lessee entered into a contract for the sale of the property.  Because two of the partners, the taxpayer and her mother, wanted to do a 1031 exchange, shortly before the close of escrow Con Med redeemed the taxpayer’s and her mother’s partnership interests and issued grant deeds transferring TIC interests in the property to them.  The partnership, the taxpayer and her mother signed grant deeds transferring their respective partnership interests to the buyer.  The escrow company transferred to a qualified intermediary the taxpayer’s and her mother’s aliquot share of sale proceeds.  Subsequently, replacement property was identified and purchased for the taxpayer and her mother.

The OTA held an evidentiary hearing before a panel of three administrative law judges.  The FTB argued that the transaction did not satisfy the exchange requirement because the partnership rather than the taxpayer sold the property.  It argued substance over form, that the taxpayer was merely a conduit for passing title and that she never had any of the benefits or burdens of ownership.  Finally it argued that the partnership made an anticipatory assignment of income.   The OTA rejected the FTB’s arguments and ruled for the taxpayer.

The two judge majority held that the taxpayer “continuously held” an interest in the property for investment purposes and that she intended to exchange it for like-kind property.  That the taxpayer’s ownership changed from holding through a partnership to direct ownership of a TIC interest was viewed as immaterial.  Since she transferred her interest to a qualified intermediary she met the requirements of §1031.

The majority rejected the substance over form and step transaction arguments on the ground that for a number of years prior to the sale the partners had been discussing a sale that allowed some of the partners to do a like-kind exchange.  A drop and swap was the only way to accommodate the wishes of the partners to either cash out or do a like-kind exchange.

With respect to the conduit argument, the majority held that since the grant deed to the taxpayer was valid on its face and Con Med negotiated on behalf of all its 17 partners, “that only Con Med’s name appears on counteroffers is simply a reflection of the state of the title to the Property at the time.”

In Court Holding, 324 US 331, the Court held that a corporation that  negotiated a sale of property was in substance the seller taxable on the gain even though, prior to the close of the transaction, it had deeded the property to its shareholders, who signed the sales agreement, completed the transaction and reported the gain on their tax returns.  The majority viewed Court Holding as inapplicable since it involved a corporation and was based on its facts.  The case before it did not involve an attempt to avoid taxes, merely to defer them through a 1031 exchange.  The majority also rejected the assignment of income argument on the ground that the partnership, as a pass-through entity, was not taxable on gain from the sale.

The dissent pointed out that the taxpayer was not involved in negotiations, was not mentioned in any of the counteroffers or the signed agreement and the redemption agreement recited that Con Med (not the taxpayer) was under contract to sell the property.  Con Med handled the negotiations and sold the property. Additionally, rents were paid to Con Med during the entire period up to the sale date and Con Med paid all expenses associated with the property, not the taxpayer.  Based on the notarized dates and filing dates, the deeds transferring TIC interests to the taxpayer and her mother were signed and filed one day before the deeds transferring the property to the buyer.

The dissent criticized the majority’s rejection of Court Holding, noting that it had been applied by both federal courts and the Board of Equalization to cases involving 1031 exchanges.  It also pointed out that the facts in Court Holding were more favorable to the taxpayer since the shareholders were the only ones who signed any sales contract whereas here the partnership, not the partner, signed all sales documents.  Thus, the dissent would have found that there was an assignment of income.

The dissent would also have found that in substance the transaction was a sale by the partnership, rejecting the taxpayer’s argument that the partnership negotiated the sale as her agent.  Further, contrary to the majority, there was no evidence that the taxpayer’s mother negotiated a sale on behalf of the taxpayer.  The dissent would have found that the partnership, not the taxpayer, negotiated and sold the property, and, therefore, the transaction was not a like-kind exchange.

The FTB has filed a petition for rehearing, which is currently pending. Because of the petition for rehearing, the opinion has not become final.  Whether the OTA will deny the petition or issue a new opinion remains to be seen.  If the OTA ultimately reaffirms its initial opinion and designates it as precedential, the FTB’s challenges to drop and swap transactions will  finally be over and application of the like kind exchange provisions in California will be consistent with the more liberal federal interpretations.



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

Pro se petitioners James and Tina Loveland hit a home run in a CDP case that resulted in a formal Tax Court opinion, Loveland v. Commissioner, 151 T.C. No. 7 (September 25, 2018), here.  The Tax Court has three levels of opinions: 1) a formal Tax Court opinion, which is published in the Tax Court Reporter and has precedential value in future cases, 2) memorandum opinions which are not precedential although they are often cited by litigants; and 3) summary opinions, which are issued in cases where the amount in dispute is $50,000 or less and the taxpayer agrees to application of the Tax Court’s small case procedures.  Memorandum and summary opinions are not published by the Tax Court but are available on the Court’s website.  Formal Tax Court opinions comprise a fraction of all Tax Court opinions.  To merit a formal opinion, the Tax Court considered the Lovelands’ case to involve significant legal issues.  The issues under consideration are the scope of review by the Office of Appeals where the taxpayers had previously been afforded, but failed to avail themselves of, an opportunity to appeal a rejected collection alternative.

The Lovelands story is a sad commentary on life in what the news media calls “fly over America.”  The Lovelands live in Michigan.  During the 2008-2009 financial meltdown they lost their home in foreclosure.  Mr. Loveland developed heart problems and could no longer work.  Mrs. Loveland developed breast cancer.  As a result, they accrued over $60,000 in tax, penalties and interest for 2011-2014.  The IRS issued a notice of intent to levy under §6330.  In response, the Lovelands submitted an offer in compromise (OIC) to collections.  The OIC was rejected on the ground that there were no special circumstances and the Lovelands could full pay the tax.  They appealed the rejection and submitted an installment agreement request (“IA”).  They were told the IA could not be considered while they were appealing the rejection of the OIC, so they withdrew the appeal.

The Lovelands decided to get a loan to pay the tax down to under $50,000 so they could take advantage of the IRS’s streamlined processing of the IA request.  On the day they submitted the loan application the IRS filed a notice of federal tax lien.  The Lovelands filed a CDP request, seeking release of the lien because it disrupted their efforts to get a loan and caused economic hardship.  The Lovelands submitted their prior OIC with the attached financial information and their IA request.  The Lovelands pointed to Mr. Loveland’s health as a special circumstance.

Appeals rejected the request for lien release.  It rejected the IA request on the ground that the taxpayers failed to submit any financial information.  The Appeals Officer never looked at the OIC or the accompanying financial information and did not address the OIC, Mr. Loveland’s health or any special circumstances.  The Lovelands petitioned the Tax Court for review of Appeals’ determination.  The IRS moved for summary judgment.  Finding that the Commissioner had abused his discretion, the Court denied the motion.

The first issue was whether the IRS abused its discretion in failing to consider the OIC.  The IRS took the position that since the Lovelands discussed the OIC with a revenue agent and filed an appeal, which was withdrawn, there was a prior administrative proceeding that precluded consideration by Appeals.  Wrong, said the Tax Court.  Under §6330(c)(4)(A)(i),  an issue may not be considered in a CDP hearing if it “was raised and considered in a previous hearing under section 6320 or in any other previous administrative or judicial proceeding.”   Additionally, under the regulations, the taxpayer must have meaningfully participated in the hearing or proceeding.

The Tax Court held that while the Lovelands had an opportunity for prior Appeals Office review of the OIC, they did not avail themselves of that opportunity and, thus, the OIC was never actually considered in a prior administrative or judicial proceeding.  This was contrasted with disputing the underlying liability, which can only be considered if the taxpayer did not have an opportunity to challenge the liability.  Discussions and negotiations with a revenue officer do not cut the mustard.  Thus, in failing to consider the OIC during the appeal, the IRS abused its discretion.

The Tax Court also held that the IRS abused its discretion in failing to consider the IA on the ground that the Lovelands did not submit financial information.  The financial information was part of the OIC package that was submitted to, but never reviewed by, Appeals.  Appeals did not reject the financial information on the ground that it was incomplete or outdated.

Finally, the Tax Court addressed the IRS’s failure to consider whether extraordinary circumstances existed to justify the OIC due to Mr. Loveland’s poor health.  Although the Lovelands raised this issue before Appeals, it was not addressed or considered by Appeals.  In not considering and addressing the Lovelands’ economic hardship claim the IRS abused its discretion.

Effectively, three strikes and the IRS was out.  The case will ultimately go back to IRS Appeals to address the issues that it failed to previously address.


For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com 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 http://www.taxlitigator.com.


Since Mayo Foundation v United States, 562 US 544 (2011), the IRS has given lip service to the proposition that rules governing judicial review of administrative agency action apply to the IRS.  The Tax Court’s order granting the taxpayer’s summary judgment motion in Renka, Inc. v. Commissioner, Dkt. No. 15988-11 R (Aug. 16, 2018), here, shows that the IRS has yet to fully understand what that means.

Renka, Inc., petitioned the Tax Court to determine whether the ESOP that owned 100% of its stock qualified as a tax-exempt trust for tax years ending December 31, 1998, and subsequent plan years.  Renka was the exclusive agent for American Nutrition Corp. (ANC) in soliciting, negotiating and securing orders for ANC products.  The IRS’s determination had two stated bases: first, Renka and ANC were a controlled group under IRC §414(h) and second, Renka and ANC were an affiliated service group under IRC §414(m)(5).  If either were correct, then Renka and ANC would have to be considered together to determine whether non-highly compensated employees benefitted equally with highly compensated employees.

Initially, the IRS moved for summary judgment on the ground that ANC and Ranka were a controlled group in 1999.  The Tax Court denied the motion, holding that a) Renka and ANC were not a controlled group and b) under the Chenery doctrine (named after SEC v. Chenery Corp., 332 U.S. 194 (1947)), a court is required to judge an agency’s action by the grounds invoked by the agency at the time of the action rather than by after-the-fact rationalizations.  Since the IRS determination dealt with the year ending December 31, 1998, facts relating to 1999 could not be considered.

The parties then filed cross-motions for summary judgment.  Renka argued that its ESOP qualified in 1998.  The IRS argued that Renka and ANC were an affiliated service group based on facts relating to 1999.

The Tax Court denied the IRS motion and granted the taxpayers’ motion.  First, the Court noted that Chenery prevents the IRS from using facts from 1999 to uphold a determination for 1998.  The Court rejected the IRS’s argument that if it strips away all extraneous matter, the determination is correct.  According to the Court, this was like saying “if we ignore all the things he (IRS) did wrong, then he was right.”  The IRS admitted the grounds given in the determination letter were wrong.  The upshot: the determination an abuse of discretion.

Next, the Court held that the IRS could not justify its determination by claiming it was a “continuing determination” since it applied to all years because the determination was made for the 1998 tax year; if the ESOP didn’t qualify for 1998, it didn’t qualify in later years.

The Court also rejected the IRS’s argument that a proposed regulation supported its position.  Even if Chenery did not apply, the proposed regulation would have no more weight than an argument in a brief and, contrary to the IRS, the regulation did not state that marketing was tantamount to managing.  Additionally, the regulation was withdrawn in 1993, so that it couldn’t be relied on to justify the IRS’s action for the 1998 tax year.  There was no way the IRS could “edit the rationale he gave into something that isn’t an abuse of discretion.”

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com 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 http://www.taxlitigator.com.


Taxpayers often find dealing with the IRS so stressful a root canal without anesthetic is preferable.  One couple may be able to recover emotional distress damages for the way they were treated by the IRS.  The taxpayers in Hunsaker v. United States, Dkt. No. 16-35991 (9th Cir. Aug. 30, 2018), here, filed a bankruptcy petition under chapter 13.  After the petition was filed, the IRS sent them routine collection notices.  The taxpayers responded by filing an adversary proceeding for violation of the automatic stay, seeking injunctive relief and emotional distress damages.  The Government conceded the violation of the bankruptcy automatic stay and argued that sovereign immunity barred emotional distress damages against the Government.  The Bankruptcy Court rejected the argument and awarded $4,000 in damages for emotional distress.  The district court reversed on the ground of sovereign immunity.  The taxpayers appealed to the Ninth Circuit, which reversed.

The Ninth Circuit framed the issue as one involving the interplay between Bankruptcy Code §§106(a) and 362(k).  Sec. 106(a) waives sovereign immunity “to the extent set forth in this section” including for monetary damages, but not punitive damages.  After a bankruptcy petition is filed Bankruptcy Code §362 imposes an automatic stay on various types of activities to collect a debt.  Sec. 362(k) allows a debtor injured by violation of an automatic stay to collect actual damages, including costs and attorney’s fees.

The Ninth Circuit reasoned that §106(a)’s waiver encompasses a money recovery for damages other than punitive damages.  Since damages for emotional distress are a form of monetary relief and are not punitive damages, they are covered by §106(a)’s waiver.  The Court had previously ruled that emotional distress damages are actual damages recoverable under §362(k).

The Court rejected the Government’s argument that “money recovery” is limited to restoring to the estate money unlawfully in the possession of the United States, finding this interpretation contrary to the statute’s plain text, which excludes only punitive damages.  The Court rejected the contrary holding of United States v. Rivera-Torres, 432 F. 2d 20 (1st Cir. 2005), believing that case misconstrued the effect of the 1994 amendment to §106(a).  In the Ninth Circuit’s view the “plain language of the statute is dispositive.”

The Court concluded “In sum, sovereign immunity does not preclude an award of emotional distress damages against the United States for willful violation of the Bankruptcy Code’s automatic stay.”  It remanded the case to the district court to consider the Government’s challenge to the merits of the taxpayer’s claim.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com 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 http://www.taxlitigator.com.



Posted by: Cory Stigile | September 18, 2018

How Long Should You Keep Tax-Related Records? by CORY STIGILE

The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out. For most taxpayers, the general recommendation is to retain copies of tax returns and supporting documents at least three years. Some documents should be kept up to seven years in case a taxpayer needs to file an amended return or if questions arise. Taxpayers should retain records relating to real estate for at least seven years after disposing of the property.

Health care information statements should be kept with other tax records. Taxpayers do not need to send these forms to IRS as proof of health coverage. The records taxpayers should keep include records of any employer-provided coverage, premiums paid, advance payments of the premium tax credit received and type of coverage. Taxpayers should keep these — as they do other tax records — generally for three years after they file their tax returns.

Whether stored on paper or kept electronically, taxpayers are urged to keep tax records safe and secure, especially any documents bearing Social Security numbers. Consider scanning paper tax and financial records into a format that can be encrypted and stored securely on a flash drive, CD or DVD with photos or videos of valuables.

Now is a good time to set up a system to keep tax records safe and easy to find when filing next year, applying for a home loan or financial aid. Tax records must support the income, deductions and credits claimed on returns. Taxpayers need to keep these records if the IRS asks questions about a tax return or to file an amended return.

Keep tax, financial and health records safe and secure whether stored on paper or kept electronically. When records are no longer needed for tax purposes, ensure the data is properly destroyed to prevent the information from being used by identity thieves.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax. Unless otherwise stated, the years refer to the period after the income tax return was filed. Returns filed before the due date are treated as filed on the due date. Filed tax returns can be helpful in preparing future tax returns and making computations if you file an amended return.

Period of Limitations that generally apply to income tax returns:

  1. Keep records for 3 years, if situations (4) and (5) below do not apply to you.
  2. Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
  3. Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
  4. Keep records of gross income for 6 years, which is the statute of limitations for assessment where a return omits more than 25% of gross income or 25% of gross receipts of a trade or business. Examples where this can occur is reclassification of a related-party loan as income, constructive dividends, failure to report alimony, failure to report discharge of debt income, and failure to report income from a pass-through entity.
  5. Keep records indefinitely if have not filed a return.
  6. Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to property? Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property. 

What should I do with my records for nontax purposes? When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

Caveats:  There is no statute of limitations on assessment where the taxpayer files a fraudulent return.  If the taxpayer was required to file reports relating to foreign assets or foreign transfers, the statute of limitations does not begin to run until those reports are filed.

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

Long ago, some practitioners may have thought “PFIC” was a type of electric plaque removal devise.  OVDI changed all that.  Now we know it stands for “Passive Foreign Investment Company” and that special rules exist for determining taxable income from owning PFIC stock.  See §§ 1291 et seq.

Toso v Commissioner, 151 T.C. No. 4 (Sept. 4, 2018), here, addresses the six-year statute of limitations for assessing deficiencies due to a substantial understatement of gross income where gain from the sale of PFIC stock is involved and whether net PFIC losses can be offset against PFIC gains.  The taxpayers had an account at UBS in 2006, 2007, and 2008.  Their original timely filed returns did not report items relating to the UBS account.  They subsequently filed amended returns reporting items related to the UBS account.  On January 15, 2015, the IRS issued a statutory notice of deficiency for 2006, 2007 and 2008.  It determined that gain reported on the amended returns was from the sale of PFIC stock.  The taxpayers argued that the notices of deficiency were barred by IRC §6501(a)’s three-year statute of limitations on assessment.  The IRS contended that the six-year statute under IRC §6501(e)(1)(A)(i), for substantial understatements of gross income, applied.  The issues before the court were whether gains from the sale of PFIC stock are counted as gross income for purposes of the six-year statute of limitations and, if so, whether PFIC losses could be offset against PFIC gains.  The answers were no and no.

The Tax Court began with the definition of “gross income.”  Gross income for purposes of the statute of limitations is generally synonymous with gross income for purposes of IRC §61(a), which includes gains from dealings with property.  Gains from PFIC stock are taxed under special rules: normally §1291 applies unless the taxpayer elects to treat PFIC stock as a qualified electing fund under §§1292-1295 or to mark to market under §1296.  If no election is made, as was the case with the taxpayers, §1291 applies.

Sec. 1291 provides that gain from sale of PFIC stock is allocated ratably on a daily basis over the entire holding period of the stock.  Only PFIC gain attributable to the year of sale is included as ordinary income in gross income.  It is taxed as ordinary income.  The gain allocated to prior years is not included in current year PFIC income.  Instead, there is a “deferred tax amount” calculated by a) allocating non-current year PFIC gain ratably by day over the entire holding period, b) multiplying the amount of gain allocated to each prior year by the highest ordinary income rate in effect for that year, c) computing interest on the tax and d) summing up all the tax and interest.  This deferred tax amount is added to the taxpayer’s tax for the current year.  As a result, only the gain allocated to the current year is included in the current year’s gross income and included in determining whether there was a substantial understatement of gross income under §6501(e)(1)(A)(i).  Gain allocated to prior years is not included in gross income for any purpose.

The Tax Court rejected the IRS’s argument that all non-current year PFIC gain is gross income and that §1291 is nothing more than a method of calculating tax and interest.  According to the Court, such a reading treats §1291 out of existence.  Since it is part of the Code and is a specific provision, it overrides the general provision, §61.

According to the Court, this should have ended the issue, but it felt obliged to address the IRS’s policy argument.  The PFIC provisions were enacted in 1986.  Prior to that time, a taxpayer who invested in a foreign investment company that had no US source income, did not do business in the US, and retained earnings rather than paying dividends could defer tax until the foreign investment company stock was sold.  By contrast a domestic registered investment company (“RIC”) had to distribute 90% of its ordinary income each year to its shareholders.  If it did not, it was taxable as a C corporation.  Even if it distributed the requisite 90%, it would still pay a tax on retained ordinary income.  The PFIC provisions were enacted so that taxpayers who invested in PFICs would be treated similarly to taxpayers who invested in RICs.

From this, the IRS argued that since holders of PFIC stock are to be treated similarly to holders of RIC stock, all gain from the sale of PFIC stock should be treated as gross income for statute of limitations purposes.  This argument did not meet with approval.  That the PFIC provisions were meant to treat owners PFIC similarly to owners of RIC stock, they were not treated identically.  Among other things, gain from sale of PFIC stock under §1291 is taxed at ordinary income rates while gain from the sale of RIC stock is taxed at capital gain rates.  Similarity is not identicality.  The Court concluded that PFIC gain allocated to prior years under §1291 is not “gross income” for purposes of §6501(e)(1)(A)(i).

The Court next determined whether there was a substantial understatement of gross income for any of the three years before it.  2006 was the only year in which the amount of unreported gross income was more than 25% of what was reported on the original return.  The notices of deficiency for 2007 and 2008 were thus time barred.

Finally, the Court addressed the taxpayer’s argument that it should be allowed to net PFIC losses against PFIC gains.  Since §1291 only applies to PFIC gains, it found no basis for allowing the losses to be offset against the gains.

So one benefit of PFIC is if you didn’t report all of your gross income for one or more years, not all gains from the sale of PFIC stock will be treated as gross income.  That is if a court of appeal does not reverse the Tax Court.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com 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 http://www.taxlitigator.com.

The pending 2014 Offshore Voluntary Disclosure Program (OVDP) is set to close on September 28, 2018.  According to FAQs most recently updated by the IRS on July 26, 2018, pre-clearance requests take a minimum of 30 days and should be submited by August 24, 2018 to allow sufficient lead time for processing. (see OVDP FAQs)   The 2014 OVDP is the last in a series of offshore voluntary disclosure programs administered by the IRS since 2009.  The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed similar programs offered in 2011 and 2009. These programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.


So how does this impact the non-compliant taxpayer?  The answer depends on the culpability and prior actions of the taxpayer, and whether that person needs the protection and certainty afforded by OVDP.

OVDP is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and to pay all tax due in respect of those assets.  OVDP is designed to provide taxpayers with such exposure with protection from criminal liability and terms for resolving their civil tax and penalty obligations.

Taxpayers participating in the OVDP generally agree to file amended returns and file FINCEN Form 114 (formerly Form TD 90-22.1, Report of Foreign Bank and Financial Accounts “FBARs”), for eight tax years, pay the appropriate taxes and interest together with a 20% accuracy related penalty and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5% of the highest account value that existed at any time during the prior eight tax years (or 50% for those foreign banks or facilitators on the IRS list) (see list of foreign financial institutions or facilitators).  The OVDP did not have a stated expiration date, until recently when the IRS announced its intention to close OVDP on September 28th in a IRS Notice issued on March 13, 2018 (see IR-2018-52).

There are various considerations before a taxpayer should determine whether to pursue a voluntary disclosure of prior tax indiscretions through the OVDP or through some other manner. When considering OVDP, many look to whether the taxpayer might be considered a realistic candidate for a criminal prosecution referral by the IRS or prosecution by the Department of Justice?  If so, the determination to participate may be relatively quick and easy.   Other factors may include: (1) Is there a possibility of reducing penalty exposure by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDP: (2) What would be the potentially applicable penalties upon an examination of such returns and FBARs; and (3) Would the government be able to carry their burden to demonstrate the taxpayer “willfully” violated the FBAR filing requirements.  Because OVDP asserts an offshore penalty based on foreign financial accounts and asset valuations, for many with smaller financial account values, the aggregate offshore penalty determination, even for multiple years, may actually less outside the OVDP.

Taxpayers with criminal exposure or those wishing to resolve their civil tax and penalty obligation should quickly act to meet the deadline. The first step is to confirm eligibility through the IRS pre-clearance process.  While a preclearance request is not required to participate in OVDP, it assists the taxpayer in learning whether the IRS has received information that can disqualify one from participation in OVDP before one reveals to the IRS additional information required by OVDP.

The deadline to make a pre-clearance request is August 24, 2018.  We suggest pre-clearance requests in all cases where there is an intent to participate in OVDP.  Those who further wait may not benefit from a pre-clearance check, potentially exposing themselves to the risk that the IRS obtains information about that person even though that person may not be accepted into OVDP which is something that should be avoided, if possible.

Any client presently not in compliance should seriously consider availing themselves of the OVDP prior to its expiration. One should anticipate that the IRS may treat those failing to take timely, voluntary corrective action in a more severe manner. There may still be mechanisms for those who take corrective action post OVDP, but the civil penalty regime will be uncertain and taxpayers will be left without the benefits of an informed approach to resolution.

There has definitely been an increased interest by clients in the program since the sunset of the program has been announced.   We have seen this before with each successive closure of the 2009, 2011 and 2012 program.  This time, however, it appears that most clients have been better informed about the benefits and burdens involved.  Practitioners have been educating the public about these issues for more than a decade now, and the IRS has been hugely successful in publicizing the existence of the programs.


Since 2009, more than 56,000 taxpayers have used one of the OVDP programs to comply voluntarily. All told, these taxpayers paid approximately $11.1 billion in back taxes, interest and penalties.  The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward and has steadily declined thereafter, falling to only 600 disclosures in 2017.  The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations, according to the IRS.  The IRS will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution.

The Streamlined and Delinquent filing procedures will continue to remain open for the non-willful taxpayer.  There presently is no sunset date for these procedures.  The IRS resources dedicated to these filing procedures appear well worth it, given the number of taxpayers who have voluntarily corrected under these procedures.

Programs come and programs go, including “last chance” programs and programs following those. We do not know what will happen after the expiration of the current program on September 28, but what we do know is that this could be the last best chance for taxpayers and their advisors to take a hard look at this option before it becomes history.

MICHEL R. STEIN – For more information please contact Michel Stein – Stein@taxlitigator.com  Mr. Stein is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Mr. Stein has significant experience in matters involving previously undeclared interests in foreign financial accounts and assets, the IRS Offshore Voluntary Compliance Program (OVDP) and the IRS Streamlined Filing Compliance Procedures. Additional information is available at www.taxlitigator.com

This is the sixth of a six part series devoted to utilization of various indirect methods of determining the income of a taxpayer.

Financial Status Audit Techniques. (FSAT). There are various audit and investigative techniques available to corroborate or refute a taxpayer’s claim about their business operations or nature of doing business. Audit or investigative techniques for a cash intensive business might include an examiner determining that a large understatement of income could exist based on return information and other sources of information. The use of indirect methods of proving income, also referred to as the FSAT, is not prohibited by Code Section 7602(e)[i]. Indirect methods include a fully developed Cash T, percentage mark-up, net worth analysis, source and application of funds or bank deposit and cash expenditures analysis. However, examiners must first establish a reasonable indication that there is a likelihood of underreported or unreported income. Examiners must then request an explanation of the discrepancy from the taxpayer. If the taxpayer cannot explain, refuses to explain, or cannot fully explain the discrepancy, a FSAT may be necessary.

The Net Worth Method for determining the actual tax liability is based upon the theory that increases in a taxpayer’s net worth during a taxable year, adjusted for nondeductible expenditures and nontaxable income, must result from taxable income. This method requires a complete reconstruction of the taxpayer’s financial history, since the government must account for all assets, liabilities, nondeductible expenditures, and nontaxable sources of funds during the relevant period.

The theory of the Net Worth Method is based upon the fact that for any given year, a taxpayer’s income is applied or expended on items which are either deductible or nondeductible, including increases to the taxpayer’s net worth through the purchase of assets and/or reduction of liabilities. The taxpayer’s net worth (total assets less total liabilities) is determined at the beginning and at the end of the taxable year. The difference between these two amounts will be the increase or decrease in net worth. The taxable portion of the income can be reconstructed by calculating the increase in net worth during the year, adding back the nondeductible items, and subtracting that portion of the income which is partially or wholly nontaxable.

The purpose of the Net Worth Method is to determine, through a change in net worth, whether the taxpayer is purchasing assets, reducing liabilities, or making expenditures with funds not reported as taxable income. The use of the Net Worth Method of proof requires that the government establish an opening net worth, also known as the base year, with reasonable certainty; negate reasonable explanations by the taxpayer inconsistent with guilt; i.e., reasons for the increased net worth other than the receipt of taxable funds. Failure to address the taxpayer’s explanations might result in serious injustice; establish that the net worth increases are attributable to currently taxable income, and; where there are no books and records, willfulness may be inferred from that fact coupled with proof of an understatement of taxable income. But where the books and records appear correct on their face, an inference of willfulness from net worth increases alone might not be justified.[ii] The government must prove every element beyond a reasonable doubt, though not to a mathematical certainty.

When to Anticipate an Indirect Method. Circumstances that might support the use of an indirect method include a financial status analysis that cannot be easily reconciled – the taxpayer’s known business and personal expenses exceed the reported income per the return and nontaxable sources of funds have not been identified to explain the difference; irregularities in the taxpayer’s books and weak internal controls; gross profit percentages change significantly from one year to another, or are unusually high or low for that market segment or industry; the taxpayer’s bank accounts have unexplained deposits; the taxpayer does not make regular deposits of income, but uses cash instead; a review of the taxpayer’s prior and subsequent year returns show a significant increase in net worth not supported by reported income; there are no books and records (examiners should determine whether books and/or records ever existed, and whether books and records exist for the prior or subsequent years. If books and records have been destroyed, the examiner will attempt to determine who destroyed them, why, and when); no method of accounting has been regularly used by the taxpayer or the method used does not clearly reflect income as required by Code section 446(b).

When considering an indirect method, the examiner will look to the industry or market segment in which the taxpayer operates, whether inventories are a principle income producing activity, whether suppliers can be identified and/or merchandise is purchased from a limited number of suppliers, whether pricing of merchandise and/or service is reasonably consistent, the volume of production and variety of products, availability and completeness of the taxpayer’s books and records, the taxpayer’s banking practices, the taxpayer’s use of cash to pay expenses, expenditures exceed income, stability of assets and liabilities, and stability of net worth over multiple years under audit.

[i].  See IRM (06-01-2004). And Holland v. United States, 348 U.S. 121 (1954).


[ii].  Internal Revenue Manual sets forth the requirements for examining income and FSATs. The indirect method need not be exact, but must be reasonable in light of the surrounding facts and circumstances. Holland v. United States, 348 U.S. 121, 134 (1954). “Examination techniques” include examining and testing the taxpayer’s books and records, analytical tests, observing, and interviewing the taxpayer. These techniques are unique to the use of a formal indirect method and will not routinely trigger the limitation of Code Section 7602(e).

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

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