If you or your client are under examination by the IRS Small Business/Self-Employed (“SB/SE”) division, changes are your case will not be referred criminally.  Currently, criminal fraud referrals from the IRS civil divisions are only approximately 7% of IRS Criminal Investigations Division’s (“CI”) inventory.  Things, however, are changing, and taxpayers and their representatives should take note.

The IRS recently promoted Eric Hylton to SBSE Commissioner.  Prior to his promotion, Mr. Hylton was the deputy chief of CI.  Having a former CI executive in charge of SBSE is historic in many ways.  IRS Commissioner Charles Rettig has made enforcement a priority for the IRS and given the division heads marching orders to increase referrals.  After years of hiring freezes and retirements, the IRS is staffing up across all divisions, including SBSE and CI.

This increased focus on enforcement and especially the desire to increase criminal referrals means tax representatives need to be alert and recognize signs that your case might take a criminal turn.  SBSE audits individuals and business with assets of under $10 million.

Seasoned tax practitioners will tell you there is no such thing as a random audit.  Most IRS audits include a review of the taxpayer’s gross receipts.  Be proactive and know whether your client has a serious unreported income problem that is often the hallmark of a criminal referral.

Cooperate with the Revenue Agent and timely respond to requests.  Giving a Revenue Agent the runaround and failing to cooperate will annoy the Revenue Agent and increase scrutiny towards your client and can be viewed as a badge of fraud.  If you are going to let your client speak to the IRS he or she MUST tell the truth.  Lying only puts your client deeper in the hole.  This might seem obvious, but I can’t tell you how many times taxpayers think the IRS will never find out the truth.  The IRS has a wealth of data, and is growing its use of data analytics.  Again, there is no such thing as a random audit.  There is a reason you or your client are under examination and the IRS knows it.

Commissioner Rettig and Mr. Hylton are both featured speakers at the upcoming 35th Annual UCLA Tax Controversy Institute on October 22 at the Beverly Hills Hotel.  To sign up for the conference click the link below.

http://business.uclaextension.edu/taxcon/

Jonathan Kalinski is a principal at Hochman Salkin Toscher Perez, P.C. and 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.

For the most part, the deck is stacked in the IRS’s favor when it comes to enforcing administrative summonses.  It’s relatively easy for the government to show that it is entitled to enforcement of a summons through submitting a declaration from an IRS employee that states (often with no supporting facts):

  • The investigation is being conducted pursuant to a legitimate purpose;
  • The inquiry may be relevant to the purpose;
  • The information sought is not already within the Service’s possession; and
  • All administrative steps required by the Code have been followed.

The burden then shifts to the taxpayer to show one of the handful of allowable affirmative defenses.  One defense, not surprisingly, is that the taxpayer doesn’t possess responsive documents.  And, unlike the IRS that’s often allowed to make its showing without providing support, the taxpayers’ affirmative defense only works if she provides “more than conclusory or self-serving claims of non-possession.”  United States v. Sharon Santoso, Docket No. 817-cv-3030-PWG (D. MD. 08/29/2019).  What does that mean? A taxpayer “must demonstrate not only that she does not possess the documents, but also that she has taken reasonable steps to obtain them if they are within her control.”  Id.

Proving the negative – that she does not possess them – is difficult beyond stating that the documents are not in her possession.  In Santoso, the district court took the taxpayer at her word, which she stated twice in declarations and once in oral testimony.  The harder task is to show that her efforts to obtain missing documents were enough beyond “a pro forma effort” to satisfy the judge.

They were in Ms. Santoso’s case.

Noting that there’s little case law showing how much is enough, the district court appeared to have little trouble in saying that Ms. Santoso’s efforts were sufficient to qualify as “reasonable steps” to obtain the information.  I would argue Ms. Santoso went well beyond reasonable, by having her lawyer reach out to every likely source of summoned information and implore them to provide the documents to her lawyer.  She also personally reviewed a massive amount of information as well as having her lawyer (presumably generating substantial fees) also review files to ensure she did not have additional responsive records.  In a smart twist, she also submitted Freedom of Information Act requests to the IRS to see if the IRS already had some responsive documents, but the IRS denied the requests (perhaps legally permissible but it undermines the government’s argument if they didn’t want to bother looking or refused to turn over documents that they claimed the taxpayer needed to provide).

Notwithstanding what sounds like more-than-reasonable efforts by the taxpayer, the IRS got the Department of Justice to file suit to enforce the summons and argue that the efforts didn’t go far enough.

The district court demonstrated that the government’s arguments that Ms. Santoso could have done more were weak.  The district court reiterated the many steps, including follow-ups, by Ms. Santoso’s lawyer, and noted that “while there may always be additional steps that could be taken, the actions taken by Ms. Santos and her attorney, as described above, can hardly be considered inaction.”  Noting that all she had to show was that she cleared the “pro forma efforts” bar, the district court found Ms. Santoso’s efforts “are certainly more than that.”

The case reinforces that honest efforts to comply with a summons are, at least sometimes, rewarded despite the IRS’s insistence that more should be done.  The IRS is hardly perfect and can’t demand perfection from others.

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.  He spent 11 years as an AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) where he handed civil and criminal tax cases, and of the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator, 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.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years. 

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).

 

Posted by: sbbrown64 | September 22, 2019

California Doubles Down on Taxing the Underground Economy:  What AB 1296 Could Mean for Tax Enforcement

By SANDRA R. BROWN and TENZING TUNDEN

California is showing it is serious about taxing the underground economy. On September 13, Assembly Bill 1296 also known as “AB 1296”, was passed with unanimous consent by the California State Senate and California State Assembly.[1] If signed into law, AB 1296 will authorize California tax agencies to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating illegal underground operations.[2]  Additionally, AB 1296 would permanently establish the Tax Recovery in the Underground Economy (TRUE) criminal enforcement program.[3] TRUE is intended to be a multi-agency effort designed to continue Californian’s efforts to prosecute tax evasion, wage theft, and other economic crimes in the underground economy.[4]

What is the Underground Economy?

The underground economy is comprised of any unlawful or “off the books” activities conducted by taxpayers that create an illegal or unfair business environment.  In 2014, the California Department of Industrial Relations estimated that $8.4 billion to $28 billion was being lost in unpaid income, insurance, and sales taxes because of the underground economy.[5] Investigative teams identified $482 million in unreported gross receipts and $60 million in associated tax loss to the state.[6] Examples of some activities that facilitate an underground economy include: working without required permits or licenses, not complying with mandatory processes, evading taxes, underpaying employees, inaccurately reporting employee wages or hours and underreporting numbers of employees.[7] Additionally, taxpayers who are involved in cash intensive legal (as opposed to illegal) businesses, such as construction, landscaping, restaurant, automotive repair, and garment businesses, are often (while not exclusively) a part of the underground economy.  The realization that much of California’s legal cannabis business remains off the books suggest that the new legislation will impact the cannabis industry as well.

AB 1296 would establish a new joint task force which would replace what is now the disbanded task force, previously known as TRaCE.  TRaCE, the Tax Recovery and Criminal Enforcement task force, created by AB 576, was a multi-agency team previously created to prosecute tax evasion in the underground economy in California.[8]  TRaCE, while only a pilot program and never formally enacted into law, nonetheless recovered over $25 million in lost tax revenue, victim restitution and investigative costs.  As such, AB 1296, and its criminal enforcement program “TRUE”, if enacted, is expected to have similar if not greater success.

TRUE’s criminal enforcement program would consist of a joint task force which brings together the California Employment Development Department, US Department of Justice, California Department of Consumer Affairs, California Department of Industrial Relations, California Department of Tax and Fee Administration, Board of Equalization, and the Franchise Tax Board.  Such joint task force is intended to promote a more effective and expansive enforcement program by placing multiple agencies together to share information and promote more effective enforcement, and potential prosecutions, over the underground economy.  Ultimately, the funds recovered by this task force would be made available to benefit impacted workers, schools, law enforcement and the general community.

AB 1296’s Impact on Tax Enforcement in California

Public commentary by the California Attorney General has strongly suggested that “AB 1296 is an important measure that would substantially strengthen the state’s efforts to combat and deter underground economic crimes in California. Our workers, business owners, consumers, and taxpayers would be the biggest beneficiaries of a robust program.”[9]  In unanimously passing this bill, the states’ top cop has the support of the California legislature.  If signed into law by the Governor, the clear message to all taxpayers engaged in business in the State of California, underground or above, is that there will be a renewed and concerted focus on the enforcement of California’s tax laws.

Sandra R. Brown is a principal at Hochman Salkin,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, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). 

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

 

[1] Paul Jones, California Legislature Passes Several Tax Bills Before Adjourning (Sep. 18, 2019), Tax Notes, available at https://www.taxnotes.com/tax-notes-today-state/legislation-and-lawmaking/california-legislature-passes-several-tax-bills-adjourning/2019/09/18/29ycy.

[2] Id.

[3] Id.

[4] See California Department of Justice Office of Attorney General, Attorney General Becerra and Assemblymember Gonzalez Unveil Legislation to Strengthen Program to Combat California’s Law-Evading Underground Economy (Feb. 22, 2019), Press Release, available at https://oag.ca.gov/news/press-releases/attorney-general-becerra-and-assemblymember-gonzalez-unveil-legislation.

[5] Id. at 3.

[6] Id.

[7] Little Hoover Commission, Level The Playing Field: Put California’s Underground Economy Out of Business (Mar. 2015), at 1, available at https://arev.assembly.ca.gov/sites/arev.assembly.ca.gov/files/Little%20Hoover%20Commission%20Underground%20Economy.pdf.

[8] See Generally California Department of Tax and Fee Administration, Tax Recovery and Criminal Enforcement Task Force, available at https://www.cdtfa.ca.gov/trace/.

[9] See California Legislative Information, Assembly Floor Analysis AB 1296, Sep. 10, 2019, available at https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201920200AB1296.

A recent report  by  the Treasury Inspector General for Tax Administration (TIGTA)  after an audit into the Internal Revenue Service’s (IRS) denial of Freedom of Information Act (FOIA) requests for the 2018 fiscal year reminds us of the importance of using FOIA in the course of our dealings with the IRS and to not routinely accept the IRS’s failure to provide all the responsive information taxpayers are entitled to.

FOIA Requests

FOIA requests allow individuals to request records from government agencies, which the government must make available, unless the requested information meets certain exemptions. FOIA contains a number of exemptions from disclosure.[1]  Certain records compiled for law enforcement can be withheld if production of the information would (1) interfere with enforcement proceedings; (2) deprive an individual of a right to a fair trial; (3) constitute an unwarranted invasion of personal privacy; (4) disclose the identity of a confidential source; (5) disclose techniques, procedures, or guidelines for law enforcement investigations or prosecutions; and (6) could endanger the life or safety of an individual. [2]

Another exemption is information that, by statute, is not subject to disclosure.[3]  Under I.R.C. § 6103, the IRS cannot disclose information about a taxpayer’s returns or return information to an individual other than the taxpayer or the taxpayer’s representative.[4]  I.R.C. § 6103 thus provides another exception to produce information requested in a FOIA.

TIGTA Audit

TIGTA conducts periodic audits to determine whether the IRS is properly implementing the exceptions described above and withholding information requested by taxpayers. For the most recent audit, TIGTA reviewed 80 of the 3,547 FOIA requests where the IRS denied requests in full or in part on the basis of I.R.C. § 6103 or FOIA exemption (b)(7), as well as requests for which no information was provided because the IRS determined no responsive records existed or the request was imperfect. An imperfect request is not specific enough to process, is too broad, or does not comply with statutory requirements.

Results of the Audit

TIGTA determined that information was properly withheld in 73 of the 80 cases reviewed in the statistical sample. Not bad.  However, they found that a total of 7, or 8.75%, of the cases examined showed the IRS had improperly withheld information.

In one case, the IRS cited FOIA exemption (b)(7) to withhold the information regarding IRS examination techniques. However, the same information requested in the FOIA was publicly available on the IRS’ website. The IRS has attributed this mistake to “employee error.”

In 5 cases, the IRS cited FOIA exemption (b)(7) stating the information would disclose law enforcement techniques that would risk circumvention of the law, but TIGTA found that disclosure would not create this risk.

In the last of the 7 cases, the IRS withheld the information citing I.R.C. § 6103 (c) and (e) because the caseworker believed the records were beyond the retention period. TIGTA concluded that the retention period had changed before this determination and the information was available, but the procedures applied by the caseworker had not been updated.

In all 7 of these cases, a manager had reviewed the cases and found they were accurate and complete.

Significant Rise in Improper Withholdings Since the 2017 Fiscal Year

In TIGTA’s report of the review of denials for the 2017 fiscal year, only 1.33% of the sample reviewed was improperly withheld. The latest audit report shows an increase of 7.42%.

It is important to note that TIGTA and the IRS state that “the IRS has already provided training and updated procedures to address the issues identified.”[5] This should help reduce the number of responses for with the IRS improperly withholds information in in the future.

Having all the facts in an IRS matter is critical to a successful outcome and utilizing the FOIA Procedures is an important tool to obtain information. The IRS does a good job in complying with its obligations but is not perfect, as the TIGTA report shows. It’s up to practitioners to help the IRS do its job better by not blindly accepting unfounded denials of access to information. The recent report should make our job a little easier.

Steven Toscher is a principal at Hochman Salkin 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. You can contact Mr. Toscher at toscher@taxlitigator.com.

Gary Markarian is a Tax Associate of Hochman Salkin Toscher Perez P.C., and a recent graduate of the joint JD/LL.M. Taxation program at Loyola Law School, Los Angeles. Mr. Markarian’s prior tax experience includes externships with the Tax Division of the U.S. Attorney’s Office (CDCA), the Office of Chief Counsel, IRS (LB&I), Los Angeles, and Loyola Law School’s Sales and Use Tax Clinic.

[1] 5 U.S.C. §552(b).

[2] 5 U.S.C. § 552(b)(7)

[3] 5 U.S.C. §552(b).(3).

[4] I.R.C. § 6103(c); I.R.C. § 6103(e)

[5] TIGTA, Ref. No. 2019-10-057, Fiscal Year 2019 Statutory Review of Compliance With the Freedom of Information Act (Sept. 2019).

The IRS has recently provided interim guidance to clarify actions IRS Examiners must take to analyze and document Currency Transaction Report (CTR) data during an audit.  The Guidance, which is effective immediately, will be incorporated into IRM 4.10.4, Examination of Returns, Examinations of Income.

Prior to incorporation, IRM 4.10.4 provided very little guidance on when and how to use the Financial Crimes Enforcement Network’s (FinCEN) Currency Transaction Reports. However, this new guidance assists examiners during an audit of a taxpayer’s returns and income.

The Guidance

Financial institutions are required to report all transactions of currency that exceed $10,000 by filing a FinCEN CTR. Information from this filing may be used by an examiner to decide whether to use additional auditing techniques, question sources of income for which tax has not been withheld, and generate leads for potential unreported income, money laundering transactions, and other tax avoidance schemes.

The Guidance reminds examiners that while conducting the in-depth pre-contact analysis (during which examiners determine the scope of the audit), examiners should review Information Returns Processing Transcript Requests (IRPTR) for CTR data. However, when the information on an IRPTR does not provide enough information regarding the taxpayer’s CTR data, the examiner should request a FinCen Query (FCQ), which, if approved, will provide a full copy of the taxpayer’s CTR data.

An examiner may also request FCQ data when a CTR is not shown on the IRPTR. This request should be used when (1) there is an indication of fraud; (2) banking information is not located through traditional means; (3) there are an unusually large number of cash transactions or cash transactions that are of an unusually large amount; (4) a business’ activities remain consistent after a pattern of CTR filing stops; (5) there is suspicion of offshore bank accounts or entities;  or (6) when a whistleblower reports a third-party’s alleged unreported income or offshore banking activities

A CTR provides information that an individual was involved in a transaction that exceeded $10,000. It does not provide information as to who the money belonged to. To remedy this situation, the Guidance has provided the following actions an examiner should take to determine whether the individual names on a CTR is the taxpayer in question:

  1. The examiner must confirm the information on the CTR is for the taxpayer in question.
  2. The examiner must confirm the bank account on the CTR is the taxpayer’s, or whether the bank account belongs to an entity related to the taxpayer.
  3. The examiner must trace the transaction on the CTR to the taxpayer’s bank account.
  4. The examiner must determine the origin of the transaction.
  5. If the examiner is unable to establish a relationship between the CTR and taxpayer through an analysis of the financial accounts, the examiner should ask the taxpayer if they were involved in cash transactions over $10,000.
  6. If the examiner cannot trace the transaction and the taxpayer denies involvement in transactions over $10,000, the examiner may consider issuing a summons for the bank account listed on the CTR.

Examiners must document the steps taken to trace a CTR and their conclusions.

It is important to note that although the examiner will not provide a taxpayer with a copy of the CTR, a taxpayer can still obtain the information from the CTR by submitting a Freedom of Information Act Request.

This Guidance is a reminder to all taxpayers that large monetary transactions are tracked by the government and, more importantly, that the IRS is taking steps to insure that its agents are following proper procedures to utilize the rich treasure trove of data in its possession.

Taxpayers thinking of avoiding leaving CTR footprints by depositing smaller amounts of currency in their bank accounts – say $9,500 – should think twice.  Structuring bank deposits to avoid the CTR requirements is a felony punishable by prison.

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com Mr. Toscher is a principal at Hochman Salkin 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

Posted by: mstein10 | July 29, 2019

Cryptocurrency Enforcement Is Here by: Michel R. Stein

For those who have failed to report their cryptocurrency transactions correctly — be warned.   The Internal Revenue Service (IRS) is paying attention.

IRS Virtual Currency Contact Letters

Beginning this month (July 2019), the IRS has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay tax from virtual currency transactions or did not report their transactions properly.  See IR-2019-132.  By the end of August, more than 10,000 taxpayers will receive these letters.  For taxpayers receiving these educational or soft letters, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A.  According to the IRS, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.  The letters point to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.

The IRS states that the names of these taxpayers were obtained through various ongoing IRS compliance efforts.  It is likely that these names were obtained as part of the Coinbase, Inc. (“Coinbase”) Summons Enforcement proceedings, culminating with a District Court Order ordering Coinbase to produce documents on approximately 14,000 of its customers in response to the IRS’ petition to enforce its summons.  The court ordered Coinbase, the largest  U.S. based virtual currency exchange, to produce accounts with at least the equivalent of $20,000 in any one transaction type (Buy, Sale, Send or Receive) in any one year between 2013 and 2015, and to include: (1) Taxpayers’ identification number; (2) name; (3) birth date; (4) address; (5) record of account activity; and (6) all periodic statements of account.

Undoubtedly, the IRS has culled through this Coinbase information, in additional to information obtained through Third Party Settlement Organization (TPSO) required by the Form 1099-K reporting system, as part of its decision to send these letters.  In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a TPSO.  A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.  When determining whether the transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment.

Previously in July 2018, the IRS announced a Virtual Currency Compliance campaign as part of its Large Business and International Compliance Campaign to, among other things, address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers.  The IRS says that it will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.  Virtual currency is an ongoing focus area for IRS Criminal Investigation. The Chief of the Criminal Investigation of the IRS recently announced that he anticipates the public announcement of criminal prosecutions of taxpayers who failed to report cryptocurrency transactions.

Back in 2018, we cautioned that the ordered release of this information is clear warning to all cryptocurrency customers that the IRS has the tools, means and fortitude to seek out and make an example of those who are not in compliance.  Today, we see that the IRS is in fact directing its resources to education and on the noncompliant taxpayer. Anyone out of compliance should be thinking long and hard about these issues. Taxpayers should consult with qualified tax counsel regarding the need to utilize the IRS voluntary disclosure practice and the availability of the qualified amended return exception to accuracy related penalties.

IRS Guidance on Virtual Currency

 The first and only guidance issued by IRS on the income taxation of virtual currency was IRS Notice 2014-21 (PDF).  The IRS Notice describes how existing tax principles apply to transactions using virtual currency in the form of answers to Frequently Asked Questions (“FAQs”).  The Notice states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions.    The recent explosion of cryptocurrency has created challenging tax reporting issues with no further guidance from the IRS.  Whenever virtual currency is issued, received, spent, bought, sold, traded or given away — there is a potential tax impact.  Cryptocurrency is treated as “property” for tax purposes, which typically means gains or losses when disposing of virtual currency—in a realization and recognition event.  Anytime virtual currency is used to acquire goods or services, a taxable bartering transaction takes place.  Much has changed in the virtual currency world since 2014, and clearly much more guidance is needed.  The IRS anticipates issuing additional legal guidance in this area in the near future.

For a detailed discussion of the tax treatment of cryptocurrency, when virtual currency is bought, sold, exchanged for other currency, received through mining or received through a hardfork transaction, see the article Toscher & Stein, Cryptocurrency and IRS Enforcement – Get Ready for Uncle Sam to Look into your Digital Wallet, Journal of Tax Practice an Procedure, Feb.-March 2018.

Voluntary Disclosures for Virtual Currency

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Voluntary disclosure is a long-standing practice of the IRS to provide taxpayers with criminal exposure a means to come into compliance with the law and potentially avoid criminal prosecution. See I.R.M. 9.5.11.9. In November, 2018, the IRS issued memorandum addressing the process for all voluntary disclosures (domestic and offshore).  See Memorandum for Division Commissioners, Chief Criminal Investigation, November 28, 2018.  The Voluntary Disclosure procedures are designed for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to pay all tax due in respect of their noncompliance. The procedures provide taxpayers with exposure potential protection from criminal liability and terms for resolving their civil tax and penalty obligations.  Noncompliance with respect to cryptocurrency may be corrected through a timely and complete voluntary disclosure.  Different compliance options exist depending upon the facts of each case.  Anyone lacking in compliance, should consult a tax professional with experience and expertise with these matters.

For more information about virtual currency tax reporting, the latest on IRS enforcement and potential voluntary disclosure options, we invite you to attend our presentation for Strafford Webinar entitled  “Tax Reporting of Cryptocurrency Calculating Basis, Income and Gain” scheduled for Thursday, August 29, 2019, 1:00 p.m. – 2:50 p.m. EDT/ 10:00 a.m. – 11:50 a.m. PST.

MICHEL R. STEIN – For more information please contact Michel Stein – stein@taxlitigator.com.  Mr. Stein is a principal at Hochman Salkin 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 cryptocurrency enforcement and reporting, 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 http://www.taxlitigator.com.

Internal Revenue Code § 6694 imposes a penalty on return preparers who understate a taxpayer’s tax liability. The amount of the penalty is $1,000 per return if the understatement is due to an “unreasonable” position.  § 6694(a)(1).  Under § 6694(b)(1), the amount is the greater of $5,000 or 75% of the income derived by the preparer from preparing the return if the understatement is due to

  • “a willful attempt” to understate the tax liability on the return, § 6694 (b)(2)(A), or
  • “reckless or intentional disregard” of tax “rules and regulations’.’§ 6694 (b)(2) (B).

In Rodgers v. United States, Docket No. 18-55009 (June 21, 2019), the Ninth Circuit held that “willful” under (b)(2)(A) does not include reckless conduct.  Instead, it requires “a conscious act or omission made in the knowledge that a duty is therefore not being met.” It reversed the district court’s determination that 5 corporate returns prepared by Rodgers willfully understated tax because the district court defined willful as including reckless disregard-

The Rodgers decision is “not for publication” and thus may not be cited as precedent under Ninth Circuit Rule 36-3.  It also does not discuss the facts in the case.  The district court’s 33-page Findings of Fact and Conclusions of Law fill in the details.  Rodgers is a tax attorney and certified public accountant who prepares tax returns.  He prepared returns for two individuals and three related corporations.  These returns substantially understated tax due to numerous errors.  Determining that the understatements were due to Rodgers’ willful or reckless acts and omissions, the IRS assessed fourteen penalties against him under §6694(b).  Rodgers paid part of the penalties and sued for a refund of the amounts paid and the abatement of the remainder.  The Government answered and counterclaimed for the balance owed.  Prior to trial, the Government conceded five of the penalties.  The district court was left to decide whether Rodgers was liable for penalties assessed with respect to the 2009 and 2010 returns prepared for each of the two individual clients and two of the corporate clients and the 2009 return for a third corporate client.

In its conclusions of law, the district court cited Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007), for the proposition that “where willfulness is a statutory construct of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.”  The district court then held, as to the returns for each of the five taxpayers, that Rodgers “willfully” understated tax, listing for each return the numerous errors they contained.  The only difference between the district court’s discussion of Rodgers’ willfulness in preparing the individual returns and its discussion concerning the corporate returns is that with respect to the former the district court found that Rodgers had knowledge of specific provisions of the Internal Revenue Code but failed to apply them while in the case of the corporate returns the district court determined that Rodgers “knew of the operation” of the three corporations and failed to follow his office’s standard practice in preparing their returns.  The district court concluded by finding that Rodgers “willfully and recklessly” prepared the nine returns in question and was, therefore, liable for penalties under § 6694(b).

In support of its decision, the Ninth Circuit relied on its prior decision in Ritchey v IRS, 9 F3d 1407 (9th Cir. 1993), and “noted further” that “willful” in § 6694(b) has the same meaning as the definition used in § 7206.  According to the Ninth Circuit, under United States v. Bishop, 412 US 346 (1973), this “does not include recklessness.”  In Bishop, the Supreme Court held that “willful” for purposes of § 7207, a misdemeanor, has the same meaning as for purposes of § 7206(1):

The Court, in fact, has recognized that the word “willfully” in these statutes [the criminal tax provisions of the Internal Revenue Code] generally connotes a voluntary, intentional violation of a known legal duty.

412 US at 360.

The Richey case relied on in Rodgers was a § 6694(b) penalty case involving a return preparer previously convicted of aiding and abetting in the preparation of false and fraudulent returns in violation of § 7206(2).  The Government moved prior to trial for partial summary judgment on the ground that the conviction collaterally estopped Richey from asserting he was not willful.  The district court denied the motion and the jury returned a verdict in favor of Richey.  The Ninth Circuit reversed, noting that the issue was the same in both the criminal case and the civil penalty case: whether Richey acted willfully.  The Ninth Circuit held that the district court erred in denying the Government’s motion:

Furthermore, the term “willful” has the same meaning under both sections 7206 and 6694. Willfulness under section 7206 “simply means a voluntary, intentional violation of a known legal duty.”  United States v. Pomponio, 429 U.S. 10, 12, 97 S.Ct. 22, 23-24, 50 L.Ed.2d 12 (1976). Similarly, under section 6694(b) willfulness “merely requires a conscious act or omission made in the knowledge that a duty is therefore not being met.” Pickering v. United States, 691 F.2d 853, 855 (8th Cir.1982).

Neither Richey nor Rodgers articulates why the definition of “willful” for criminal tax purposes means the same for civil tax penalties.  In the context of the trust fund recovery penalty under § 6672, the Ninth Circuit has held that reckless disregard is sufficient to support a finding of willfulness, Phillips v United States, 73 F3d 939 (9th Cir. 1996); Leuschner v United States, 336 F2d 246 (9th Cir. 1964), even though criminal liability for failing to collect, account for or pay over withholding tax requires a finding of a “voluntary and intentional violation.”  United States v Easterday, 564 F3d 1004, 1006 (9th Cir. 2009); United States v. Gilbert, 266 F3d 1180, 1185 (9th Cir. 2001).

If the Ninth Circuit is of the opinion that, where criminal and civil liability for the same action require a finding of willful action or omission, the same definition of willful should be used, then the definition of “willful” articulated by the Supreme Court in Ratzlaff v United States, 510 US 135 (1994), involving a criminal violation of the structuring provisions of the Bank Secrecy Act, should apply to the parallel civil penalties contained in 31 USC § 5321, including the FBAR willful penalty.  The definition of “willful” articulated by the Supreme Court in Ratzlaff required the Government to prove that the defendant’s actions were voluntary and that the defendant knew his actions violated the law.  The only published appellate decision on the question of what constitutes willfulness for purposes of the civil FBAR penalty is Bedrosian v United States, 912 F. 3d 144 (3d Cir. 2018) (holding that willfulness for purposes of the FBAR civil penalty encompasses both knowing and reckless violations).  In a brief recently filed with the Fourth Circuit, the defendants in United States v. Horowitz urge the appellate court to apply the Ratzlaff standard and require a showing of actual knowledge to impose the willful FBAR penalty.

In a blog posted on January 2, 2019, I wrote about the district court’s decision in United States v. Flume, 122 AFTR 2d 2018-5641 (SD TX 2018), where the court denied the Government’s motion for summary judgment in an FBAR willful penalty case, specifically rejecting the theory that a taxpayer is deemed to have known of the FBAR requirement if he signed a tax return that checked the box “no” to the question of whether he had offshore accounts.  Flume’s victory was short lived.  On June 11, 2019, the district court issued an opinion holding that Flume was liable for the willful FBAR penalty.  123 AFTR 2d 2019-2211 (SD TX 2019).

In its opinion, the district court stated that willful for purposes of the FBAR penalty includes a knowing or reckless failure to file.  It found that Flume knew about the FBAR requirement but intentionally did not file reports listing his UBS accounts.  At trial, Flume’s two return preparers for 1999 through 2010 both testified that Flume told them about Mexican bank accounts but never told them about his UBS accounts, that they had never seen the general ledger for his business listing the UBS accounts, and that they sent him each year a form letter reminding him of his obligation to report all foreign bank accounts and financial interests.  The district court further found Flume’s testimony “not credible,” and full of “numerous indicia of dishonesty,” due, among other things, to the many contradictions in his testimony, the discrepancy between his testimony about when and how he learned of the FBAR requirement in a Tax Court case, in his deposition and at trial, and his explanation of why he understated the value of his UBS accounts in delinquent FBARs.  The court ended its opinion with the continued affirmance of its determination that “‘the constructive-knowledge theory is unpersuasive’ as a justification for penalties based on knowing conduct.”

We still have a long way to go before the willfulness standard for the FBAR willful penalty is resolved.   Besides the Horowitz case pending before the Fourth Circuit, there is the Kimble case pending before the Federal Circuit challenging a Federal Claims Court decision holding that constructive knowledge is sufficient to establish willfulness and rejecting the argument that the FBAR regulation caps the maximum willful penalty at $100,000.  So stay tuned.

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

The Treasury Inspector General for Tax Administration Issued a report to the IRS Commissioner on  May 23, 2019 pointing the way to increasing the efficacy of its Information Referral  Program to increase tax compliance and raise revenue.

The IRS has long had a program where the public could report  to the IRS alleged non-compliance with the tax laws. IRS received almost 300,000 Information Referrals in the last four fiscal years.  These Information  Referrals, filed on Form 3949-A, can range from claims of false exemptions or deductions, unreported income or failure to withhold tax — employment or otherwise. These forms are processed at a central Service Center and reviewed by technicians or examiners depending on the complexity and if the information seems promising, the information is sent out to the appropriate business unit of the IRS for further review and action. These business units could include the Small Business Self Employed, the Wage and Investment Division or even the Criminal Investigation Division. Some of course – those that are not so promising — end up in “retention” for future possible use.

These are not informants’ claims for rewards (although there may be some duplication) but just individuals and businesses providing the IRS information on a confidential basis, such as a disgruntled employee or a competitor who believes it is at a disadvantage.

Figure 1, below, from the TIGTA Report reflects the number of Information Referrals received over the last four fiscal years.

Figure 1: Forms 3949-A Received in FYs 2015 Through 2018

FY Total Receipts
2015 89,213
2016 72,593
2017 67,046
2018 61,890
Total 290,742

Source: Form 3949-A Inventory Reports, as of September 29, 2018.

What is really interesting is the amount of tax assessments made based on these Information Referrals — more than $246 million in additional tax for the fiscal years 2016-2018. Moreover, examinations emanating from Information Referrals produce almost twice as much revenue per examination as other sources of examinations.  This suggests that random public information reporting may be one of the most effective mechanisms of finding non- compliance.

See Figure 4 c, below, from the TIGTA Report.

Figure 4: Form 3949-A Examinations vs Other Sources for Examinations for FYs 2016 Through 2018 

  SB/SE Division W&I Division
  Form 3949-A Other Sources of Examinations Form 3949-A Other Sources of Examination
Total Examinations 6,636 1,214,048 6,750 1,406,448
Total Assessments $200,571,550 $22,329,977,944 $46,425,181 $6,521,042,199
Average Assessment Per Examination $30,225 $18,393 $6,878 $4,637

Source: Accounts Information Management System – Centralized Information System Reports for W&I and SB/SE Informant Examination Closures and Other Examination Closures.

The TIGTA Report has some very good suggestions that the IRS has agreed to implement. These include an online Information Referral portal for taxpayers to use, better communication to the public through its website, and up to date computer tracking — it’s presently largely manual — of the processing and use of these forms.  One might also assume with the computerization of the process, the IRS will be utilizing data analytics to help further develop the program.

Some advice to taxpayers-keep your tax positions to yourself. Many people out there would love to share your secrets with the IRS — even if they aren’t looking for a reward.

STEVEN TOSCHER – For more information please contact Steven Toscher – toscher@taxlitigator.com Mr. Toscher is a principal at Hochman Salkin 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 www.taxlitigator.com.

The general rule is that under IRC Section 6672(a), a person “required to collect, truthfully account for, and pay over any tax…who willfully fails to collect such tax, or truthfully account for and pay over such tax” (known as trust fund taxes) is liable for a penalty equal to the total amount of the tax not paid over—even if that person was directed by a superior to not pay the tax.[i]  In Myers v. United States, Docket No 1:16-cv-01792 (11th Cir. May 6, 2019)[ii], the Eleventh Circuit addressed the narrow question of whether there is an exception to that general rule where the order to not pay the taxes came from a government agency.  Holding that the rule applies the same, the Eleventh Circuit affirmed the lower court’s decision rejecting the defense of “my boss told me not to pay,” where the boss in question was the U.S. Small Business Administration (“SBA”), a government agency.

The plaintiff in Myers v. United States was the CFO and co-president of two newspaper publishing companies, which were both owned by a parent company that had been licensed by the SBA as a Small Business Investment Company.  The SBA is an agency of the federal government that helps small businesses in the U.S. to start, build, and grow, by providing loans, loan guarantees, contracts, counseling sessions, and other forms of assistance.[iii]  As a Small business Investment Company, the parent company could issue debentures guaranteed by the SBA, and in turn, the SBA had the power to place the parent company into receivership.

In 2008, after violating the terms of its Small Business Investment Company license, the SBA filed suit in the Southern District of New York to place the parent company into receivership.  The Southern District of New York took “exclusive jurisdiction” of the parent company and all of its assets—including the two newspaper publishing subsidiaries—and appointed the SBA as the parent company’s receiver.  As receiver, the SBA was given “all powers, authorities, rights and privileges…[enjoyed] by the general partners, managers, officers and directors” of the company.

The following year, while the parent company was under the control of the SBA, the newspaper publishing companies failed to pay the required payroll taxes to the IRS, which are trust fund taxes under Section 6672(a).  As CFO and co-president, Myers had signature authority on the companies’ bank accounts, knew the payroll taxes were due, and approved payments to other vendors instead of paying the taxes over to the IRS.  As a result, the IRS assessed the trust fund tax penalties against Myers.  Myers argued that he should not be liable for the penalties because he was told by the SBA—a federal government agency—to prioritize other vendors over the trust fund taxes; however, the Eleventh Circuit held that Section 6672(a) “applies with equal force when a government agency receiver tells a taxpayer not to pay trust fund taxes.”

LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a principal at the law firm of Hochman Salkin Toscher Perez P.C. and represents clients throughout the United States and elsewhere in complex civil tax litigation and criminal tax prosecutions (jury and non-jury).  Ms. Strachan has experience in a wide range of civil and criminal tax cases, including cases involving technical valuation issues, issues of first impression, and sensitive examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise.  Additional information is available at http://www.taxlitigator.com.

[i] See, e.g., Thosteson v. United States, 331 F.3d 1294, 1300 (11th Cir. 2003) (“Acting, or rather failing to act, under orders from his superior does not negate [a defendant’s] culpability under the statute.”); Brounstein v. United States, 979 F.2d 952, 955 [71 AFTR 2d 93-1714] (3d. Cir. 1992) (“Instructions from a superior not to pay taxes do[es] not… take a person otherwise responsible under section 6672(a) out of that category.”).

[ii] Myers v. United States, Docket No 1:16-cv-01792 (11th Cir. May 6, 2019), available at http://media.ca11.uscourts.gov/opinions/pub/files/201811403.pdf.

[iii] U.S. Small Business Administration, https://www.sba.gov/about-sba/organization.

Administrative summonses are an important investigative tool of the IRS in fulfilling its statutory duty of “proceeding from time to time, through each internal revenue district and inquire after and concerning all persons who may be liable to pay any internal revenue tax.”  Internal Revenue Code (“IRC”) §7601(a).  Where a person served a summons fails to comply, the IRS can bring a summary proceeding to enforce the summons.  To obtain enforcement, the government must show (usually done by the affidavit of the IRS officer who issued the summons) that a) the summons was issued for a legitimate purpose; b) it seeks information that may be relevant to that purpose; c) the information sought is not already in the IRS’s possession; and d) the IRS has followed all administrative steps required by the I.R.C.  United States v. Powell, 379 U.S. 48, 57-58 (1964).  Once this Powell showing is made, the summoned party can only defeat enforcement if it can show that enforcement would be an abuse of process, 379 U.S. at 58, or another “appropriate ground,” including that the information sought is privileged or is sought for use in a criminal prosecution.  Reisman v Caplin, 375 U.S. 440, 449 (1963).

The courts, including the Supreme Court, broadly constructed the IRS’s summons power with respect to third-party record keepers, including so-called “John Doe” summonses.  Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 315-316 (1985).  Concerned that the use of John Doe and other summonses to third parties could “unreasonably infringe on the civil rights of taxpayers, including the right of privacy,” H.R. Rep. 94-658 at p. 307, Congress enacted IRC §7609.  This section instituted procedures requiring notice to taxpayers when a summons was issued to a third-party (with certain limited exceptions) and provides any person entitled to notice with a right to intervene in any proceeding to enforce the summons and a right to bring an action in district court to quash the third-party summons.  IRC §7609(a)(2), (b).

In the case of a John Does summons, the IRS does not know the identity of the taxpayer (or class of taxpayers) about whom it is seeking information.  Because this makes the service of notice on the taxpayer impossible, Congress required district court approval before a John Doe summons could be served.  H.R. Rep. 94-658 at p. 307.  Section 7609(f) provides that a summons that does not identify the person with respect to whose liability it was issued may only be served if the IRS establishes to the satisfaction of a court that:

(1) the summons relates to the investigation of a particular person or ascertainable group or class of persons,

(2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and

(3) the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

The IRS and the Department of Justice have set up additional safeguards with respect to a John Doe summons.  While non-John Doe summonses can be served after approval by the issuing IRS officer’s manager, see Internal Revenue Manual ¶25.5.6.1.3 [2] (03/03/2017) and Exhibit 25.5.2.1 m, n, a John Doe summons must be approved by IRS Area or Associate Area Counsel, who will then refer the matter to the Department of Justice.  Internal Revenue Manual ¶25.5.7.3 [3], [4].  Before a proceeding is instituted in court for authorization to serve the John Doe summons, the summons must be approved by the Deputy Assistant Attorney General (Civil Trial Matters) of the Tax Division.  Department of Justice Tax Division Summons Enforcement Manual at §III.A.2.

This prolix preface gets us to the subject of this blog: Taylor Lohmeyer Law Firm PLLC v United States, 2019 WL 2124676 (WD Tex. 5/15/19), an action by a law firm to quash a John Doe summons issued for the names and other information relating to clients for whom the firm (between 1995 and 2017) “create[d] and maintain[ed] foreign bank accounts and foreign entities” that may have been used to hide taxable income.

Prior to service of this John Doe summons, the government petitioned the district court for an order authorizing it to serve the summons.  The petition was supported by a 30 page declaration from an IRS agent who had audited an unidentified client of the firm.  The IRS had assessed a deficiency of over $2 million tax on over $5 million of income the client had allegedly hidden through the use of “foreign accounts, foreign trusts, foreign corporations” set up by the law firm.  Attached to the declaration were more than 200 pages of exhibits, including memos from the law firm, letters between the law firm and firms in tax haven jurisdictions, transactional documents and excerpts from recorded interviews of both the taxpayer and a partner of the law firm.  It appears that the IRS obtained some documents because the taxpayer asserted reliance on advice of the law firm, thus waiving the attorney client privilege.  During the lawyer’s interview, he estimated that he had set up foreign entities for twenty to thirty other clients.  The lawyer died before the petition for service of the summons was filed.

In authorizing service of the summons, the district court determined that the requirements of §7609(f) had been satisfied.  The findings, made in an ex parte proceeding, cannot be challenged in a proceeding to enforce the summons.  United States v. Samuels, Kramer & Co., 712 F. 2d 1342, 1346 (9th Cir. 1983).  Because the government had met its burden under Powell to enforce the summons, the burden shifted to the law firm to establish that enforcement would be inappropriate.  The court held that the law firm failed to meet its burden.

The first claim of the law firm that the court addressed was that the affidavit submitted in support of the petition to serve the summons contained numerous inaccuracies.   In the court’s view, this was an attack on its finding in the prior proceeding that it was reasonable to believe that the persons about whom the information was sought failed to comply with the internal revenue laws.  Thus, it was not an issue that could be raised in the context of the enforcement proceeding.  Even if it could have been raised in the enforcement proceeding, the court held that issuance of the summons was proper.

The firm further argued that not only was the agent’s affidavit replete with misrepresentations, the audited taxpayer owed additional tax because he failed to follow the law firm’s advice.  According to the firm, it had reviewed the files of the clients for whom it had structured and maintained foreign grantor trusts and determined that all of them had followed the firm’s advice and thus did not owe additional tax.  The court viewed this argument as being two-fold: that enforcement would be an abuse of process and that the Government failed to meet the first two Powell requirements.   The court held that these allegations did not rebut the fact that investigating possible offshore tax evasion is a legitimate purpose and that the information sought is relevant to that purpose.  Because the law firm disavowed the implication the government acted with a sinister purpose, this undermined its claim of abuse of process.

The main issue raised by the law firm in opposition to enforcement of the summons was that providing the requested information would breach the attorney-client privilege.  The law firm did not produce a privilege log identifying any specific document or set of documents that were protected by the attorney client privilege.  The court held that the law firm could not use a blanket assertion of privilege but instead had to identify specific documents that it claimed were privileged.  The court noted that the identity of a client is not normally privileged except in those rare instances where the identity would be the “last link in an existing chain” of evidence that would likely lead to the client’s indictment.

The law firm argued that identifying the clients and services sought amounted to a violation of the attorney client privilege while the government argued that it was not seeking the advice given clients, just the identities of clients for whom the firm formed or maintained foreign entities or foreign accounts or assisted in foreign financial transactions and that the summons was tailored to avoid the attorney-client privilege.  [In fact, the summons sought more than taxpayer identities: an attachment to the summons contained 2 ½ pages of categories of documents sought.]

According to the firm, it had identified 32,000 documents that were responsive to the summons.  While given the opportunity to submit additional briefing on the attorney-client issue, the law firm failed to provide a privilege log specifying what documents it alleged were privileged and the reason for the claim of privilege.  The firm did produce redacted billing statements that indicated that it performed legal services and thus some documents sought were potentially privileged.  The court held that this was insufficient to establish that any specific documents sought were privileged.  Thus it ordered the summons enforced.

The court ended its discussion with the following observation:

As the Government suggests, “[u]pon this Court ordering enforcement of the summons, if Taylor Lohmeyer wishes to assert any claims of privilege as to any responsive documents, it may then do so, provided that any such claim of privilege is supported by a privilege log which details the foundation for each claim on a document-by-document basis.” Docket no. 7 at 8. Whether certain documents fit the Liebman argument the Firm advances is better decided individually or by discrete category.

As a result, the enforcement order may not be the end of the matter.  It will probably take a while for the firm and its counsel to review all 32,000 documents and provide a privilege log of those documents or categories of documents that are privileged.  If the law firm produces a privilege log and establishes that specific documents are privileged, it may still be able to keep the IRS from obtaining the documents.

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

 

« Newer Posts - Older Posts »

Categories