TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

We are very pleased to announce that Sandra R. Brown, Robert Horwitz, Michel Stein, Edward M. Robbins, Jr., Philipp Behrendt, Gary Markarian, and Michael Greenwade will be part of the Taxation Section of the California Lawyers Association’s “DC Delegation” on May 16-17, 2023, in Washington D.C.

For over 30 years, the Taxation Section has annually sent a select delegation to bring California tax lawyers and their ideas to Washington, D.C. As in the past, our firm will be part of this important process which creates an opportunity to present significant issues and engage in fulsome discussions with key tax officials and staff members from government offices including the Internal Revenue Service Chief Counsel, National Taxpayer Advocate, Treasury Department, House Ways and Means Committee, Joint Committee on Taxation, Senate Finance Committee Members, United States Tax Court, and the Department of Justice Tax Division.

This year the principals and associates in our firm will present on the following three topics:

Judicial Jurisdiction for Assessable and Foreign Information Penalties

Currently, some civil tax penalties are subject to deficiency procedures, giving taxpayers the opportunity for pre-assessment review of the penalty by the Tax Court and postponing assessment and collection until the decision of the Tax Court becomes final. Other penalties, such as assessable penalties found in Chapter 68B of the Internal Revenue Code and foreign information penalties found under Chapter 61A, are not subject to deficiency procedures. Assessable penalties are assessed without taxpayers being afforded the right to challenge the penalty in court before assessment. To challenge these penalties in court, taxpayers must first pay the penalty in full and file a refund claim. This results in clear inequity and financial hardship for those who cannot afford to fully pay their penalties, denying some taxpayers the right to challenge IRS determinations while other taxpayers are afforded such rights. Foreign information penalties were treated the same as assessable penalties until a recent Tax Court decision held that the Commissioner of the IRS did not have statutory authority to assess them, which has unleashed an uncharted procedural web for taxpayers subjected to these penalties. The paper written by Edward Robbins and Michael Greenwade advocates for a unified application of deficiency procedures, proposing amendments to the Code to make the deficiency procedures apply to penalties found in Chapter 61A and Chapter 68B. 

2023 CLA DC Delegation Assessable and Foreign Information Penalties Paper

BBA Imputed Underpayment Abuse of Discretion

The Bipartisan Budget Act of 2015 reformed the partnership audit and tax collection procedures to create a new centralized audit regime. The paper written by Sandra Brown, Michel Stein, and Philipp Behrendt, highlights the inconsistencies that arise in the computation of the tax liability resulting from an audit under the new regime. Adjustments to non-income partnership items can create a tax liability under the applicable Regulations, although these items may not have directly changed any partner’s tax liability if it were reported correctly in the first place. The IRS recognized this shortfall, and published a new regulation in December 2022 that allows for treating some adjustments to non-income items as zero to address the issue. However, the Regulations do not cover all relevant situation and grant exercise of the IRS’s discretion to include the item again. The regulation fails to set forth any standard when the exercise of this discretion is appropriate, leaving the taxpayer vulnerable to using the inclusion as leverage. The paper proposes to zero out non-income items for all relevant situations, and also the implementation of clear directives for consistency in the treatment of non-income items in calculating the IU to ensure a fair and just tax system.

2023 CLA DC Delegation BBA Imputed Underpayment Paper

IRC Section 6695A Appraiser Penalties

IRC § 6695A imposes a monetary penalty on an appraiser whose appraisal results in a substantial valuation misstatement, a substantial estate or gift tax valuation understatement, or a gross valuation misstatement, if the appraiser knew, or reasonably should have known, that the appraisal would be used in connection with a return or a claim for refund. The only defense to the appraisal penalty requires the appraiser establish to the satisfaction of the IRS that the value established in the appraisal was more likely than not the proper value. Additionally, the statute of limitations for assessing these penalties may result in situations where the IRS assesses an appraiser penalty before concluding the underlying tax return or claim for refund at issue. The paper written by Avram Salkin, Robert Horwitz, and Gary Markarian proposes changes to ensure appropriate safeguards for the imposition of appraiser penalties, including the need for a reasonable cause argument to defend against an imposition of the appraiser penalty and an amendment to the statute of limitations to allow the IRS to fully examine the underlying tax return or claim for refund before assessing the penalty.

2023 CLA Delegation 6695A Paper

Dear Colleague-

We cordially invite you to save the date for this years UCLA Extension Tax Controversy Institute which will be live this year and held on October 26, 2023 at the Beverly Hills Hotel in Beverly Hills, California. 

The Institute is entering its 39th year and is recognized as one of the top tax controversy programs in the country. 

As in the past, we will again be covering the most important topics of interest to tax controversy practitioners including —

The New Landscape in IRS Examinations – What Can We Expect in the New Tax Enforcement Environment for High Wealth Individuals and Companies 

Employee Retention Credits – Here Come the Examinations

and Investigations

Handling California Tax Disputes Before the Franchise Tax Board and the California Office of Tax Appeals. 

Cryptocurrency Enforcement – Where Do We Go From Here. 

The Internal Revenue Service’s Criminal Enforcement Program- How to Keep your Client out of Jail. 

The IRS Continuing Focus on Promoters and Other Enablers. 

We anticipate keynote presentations by the National Taxpayer Advocate Erin Collins and the Chief of IRS Criminal Investigation James Lee. We are also pleased to announce that this year’s Bruce I. Hochman Award recipient is retired IRS Area Counsel Sherrie Wilder.

Join us, your fellow practitioners and top government officials for a day filled with critical insights on the hot topics and current developments relevant to all tax practitioners. And since we are back in person at the Beverly Hills Hotel, you will also get to enjoy a great lunch program and an excellent cocktail party to networking and gather with old and new tax colleagues alike. 

 A link for early registration is below.

Click Here for More Information

We look forward to seeing you on October 26, 2023.

We are pleased to include a link to an article discussing last years Institute appearing in the Spring 2023 edition of the

Journal of Tax Practice & Procedure.

Click Here for the Article

Steven Toscher and Sandra Brown, Co-Chairs

UCLA Extension Tax Controversy Institute

Hochman Salkin Toscher Perez P.C.

toscher@taxlitigator.com

We are pleased to announce that Michel Stein, Evan Davis and Philipp Behrendt will be speaking at the upcoming CPA Academy webinar “New Developments in Cryptocurrency: Reporting and Enforcement,“ Thursday, May 11, 2023, 8:00 a.m. – 9:00 a.m. (PST).

This program will provide tax advisers and compliance professionals with a practical look at IRS guidance for calculating and reporting income and gain on cryptocurrency (e.g., Bitcoin) transactions. We will discuss the changes within the IRS as well as the agency’s latest publication on cryptocurrency reporting requirements, NFT, and other updated.

We will address recently released IRS Chief Counsel Advice, the Ethereum merge, and the recent IRS enforcement initiatives to identify digital asset activity. We’ll also discuss how the requirements of voluntary disclosures and the risks of criminal prosecution related to unreported and improperly reported cryptocurrency transactions.

Click Here for More Information

We are pleased to announce that Steven Toscher, Michel Stein and Cory Stigile will be speaking at the upcoming Strafford webinar “IRS High-Wealth Examinations: IRS Wealth Squad, Targeted Issues, Preparation, IDRs, Appeals, and Litigation,” Thursday, May 4, 2023, 10:00 a.m. – 11:50 a.m. (PST).

The IRS Large Business and International Division is auditing high net worth individuals and their related entities, including partnerships, S corporations, trusts, and private foundations. The Wealth Squad, a highly-trained division of the IRS, is conducting these audits.

Although targeting specific areas, these are comprehensive audits covering most aspects of a taxpayer’s tax return. Tax professionals working with high-wealth clients need to prepare for potential examinations and understand how to represent these taxpayers.

Listen as our panel of tax experts provides the latest information on these comprehensive audits, including the IRS selection process, information document requests, supporting documentation, audit adjustments, appeals, and litigation.

Click Here for More Information

The IRS Office of Chief Counsel issued Chief Counsel Advice (“CCA”) 202316008 last Friday regarding the tax consequences of holding a native token to a blockchain distributed ledger that is undergoing a protocol upgrade.

Click Here for Full Article

The Tax Court has determined that the IRS lacks authority to assess penalties under IRC § 6038(b) for failing to file Forms 5471, in a recent decision, Farhy v. Commissioner, 160 T.C. No. 6 (T.C. April 3, 2023). As further held by the court, absent such an assessment, the IRS has no administrative authority to pursue collection, including filing of Notices of Federal Tax Liens or issuing Notices of Intent to Levy. While the Tax Court’s decision is limited to the IRC § 6038(b) penalty, its reasoning is applicable to all foreign information return reporting penalties contained in IRC Chapter 61A. Both determinations now raise a flurry of questions as to what actions taxpayers should consider when receiving a penalty notice for the failure to file informational returns, such as the Form 5471, from the IRS.

Click Here for Full Article

On April 4, 2023, during his ceremonial swearing-in as the 50^th IRS Commissioner, Danny Werfel, announced that the IRS’s strategic operating plan for the nearly $80 billion in funding, under the Inflation Reduction Act (IRA), would be issued later that week, stating there would be “real world improvements for every taxpayer, every tax professional, and every IRS employee.”  That day, Janet Yellen, the Secretary of Treasury, gave clear marching orders to Commissioner Werfel, stating that he will be focused on “dramatically improving taxpayer service and ensuring that large corporations and the wealthy pay the taxes they owe.”  

Click Here for Full Article

When a taxpayer who has not filed a tax return is contacted by an IRS agent, the taxpayer will be requested to give the delinquent return to the agent. Internal Revenue Manual 4.12.1.7.2.1 (10-05-2010) states that the IRS agent is to “[a]dvise the taxpayer to deliver the returns promptly to the examiner along with a written statement explaining why they did not timely comply with filing requirements.” If you have a client in this situation, advise her it is best to not to listen to this particular request by the IRS agent. Instead, the client should first either e-file the delinquent returns or send them by certified mail to the appropriate IRS service center and then provide the IRS agent with a copy of the duly filed return. The reason is that, according to the Ninth Circuit, a taxpayer who complies with an IRS agent’s request for a delinquent return has not legally filed a return with the IRS unless and until the IRS agent has sent it to the appropriate service center. Thus, the statute of limitations for examination of that return will continue to remain open indefinitely. This is what the taxpayer learned in Seaview Trading, LLC v. Commissioner, ___ F.4^th ___ 2021 WL 2442606 (9^th Cir., March 10, 2023). 

Click Here for Full Article

We are pleased to announce that we have won a major victory in the United State Tax Court with the Court holding the Internal Revenue Service does not have authority under the Internal Revenue Code to assess penalties for the failure to file Forms 5471. Farhy v. Commissioner, 160 T.C. No. 6, (April 3, 2023). The IRS excessive assessment of foreign penalties has been a concern to the tax practitioner community for a number of years now.

Congratulations to Edward Robbins of our office for helping to establish this important precedent which invalidated the IRS authority to assess these penalties. 

Stay tuned. We expect this decision to have a significant impact in the foreign enforcement area. Any taxpayer who has paid these penalties should consult with their tax advisor about filing a claim for refund. 

Click Here for the Opinion

On February 28, 2023, the Supreme Court issued its opinion in Bittner v. United States, ___ U.S. ___, 143 S.Ct. 713, 2023 WL 2247233, holding that the non-willful FBAR penalty is applied per annual report and not per account. For the past few years, the IRS has taken the position that it could impose a separate $10,000 non-willful FBAR penalty based on the number of foreign accounts a U.S. person failed to properly report. The Ninth Circuit rejected the Government’s argument and held the maximum penalty per year is $10,000, United States v. Boyd, 991 F. 3d 1077 (2021), while the Fifth Circuit held the $10,000 penalty could be imposed per account. United States v. Bittner, 19 F. 4th 734 (2021).

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