TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

In a recent announcement, titled: “IRS cautions plan sponsors to be alert to compliance issues associated with ESOPs” (IR-2023-114, dated August 9, 2023), the Internal Revenue Service (IRS) highlighted its expanded efforts to ensure high-income taxpayers pay their fair share of taxes. The focus of this announcement is on compliance issues associated with Employee Stock Ownership Plans, so-called ESOPs. We discuss the key takeaways from the IRS’s warning and the implications for businesses and individual taxpayers.

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Introduction:

The recent case of Farhy v. Commissioner has brought attention to an essential aspect of the tax collection process – the assessment authority for penalties by the Internal Revenue Service (IRS). Ed Robbins, who argued this case on behalf of the taxpayer, explains the impact of this taxpayer’s victory in the latest volume of CCH’s Journal of Tax Practice & Procedure. A copy of this article is available below.  

In this case, the IRS attempted to enforce penalties against a taxpayer for failings to file Form 5491. However, the Tax Court ruled that the penalties were not validly assessed because the IRS does not have assessment authority. This blog post explores the significance of assessments in tax collection and the implications of the Farhy case for taxpayers and the IRS. Also, the article provides an over of penalties to which the determination of missing assessment authority could extent.

Understanding Assessments in the Tax Collection Process:

An assessment is a pivotal event in a taxpayer’s tax liability journey, representing the IRS’s official determination of the amount owed. The Code grants the Commissioner of Internal Revenue the authority to make these assessments, which are recorded in the office of the Secretary according to rules and regulations prescribed by the Secretary. Importantly, an assessment is the trigger for the IRS’s unique collection powers under the Code.

The Farhy Case: Highlighting the Importance of Proper Assessments Authority:

Farhy v. Commissioner serves as a vital lesson for taxpayers and the IRS alike. The Tax Court ruled that without a valid assessment authority, the IRS’s administrative collection powers are non-existent. Consequently, the IRS cannot assess certain penalties and, thus, cannot proceed with collection actions against a taxpayer. The implications of this case extend to most foreign information penalties in Chapter 61 where the IRS lacks assessment authority. As a result, taxpayers facing such penalties should consider raising the issue of the IRS’s lack of authority and file a protective claim for a refund if they have already paid the penalty.

The Timely Appeal and Reminder for the IRS:

The IRS appealed the Fahry decision just before the appeal deadline expired.

However, this case serves as a poignant reminder to the IRS to strictly validate whether they have the proper assessment authority. The case underscores the importance of turning “square corners” in the tax collection process.

Conclusion:

Farhy v. Commissioner highlights the critical role of assessments in the tax collection process. Taxpayers must be aware of their rights and protections under the law, and if facing collection actions by the IRS, you need to consult with a qualified tax professional. For the IRS, this case serves as a reminder to adhere to proper procedures, ensuring that assessments are conducted accurately and lawfully. By turning square corners and following the tax code’s letter and spirit, the IRS can foster a fair and transparent tax system that benefits both taxpayers and the government alike.

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In an effort to combat tax evasion and abusive tax transactions, the Internal Revenue Service (IRS) and the U.S. Treasury Department have recently released proposed regulations targeting monetized installment sale transactions. These transactions, along with substantially similar schemes, have been classified as listed transactions—a category of reportable transactions that requires special disclosure and reporting.

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We are pleased to announce that Philipp Behrendt will be speaking at the upcoming California Lawyers Association webinar “The Use of AI for Tax Litigation,” Tuesday, August 8, 2023, 12:00 p.m. – 1:00 p.m. (PST).

The webinar will delve into the transformative impact of artificial intelligence on tax litigation practices. Attendees can look forward to gaining valuable knowledge on the use and still existing limitations of AI tools and techniques that can be employed by tax professionals. The speakers will also address the ethical considerations surrounding the use of AI in this context, ensuring a holistic understanding of the topic. The program will assist attendees to uncover the strategies for effective prompt engineering, leveraging AI for optimal results.

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Our partners, Dennis Perez and Sandra Brown, had the privilege of speaking in San Diego on Friday at the 8th Annual USD School of Law- RJS LAW Tax Controversy Institute. 

Joining Dennis Perez on the Government Loans Panel, which provided an in depth focused on PPP, EIDL and ERC audit and fraud issues, were AUSA Dylan M. Aste, Special Litigation Counsel Joseph Orabona, and IRS CI SSA Jason Powell as well as moderators Kaveh and Sam Imandoust. 

Sandra Brown was joined on the Criminal Tax Investigations and Prosecution panel by the Honorable Allison H. Goddard, former AUSA Daniel Silva, and former IRS CI Chiefs Don Fort and Victor Song. Always nice to present with former colleagues and a bonus to learn various tips about federal court procedures and sentencings from Magistrate Judge Goddard.

Many thanks to Ronson J. Shamoun for co-hosting such an informative conference event, and to our tremendous panelists for their enlightening comments on these interesting tax controversy topics.

We are pleased to announce that Steven Toscher, Michel Stein, and Philipp Behrendt will be speaking at the upcoming CalCPA webinar “Cryptocurrency Compliance 2023,” Tuesday, August 8, 2023, 9:00 a.m. – 10:00 a.m. (PST).

Keep abreast of the IRS’s continuous efforts to enhance compliance in the crypto space. Join us for a practical look at the IRS enforcement strategy, established reporting principles as well as recent guidance on digital assets taxation. The Program is your guide to navigating the intricacies of digital asset taxation. Gain valuable insights what the IRS positions on many hot topic items in the world of digital asset taxation actually is, allowing you to provide expert guidance to your clients. Being up to date ensures you can offer the most current and relevant solutions to your clients. We also address how to ensure FBAR compliance and explore voluntary disclosure practices to protect your clients’ interests.

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Please join us July 28, 2023 for the CalCPA 2023 Annual Income Tax Seminar.

We have an excellent line up of programs –

How to Help an Individuals with Unreported or Misreported Crypto Transactions
(8:05 a.m. – 9:25 a.m. PST)
Featuring Evan Davis

R&D Credit Hot Topic and California Considerations
(1:05 p.m. – 2:20 p.m. PST)
Featuring Cory Stigile

The Annual Income Tax Seminar is a collaboration of CalCPA and the California Lawyers Association Taxation Section that will provide comprehensive insights into critical topics shaping the world of taxation. This event is tailored for tax professionals, CPAs, attorneys, and financial advisors seeking to stay at the forefront of the industry.

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The Employee Retention Credit (ERC) has been a lifeline for businesses struggling during the COVID-19 pandemic. Designed to provide financial assistance to eligible employers who kept their workforce employed during times of economic hardship, the ERC has proven to be a vital source of support for many. However, with its increasing popularity, aggressive marketing tactics, and potential for misuse, the IRS has found itself facing a growing challenge in ensuring the program’s integrity.

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Jonathan Kalinski quoted in Tax Notes article on newly filed Tax Court cases challenging the IRS’ position in applying IRC Section 280E to Offers in Compromise for marijuana businesses. Offers in Compromise are challenging for marijuana businesses because the IRS uses 280E disallowed expenses in determining collection potential, creating a phantom cash problem. 

“The fiction of ignoring taxpayer expenses for considering an OIC makes no one’s life easier as the IRS struggles to collect phantom cash and the taxpayer struggles to pay it.”  

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We are pleased to announce that Steven Toscher, Michel Stein, and Sandra Brown will be speaking at the upcoming CPA Academy webinar “Tax Controversy Hot Topics,” Tuesday, July 25, 2023, 8:00 a.m. – 9:00 a.m. (PST).

This webinar will cover critical practice and procedural issues facing practitioners, including IRS priorities, the new emphasis on fraud investigations, and referrals to the criminal investigation division.

Practitioners at all levels need to have the most up-to-date information to best advise their clients, and this webinar will cover a broad range of topics that any practitioner will benefit from knowing. The presenter will cover updates on IRS Enforcement and what the IRS plans to do with its additional funding, issues around high-wealth examinations and high-income non-filers, John Doe summons, Digital Assets/Cryptocurrency enforcement, and options for taxpayers with undisclosed foreign assets as well as the latest on the Maltese pension plans and on Employee Retention Credits.

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