TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

We are pleased to announce that Dennis Perez, Robert Horwitz and Lacey Strachan will be speaking at the upcoming CalCPA webinar on “Office of Tax Administration: Handling a Case Before California OTA,” Wednesday, August 31, 2022, 9:00 a.m. – 10:00 a.m. (PST).

The OTA (Office of Tax Appeals) has been in operation since January, 2018, but its rules are not well known to many tax practitioners. Learn how to guide a case through the procedural maze of the OTA regulations and avoid foot faults that can jeopardize your client’s case.

Learning Objectives

• Types of cases the OTA hears.

• How to file an appeal with the OTA

• Discovery in OTA cases

• Opportunities for settlement before the case is heard

• What to expect in an OTA hearing

Major Subjects

• OTA jurisdiction

• OTA procedures

• Settlement with the FTB or CDTFA while a case is pending before the OTA

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We are pleased to announce that Philipp Behrendt, along with LaVonne Lawson, Richard Gano and Michele F.L. Weiss will be speaking at the upcoming webinar at the Beverly Hills Bar Association on “Tax Impacts of the Inflation Reduction Act,” Tuesday, August 30, 2022, 12:30 p.m. – 1:30 p.m. (PST).

President Biden recently signed The Inflation Reduction Act into law. The Act contains numerous tax provisions. Come listen to our expert panel discuss the provisions and how they may impact you and/or your clients.

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The Tax Court’s jurisdiction has been expanding over the years, both by legislation and rulings designed to make sure that taxpayers have adequate remedies.. This is the message in Treece Financial Services Group v. Commissioner, 158 T.C. No. 6, as well as the related opinion Treece Investment Advisory Corp. v. Comm’r, T.C. Memo 2022-38 (both April 19, 2022).

The background of the Treece cases is quickly explained. For the years in question, the petitioner(s)’ sole corporate officer classified himself as an independent contractor. Mr. Treece does not dispute that this classification was incorrect, but he claims that he is eligible for federal employment tax relief under the Voluntary  Classification Settlement Program (“VCSP”). Because the misclassification was  purportedly discovered during an employment tax examination, the government denied the petitioner’s participation in the program.

The following is a summary of the requirements for VSCP eligibility as discussed by the court: “(1) have consistently treated the workers as nonemployees; (2) have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and (3) not currently be under employment tax audit by the Internal Revenue Service (IRS).”

Not surprisingly, the court denied the petitioner’s motion for summary judgment because whether he was audited is a material fact in dispute. But that’s not all.

. Importantly, the opinion also addressed the government’s motion to dismiss due to lack of jurisdiction. The IRS has repeatedly argued that the tax court’s jurisdiction does not extend to the agency’s determination of whether  a taxpayer is eligible for the VCSP.

The Tax Court rejected the IRS position and denied its motion to dismiss.. While the Tax Court has jurisdiction only when Congress expressly grants it. See § 7442; Breman v. Commissioner, 66 T.C. 61, 66 T.C. (1976), the Tax Court, however, determines whether jurisdiction can be exercised. Kluger v. Commissioner, 83 T.C. 309, 314 (1984).

According to IRC § 7436(a), the Tax Court has jurisdiction to determine whether the  determination is correct and to determine the proper amount of employment taxes. Trimmer v. Commissioner,148 T.C. 334, 345-48 (2017) and similar cases established that the court’s jurisdiction extends to determinations going to the merits of a deficiency determination. The amount of employment tax owed is directly affected by the agency’s determination of whether an employer is eligible under the VCSP. An eligible employer is not subject to interest or penalties and pays a lower tax amount. According to the Tax Court, reviewing the eligibility denial was logically part of reviewing the tax deficiency.

As a result, the IRS’s determination is subject to Tax Court review. A few weeks later, on May 19, 2022, the IRS filed a 23-page motion for reconsideration (compared to the agency’s 10-page motion for summary judgment), a motion described in the Chief Counsel’s Directive Manual at 35.9.1.2.4 as necessary “[i]n rare instances.”

This is apparently one of these “rare” instances–; not only because the agency expects taxpayers to litigate their VCSP eligibility denials if the decision stands, but also because of the  ongoing expansion of Tax Court’s jurisdiction  over agency administrative acts that are improper and result in a notice of deficiency. What is the IRS afraid of—isn’t judicial review a good thing for improper agency action?

Steven Toscher is a Principal and Managing Partner at Hochman Salkin Toscher Perez P.C., and specializes 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.

Michel Stein is a Principal at Hochman Salkin Toscher Perez, specializing in controversies, as well as tax planning for individuals, businesses and corporations.  For more than 20 years, he has represented individuals with sensitive issue civil tax examinations where substantial penalty issues may arise, and extensively advised individuals on foreign

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., licensed in California as well as in Germany and assists in advising clients in civil and criminal tax controversies as well as international money laundering investigations stemming from tax avoidance structures.  He also focuses on the technical aspects involved in advising voluntary disclosures in connection with DeFis, NFTs, and other crypto assets.

We are pleased to announce that Sandra R. Brown will be speaking on upcoming seminars at the 39th Symposium on Economic Crime – Jesus College, University of Cambridge, being held at Jesus College, a College within the University of Cambridge, Sept. 4–11, 2022. Sandra will be participating on a panel entitled “Getting Your House in Order – Conducting Internal Investigation Into Alleged Tax Offenses” on Tuesday, September 6, 2022, 4:15 p.m. – 5:15 p.m. and will also deliver a keynote on “Insider Crime the Enemy Within” on September 7, 2022, 2:00 p.m.

The Cambridge International Symposium on Economic Crime over the last thirty-nine years has established itself as a leading forum for the discussion and analysis of issues related to economically motivated crime and misconduct and its prevention and control, which this year is focused on “Selling Status – insider crime and abuse of trust.” In recent years it has attracted annually nearly 2,000 participants from over 100 countries.  This year’s speakers, panelists and participants include those involved in policy, legislation, enforcement, compliance, international relations and members of the judiciary, legal and financial advisors. 

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We are pleased to announce that Michel Stein along with Phillip Colasanto, Caroline Ciraolo and Daniel Price, will be speaking at the upcoming CPA Academy on “Coming in From the Cold: the Future of Voluntary Disclosures” on Tuesday, August 23, 2022, 2:00 p.m. – 3:00 p.m. (PST).

For more than 70 years, the IRS maintained a voluntary disclosure policy designed to encourage taxpayers to come in from the cold and self-report non-compliance. In 2018, the voluntary disclosure program was updated to provide new procedures. In its most recent annual report, the Taxpayer Advocate Service noted that the new procedures are substantially more onerous and uncertain than the old procedures and may discourage taxpayers from stepping forward to self-disclose.

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We are pleased to announce that Steven Toscher along with Sara Neill, Peter Poulos and Charles Wien will be speaking at the upcoming ABA “Reportable Transactions for Estate Planners” on Tuesday, August 30, 2022, 10:00 a.m. – 11:30 a.m. (PST).

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This esteemed panel of tax professionals will address reportable transactions for estate planners. Panelists will identify current reportable transactions, categories of reportable transactions, and the implications for estate planners and their clients when participating in a reportable transaction. Among the issues to be addressed are the following:

• Why do estate planners need to know about reportable transactions?
• How should an estate planner approach a variation of a reportable transaction?
• How can an estate planner unwittingly become a “material advisor” and why does this status matter?
• What if an estate planner’s client wishes to proceed with a transaction for which the planner is uncertain as to the tax position?
• What is the role of the new Office of Promoter Investigations?
• Recent case law pertaining to reportable transactions.

HOCHMAN SALKIN TOSCHER PEREZ P.C. is proud to be recognized by Chambers and Partners as one of only three top tier law firms in its U.S. 2022 High Net Worth Guide in the category of Tax: Private Client. High Net Worth Guide Rankings

Chambers states that HOCHMAN SALKIN TOSCHER PEREZ P.C., is “a superb firm for tax controversy matters” Additional sources add: “They have an excellent team of highly qualified practitioners that are well versed on the law. I would happily refer a matter to them.” “They are a very talented group of practitioners that are leaders in the tax controversy space. That firm is absolutely amazing.”

In addition to the recognition of the firm, Steven Toscher and Sandra R. Brown were named top tier lawyers, along with their partner, Dennis Perez, who was also highly ranked in the 2022 High Net Worth Guide Tax: Private Client USA Rankings.

Steven Toscher is “one of the most knowledgeable lawyers around when it comes to tax controversy matters. I would refer a client to him in a heartbeat,” states an interviewee, and another concurs: “He is a very good lawyer; he has a fantastic reputation in the market. He is very skilled, intelligent and someone I would gladly refer a matter to if I were conflicted.” Toscher has a fantastic reputation for controversial tax matters. A source remarks: “Steve Toscher is an extraordinary lawyer. He is extremely intelligent, a great advocate for his clients and he has so much expertise.”

Our managing partner, Mr. Toscher, has been representing clients for almost 40 years before the Internal Revenue Service, the Tax Division of the U.S. Department of Justice and the Offices of the United States Attorney, numerous state taxing authorities and in federal and state court litigation and appeals. He is Certified Specialist in Taxation, the State Bar of California Board of Legal Specialization, and is often ranked in California as well as nationwide as a top tax lawyer including being honored by the Taxation Section of the California State Bar with the 2017 Joanne M. Garvey Award.  

Dennis Perez represents high net worth clients in domestic tax examinations and administrative appeals. “He is one of the strongest practitioners in the country on the foreign reporting space,” says an interviewee, while another adds: “He’s a great practitioner. He is definitely somebody I can recommend in this area.“

A former senior trial attorney with the IRS District Counsel in Los Angeles, California, Mr. Perez has, for more than 35 years, represented and advised clients in foreign and domestic civil tax examinations and administrative appeals where substantial civil income tax and penalty issues may arise, and he has extensive experience in representing clients in criminal tax fraud investigations and prosecutions. He is also a Certified Specialist in Taxation, the State Bar of California Board of Legal Specialization. Mr. Perez is the first ever recipient of the Los Angeles Lawyer Sam Lipsman Service Award.

Sandra R. Brown represents high net worth individuals in a broad range of tax investigations. A market source says: “She is a very good attorney. She is knowledgeable, technical and knows her stuff.” Another remarks: “Sandra Brown is exceptional. She has a wealth of experience, she is really clever and a very good strategist. I would happily refer a case to her.”

In her more than 30 years as a tax litigator, Ms. Brown has a vast expanse and depth of experience in complex civil and criminal tax matters, having personally handled over 2,000 cases before the United States District Courts, the Ninth Circuit Court of Appeals, the United States Bankruptcy Court, the United States Bankruptcy Appellate Panel and the California Superior Court. Those cases included nationally significant civil tax cases such as two Supreme Court decisions and a multitude of published 9th Circuit decisions. Ms. Brown has her LL.M. in Taxation from the University of Denver, served as the Acting U.S. Attorney for the Central District of California, Chief of the Tax Division, and, in 2021, was named a Top Women Lawyer in California.

HOCHMAN SALKIN TOSCHER PEREZ P.C., enjoys an unparalleled reputation for excellence and integrity in the tax community. For more than 60 years, the firm has been serving clients throughout the United States with federal and state civil tax litigation, defense of criminal tax prosecutions, all forms of tax disputes with the federal, state and local taxing authorities, white collar criminal defense, estate and business planning, and business transactions. More information about the firm and our attorneys is available at https://www.taxlitigator.com/

For non-U.S. citizens, criminal convictions can have broader reaching consequences, in addition to the already severe criminal and civil penalties. A felony tax evasion conviction in which the revenue loss to the government exceeds $10,000, or even an attempt or conspiracy to evade with over $10,000 in intended losses, is expressly mentioned in the Immigration and Nationality Act, allowing the Department of Homeland Security (DHS) to remove a non-citizen using expedited proceedings. The $10,000 threshold amount for tax losses, often referred to as an aggravated felony, is quickly accumulated, especially in a corporate tax fraud setting. In Evdokimow v. Att’y Gen, No. 20-2051 (3d Cir. 2022), filed on August 4, 2022, the petitioner has experienced this powerful authority that DHS over tax dodgers.

After a jury found him guilty of multiple counts of tax evasion and serving his prison time, the petitioner, Swedish national David Evdokimow, was ordered to leave the United States. He challenged the removal order on the basis of due process, claiming that there was no clear and convincing evidence of an aggravated felony.

David Evdokimow came to the United States on a J-1 visa to study medicine and later established a successful reconstructive surgery practice. His immigration status was changed to an O-1 visa, which is available to people with extraordinary abilities or achievements.

As the 3^rd Circuit pointed out, as with his practice, the petitioner’s tax liability also grew. The petitioner responded to the rising tax bill by channeling funds through shell companies. He claimed these funds as business expenses on his corporate return, but used them for personal expenses and left them off his personal tax return. He also failed to report “a large portion of the cash and check payments he received directly from patients.” In this manner, he amassed nearly $3 million in unpaid corporate and personal taxes.

Subsequently, the petitioner was charged with one count of conspiracy to defraud the United States under 18 U.S.C. § 371 and seven counts of tax evasion under 26 U.S.C. § 7201 and 18 U.S.C. § 2. On all counts, the jury found him guilty. After his incarceration ended, DHS issued a notice of intent to issue a Final Administrative Removal Order (FARO), alleging that he was deportable because he had been “convicted of an aggravated felony.  The DHS issued the FARO notice and ordered him to leave the country (Order of Removal).

At issue when the petitioner requested that the United States Court of Appeals review the Order of Removal, was whether the petitioner’s convictions satisfy the “aggravated felony” requirement under 8 C.F.R. § 238.1(b); see 8 U.S.C. §§ 1227(a)(2)(A)(iii), 1228(b).

“An aggravated felony includes, among other things, (1) an offense that “involves fraud or deceit in which the loss to the victim or victims exceeds $10,000,” (2) an offense “described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000,” or (3) “an attempt or conspiracy to commit” one of those offenses with over $10,000 in intended losses. 8 U.S.C. § 1101(a)(43)(M), (U); Rad v. Att’y Gen., 983 F.3d 651, 670 (3d Cir. 2020).”. The petitioner did not dispute that his conviction was for an offense listed in the statute, e.g., one that involved fraud or deceit or was described in section 7201 of title 26, but rather he claimed that the threshold requirement of more than $10,000 was not met. Despite the fact that the conviction for tax evasion involved an amount of nearly $3 million, petitioner argued that the tax loss amount was not part of the jury finding.

In relying on Ku v. Att’y Gen., 912 F.3d 133, 139 (3d Cir. 2019 and Nijhawan v. Holder, 557 U.S. 29, 34 (2009), rooted the court’s “circumstance-specific approach,” the court, looked to the specific way the crime was committed rather than only the elements of the crime or the charging document or jury findings.   The court then determined that, based upon the indictment which charged evasion of at least $1.5 million in tax, the presentence report which noted total tax loss of $2,978,774, the jury conviction on all counts, and sentencing-related materials, it was shown by were clear and convincing evidence that the total tax loss was “far beyond $10,000” in the absence of any contradictory evidence.

Fighting a non-U.S.  citizen’s removal after conviction for a tax crime can be insurmountable.  A reminder that addressing tax noncompliance early and, importantly, well before a criminal tax investigation has been initiated is often the most crucial step a non-citizen residing and working in the U.S. can take.  Consulting with an attorney experienced in assisting individuals facing decisions about correcting tax noncompliance, including the potential for a voluntary disclosure submission with the IRS,  may be the best defense to not only a criminal tax investigation but also preventing a removal action with the DHS.

Sandra R. Brown is a Principal at Hochman Salkin Toscher Perez P.C., and former Acting United States Attorney, First Assistant United States Attorney, and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal). Ms. Brown 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. 

Steven Toscher is a Principal and Managing Partner at Hochman Salkin Toscher Perez P.C., and specializes 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.

Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., licensed in California as well as in Germany and assists in advising clients in civil and criminal tax controversies as well as international money laundering investigations stemming from tax avoidance structures.  He also focuses on the technical aspects involved in advising voluntary disclosures in connection with DeFis, NFTs, and other crypto assets.

We are pleased to announce that Steven Toscher, Michel Stein along with Thomas Giordano will be speaking at the upcoming Strafford webinar, “IRS Audits of Expatriates: Section 965 Transition Tax, Exit Tax, Non-Filers, and the Examination Process” on Thursday, August 11, 2022, 10:00 a.m. – 11:30 a.m. (PST).

The IRS has and continues to audit a higher proportion of ex-pat tax returns. The IRS 2019 Databook revealed that it selects approximately 10 percent of expatriates’ tax returns for audit. Considering the complexity of the returns, it is not surprising.

The rules for these nonresidents are often the reverse of those for residents. The filing status Married Filing Jointly can require a special election. Self-employed taxpayers usually are not entitled to deduct expenses. A simple presence in the U.S. for 183 days can trigger capital gains. Remarkably, two-thirds of exp-pats file these complicated returns on paper.

In January 2020, the IRS began its compliance campaign focusing on Section 965 transition tax payments. The Service required these payments by U.S. shareholders of certain foreign corporations on unrepatriated (untaxed) earnings as part of the 2017 Tax Act. The IRS stated that these audits could be expanded to other issues, particularly those relative to the 2017 Tax Act.

Tax professionals and advisers working with individuals who have relocated abroad must understand the issues triggering these IRS audits, prepare clients for these audits, and know how to handle these demanding examinations.

Listen as our panel of foreign tax experts discusses reporting requirements of expatriates’ issues for non-filers, guides tax practitioners through the examination process, and explains best practices to withstand the ongoing scrutiny of these taxpayers’ returns.

We are also pleased to announce that we will be able to offer a limited number of complimentary and reduced cost tickets for this program on a first come first serve basis. If you are interested in attending, please contact Sharon Tanaka at sht@taxlitigator.com. 

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A recently acquired IRS guide for voluntary disclosure practice (VDP) examiners provides insights into the IRS’s actions and priorities within the practice and could give practitioners more confidence and familiarity with it.

Steven Toscher weighs in and states cooperation has always been an essential condition of the practice, though that is not to say that the IRS’s position toward voluntary disclosure remains unchanged.  Toscher further states “It’s always been be prepared for open kimono,” “The government has morphed cooperation into part of their data gathering function. . . . Maybe 70 percent is you fixing your sins. The other 30 percent — they are not interested in you; they’re interested in other data.” Acknowledging that the data analysis is smart practice on the part of the IRS, Toscher wondered whether the reinvigorated practice would be too much for some taxpayers that signed up to get into compliance and not to be a “data guinea pig.”

He cited the lack of disclosure from the IRS on statistics of voluntary disclosures over the last several years as evidence that some taxpayers may be hesitant to enter the practice.

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