Posted by: Robert Horwitz | January 9, 2018

PLANNING AN OVERSEAS VACATION? FIRST PAY YOUR TAXES By Robert S. Horwitz

If you’re planning a vacation overseas in 2018 and you owe more than $50,000 in taxes, penalties and interest to the IRS, you have another thing coming. Beginning January 2018 the IRS will start implementing Internal Revenue Code section 7345.  That section was enacted in December 2015.  It says “If the Secretary receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32101 of the FAST Act.”  You’re “seriously delinquent” if you owe more than $50,000 in assessed tax, penalties and interest and the IRS has either a) filed a notice of federal tax lien and your collection due process rights have lapsed or been exhausted or b) the IRS has begun levy action.

There are a couple of exceptions – the IRS cannot certify you for passport revocation or denial if

  • you entered into an installment agreement to pay your tax,
  • collection action has been suspended because of a collection due process proceeding
  • you requested innocent spouse relief.

Certification can be reversed if the tax is paid in full, if the statute of limitations has lapsed, if the taxpayer has requested innocent spouse relief or the taxpayer has entered into an installment agreement or offer in compromise. Certification is also reversed if it was erroneous.  A taxpayer can sue the IRS in district court or Tax Court for a determination that certification was wrong or should be reversed.

The IRS is required to notify a taxpayer if it has requested the State Department to revoke or deny a passport. Notice will be sent on letter CP508C.  If certification is reversed, notice will be sent to the taxpayer on letter CP508R.

So if you owe the IRS more than $50,000 don’t start planning that trip to the South of France just yet. First, pay your past due tax.

Robert S. Horwitz – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

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Posted by: Taxlitigator | January 3, 2018

WEBINAR featuring Steve Toscher – The Perils of Civil and Criminal Tax Penalties: What You Need to Know

The Perils of Civil and Criminal Tax Penalties: What You Need to Know

The Knowledge Group  

January 11, 2018 – Noon – 1:30 pm (Pacific)

On January 11 at Steve Toscher, Curtis Elliott, Jr. and Steve Mather will be hosting a Knowledge Group Webinar “The Perils of Civil and Criminal Tax Penalties: What You Need to Know.” The Internal Revenue Service is increasingly asserting civil penalties for domestic and international taxpayers and the recent IRS Criminal Investigation Annual Report criminal tax enforcement regarding traditional tax cases is on the rise as well.

This presentation will cover major civil penalties – including international reporting penalties; best practices in (hopefully) avoiding the civil fraud penalty and sanctions for criminal tax fraud and the differences between the two; handling sensitive IRS audits and how to avoid a prosecution referral to the Criminal Investigation Division. The presentation will also discuss the major criminal tax violations, including the pending U.S. Supreme Court case of Marinello dealing with Obstruction of IRS Administration and the role of the Federal  Sentencing  Guidelines in Criminal Tax Enforcement.

Registration information is available at:

https://www.theknowledgegroup.org/webcasts/tax-accounting-finance/taxation/perils-of-civil-and-criminal-tax-penalties

Steve Toscher has been representing clients for more than 35 years before the Internal Revenue Service, the Tax Divisions of the U.S. Department of Justice and the Office of the United States Attorney (C.D. Cal.), numerous state taxing authorities and in federal and state court litigation and appeals.

Mr. Toscher enjoys a unique combination of solid criminal defense experience and extensive substantive tax experience to assist individuals and entities subject to sensitive government inquiries.  He has considerable experience as lead counsel in defending criminal tax fraud investigations (both administrative and Grand Jury investigations) as well as in defending criminal tax prosecutions (both jury and non-jury).

Recently, Steve Toscher received a judgment of acquittal in a matter involving allegations of a conspiracy between the client, the client’s independent certified public accountant and others relating to the clients personal taxes as well as those of the clients son and his business enterprise, including the use of a foreign bank account and a foreign trust. Others included in the indictment previously pled guilty and the former accountant testified at trial as a cooperating witness for the Government. This is believed to be among the first unsuccessful prosecutions relating to the use of matter involving use of foreign trusts and foreign financial accounts in the Government’s ongoing, extensive international enforcement efforts.

For more information please contact Steve Toscher – toscher@taxlitigator.com

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Posted by: AGOSTINO ASSOCIATES | December 27, 2017

AGOSTINO & ASSOCIATES Monthly Journal of Tax Controversy – (i) Protecting The Taxpayer Facing Passport Revocation and (ii) Fifth Amendment Privilege In Tax: How To Keep The Case Moving While Protecting the Taxpayer

AGOSTINO & ASSOCIATES –To download two great articles prepared by our very close friends at the Law Firm of Agostino & Associates in Hackensack, NJ ( http://www.agostinolaw.com ), see the Agostino & Associates Monthly Journal of Tax Controversy – http://files.constantcontact.com/f7d16a55201/c21d62be-4a0e-46dc-8d5e-efeebf699f6c.pdf?ver=1514328871000

PROTECTINGTHETAXPAYER FACINGPASSPORTREVOCATION by Frank Agostino, Esq. and Edward Mazlish, Esq. – Some taxpayers subject to passport revocation may have foreign assets. There may be agreements the taxpayer signed in connection with those foreign assets which require the taxpayer to provide his passport number for purposes of linking him to the foreign asset. If the passport is revoked, this may trigger obligations of disclosure for the taxpayer with regard to those foreign assets. The diligent tax professional should raise this issue with the taxpayer, and evaluate any foreign or domestic reporting requirements that might be triggered by a passport revocation that precludes the taxpayer from supplying a valid passport identification to the foreign custodian of the taxpayer’s assets. It may even be necessary to file amended tax returns, depending on the taxpayer’s circumstances.

If a taxpayer owes the Internal Revenue Service (“IRS” or “Service”) more than $50,000 ($51,000 after January 1, 2018) in unpaid tax liabilities (including interest and penalties) he may be subject to passport revocation. Specifically, Congress has given the IRS the ability to request that the State Department deny, revoke or limit the passports of certain delinquent taxpayers. This article explores this new tax collection device and suggests strategies for representing taxpayers facing passport revocation.

What Does the Payment of Taxes Have to Do with Issuance of Passports? What Tax Debts Could Result in the Loss of a Taxpayer’s Passport? What Should a Taxpayer Do to Avoid Passport Revocation? Does Filing for Bankruptcy Stop or Delay Passport Revocation? How Will the IRS Notify a Taxpayer That It is Requesting That the State Department Deny, Revoke, or Limit His or Her Passport? When, If Ever, Should a Taxpayer with a Seriously Delinquent Tax Debt Invoke the Right to Remain Silent? Where and How Does a Taxpayer Challenge the Certification that He or She Has a “Seriously Delinquent Tax Debt”?

FOR THE FULL ARTICLE –  http://files.constantcontact.com/f7d16a55201/c21d62be-4a0e-46dc-8d5e-efeebf699f6c.pdf?ver=1514328871000

FIFTH AMENDMENT PRIVILEGE IN TAX: HOW TO KEEP THE CASE MOVING WHILE PROTECTINGTHE TAXPAYER By Frank Agostino, Esq. and Valerie Vlasenko, Esq. – This column reviews how taxpayers and tax professionals should evaluate IRS information and document requests and when a taxpayer should decline to respond to IRS requests for testimony, documents, and other information. More specifically, this column addresses:

(1) The Fifth Amendment privilege in tax matters and its limitations;

(2) The obligations tax professionals have to their clients and the IRS;

(3) The consequences of invoking the privilege during examinations of offshore transactions; and

(4) The impact that asserting the privilege during an examination has on future proceedings before the U.S. Tax Court (“Tax Court”), U.S. District Courts (“District Courts”), and U.S. Court of Federal Claims, and during Collection Due Process (“CDP”) Cases.

FOR THE FULL ARTICLE – http://files.constantcontact.com/f7d16a55201/c21d62be-4a0e-46dc-8d5e-efeebf699f6c.pdf?ver=1514328871000

AGOSTINO & ASSOCIATES, an internationally recognized tax controversy law firm and the recipient of numerous professional awards and honors with a national practice based in Hackensack, NJ, specializes in tax and tax controversies (civil and criminal), offers in compromise, domestic and foreign voluntary disclosures, tax lien discharges, innocent spouse determinations, forfeitures, estate planning and probate, contract and contract litigation. A firm comprised truly great, caring people diligently representing their clients!

For further information, contact Frank Agostino, Esq., Edward Mazlish, Esq. or Valerie Vlasenko, Esq. directly at (201) 488-5400 or visit http://www.agostinolaw.com

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Posted by: Robert Horwitz | December 20, 2017

Is It Debt? Is It Equity? Let the Tax Court Decide by Robert S. Horwitz

A question that frequently arises in tax cases is whether a transaction is debt or equity. As Judge Alex Kosinski recently noted in Hewlett-Packard, Inc. v Commissioner, Dkt. 14-73047 (9th Cir., Nov. 14, 2016), http://cdn.ca9.uscourts.gov/datastore/opinions/2017/11/09/14-73047.pdf, it is a “timeless and tiresome question of American tax law”.  In arriving at the answer, which was “we defer to the Tax Court,“ the Ninth Circuit made several digressions.  First the facts.

Normally, a corporation wants an investment to be treated as debt so it can deduct interest. Hewlett-Packard  (HP) treated its investment as equity and claimed millions in foreign tax credits (FTCs).  AIG Financial Products created a Dutch company, FOP, whose sole business was to acquire and hold contingent interest notes.  The common stock in FOP was held by a Dutch Bank, ABN.  HP paid AIG $200 million for the preferred stock in FOP.   It also paid ABN a fee for a put that allowed it to sell the shares to the bank in either 2003 or 2007.   FOP paid Holland taxes on the accrued interest on the notes.  As preferred shareholder, HP received the interest from the notes as dividends and claimed FTCs for the taxes FOP paid.  After claiming millions of dollars in FTCs between 1999 and 2003, HP exercised the put and sold the preferred shares to ABN for a $16 million loss.  Claiming that HP had purchased a tax avoidance scheme, the IRS disallowed the FTCs and the capital loss.   The Tax Court held that the transaction was debt and disallowed the FTCs.  It held that HP failed to meet its burden of proof on the capital loss.  HP appealed.

In affirming, the Ninth Circuit first looked at whether the debt-equity issue was a question of fact, of law or a mix of the two. Based on its past precedent, the Ninth Circuit views it as a question of law, but noted that there is a split in the circuits on the question.  This led to the first philosophical digression:

We hazard a few observations on this split. First, the distinction between fact and law is notoriously fuzzy, and can turn as much on convention as logic. See, e.g., Nathan Isaacs, The Law and the Facts, 22 Colum. L. Rev. 1 (1922). Second, calling this a mixed question rather than a factual one doesn’t add much focus: If it’s a mixed question, we still ask whether the trial court “based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990). But this just means that “[w]hen an appellate court reviews a district court’s factual findings, the abuse of discretion and clearly erroneous standards are indistinguishable.” Id. at 401. Thus, calling this a “mixed question” succeeds only in pushing the conceptual conundrum back one step: Are we reviewing a factual finding or not?

Because corporate tax planning often “involves abstruse transactions that generalist appellate courts are ill-equipped to untangle ,” the Ninth Circuit decided that the best approach was to defer to the Tax Court.

The Ninth Circuit next discussed its traditional approach to resolving the debt-equity question: application of a non-exclusive eleven-factor test that it described as not a “bean-counting exercise” but a test meant to guide a court in resolving the factual issue. It then digressed on whether the issue is one of intent, as it had intimated in earlier cases:

We think the best way to read our precedent is as follows: Our test is “primarily directed” at determining whether the parties subjectively intended to craft an instrument that is more debt-like or equity-like. A quest for subjective intent always requires objective evidence, hence the eleven factors. On this account, all factors on the list could be described as “evidence of intent.” Direct, objective evidence of intent—say, an email from an executive stating he wishes to create an unalloyed debt instrument—is one of the eleven, and it matters. But assertions of intent don’t resolve our inquiry, which considers all the “circumstances and conditions” that speak to subjective intent. Bauer, 748 F.2d at 1368. Proclaiming an intent to create an instrument that is “debt” or “equity” doesn’t make it so.

Our precedent’s preoccupation with intent is nonetheless a little puzzling, since it suggests that a taxpayer could achieve debt treatment for an instrument that functions as equity (or vice versa), so long as he had the right state of mind in crafting the instrument. Were we writing on a barren slate, we might say that our test is simply directed at determining whether an instrument functions more like debt or equity. There’s nothing magical about intent. Nonetheless, we believe our circuit’s roundabout intent-based test merges with this simple function test in all but a few outlandish cases.

After these musings, the Ninth Circuit had no difficulty reaching its decision: the Tax Court didn’t err in finding that the transaction was best characterized as debt, resulting in the FTCs being disallowed.  The Tax Court also did not err in determining that HP purchased the put as part of an integrated transaction.  The Tax Court’s determination that the “capital loss” was really a fee to participate in a tax shelter was not clearly erroneous.  Thus disallowance of the capital loss was also affirmed.  One part of HP’s agreement with AIG didn’t help its claim that the transaction was not a tax scam:  “A clawback agreement even obligated AIG to compensate HP if HP didn’t get its desired tax results.  HP almost got its desired tax results.”

Along with Pritired 1, LLC v. United States, 816 F. Supp. 2d 693 (S.D. Iowa 2011), and the STARS transaction cases (Bank of New York v. Commissioner, 801 F.3rd 104 (2nd Cir. 2015) aff’g 140 T.C. 15 and 111 AFTR 2nd 2012-1472 (SD NY)), this case involved the IRS’s challenge to what it terms “foreign tax credit generators.” These cases involve complex financial structures whose primary impact is to generate foreign tax credits for major corporations.  It is not the normal debt-equity case in which a taxpayer funds an operating business in which it has an ownership interest.  Maybe what the Ninth Circuit finds “timeless and tiresome” is the shenanigans major corporations engage in to reduce their tax liabilities.

For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

 

 

 

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Posted by: Cory Stigile | December 18, 2017

IRS Complex Collection – Holiday Considerations and Collection Moratorium by CORY STIGILE

As the holidays approach, it is a great time to think about your clients who have had difficulty paying their taxes. Below is a Top 5 list of enforced collection issues to think about this December.

  1. Collection Moratorium / Current Compliance – Although it is not an official policy position, during most of December the IRS limits its enforced collection of outstanding taxes.   This generally means decreased levies, wage garnishments and other seizures. While only temporary, this short break provides an opportunity for your clients to get back on their feet and start the next year (hopefully) by being currently compliant with their estimated taxes and withholdings.
  2. Practitioner Hotline Hold Times – As with the IRS employees that have use-it-or-lose-it time off, your tax preparer colleagues also take time off during December. As of the time of writing this article, the hold time for the practitioner hotline was only 10 minutes! Consider blocking off an hour each of the next few weeks to call the IRS to resolve outstanding collection issues or request account transcripts.
  3. Collection Information Statements – As the filing season approaches after the year end, we will all become much busier with the 2017 tax return filing season. Consider preparing the financial information (Form 433-A for individuals and Form 433-B for businesses) to send to your assigned Revenue officer during December. Gathering the end of year bank statements will also help you get a jump start on fourth quarter information that you will need anyway when preparing the 2017 returns in the coming months.
  4. Payment of Prior Year State Taxes / 2017 Tax Legislation – With the potential limitation of 2018 state tax deductions to $10,000, clients with large outstanding state tax liabilities should consider payment of their prior year taxes before the year end.   While the tax benefit may still be phased out because of alternative minimum provisions that are still applicable for 2017, you should walk through potential payment advantages with your clients. You will potentially be saving them money and you will also be showing them that you are current on legislative issues that may impact them.  Also, please note that this blog post addresses payment of past tax liabilities, but the proposed legislation specifically excludes prepayment of 2018 state income tax liabilities in 2017 to get the state tax deduction before the benefit is substantially limited in 2018.
  5. First Time Abatement of Late Payment Penalties – If you client has otherwise been compliant with taxes, consider whether your client is eligible for late payment penalty abatement. To qualify, the taxpayer must have filed all required returns currently due and paid (or arranged to pay) any tax currently due. Additionally, the taxpayer may not be eligible if they were subject to penalties in one of the three years preceding the tax year that is being collected. See IRM 20.1.1.3.3.2.1 (11-21-2017).

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

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Posted by: Robert Horwitz | December 15, 2017

Court Tightens Noose on Reasonable Cause Exception for the FBAR Penalty By Robert S. Horwitz

A U.S. person with foreign financial accounts worth over $10,000 during the calendar year is required to file a Foreign Bank Account Report (FBAR). Failing to file can result in either a “non-willful” or a “willful” penalty under 31 USC §5321(a)(5).  If the failure is non-willful, the person can avoid liability under the reasonable cause exception of  §5321(a)(5)(B)(ii):

Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—

(I) such violation was due to reasonable cause, and

(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

In Jurnagin v United States, Ct. Fed. Cl. (Nov. 30, 2017), https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2015cv1534-36-0 , the Court granted the Government’s motion for summary judgment and held that the taxpayers failed to establish reasonable cause for not filing FBARs because they did not review their income tax returns.

The Jurnagins were married in 1966. Mr. and Mrs. Jurnagin were both high school graduates who had taken a couple of college courses.  Mr. Jurnagin obtained a barber license and his wife became a real estate agent.  They were very successful, eventually owning a string of barbershops, ranches in Oklahoma and British Columbia and apartment complexes in the U.S.  Mr. Jurnagin became a Canadian citizen and resided 9-10 months each year in Canada.  His wife spent most of her time in the US watching their U.S. business interests.  They had a bank account in Canada that, in 2006, had a balance of $4 million.  They never filed FBARs reporting the Canadian account.

For 2006, 2007, 2008 and 2009, the Jurnigans used a U.S. accountant to prepare their U.S. tax returns and a Canadian accountant to prepare their Canadian tax returns.   The U.S. accountant provided information to the Canadian accountants.  The Jurnigans never asked their U.S. accountants if they knew anything about international taxation.  They never told their U.S. accountant that they had a Canadian bank account and did not give him statements for the account.  They gave their U.S. accountant annual financial statements that listed the Canadian account.  Their U.S. accountant testified that he knew about the Canadian account from reviewing the statements.

Schedule B, Part III of Form 1040 asks whether the taxpayer had an account overseas and refers to the FBAR form. The U.S. accountant checked “no” to the box.  The Jurnigans never discussed their returns with their U.S. accountant and did not review them before signing, other than to see the amount of tax they owed.

The IRS assessed four $10,000 non-willful penalties against Mr. Jurnigan (one each for 2006, 2007, 2008, and 2009) and four $10,000 penalties against Mrs. Jurnigan. The Jurnigans paid $80,000 and sued for a return of the monies plus interest.  The Government and the Jurnigans filed cross-motions for summary judgment.  The Jurnigans claimed that they had reasonable cause because 1) they hired a competent accountant, 2) they provided the accountant with information and 3) they relied on the accountant.  The Court held that this did not cut the mustard.

The Court looked to the regulations under the Internal Revenue Code defining “reasonable cause.” To establish reasonable cause, a taxpayer must act with ordinary business care and prudence in ascertaining her tax liability. In ruling for the Government, the Court assumed that the Jurnigans’ accountants were competent and that they knew about the Jurnigans’ Canadian account.  This was not enough to show ordinary business care and prudence.  Despite their Canadian residence and business interests, the Jurnigans did not ask their U.S. accountant how this impacted their U.S. tax obligations and they did not discuss the Canadian account with him.

They also did not review their income tax returns. Citing Williams, 489 F. App’x 655 (4th Cir. 2012), for the proposition that a taxpayer is charged with knowing what is in her tax return, the Court stated that the Jurnigans should have read their returns before signing.  If they had done so, they would have seen that the returns incorrectly checked the “no” box and would have noticed the reference to FBAR forms.  This would have led them to tell the accountant about the Canadian account and ask about the FBAR Form.  The Jurnigans did not do this.   While reliance on the advice of a tax professional can establish reasonable cause, the Jurnigans never requested or received advice about any filing requirements due to their Canadian account.  The Court noted that their U.S. accountant testified that he was unaware of the FBAR requirement and thus the Jurnigans could not have relied on him.

The [Boyle] Court acknowledged that “[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.” Boyle, 469 U.S. at 251 (emphasis in original). Such “reliance” however, “cannot function as a substitute for compliance with an unambiguous statute.” Id. The Court thus held that “failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause.’”

The moral of the case is that taxpayers are obligated to read their income tax returns before filing and bring any errors to their return preparer’s attention. The Court in its opinion did not mention the second part of the “reasonable cause” exception, which is that the taxpayer filed an FBAR that reported the balance in the account.  Thus, even if the Jurnigans had discussed their Canadian account with their U.S. accountant and he had given erroneous advice, it would not have gotten them out of the penalty.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200  Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com

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Posted by: Robert Horwitz | December 12, 2017

IRS Can’t Assess Interest and Penalties on Criminal Restitution by Robert S. Horwitz

A defendant convicted of a tax crime can be ordered by the district court to pay the IRS restitution equal to the amount of the tax loss. As part of the 2010 Firearms Excise Tax Improvement Tax, Congress added sec. 6201(a)(4) to the Internal Revenue Code.  That section authorizes the IRS to “assess and collect the amount of restitution *** for failure to pay any tax***in the same manner as if such amount were such tax.”  The assessment of restitution is not subject to notice of deficiency procedures.  The IRS claims it can assess interest from the due date of the return plus failure to pay penalties on the amount of restitution without a notice of deficiency. In a case of first impression the Tax Court told the IRS “NO.”

In 2011, Samuel and Zipora Klien each pled guilty to one count of filing a false income tax return. The district court ordered them to pay restitution of $562,179 for 2003-2006.  They paid the restitution amount.  In 2012, the IRS assessed the restitution amount under IRC sec. 6201(a)(4), plus interest from the due dates of the return and failure to pay penalties.  When the taxpayers failed to pay the interest and penalties, the IRS filed a Notice of Federal Tax Lien (“NFTL”).  The taxpayers protested on the ground that the penalties and interest were not properly assessed. IRS Appeals sustained the NFTL and the taxpayers petitioned the Tax Court.

The Court focused on the meaning of “in the same manner as if such amount were such tax,” which the Court noted is in the subjunctive mood.  The Court found that 6201(a)(4) was adopted for the sole purpose of enabling the IRS to assess the restitution amount, thus creating an account receivable against which any restitution payment can be credited.  The section was not meant to make the restitution amount a “tax.”  Interest on the other hand is assessed and paid on “tax imposed by” the Internal Revenue Code.  Failure to pay penalties are imposed for failure to timely pay tax.  Since restitution is not a “tax,” assessments of restitution “do not generate” interest or penalties.

The Court refused to defer to the Internal Revenue Manual provisions that state that interest and penalties are assessed on restitution. The Court did offer some solace to the IRS: if it wanted to assess penalties and interest it could do so after the taxpayers’ correct civil tax liability was finally determined.  The case is Klein v. Commissioner, 149 TC No. 15 (Oct. 3, 2017), available at https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11428.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com

 

 

 

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Posted by: jkalinski | December 4, 2017

Tax Court Update: What is a Postmark? by JONATHAN KALINSKI

My colleagues and I have spent hours discussing the best way to mail time sensitive documents such as a Tax Court petition, tax return, and refund claim. FedEx or U.S. Postal Service, Certified Mail or Overnight or Personally Stamped Green Card[i] or not.  Consider this the tax lawyer equivalent of Brady or Manning (Brady), The Beatles or the Stones (The Beatles), and Hammett or Chandler (Chandler).

Although it might seem trivial, and often is, the mail discussion is important and can have dire consequences if you don’t follow the rules. The Tax Court is a court of limited jurisdiction, and if you do not timely file your petition, you won’t get to Tax Court and may be stuck with a large tax liability.

In a Pearson v. Commissioner[ii], a Court Reviewed opinion, a divided Tax Court followed a recent 7th Circuit case and overturned its own precedent in holding that a Stamps.com postage label is a “postmark not made by the United States Postal Service.”  In a rare occurrence, the IRS supported the Court finding for the Taxpayer and holding that it had jurisdiction.

The last day to mail the petition in this case was April 22. The Tax Court received and filed the petition on April 29.  The envelope had a Stamps.com label with a date of April 21, and a USPS Certified mail tracking number whose earliest entry signified arrival at the USPS facility on April 23.  An employee of the law firm who mailed the petition submitted a declaration that she actually mailed the petition on April 21.

Under IRC §7502, a petition is treated as timely even if the Tax Court files it after the 90th day if it was timely mailed.  This is the mailbox rule.  The mailbox rule only applies if you use a proper mailing service such as the U.S. Postal Service or a designated private delivery service like FedEx and UPS (and use the designated delivery types, e.g. not UPS Ground).

IRC §7502(b), allows for regulations regarding postmarks not made by USPS. Those regulations stated that if a postmark is made other than by USPS, the postmark must bear a legible date on or before the last date, and that the document must be received by the agency not later than the time when a document sent by the same class of mail would be received if sent by USPS.

In Tilden v. Commissioner[iii], the Tax Court disregarded the Stamps.com label as postmark and used the USPS tracking data to hold the petition was not timely.  The 7th Circuit reversed.  The Tax Court now follows the 7th Circuit’s holding in Tilden in this case that would be appealable to the 8th Circuit.  By holding that the Stamps.com label was a postmark not made by USPS, the question became whether the document arrived in the time that it would have arrived if mailed by USPS.  The parties, and the Court, agreed that it did.  As a result, the petition was timely.

In a concurring opinion, Judge Buch writes that, “as technology evolves, so must the law. But the law must evolve in a manner that is consistent with the statutes as written by Congress.”  He goes on to discuss the evolution of mailing options, including those offered by USPS.  Two judges dissented in the opinion arguing that “a postage label printed by an individual customer on his own printer through the means of an internet vendor and placed by himself on his own piece of mail” should not constitute a postmark not made by the USPS.

Going to the post office can be inefficient and a hassle. Technology has dramatically improved this, but you need to be sure your firm is using a method that is reliable and won’t get your clients (and you) in trouble.

There are probably several lessons in this case. One, how to mail a document should not be an afterthought because the wrong way will have dire consequences.  Second, as a practitioner, if you can, try not to rely on the mailbox rule.  The 7th Circuit in Tilden cautioned against waiting until the last day.  You, your client, and your E&O carrier, will all sleep easier.  As the case notes, using USPS certified mail from Salt Lake City, UT to the Tax Court in Washington, DC can take eight (8) days.  The Tax Court also irradiates its mail, which can cause further delay in actually filing your petition.  Spare the heartache and use a proper overnight delivery method such as FedEx Priority Overnight or UPS Next Day Air.  You will know that your package has arrived the next day.  The list of approved private delivery services can be found at https://www.irs.gov/filing/private-delivery-services-pds. This list changes so be sure that the method you are using is approved at the time of mailing.

JONATHAN KALINSKI 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.

[i] Formally known as PS Form 3811.

[ii] Pearson v. Commissioner, 149 T.C. No. 20 (2017).

[iii] Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), rev’g and remanding T.C. Memo. 2015-188.

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Posted by: mstein10 | November 28, 2017

Beware of California Penalties for Failure to Report Foreign Financial Assets on Form 8938 by MICHEL STEIN

The California Franchise Tax Board (“FTB”) recently reminded the public that the State of California (“State”) can and will impose penalties for failing to disclose foreign financial accounts and assets.  In State Legal Ruling 2017-02 (October 16,2017), the State considered whether its conformity to federal information filing requirements relating to foreign financial assets imposed by the Internal Revenue Code (IRC) section 6038D applies to non-resident aliens.   In ruling that it did, it held that a minimum penalty of $10,000 may be imposed by the FTB for failing to provide a copy of the Form 8938 with the State income tax return, unless it can be shown that the failure was due to reasonable cause and not willful neglect.  (Citing to Revenue and Taxation Code (“R&T Code”) Sec. 19141.5(d)(2)).   

The Legal Ruling is significant because California has been largely silent on the enforcement of foreign asset non-compliance since its enactment of Voluntary Compliance Initiative 2 (VCI 2) back in 2011.  Beginning with tax year 2016, however, the State now requires copies of IRS Form 8938 to accompany the State return, and we can expect the imposition of penalties by the State where there is perceived non-compliance. 

State Conformity with 8938 . Under federal law, IRC section 6038D requires specified individuals and business entities to file information with their federal income tax returns relating to their interests in specified foreign financial assets if the aggregate value of those assets exceeds $50,000 or a higher prescribed amount.   Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return.  Taxpayers living in the U.S. must report specified foreign financial assets on Form 8938 (filed with their income tax return) if the total value of those assets exceeds $50,000 at the end of the tax year or if the total value was more than $75,000 at any time during the tax year for taxpayers filing as “single” or “married filing separately” (or if the total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year for taxpayers filing as “married filing jointly”). 

In 2015 (beginning with the tax year 2016 ), the State enacted AB 154 (Stats. 2015, ch. 359) amending RTC Sec. 19141.5 to add subdivision (d), which conforms California to IRC section 6038D without any modifications. RTC section 19141.5(d)(2) imposes a penalty determined in accordance with IRC section 6038D.  Legal Ruling 2017-02 clarifies that the State also follows the federal law regarding the application of the IRC section 6038D for nonresident aliens, stating that the disclosure requirement under RTC section 19141.5(e) is a specific exception to the general rule that State conformance rules typically do not apply to nonresident aliens (See RTC section 17024.5(b)(11) which sets forth that unless otherwise specifically provided, when applying any provision of the IRC for California purposes, any provision that refers to nonresident aliens shall not be applicable).    

California Voluntary Compliance Initiative 2 (VCI 2). In 2011, California enacted VCI 2 which provided an opportunity for taxpayers, who underreported their California income tax liabilities by utilizing Anti-abusive Tax Avoidance Transactions (“ATATs”) or offshore financial arrangements, to amend their income tax returns for 2010 and prior tax years and obtain a waiver of most penalties.   Many who participated in the IRS Offshore Voluntary Disclosure Programs or Initiatives also participated in VCI 2.  VCI 2 raised $350 million with $293 million received in cash and later an additional $57 million was raised from installment payments.   

California currently does not have a formal voluntary compliance initiative concerning unreported offshore accounts or income in effect.   However, California taxpayers who participate in a federal offshore program such as the Offshore Voluntary Disclosure Programs or Streamlined Initiatives with respect to foreign financial accounts generally mirror those filings for the State.  Notwithstanding voluntary action to correct, the State can impose its own set of penalties, including accuracy-related penalties (20% or 40%), fraud penalties (75%), delinquency penalties (up to 25%) and failure to furnish information return penalties such as Forms 5471 and 8938 penalties (minimum of $10,000), absent reasonable cause.  Up to this point, the State has not been aggressive in this area.  Given the extent of information sharing between the federal and state Governments, care should be taken when considering the best approach to dealing with the State with respect to foreign account and asset non-compliance. 

Federal Delinquent Filing Options. Taxpayers who are not in compliance with their reporting and filing options regarding undeclared interests in foreign financial accounts and assets should consider various options to come into compliance, including: 

(a)    2014 Offshore Voluntary Disclosure Program (OVDP).   The OVDP is designed for taxpayers seeking certainty in the resolution of their previously undisclosed interest in a foreign financial account. For those who might be considered to have “willfully” failed to timely file an FBAR or similar, the OVDP avoids exposure to numerous additional penalties associated with the income tax returns and various required foreign information reports, a detailed examination, and limits the number of tax years at issue while also providing certainty with respect to the avoidance of a referral for criminal tax prosecution. 

(b)   Streamlined Procedures for Non-Willful Violations. In addition to the OVDP, the IRS maintains other more streamlined procedures designed to encourage non-willful taxpayers to come into compliance. Taxpayers using either the Streamlined Foreign Offshore Procedures (for those who satisfy the applicable non-residency requirement) or the Streamlined Domestic Offshore Procedures are required to certify that their failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to “non-willful” conduct.  For these Streamlined Procedures, “non-willful conduct” has been specifically defined as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” 

(c)    Delinquent Submission Procedures. Taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who have reasonable cause for not filing a required FBAR or other international disclosure forms, should considering filing the delinquent FBARs or other delinquent forms according to the instructions, along with a statement of all facts establishing reasonable cause for the failure to file. FBARs or delinquent information returns will not be automatically subject to audit but may be selected for audit through the existing IRS audit selection processes that are in place for any tax or information returns. 

As the State and Federal Government continue to refine the reporting rules for foreign accounts and assets, one should expect continued attention in this area.  Anyone lacking in compliance, should consult a tax professional with experience and expertise with these matters. 

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

 

 

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Posted by: evanjdavis | November 21, 2017

THE LONG ARM OF THE TAX MAN NABS TAX LAWYER ON THE LAM IN CANADA by Evan Davis

A United States tax lawyer is going to return home after being on an extended vacation in Canada for ten years. But he isn’t returning willingly.  

When I was at the Department of Justice Tax Division from 1998 through 2005, I spent much of my time shutting down abusive tax schemes through getting courts to enjoin the promoters. The late 1990s through mid-2000s were the heyday for tax shelter promoters, as the government taken its eye off the ball in the mid-1990s and allowed tax planners to step closer and closer to the line between aggressive tax planning and tax evasion. Not surprisingly, planners thought the IRS wasn’t looking, and many chose to step over the line from mere planning into criminal conduct.

In 2007, David L. Smith, a tax lawyer and CPA, was indicted for tax and conspiracy charges along with another tax planner and four Ernst & Young, LLP, partners, for having designed and sold tax schemes to E&Y’s clients as well as cheating on his own taxes and failing to report his foreign bank account. The indictment alleged that Smith conspired with the other defendants to market a tax scheme and created false and misleading documents to lull the IRS into believing that the tax scheme was instead a real business transaction.

The second planner quickly pled guilty and Smith’s four other co-defendants were found guilty of all charges in a 2009 trial, although two of the four had their convictions reversed on appeal. Smith never showed up to court.

Instead, it appears Smith decided that 2007 was a good time to check out the beautiful scenery of British Columbia, and he became very attached to the province. So attached, it seems, that when the United States government tried to force him to return to New York to face his charges, Smith hired a Canadian lawyer who made a novel arguments against extradition, including two that a tax protestor would be familiar with.

The US-Canada extradition treaty only permits extradition to the United States where the defendant is charged with a crime that’s also a crime in Canada. The analogous Canadian law prohibits fraud on the public or a person. Smith’s lawyer claimed that Smith was charged with defrauding the IRS, which isn’t a person or “the public.”

The Canadian court didn’t buy that the IRS isn’t a “person” or a proxy for “the public,” because, as it pointed out, the IRS collects tax revenue for the government, and in Canada it is illegal to defraud “her Majesty in Right of Canada,” meaning the government of Canada. Tax fraud is illegal in Canada as well, so Smith could be extradited to the United States on tax fraud charges.

The court also didn’t buy Smith’s two tax-protestor-esque arguments: that the government hadn’t shown that he had an obligation to pay taxes on his income, and that a Klein conspiracy (conspiracy to defraud the government) has been found in the United States to be unconstitutional. Unfortunately for our clients, Klein conspiracy charges are constitutional, and the tax code is quite clear that income earned is taxable.

The story isn’t over yet for Smith, because he can appeal the extradition order to the British Columbia Court of Appeal, and then to the Supreme Court of Canada. In my experience from the government side, it can take many, many years for a well-financed defendant to be extradited from Canada to the United States and they usually remain free on bond while they are waiting. Given that three of his five co-conspirators (including the other promoter) were convicted, Smith likely prefers to remain in Canada rather than find out whether the AUSAs in New York can continue to bat above .500 in obtaining convictions on the case.      

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, Rettig, Toscher & Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal. He has served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white collar criminal investigations. 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 (OVDP, Streamlined Procedures and otherwise).

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