TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

The federal government’s forfeiture power is unprecedented. In United States v. Bajakajian, 524 U.S. 324 (1998), the Supreme Court made the first chink in the Government’s forfeiture power.  It held that forfeitures are subject to the excessive fine provision of the Eighth Amendment. On March 30, 2016, the Court made the second chink in the forfeiture power in Luis v United States, 578 U.S. ___ (2016), where it held that a district court can’t freeze untainted funds needed by a criminal defendant to pay counsel to represent her in a criminal case.

The petitioner, Sala Luis, was charged with multiple counts of health care fraud, bribery and kickbacks as a result of which she allegedly received approximately $45 million. She had spent virtually all of her ill-gotten gains.  She had $2 million in funds that were not used in the commission of the offense or obtained as a result of the offense (the “untainted funds”).  Under 18 USC 1345, the Government moved for an order freezing the untainted funds pre-trial.  Sec. 1345 provides that where a criminal defendant is charged with health care or bank law violations, a court can freeze pretrial 1) property obtained as a result of the crime, 2) property traceable to the crime, and 3) other property of equivalent value.  The district court granted the motion over the defendant’s assertion that she needed the funds to retain counsel.  The Eleventh Circuit affirmed.

The issue before the Supreme Court was whether the pretrial restraint of a criminal defendant’s untainted funds, which are needed to retain counsel, violates the Fifth and Sixth Amendments. The Court held that it did.

The plurality decision weighed the interests of the Government in having funds available to pay criminal penalties and restitution against the defendant’s right to counsel guaranteed by the Sixth Amendment.

The Court began by discussing the importance of the right to counsel guaranteed by the Sixth Amendment: it is a “fundamental” right that is the “great engine by which an innocent man can make the truth of his innocence visible.”  Its importance had led to the Court requiring the Government to provide counsel to an indigent defendant accused of “all but the least serious crimes.”  A deprivation of the right to counsel is a structural error that requires reversal without recourse to harmless error analysis.  “Given the necessarily close working relationship between lawyer and client, the need for confidence and the critical importance of trust, neither is it surprising that the Court has held that the Sixth Amendment grants a defendant ‘a fair opportunity to secure counsel of his own choice.’”

The Court distinguished earlier cases where it held that funds that a criminal defendant intended to use to pay attorney fees were forfeit on the ground that in those cases the funds were “tainted” in that they were either the proceeds of a criminal act or used further a criminal act. In Ms. Luis’ case, the Government admitted that the funds did not bear any such taint.

The plurality summed up three primary considerations that underlay its decision: 1) the competing interests are the “fundamental” right to counsel vs. the Government’s interest in securing its punishment of choice, 2) the common law tradition that supports the Court’s view and 3) adopting the Government’s position would erode the right to counsel “to a greater extent than we have so far indicated,” and would be especially harmful to innocent defendants. Finally, the court noted that if there is a dispute over whether funds are “tainted” or “untainted” the courts have developed tracing rules to determine whether funds are tainted.

Justice Thomas in a concurring decision cast the deciding vote in the case. He rejected the plurality’s “balancing” of the interests of the Government against the Sixth Amendment right to counsel.  In his view, the Sixth Amendment, in light of its common-law background, required that the Government not be allowed to freeze “untainted” funds that a criminal defendant needed to pay attorney fees.  To hold otherwise could render the Sixth Amendment right to counsel in a criminal case nugatory.

Both Luis and Bajakajian involve situations in which the property the Government seeks to freeze or hold forfeit was not derived from or to be used in furtherance of criminal activity.   The Government has in recent years been active in seizing funds and bank accounts of small legal businesses and their owners often on the ground that the business owner violated banking regulations. The two cases highlight the Supreme Court’s concern over the Government’s use of the forfeiture power to grab property that was neither derived from criminal activities nor used to further criminal activities.

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

IRS has released  another Tax Time Guide, sixth in a series of 10 tips, reminding individuals that they can check the status of their tax returns and refunds through “Where’s My Refund?” which is available at IRS.gov or on the smartphone application IRS2Go. Taxpayers that they can quickly check the status of their tax return and refund through “Where’s My Refund?” on IRS.gov. These Tax Time Guides are designed to assist taxpayers with common tax issues as the April 18 tax deadline approaches.

2016 Individual Return Filing Deadline – April 18, 2016. The filing deadline to submit 2015 tax returns is Monday, April 18, 2016, rather than the traditional April 15 date. Washington, D.C., will celebrate Emancipation Day on that Friday, which pushes the deadline to the following Monday for most of the nation. (Due to Patriots Day, the deadline will be Tuesday, April 19, in Maine and Massachusetts.)

Direct Deposits. The fastest way to get your tax refund is to have it electronically deposited for free into your financial account. The IRS program is called direct deposit. You can use it to deposit your refund into one, two or even three accounts.

Taxpayers who have not yet received their refunds can use “Where’s My Refund?”on IRS.gov or on the smartphone application IRS2Go to find out about the status of their income tax refunds. Most refunds are scheduled to be issued within 21 days following the electronic filing of a return. Obviously, all refunds are not issued within that scheduled timeframe. Issues regarding identity theft refund fraud have considerably slowed the refund process and taxed already limited IRS resources.

Initial information will normally be available within 24 hours after the IRS receives the taxpayer’s e-filed return or four weeks after the taxpayer mails a paper return to the IRS. The system updates only once every 24 hours, usually overnight, so there’s no need to check more often.

When Where’s My Refund? shows the status of your refund as “Refund Approved” it means the IRS has processed your return, your refund has been approved and the IRS is preparing to send your refund to your bank or directly to you in the mail if you requested a paper check. This status will tell you when your refund is scheduled to be sent to your bank and, if you elected the direct deposit option, a date by which it should be credited to your account. The IRS suggests you wait until it’s been five days from the date they sent the refund to your bank to check with your bank about the status of your refund. This time frame is provided to allow for the variations in how and when banks deposit funds.

So far in 2016, taxpayers have used “Where’s My Refund?” more than 231 million times this year, an increase of nearly 35 percent over last year at this time. Additional 2016 tax refund questions are answered at “2016 Tax Refund frequently Asked Questions.”

Taxpayers should have their Social Security number, filing status and exact refund amount when accessing “Where’s My Refund?” Those without Internet access can access this tool by calling 800-829-1954, 24 hours a day.

This is the sixth in a series of 10 IRS tips called the Tax Time Guide. These tips are designed to help taxpayers navigate common tax issues as this year’s April 18 deadline approaches. Other IRS Tips include:

1. Tax Time Guide: Good Records Key to Claiming Gifts to Charity
   IR-2016-50, March 28, 2016 ― The IRS today reminded taxpayers planning to claim charitable donations to make sure they have the records they need before filing their 2015 tax returns.
2. Tax Time Guide: Many Home-Based Businesses Can Use Simplified Method for Claiming Home Office Deduction; Taxpayers May Deduct up to $1,500 a Year
   IR-2016-47, March 23, 2016 — The IRS today reminded people with home-based businesses filling out their 2015 federal income tax returns that they can choose a simplified method for claiming the deduction for business use of a home.
3. Tax Time Guide: Online Tools Help Taxpayers Choose a Qualified Tax Professional
   IR-2016-46, March 22, 2016 — The IRS today reminded taxpayers of options available to them on IRS.gov to get information and tips about selecting qualified tax professionals.
4. Tax Time Guide: Updated Tax Guide Helps People with Their 2015 Taxes
   IR-2016-44, March 18, 2016 — Taxpayers can get the most out of various tax benefits and get useful tips from IRS Publication 17, Your Federal Income Tax.
5. IRS Releases Tax Time Guide: Use IRS.gov Tools for Quicker Answers
   IR-2016-43, March 17, 2016 — With a month left before the tax deadline, the IRS today encouraged taxpayers working on their 2015 tax returns to take advantage of the numerous online tools and resources available on IRS.gov.

A notice of deficiency sent to a taxpayer’s last known address is a ticket to the Tax Court that allows a taxpayer to dispute a proposed deficiency of income, estate or gift tax before assessment. If a taxpayer fails to file a petition with the Tax Court within 90 days of mailing of the notice (150 days if the taxpayer is out of the country), the IRS can assess the tax and begin collection activity.  Normally, the only recourse a taxpayer has to dispute the liability in court is to pay the entire amount owed and seek a refund.

Sec. 7436 of the Internal Revenue Code contains provisions allowing an employer to dispute a proposed employment tax assessment before assessment if there is a dispute about whether workers are employees or independent contractors. The IRS is required to send a Notice of Determination of Worker Classification (“NDWC”) to the taxpayer’s last known address.  The taxpayer can then petition the Tax Court to dispute the proposed employment tax liability.  If the taxpayer doesn’t file a Tax Court petition on time, the IRS can assess the tax and begin collection.

What happens if the taxpayer doesn’t receive the notice of deficiency or NDWC? Is there a way to challenge the liability in court without having to pay and seek a refund?  The answer, as we learn in Hampton Software Development, LLC v. Commissioner, TC Memo 2016-38 (March 3, 2016), is maybe.

In Hampton Software Development, the taxpayer protested to IRS Appeals an audit finding that a worker was an employee and not an independent contractor.   After a conference, IRS mailed a NDWC to the taxpayer’s last known address.  The letter was returned stamped “unclaimed.”  The IRS then assessed the tax and issued a Final Notice/Notice of Intent to Levy under IRC sec. 6330.  This gave the taxpayer the right to protest the proposed collection action to appeals.  The taxpayer protested and raised only one issue: that it was not liable for the tax.  IRS Appeals denied relief on the ground that the taxpayer could not challenge the underlying liability in a collection due process case. The taxpayer petitioned Tax Court.  The IRS moved for summary judgment on the ground that under sec. 6330, the taxpayer could not challenge the underlying liability.  The Tax Court denied the motion.

Secs. 6320 and 6330 allow a taxpayer to protest to IRS Appeals a final notice/notice of intent to levy or notice of tax lien filing. While the matter is pending before Appeals, and in Tax Court if the taxpayer challenges Appeals’ determination, collection activity is stayed.   Sec. 6330 allows a taxpayer to challenge the underlying liability in a collection due process proceeding “if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such liability.”  IRS regulations provide that if a tax is subject to deficiency procedures, a taxpayer did not have an opportunity to contest the liability if he did not receive a notice of deficiency.  If a tax is not subject to deficiency procedures, an opportunity to dispute the liability includes an opportunity to challenge the tax in Appeals pre or post assessment.

The IRS claimed that the procedures under sec. 7436 for issuing a NDWC are not deficiency procedures; thus, the taxpayer had an opportunity to dispute the liability in appeals pre-assessment. According to the IRS, he could not dispute it post-assessment in a collection due process case.

The Tax Court first looked at the provisions of sec. 7436 to determine whether a NDWC is subject to deficiency procedures. Under sec. 7436(d)(1), the principals of several sections of the Internal Revenue Code that apply to deficiencies are applicable to NDWC.  Thus the Court held that sec. 7436 is a tax to which deficiency procedures apply.  As a result, that the taxpayer had a pre-assessment appeals conference was irrelevant to the question of whether it could challenge the underlying liability in a deficiency procedure.  The real question was whether the taxpayer actually received the notice.  A taxpayer cannot deliberately refuse to accept a notice of deficiency or a NDWC and then challenge the underlying liability in a collection due process proceeding.  In the case before it, the returned envelope established that the taxpayer did not receive the NDWC.  There was no evidence as to whether the taxpayer deliberately refused to accept the NDWC.  Since this was a factual question, the motion of the IRS for summary judgment was denied.

A taxpayer did not receive a notice of deficiency or a NDWC before an assessment is made. Similarly, a taxpayer may not receive the sec. 6672(b) notice and thus did not have an chance to appeal the proposed trust fund penalty before it is assessed.  In these circumstances, a taxpayer has not had an opportunity to contest the liability prior to assessment.   Unless a taxpayer deliberately refused to accept the notice, she can thus challenge the tax liability without paying by a timely collection due process protest.

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

Robert Horwitz recently authored a blog regarding a recent district court case, United States v. Wallis, in which the court discussed the notice required prior to assessing a trust fund recovery penalty and the effect that issuance of the notice has on the statute of limitations for assessing the penalty. In that case, the court held that notice had been timely mailed to the taxpayer’s last known address, as required by 26 U.S.C. §6672(b).

Employers are required to withhold federal income and social security taxes from the wages of their employees.[i]  An employer is deemed to hold the withheld taxes “in trust” for the United States and must pay them over to the government on a quarterly basis.[ii]  The withheld amounts are known as trust fund taxes.[iii]  If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes, and seek the unpaid funds from the employer.[iv]  Under Code Sec. 6672(a), the IRS may assess a penalty on responsible persons who willfully fail to collect, account for, and pay over the taxes to the United States.[v]

In order for the United States to assess the penalty under Code Sec. 6672, there must be a determination that the party: (1) assessed was a “responsible person,” i.e., one required to “collect, truthfully account for and pay over the tax,” (2) that party must have “willfully” refused to pay the tax, and (3) the IRS is required to give notice to the taxpayer before it can assess the penalty.

In United States v. Appelbaum, Case No. 12-CV-0186 (WD N.C. 2/3/2016), the Government filed a lawsuit to reduce a trust fund recovery penalty to judgment.  Appelbaum contested the lawsuit, asserting that he had never been sent the requisite notice of proposed assessment. The court found that the IRS had not issued notice to the taxpayer – thus the assessments were invalid and the taxpayer escaped liability.

A taxpayer has 60 days from the date of notice within which to protest the proposed assessment to the IRS Appeals Office.  Issuance of the notice suspends the statute of limitations on assessment for 90 days or, if a timely protest is filed, until 30 days after the Appeals Office issues its determination.  The IRS gives notice by mailing or hand delivering a Letter 1153 to the taxpayer.

Appelbaum testified that he never received the notice. Normally, a Government agency such as the IRS is presumed to have acted regularly.  Based on the presumption of regularity, when an IRS certificate of assessment is in evidence, the court is to presume that the IRS took all steps required before the assessment could be made.  A taxpayer has a heavy burden to overcome this presumption.  In this case, the IRS’s own records undermined the presumption and led to a decision in the Appelbaum’s favor.

First – the IRS did not have a complete copy of the Letter 1153 addressed to Appelbaum in the case file.

Second – the IRS could not produce evidence that the letter was sent either certified or registered mail, even though IRS policy required that Letter’s 1153 be sent certified or registered mail.

Third – there was nothing in the case file indicating that the revenue officer had attempted to interview Appelbaum, even though this was required before a Letter 1153 could be issued.

Fourth – all but one notation in the revenue officer’s case history were made at or near the date of the event—the notation for the Letter 1153 was made 21 months after the letter was allegedly sent.

Fifth – since Appelbaum never filled a protest, under normal IRS policy, the trust fund penalty would have been assessed shortly after the 90-day suspension of the limitations period expires if the taxpayer does not protest.  Here, the assessment was made almost two years after the notice was issued.

Lastly – the revenue officer who had been assigned the case was not called as a witness.  Since the IRS’s records did not contain evidence that the predicate steps had been taken, the court held that the assessments were invalid.

Freedom of Information Act – This case highlights the need for a practitioner to obtain a copy of the IRS’s files, including the case history sheets and all internal documents concerning an assessment, either through discovery or a Freedom of Information Act request to determine whether there are procedural grounds for challenging an IRS determination.

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

[i] See 26 U.S.C. Section 3102(a), 3402(a).

[ii] Code Section 7501(a).

[iii] Davis v. United States, 961 F.2d 867, 869 (9th Cir. 1992).

[iv] Id.

[v] United States v. Jones, 33 F.3d 1137, 1138 (9th Cir. 1994).

UNITED STATES TAX COURT

Washington, D.C. 20217

February 29, 2016

PRESS RELEASE

The United States Tax Court announced today that Judge L. Paige Marvel has been elected as Chief Judge of the United States Tax Court to serve a 2-year term beginning June 1, 2016. 

The election of the Chief Judge by the Judges of the Tax Court is undertaken biennially in accordance with statutory requirements.

Judge Marvel received a B.A. degree magna cum laude from the College of Notre Dame of Maryland (now, Notre Dame of Maryland University), and a Juris Doctor degree with honors from the University of Maryland School of Law. Judge Marvel was admitted to the Maryland Bar in 1974, and the District of Columbia Bar in 1985. She is a trained mediator.

Judge Marvel practiced law for 24 years, concentrating her practice in Federal and State tax matters and tax controversies. In 1998, President Clinton appointed her to the United States Tax Court for a 15-year term that ended on April 5, 2013. She served as Senior Judge on recall performing judicial duties until she was reappointed by President Obama to a second 15-year term that began on December 3, 2014. 

Judge Marvel, while still in practice, was appointed to serve as a member of the Commission to Revise the Annotated Code of Maryland and she chaired its Tax Procedure Subcommittee (1981-1987). She also served as an adviser on the ALI

Restatement of the Law Third – The Law Governing Lawyers (1988-1999), as a member of the Commissioner’s Review Panel on IRS Integrity (1989-1991), and as an officer of the Taxation Section, Maryland State Bar Association, and the Taxation Section of the American Bar Association. Judge Marvel is a fellow of the American College of Tax Counsel, the American Bar Foundation, and the Maryland Bar Foundation, and a member of the American Law Institute.

Judge Marvel is married and has two children.