Posted by: Lacey Strachan | March 29, 2016

9th Circuit Dismisses Corporate Taxpayer’s Pro Se Appeal by LACEY STRACHAN

In an unpublished per curium opinion, the Ninth Circuit recently dismissed an appeal filed by John C. Hom & Associates, Inc., on the grounds that the corporation was not represented by an attorney.[i]  The corporation had filed an appeal with the Ninth Circuit pro se, appealing the Tax Court’s order dismissing its petition challenging assessed tax deficiencies for tax years 2005 through 2009.

Although the Ninth Circuit rules do not limit which appellants may proceed pro se[ii], the Ninth Circuit has clarified that corporations and other unincorporated associations may not appear in court pro se.  In Licht v. Am. W. Airlines, 40 F.3d 1058,1059 (9th Cir. 1994), the Ninth Circuit held that “Corporations and other unincorporated associations must appear in court through an attorney.”[iii]  Relying on this precedent, the Ninth Circuit dismissed the pro se appeal filed by John C. Hom & Associates, Inc., because the “appellant, a corporation, must appear in court through an attorney.”[iv] 

The taxpayer’s appeal followed a determination by the Tax Court that the Tax Court lacked jurisdiction over the corporation’s petition, because the corporation was suspended at the time the petition was filed on June 13, 2011.[v]  The corporation had been suspended by the California Franchise Tax Board from March 1, 2004 through April 13, 2012.  Respondent had brought a motion to dismiss on the grounds that the Tax Court lacked jurisdiction because the corporation lacked capacity to file the petition.  Tax Court jurisdiction requires (1) a valid notice of deficiency and (2) a timely petition.[vi]   Rule 60(c) of the Tax Court Rules of Practice and Procedure provides, in pertinent part, that “[t]he capacity of a corporation to engage in [Tax Court] litigation shall be determined by the law under which it was organized.”  Even though the corporation was reinstated prior to trial, the Tax Court held that it lacked jurisdiction, because the corporation’s capacity had been suspended by California at the time the petition was filed.[vii]

LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a senior tax attorney 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. She routinely represents and advises U.S. taxpayers in foreign and domestic voluntary disclosures, sensitive issue domestic civil tax examinations where substantial civil penalty issues or possible assertions of fraudulent conduct may arise, and in defending criminal tax fraud investigations and prosecutions. She has considerable expertise in handling matters arising from the U.S. government’s ongoing civil and criminal tax enforcement efforts, including various methods of participating in a timely voluntary disclosure to minimize potential exposure to civil tax penalties and avoiding a criminal tax prosecution referral. Additional information is available at http://www.taxlitigator.com.

[i] John C. Hom & Assocs. v. Comm’r, 2016 U.S. App. LEXIS 5525 (9th Cir. Mar. 24, 2016).

[ii] The Ninth Circuit website specifically provides pro se litigants with information to assist them in their case. See http://www.ca9.uscourts.gov/open_case_prose/.

[iii] John C. Hom & Assocs., supra (citing Licht v. Am. W. Airlines, 40 F.3d 1058,1059 (9th Cir. 1994)).

[iv] Id.

[v] John C. Homm & Associates, Inc. v. Comm’r, 140 T.C. 210 (2013).

[vi] Id. at 212.

[vii] Id. at 215.

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Posted by: Cory Stigile | March 21, 2016

“Mortgage Brokerage” Does Not Constitute A “Real Property Trade Or Business” by CORY STIGILE

In Guarino v. Commissioner, T.C. Summary Op. 2016-12 (March 14, 2016), the Tax Court held that the taxpayer was not a real estate professional for purposes of the passive loss rules because the hours he spent on his “mortgage brokerage business” did not constitute hours spent in a “real property trade or business” pursuant to IRC Section 469(c)(7)(C).

The taxpayer in Guarino owned multiple real estate properties that he held for rent and/or rented out during the years at issue.  The taxpayer also had a multifaceted sole proprietorship that provided services, including the preparation of tax returns and the brokering of real estate mortgages.  The brokerage service included the originating and servicing of residential and commercial real estate loans.  Although the taxpayers did not produce contemporaneous prepared logs to track their real estate activities, a variety of logs were prepared and submitted during the examination, appeals, and litigation process.

Rental real estate activity is generally reportable as a per se passive activity.[i]  Such losses are restricted in how and when they may be utilized to offset non-passive income.[ii]  Under the “real estate professional” exception, rental activity is not treated as per se passive provided that the taxpayer satisfies the following two requirements:

  1. more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer “materially participates,” and
  2. such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates [iii]

“Real Property Trade or Business.” A taxpayer is treated as “materially participating” in an activity if the taxpayer participates for more than 500 hours per year on the rental activity,[iv] but the Court did not get to this step of considering material participation because it did not consider the taxpayer to be in a real property trade or business such that the real estate (rental) activities could be aggregated.   A real property trade or business is defined as “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.”[v]  (Emphasis supplied.)

Here, the taxpayer spent a considerable amount of time in his business of providing brokerage services and asserted that the “brokerage trade or business” hours fell within the real property trade or business definition. The Court ultimately determined that the taxpayer’s business was brokering financial services, not real estate.  The Court cited legislative history to support this distinction and pointed out that Congress considered including “financing operations” in the activities listed in section 469(c)(7)(C) but specifically did not do so.  As the taxpayer did not maintain contemporaneous substantiation, the Tax Court was not able to and did not make a determination regarding how much if any of his time was dedicated to a real property brokerage.  Accordingly, while aspects of real estate financing may be an important part of a real estate professional’s trade or business, the opinion did not need to address the issues of whether such hours should be included for purposes of qualifying as a real estate professional.

Maintain Log to Identify Specific Activities Conducted. As with other recent cases, Guarino stands as a helpful reminder about the importance of maintaining contemporaneous logs of hours spent in a real estate business.  When the scope and nature of the time spent on a real estate activity may be unclear, such as in a more complex real estate business activity, it may be helpful to keep additional records to differentiate between the specific activities conducted during the year.

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 complex and sensitive civil tax audits and tax litigation, including tax-related examinations and investigations of individuals, business enterprises, partnerships, limited liability companies, and corporations. Additional information is available at http://www.taxlitigator.com

[i] IRC § 469 (c)(2).

[ii] IRC § 469 (a).

[iii] IRC §469(c)(7)(B).

[iv] IRC § 1.469-5T(a)(1).

[v] IRC § 469(c)(7)(C).  See sec. 1.469-5T(a)(1)

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Posted by: Taxlitigator | March 16, 2016

IRS Announces Record Number of FBAR Filings!

Foreign bank account report filings with the U.S. government surpassed the 1 million mark during 2015, according to a recent IRS announcement. In 2015, Treasury Department’s Financial Crimes Enforcement Network (FinCen) received a record high 1,163,229 FBARs, up more than 8 percent from the prior year. Incredibly, FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCen data.

“Taxpayers here and abroad need to take their offshore tax and filing obligations seriously,” said IRS Commissioner John Koskinen.” Improving offshore compliance has been a top priority of the IRS for several years, and we are seeing very positive results.” U.S. taxpayers with foreign accounts exceeding certain thresholds must electronically file Form 114, Report of Foreign Bank and Financial Accounts (commonly referred to as the “FBAR,” previously Form TD F 90-22.1) with FinCen.

Filings of IRS Form 8938, Statement of Specified Foreign Financial Assets, have generally remained consistent in recent years, hovering around 300,000 filings for 2014 and 2013 (it is filed with the taxpayers income tax return), and up from about 200,000 for tax year 2011, the first year Form 8938 was required to be filed.

OVERVIEW OF FBAR FILING REQUIREMENTS. Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015 must file FBARs. A U.S. person may have a reporting obligation even though the foreign financial account does not generate any taxable income. Taxpayers also report their interest foreign financial accounts by (1) completing boxes 7a and 7b on Form 1040 Schedule B; box 3 on the Form 1041 “Other Information” section; box 10 on Form 1065 Schedule B; or boxes 6a and 6b on Form 1120 Schedule N.

The calendar year 2015 FBAR is due by June 30, 2016 and must be filed electronically through the FinCen BSA E-Filing System website. The calendar year 2016 FBAR is due by April 15, 2017 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5 (the reference to Treas. Reg. section 1.6081–5 allows for the coordination of the FBAR due date to the June 15 deadline (after automatic extension) for the coordinating income tax return).

SEPARATE REPORTING REQUIREMENTS BY U.S. TAXPAYERS HOLDING FOREIGN FINANCIAL ASSETS (FORM 8938). 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. The Form 8938 filing requirement does not replace or otherwise affect the requirement to file FBAR. A chart providing a comparison of Form 8938 and FBAR requirements, and other information to help taxpayers determine if they are required to file Form 8938, may be accessed from the IRS Foreign Account Tax Compliance Act Web page

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).

Generally, for those living outside the U.S. (for an uninterrupted period that includes an entire tax year or who are present in a foreign country or countries at least 330 full days during any consecutive 12 month period that ends in the tax year being reported), Form 8938 must be filed if the total value of such assets exceeds $200,000 at the end of the tax year or if the total value was more than $300,000 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 $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year for taxpayers filing as married filing jointly).

FBAR PENALTIES. The failure to timely file the FBAR can be subject to civil penalties and possibly criminal sanctions (i.e., imprisonment). The statutory civil penalties might be $10,000 per year for a non-willful failure but a willful failure to file could, by statute, be subject to civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six tax years. Non-willful penalties might be avoided if there is “reasonable cause” for the failure to timely file the FBAR.

Generally, the IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes have been timely paid on the U.S. tax return, and the taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

RECENT GUIDANCE LIMITING FBAR PENALTIES. The IRS recently issued interim guidance to implement procedures to improve the administration of the Service’s FBAR other than determinations arising from participation in the ongoing IRS Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures. Penalties determined under the IRS OVDP or the Streamlined Procedures are referred to as a “miscellaneous penalty” (rather than an “FBAR penalty”) determined in lieu of all the problems a taxpayer is avoiding by coming into the OVDP or filing through the Streamlined Procedures.

The statutory FBAR penalty provisions only establish maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount below that threshold based on the facts and circumstances of each case. In this regard, IRS examiners are instructed to use their best judgment when proposing FBAR penalties, taking into account all the available facts and circumstances of a case.

(a). Willful FBAR Violations. For cases involving willful violations over multiple years, IRS examiners will recommend a penalty for each year for which the FBAR violation was willful. In most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation for each year.

Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. The IRS guidance provides that in no event will the total willful penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

(b). Nonwillful Violations. For most cases involving multiple nonwillful violations, examiners are told to recommend one penalty for each open year, regardless of the number of unreported foreign financial accounts. In those cases, the penalty for each year will be determined based on the aggregate balance of all unreported foreign financial accounts, and the penalty for each year will be limited to $10,000.

For some cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager’s approval, may assert a single penalty, not to exceed $10,000, for one year only.

For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval, may assert a separate penalty for each account and for each year.

The IRS guidance provides that in no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination. A nonwillful penalty will not be recommended if the examiner determines that the FBAR violations were due to reasonable cause and the person failing to timely file correct and complete FBARs later files correct and complete FBARs.

(c). IRS Mitigation Guidelines. In determining the appropriate penalty, IRS examiners are to first determine whether the mitigation threshold conditions in Internal Revenue Manual are satisfied. If the mitigation threshold conditions are met, examiners are to make a preliminary penalty calculation based upon the mitigation guidelines in IRM, except that the penalty for each year will be limited to $10,000. Unless the facts and circumstances of a case warrant a different penalty amount, this is the penalty amount to be asserted.

If the IRM mitigation threshold conditions are not met, the mitigation guidelines do not apply and examiners are told to not make a preliminary penalty calculation based upon the guidelines. Examiners, with the group manager’s approval, are told to assert a separate penalty for each account and for each year. However, the IRS guidance provides that in no event will the total amount of the nonwillful penalties exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.

(d). Co-Owned Accounts. Where there are multiple owners of an unreported foreign financial account, the IRS guidance provides that examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful. For each co-owner against whom a penalty is determined, the penalty will be based on the co-owner’s percentage ownership of the highest balance of the foreign financial account. If examiners are unable to determine a co-owner’s percentage ownership, the penalty will be based on the amount determined by dividing the highest account balance equally among the co-owners.

ELECTRONIC FBAR FILING REQUIRED. Generally, all FinCEN forms must be filed electronically. E-filers will receive an acknowledgement of each submission. The online FinCEN Form 114 allows the filer to enter the calendar year reported, including past years.

The FinCEN system also offers an option to “explain a late filing,” or to select “Other” to enter up to 750-characters within a text box where the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with an IRS compliance program. For longer explanations, some practitioners provide an online statement indicating that a more in depth factual explanation is in the possession of the filers counsel and is available upon request.

VERIFICATION OF FBAR FILING. Ninety days after the date of filing, the filer can request verification that the FBAR was received. An FBAR filing verification request may be made by calling 866-270-0733 and selecting “option 1.” Up to five documents may be verified over the phone. There is no fee for this verification. Alternatively, an FBAR filing verification request may be made in writing and must include the filer’s name, taxpayer identification number and the filing period.

RECORD KEEPING REQUIREMENTS. Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number or other designation of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period. The records must be retained for a period of 5 years from the required filing date and must be available for inspection as provided by law. Retaining a copy of the filed FBAR can help to satisfy the record keeping requirements.

DELINQUENT FIING OPTIONS. Taxpayers who have are not in compliance with their reporting and filing options regarding undeclared interests in foreign financial accounts and assets are faced with various options to come into compliance.

(a).       The OVDP. Taxpayers participating in the ongoing 2014 OVDP generally agree to file amended returns and file Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1), commonly referred to as the “FBAR,” for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years.

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)[9] or the Streamlined Domestic Offshore Procedures[10] 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.” For eligible U.S. taxpayers residing outside the United States, all penalties will be waived under the Streamlined Foreign Offshore Procedures. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue under the Streamlined Domestic Offshore Procedures.

Even if returns properly filed under the Streamlined Procedures are subsequently selected for audit under existing IRS audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

( c).      Delinquent FBAR 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 not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1), are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs, should file the delinquent FBARs according to the FBAR instructions. FBARs 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. 

            (d).      Delinquent International Information Return Submission Procedures. Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who have not filed one or more required international information returns, have reasonable cause for not timely filing the information returns, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. Delinquent information returns filed with amended 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.

Those directly involved in creating and maintaining the foreign account and assets are the only ones capable of determining their potential non-willful status. If such status is not supported by sufficient objective facts, consider other methods of coming into compliance, including the OVDP

NEED FBAR FILING HELP? Assistance regarding the electronic filing of an FBAR is available at BSAEFilingHelp@fincen.gov or through the BSA E-Filing Help Desk at 866-346-9478. The E-Filing Help Desk is available Monday through Friday from 8 a.m. to 6 p.m (Eastern Time).

Help in completing an FBAR is available by telephone at 866-270-0733 (toll-free within the U.S.) or 313-234-6146 (from outside the U.S., not toll-free) from 8 a.m.—4:30 p.m. Eastern time, or by sending an e-mail to FBARquestions@irs.gov.

Additional information, including Frequently Asked Questions, is available.

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Posted by: Taxlitigator | March 10, 2016

In Collection Due Process Cases, It’s Receipt of the Notice that Matters by ROBERT S HORWITZ

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

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Posted by: Taxlitigator | March 5, 2016

More on Required Notice Before a Trust Fund Penalty Is Assessed by ROBERT S. HORWITZ

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).

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Posted by: Taxlitigator | February 29, 2016

Judge L. Paige Marvel has been elected as Chief Judge of the United States Tax Court

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.

 

 

 

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Posted by: Taxlitigator | February 26, 2016

If You Want to Recover Costs in Fighting the IRS, Ask on Time By Robert S. Horwitz

Internal Revenue Code sec. 7430, a taxpayer can recover administrative and litigation costs, including attorney fees, if the taxpayer is the prevailing party and the IRS’s position was not substantially justified. There is one hitch: you have to ask for costs and fees before it’s too late.  This is what the taxpayers learned in Foote v. Commissioner, Case No. 14-70668 (9th Cir. 12/23/2014) aff’g T.C. Memo. 2013-276.

The facts are ones which you would think cry out for an award of costs and attorney fees. The IRS audited the taxpayers and their companies.  The IRS issued two 30 day letters.  The first proposed additional tax of $27 million, plus penalties and interest.  The second proposed additional tax of $55 million, plus penalties and interest.  The taxpayers went to the IRS Appeals Office.  Appeals determined that most of the proposed tax was wrong.  It issued a notice of deficiency for $4 million tax and $1.5 million in penalties.  It also issued a partnership adjustment notice determining that the partnership had $13.2 million in additional income.

The taxpayers and their partnership went to Tax Court. After further negotiations, the IRS agreed that the taxpayers only owed $310,000 tax plus $64,000 in late filing penalties and that the partnership return was correct as filed.  The Tax Court entered stipulated decisions reflecting the agreement.

So the IRS starts by claiming the taxpayers owe $55 million and ultimately agree they only owe $310,000 in tax and its position was not unreasonable? No, the taxpayers did not ask in time.  The taxpayers never claimed to be entitled to administrative and litigation fees and costs during the administrative phase or in any pleadings filed with the Tax Court prior to entry of the decision.  In fact, they waited until more than a year after the decisions were entered and became final to seek fees and costs.  The Tax Court held that they didn’t ask for fees and costs in time.  The Ninth Circuit affirmed.  As the Ninth Circuit stated in its memorandum opinion “As the Footes did not properly petition the tax court for administrative and litigation costs before the stipulated decisions became final, their current action for costs is barred by res judicata.”

The moral is that if you believe the IRS’s position is unreasonable, ask for fees and costs before it is too late.

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 AUSA 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, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com

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Posted by: Taxlitigator | February 22, 2016

IRS Employment Tax Notices Must be Sent to the “Last Known Address” of the Taxpayer, by ROBERT S. HORWITZ

The IRS has recently enhanced their focus on employment tax enforcement throughout the country. An employment tax return filed by April 15 of the year following that in which the applicable quarter falls is “deemed filed” on April 15 of the following year. Where no return is filed, the three-year assessment period does not begin to run and the IRS can make the assessment at any time.

A recent district court case, United States v. Wallis, 117 AFTR 2d 2016-583 (WD VA 2/1/2016), discusses the applicable statute of limitations for assessing trust fund recovery penalties under Code Section 6672 and the notice provisions that are required before the IRS can assess the penalty.

Wallis owned two corporations, United and Boss, and was a co-owner of a third corporation, Pizza Planet. United did not file employment tax returns for any of the four quarters of 2000.  Pizza Planet failed to file employment tax returns for the first quarter of 2000.  The IRS made “substitute for return” assessments for employment taxes against United and Planet Pizza.

Boss filed its employment tax return for the second quarter of 2002 on July 31, 2003, for the third quarter of 2002 on October 31, 2002, and for the fourth quarter of 2002 on January 31, 2003. Wallis was in bankruptcy from January 31 to May 21, 2002.

On April 12, 2006, the IRS sent Wallis a Letter 1153, informing him that it had determined that he was a responsible person liable for the failure of the companies to pay employment taxes. Wallis did not protest the proposed determinations and the Government assessed the tax.

The Government sued Wallis to collect the trust fund penalty assessments and to also collect income taxes that Wallis owed. The Government moved for summary judgment.  The Court granted the motion as to all liabilities, except for those relating to Planet Pizza because there were issues of fact that were in dispute.

What interests us is the period of limitations on assessment and the notice provisions relating to the trust fund recovery penalty.

THE PERIOD OF LIMITATIONS ON ASSESSING TRUST FUND PENALITES. The IRS can assess a trust fund recovery penalty within three years of the latter of a) the date the Form 941 employment tax return is deemed filed or b) the date when the Form 941 is actually filed. An employment tax return filed by April 15 of the year following that in which the quarter falls is “deemed filed” on April 15 of the following year.  Where no return is filed, the three-year assessment period does not begin to run and the IRS can make the assessment at any time.

In addition, certain events toll the statute of limitations on assessment. The assessment period is tolled while a taxpayer’s bankruptcy case is pending plus an additional 60 days. A notice the IRS has determined that the taxpayer may be liable for the trust fund penalty tolls the period of limitation for 90 days.

After discussing these rules, the district court applied them to Wallis’ case. Since no returns had been filed for quarters in question for Planet Pizza or United, the IRS could assess the penalty at any time.  For United, since the returns for the third and fourth quarters of 2002 were filed on time, they were deemed filed on April 15, 2003.  Since the IRS sent the notice of determination to Wallis on April 12, and Wallis had an intervening bankruptcy, the court held that the IRS “had until well after July 6, 2006 to make its section 6672 assessment against Wallis, which it successfully accomplished.”

THE TRUST FUND RECOVERY PENALTY NOTICE PROVISIONS. Internal Revenue Code §6672(b)(1) requires the IRS to give a responsible person notice that he may be subject to a trust fund penalty assessment. The IRS provides notice by either hand delivery or by mailing a Letter 1153 to the taxpayer’s last known address as determined under Internal Revenue Code §6212.   According to the court:

The Service meets its duties by sending notice to the taxpayer’s “last known address,” a term of art defined in Treasury Regulation section 301.6212-2(a) as: the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address. See e.g., Bullard v. United States, 486 F. Supp. 2d 512, 516 (D. Md. 2007); Mason, 132 T.C. at 318. Further information on what constitutes clear and concise notification of a different address and a properly processed Federal tax return can be found in Rev. Proc. 90-18 (1990-1 C.B. 491) or in procedures subsequently prescribed by the Commissioner. Treas. Reg. section 301.6212-2(a).

CHANGING THE LAST KNOWN ADDRESS. Under Rev. Proc. 2001-18, taxpayers could change their address using a written notifications or by giving the Service “clear and concise oral notification.” For either notification, the Service had a “45-day processing period” to update its records.

Wallis claimed he was not given proper notice sent to his last known address. The court rejected this argument, because the notice was sent to was the address listed on his most recently filed tax returns that were filed prior to the date of the Letter 1153 and it was the same address used on his dealings with banks and everyone he paid by check.  Wallis never gave the IRS “clear and concise notice” of a different address. Therefore, the IRS gave proper notice.

The Wallis case is a reminder that, when dealing with the IRS, it is important to give timely notice of any change of address.  Failure to give proper notice can deprive a taxpayer of valuable rights to challenge a proposed liability pre-assessment, either through an appeal to the IRS Appeals Office or, in the case of notices of deficiency for income, estate and gift taxes, by petitioning the Tax Court.

NOTE: For many types of returns, a taxpayer can change their address by submitting IRS Form 8322. For more information, see https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/IRS-Procedures/Address-Changes/Address-Changes

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com Mr. Horwitz 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) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com

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Posted by: AGOSTINO ASSOCIATES | February 19, 2016

“GOTCHA” — UNANTICIPATED AUDIT ISSUES AFTER QUIET DISCLOSURES By Frank Agostino and Lawrence A. Sannicandro

ANOTHER GREAT ARTICLE FROM AGOSTINO & ASSOCIATES!!  – To download a great article prepared by our very close friends at the Law Firm of Agostino & Associates in Hackensack, NJ (www.agostinolaw.com), see the Agostino & Associates February Newsletter – http://files.ctctcdn.com/f7d16a55201/5f66c5a0-157c-4050-bbdd-81087e8b2275.pdf

“GOTCHA” — UNANTICIPATED AUDIT ISSUES AFTER QUIET DISCLOSURES By Frank Agostino, Esq. and Lawrence A. Sannicandro, Esq.-

Practitioners worry about audits of returns submitted as quiet disclosures for good reason. The Service has been far less draconian in submissions under a traditional Offshore Voluntary Disclosure Program or the Streamlined Program, but revenue agents have taken a hard line in disallowing otherwise deductions and credits with respect to quiet disclosures. In this regard, the Service is granted broad authority to deny legitimate deductions, credits, and income exclusions, and to recast transactions to not only prevent the avoidance of U.S. tax but to impute income to U.S. donees and legatees. Practitioners should consider these issues when advising taxpayers to submit returns as quiet disclosures, pursuant to the Streamlined Program, or under the traditional Offshore Voluntary Disclosure Program. Finally, it is important for practitioners to reevaluate whether the quiet disclosure was in fact a more cost-effective alternative than the traditional Offshore Voluntary Disclosure Program before being contacted by the Service.

Which taxpayers who are most likely to be negatively affected by each type of adjustments for taxpayers with international activities? Learn about common audit adjustments that can apply including: the disallowance of deductions and credits for U.S. citizens, resident aliens, and nonresident aliens; the disallowance of the foreign earned income exclusion for U.S. citizens and resident aliens; and the Internal Revenue Service’s ability to recharacterize as ordinary income purported gifts and bequests from a partnership or a foreign corporation under Treas. Reg. § 1.672(f)-4. Finally, learn how to transition the taxpayer from a quiet disclosure into a traditional Offshore Voluntary Disclosure Program.

FOR THE FULL ARTICLE SEE http://files.ctctcdn.com/f7d16a55201/5f66c5a0-157c-4050-bbdd-81087e8b2275.pdf

AGOSTINO & ASSOCIATES, with a national practice based in Hackensack, NJ, specializes in tax and tax controversies (civil and criminal), offers in compromise, voluntary disclosures, tax lien discharges, innocent spouse determinations, forfeitures, estate planning and probate, contract and contract litigation. A firm comprised truly great, caring people who want the best for their clients !

For further information or to sign up for their invaluable Newsletter, contact FRANK AGOSTINO AND LAWRENCE A. SANNICANDRO – directly at (201) 488-5400 or visit http://www.agostinolaw.com

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Posted by: Taxlitigator | February 16, 2016

IRS Transaction Codes Pocket Guide – Helpful if You Need it ! by Robert Horwitz

The IRS transaction codes are typically listed on an taxpayers transcript of account. The transaction guide identifies many of the most often used codes.

“This document is an abbreviated version of the Transaction Codes listed in Document 6209 for quick reference. The transaction codes consist of three digits. They are used to identify a transaction being processed and to maintain a history of actions posted to a taxpayer’s account on the Master File. Every transaction processed by the Automatic Data Processing (ADP) must contain a Transaction Code to maintain Accounting Controls of debit and credits, to cause the computer at MCC/TCC to post the transaction on the Master File, to permit compilation of reports, and to identify the transaction when a transcript is extracted from the Master File.

The abbreviations used under the heading “File” are as follows: Individual Master File (IMF) “I”, Business Master File (BMF) “B”, Employee Plan Master File (EPMF) “E”, Individual Retirement Account File (IRAF) “A “, Payer Master File (PMF) “P”. ”

The IRS Transaction Codes are available online at:

https://www.irs.gov/pub/irs-utl/transaction_codes_pocket_guide.pdf

Robert S. Horwitz – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com Mr. Horwitz 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)  and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com

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