Posted by: Taxlitigator | January 20, 2015

PERENNIAL NOL QUESTION (WITH ANSWER) by EDWARD M. ROBBINS, JR.

I get this question from practitioners and taxpayers several times a year . . .

Question: We are under examination for our corporation in an open loss year, and now the IRS wants to go back and look at a closed year where we took part of the loss as a carryback.  How can they do that?  The carryback year is closed!  Not only that, the IRS already subjected the now closed carryback year to a full-blown examination and issued a “no-change.”  Isn’t this a second unnecessary examination on the carryback year?

Short Answer:  In its attempt to determine the correct taxable situation for your open loss year, the IRS may look at any other year, open or closed, that may relate to the examination.  The IRS can calculate or even recalculate the taxes for the carryover years to see their impact on the open examination of your loss year.  The overriding issue is “What’s the correct tax liability in the open year under examination?”  No facts are off limits.  No, it is not a second unnecessary examination.

Longer Answer:  Section 6501 (h) establishes an exception to the general 3 year limitations period.[1] Section 6501 (h) provides an enlargement of the general limitations period when a taxpayer carries back to the taxable year in question a net operating loss from a subsequent tax year. Section 6501(h) permits the Commissioner to assess a deficiency stemming from a net operating loss carryback deduction before the expiration of the limitations period for the taxable year in which the net operating loss was created.[2]  A similar rule exists under 6501(k) for enlargement of the assessment statute with a tentative carryback that has been applied, credited, or refunded under section 6411.

This rule, however, is often misunderstood.  Taxpayers frequently file refund claims based upon net operating losses, business tax credits, or capital losses on the basis of a claim carrying back a loss to an otherwise closed taxable year.  The easy way to remember the assessment rule is to remember that the year controlling the assessment statute is the year the loss arose.  If a loss arose in 2009 and was carried back to 2007 to obtain a 2007 refund the assessment statute for the 2007 year attributable to a deficiency because of the 2009 carryback is controlled by the 2009 statute of limitations – the year the loss arose. The Code permits assessment of a deficiency in one taxable year (2007) attributable to the carryback of an NOL from a later year (2009) before the expiration of the statute of limitations for the taxable year in which the NOL arose (2009).[3]

Section 6501(h) states:

In the case of a deficiency attributable to the application to the taxpayer of a net operating loss carryback or a capital loss carryback (including deficiencies which may be assessed pursuant to the provisions of Section 6213(b)(3) [dealing with assessments that may arise out of tentative carryback or refund adjustments arising out of excess refunds made under Section 6411]), the deficiency may be assessed at any time before the expiration of the period within which a deficiency for the taxable year of the net operating loss or net capital loss which results in such carryback may be assessed.

Congress enacted this section to provide the Service with an additional amount of time to properly review the claim and determine if any deficiencies are associated with the year in which the loss is carried back.  In our hypothetical situation with a 2009 loss carried back into 2007, the Service would have 3 years from the time the 2009 return was filed to determine any deficiencies for the 2007 year resulting from the carryback.  A carryback extends the assessment period for the carryback year for the loss carryback.[4]

Because the assessment period for both the loss year and the carryback year are the same the assessment period can be extended by agreement, and its running may be suspended for several reasons (e.g., by filing a Tax Court petition). [5] If the normal assessment period for the loss year is extended by agreement, the extension also applies to the carryback years.  If the normal 3 year statute has expired for the carryback year the IRS can only assess a deficiency attributable to items related to the loss carryback, but not any items unrelated to the loss carryback.  The taxpayer is only at risk for a deficiency for the carryback.  The IRS could not assess any amounts above the loss carryback.[6]

IRS Ability To Adjust Attributes In Closed Years For NOL Determinations

Pursuant to IRC § 6501(a) – Limitations on Collection and Assessment a tax year is subject to adjustment for 3 years from filing the federal tax return.  Section 6501(b) states that if a return is filed prior to the due date then the return will be deemed filed on the last day prescribed by law or the regulations.  Therefore, the statute of limitations for each federal tax year will close 3 years from the due date of the federal return, including extensions, or the filing date, whichever is later.

When a company carries forward or back a tax loss or credit, however, the IRS may examine the loss year, and any intervening or prior year, to determine the correct loss or credit available for carryover purposes, even if the statute of limitations on assessment for those years has expired.[7]   The IRS could examine and adjust any “closed” year if the statute for the tax year in which the attribute was utilized remains open.  Note that the IRS could make no additional assessment in the closed year, the IRS’s adjustments would go only to adjusting the carryover amounts.

The IRS may adjust items in any closed year to correctly compute the tax in an open year.[8]  In Lone Manor Farms, the court held that when a taxpayer claimed an NOL for an open year, it was necessary to determine whether the NOLs claimed for that year were still available, or should have been absorbed in closed years, allowing adjustment to the income in such closed years, regardless of whether the taxpayer had claimed the NOL in the closed years.[9]

In Revenue Ruling 85-64,[10] the taxpayer timely filed returns for 1978 through 1981 and reported no tax liability for each of these years.  The IRS examined the returns and found that 1978 had taxable income of $15,000 and 1979 had taxable income of $8,000.   The IRS also found that 1981 had an NOL of greater than $23,000.  At the time of examination, the 1978 year was closed for assessment.  The ruling holds that the 1982 NOL must first be carried back and “absorbed” in 1978, so that only if the NOL exceeded $15,000 would the NOL be available to carry back to 1979.

Taxpayer’s Ability To Make Adjustments To Items In Closed Years For NOL Determinations

The Service has stated frequently that for Section 172 of the Internal Revenue Code, “taxable income” means “correct taxable income.”[11]     Revenue Ruling 56-285,[12] holds that the fact that the statutory period for assessment of income taxes for the year in which a loss was sustained has expired does not preclude the Service from making such adjustments as may be necessary to correct the net operating loss deduction.   The rationale underlying these rulings and the authority to be discussed following is that when a prior year’s taxable income has impact on another taxable year, it is that year’s “correct” taxable income controlling in the related year not the taxable income previously erroneously stated on the return.

In Revenue Ruling 81-87,[13] 1981-1 C.B. 580, the IRS ruled that the correct tax must be considered in determining the amount of an overpayment of tax.  The correct tax is determined by including all adjustments (adjustments that decrease the tax and adjustments that increase the tax), regardless of the expiration of the periods of limitation.  Any excess of tax paid over the correct tax is an overpayment and will be credited or refunded if adjustments decreasing the tax are covered by timely claims for refund.  Revenue Ruling 81-87 was applied by the IRS in rulings involving the computation of foreign tax credit carryovers which have been interpreted to be governed by the same rules applicable to net operating loss carryovers.

The concept of utilizing “correct taxable income” in computing the amount of loss carryovers or carrybacks has long been recognized by the courts.  In Phoenix Coal Company v. Commissioner,[14] the Court of Appeals for the Second Circuit affirmed the Tax Court’s holding that the amount of a net operating loss carryover from a prior and otherwise barred year could be recalculated to determine the amount available for that year.  This rule was repeated by the Tax Court in ABKCO Industries, Inc. v. Commissioner,[15] and in State Farming Co. v. Commissioner.[16]  

With, Hill v. Commissioner,[17] the Tax Court, citing  Mennuto, again allowed the Commissioner to adjust a prior year and reduce unused investment credit available to be carried over to a later year even though the prior year was “barred” to assess additional tax as provided in IRC §6501(a).[18]

While the above cases and rulings concern adjustments to prior years which reduced the loss or credit carryover available to the year in dispute, the taxpayer in Springfield Street Railway Company v. United States[19] could decrease its 1953 taxable income by an available but unclaimed deduction to determine its 1955 net operating loss carryback to be applied against its 1953 and 1954 income.  Similarly, in Situation 2 described in Rev. Rul. 81-88, supra, the Service held that the taxpayer could increase a net operating loss carryover to consider a deduction it had failed to claim in a prior year.  In GCM 38292 (which authorized the issuance of Revenue Ruling 81-88), the Office of the Chief Counsel noted that the cited court decisions concerned adjustments made to the taxpayer’s net operating losses that were favorable to the government but added:

We think that the same logic that allows the Commissioner to correct a NOL with an upward adjustment in a year barred by the statute of limitations also allows the taxpayer to correct a NOL with a downward adjustment in such year.  It would appear inequitable to allow the government to be able to make an upward adjustment in the taxpayer’s NOL, even though the statute of limitations has run, without also permitting the taxpayer to make a downward adjustment in similar circumstances.

Revenue Rulings 81-88 and 56-285 (discussed above) were cited as authority in PLR 9504032 (October 31, 1994) where the Service ruled that the taxpayer was not barred by the statute of limitations from recharacterizing events that occurred in Year 1 to redetermine net operating loss carryovers (either from Year 1 or prior years) that are available for the taxpayer to deduct as net operating loss deductions in subsequent tax years.  While the IRS often states that private letter rulings are not to be cited as precedent, the conclusion reached in this ruling is in accord with previously issued revenue rulings and judicial opinion and appears to be a correct statement of current law.

The ability to adjust items in a closed year to correctly compute tax in an open year is also available to a taxpayer.  In PLR 9504032, Taxpayer determined that as a result of the bankruptcy reorganization it had realized an amount of income from discharge of indebtedness. Pursuant to section 108 of the Internal Revenue Code, Taxpayer excluded this amount from gross income, but reduced its NOL carryovers to Year 1 by the amount of debt discharged.

Subsequently, in May of Year 5, Taxpayer’s liquidating trustee filed an amended federal income tax return for Year 1, asserting that Taxpayer’s net operating loss carryover from Year 1 should be increased, on the ground that all but a small amount of the indebtedness in question was not in fact discharged in Year 1. The Service Center responded that Taxpayer’s claim was being disallowed because the statute of limitations for Year 1 had expired.

The IRS, following Phoenix Coal v. Commissioner and Rev. Rul. 56-285, ruled:

The real question is whether, in determining the NOL deduction for an open year, taxpayers (and the service) may redetermine correct taxable income in a closed year in order to ascertain either the amount of an NOL, or the amount of an NOL that is absorbed, in the closed year.

Rev. Rul. 56-285, 1956-1 C.B. 134, holds that the fact that the statutory period for assessment of income taxes for the year in which a loss was sustained has expired does not preclude the Service from making such adjustments  [*7]  as may be necessary to correct the net operating loss deduction.

Rev. Rul. 81-88, 1981-1 C.B. 85, applies the same principle to the refund limitations period. It holds, in part, that in determining the amount of a net operating loss that may be carried from a closed year forward to an open year, all adjustments to taxable income, whether or not barred by the statute of limitations, will be taken into account.

Accordingly, we conclude that Taxpayer is not barred by the statute of limitations from recharacterizing events that occurred in Year 1 for purposes of redetermining net operating loss carryovers–either from Year 1 or from prior years–that are available for Taxpayer to deduct as net operating loss deductions in subsequent tax years.

The cases and rulings cited above support a general rule that when the tax liability for a prior year is necessary to a determination of the correct tax liability for a year placed in issue that is otherwise an open year, either the Taxpayer or the Commissioner can recompute the “correct tax liability” for a prior year to correct for errors or omissions in such prior year.  Taxpayers can correct and increase its NOL carryover schedule to reduce its taxable income.  Taxpayers are not required to file amended returns to increase its NOL for a subsequent return rather it can reflect the changes on its NOL schedule.

There Is No Second Unnecessary Examination Here, Even If the Carryover Year Was Previously Examined

The IRS published policy on reopening closed examinations section 7605(b) is found in Revenue Procedure 2005-32, 2005-1 C.B. 1206 which states that the examination may be reopened if one of the following three conditions is met:

(1) there is evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of material fact;

(2) the closed case involved a clearly-defined, substantial error based on an established Service position existing at the time of the examination; or

(3) other circumstances exist indicating that a failure to reopen the case would be a serious administrative omission.

The decision whether to reopen an examination pursuant to this administrative policy must be reviewed and approved by the Chief, Examination Division or Chief, Compliance Division, for cases under his/her jurisdiction and based upon historical experience reopening is a rare occurrence.  Under the Revenue Procedure examining an amended return or verifying a net operating loss carryover year is not considered a reopening as it is a separate tax matter, even if the particular loss year or refund year was previously subjected to an examination.

EDWARD M. ROBBINS, Jr. – For more information please contact Edward M. Robbins, Jr. –EdR@taxlitigator.com Mr. Robbins is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., the former Chief 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

[1] For Amended Corporate Returns, Form 1120X, see Rev. Rul. 81-88, 1981-1 C.B. 585.  Application of otherwise barred deduction in NOL carryback year.  The taxpayer is permitted to carryback an NOL to the full extent possible, without first applying the barred deduction to reduce taxable income in the carryback year.  If the barred deduction were taken into account first, the taxpayer would be denied that portion of the refund attributable to the barred deduction (as the claim would not be timely).  For a further analysis of this rule, see GCM 38292.

[2] IRC § 6501(h); see also Colestock v. Commissioner, 102 T.C. 380 (1994); and Schneer v. Commissioner, T.C. Memo 1993-372.

[3] IRC § 6501(h).  See also, Bryce E. Nemitz et ux. v. Commissioner, 130 T.C. 9 (2008).

[4]  See Mennuto v. Commissioner, 56 tc 910 (1971); see also Rev. Rul. 69-543, 1969-2 c.B. 1.)  Similarly a taxpayer with a NOL carryover generated in years for which the statute of limitations on assessment is closed may increase the amount of the NOL as long as the statute of limitations is open for the year the NOL is utilized.  PLR 9504032.

[5] Note that the IRS may offset tax, interest, and penalties, the assessment of which is otherwise time-barred, against a claim for refund so long as the items fall within the same tax year.  Fisher v. United States, 96-1 USTC ¶50,204 (Fed. Cir. 1996).  This is consistent with the long-standing doctrine of Lewis v. Reynolds, 284 U.S. 281 (1932), 52 S. Ct. 10 that permits the IRS to offset a tax refund by any additional time-barred amounts the taxpayer owes for the year.  See also Dysart v. United States, 340 F.2d 624 (Ct. C1. 1965). For an exception see Pacific Gas & Electric Co. v. U.S. 417 F. 3d 1375 (Fed. Cir. 2005).

[6]  See Rev. Rul. 56-285, 1956-1 C.B. 134—NOL carried over to a subsequent open year and claimed as a deduction could be adjusted to reflect proper depreciation even though the statute of limitations on assessment for the year of the NOL had expired.

[7]   ABKO Industries v Commissioner, 56 T.C 1083, 1088-89 (1971; State Farming Co. v. Commissioner, 40 T.C 774, 781 (1963).

[8]  See Lewis v. Reynolds, 284 U.S. 281 (1932); Lone Manor Farms, Inc., v. Commissioner, 61 T.C. 436 (1974).

[9]  See also, Rev. Rul. 81-87, 1981-1 C.B. 580 and Rev. Rul. 81-88, 1981-1 C.B. 585.

[10]  Rev. Rul. 85-64, 1985-1 C.B. 365.

[11]  See, e.g., G.C.M. 39358; G.C.M. 38292; Rev. Rul. 81-88, 1981 C.B. 585; Rev. Rul. 85-64, 1985-1 C.B. 7.

[12]  Rev. Rul. 56-285, 1956-1 C.B. 134.

[13]  Rev. Rul. 81-87, 1981-1 C.B. 58.

[14]  Phoenix Coal Company v. Commissioner, 231 F. 2d 420 (2d Cir. 1956).

[15]  ABKCO Industries, Inc. v. Commissioner, 56 T.C. 1083 (1971) aff’d on other grounds 482 F. 2d 150 (3d Cir. 1973).

[16]  State Farming Co. v. Commissioner, 40 T.C. 774 (1963).  See also Mennuto v. Commissioner, 56 T.C. 910 (1971)(affirming the Commissioner’s right to adjust a prior year’s taxable income in order to determine the amount of unused investment credit available to be carried over to the year in dispute).

[17]  Hill v. Commissioner, 95 T.C. 437 (1990).

[18]  See also Calumet Industries, Inc. v. Commissioner, 95 T.C. 257 (1990); Lone Manor Farms v. Commissioner, 61 T.C. 436 (1974) aff’d without opinion 510 F. 2d 970 (3d Cir. 1975); Rev. Rul. 77-225, 1977-2 C.B. 73.

[19]  Springfield Street Railway Company v. United States, 160 Ct. Cl. 111, 312 F.2d 754 (Cl. Ct. 1963).

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Posted by: Taxlitigator | January 15, 2015

FILE LATE AT YOUR PERIL by AVRAM SALKIN

In its recent opinion in Mallo v. United States of America,[1] the Tenth Circuit Court of Appeals included broad language indicating that a late filed tax return is not a tax return for purposes of determining a discharge of tax liabilities in bankruptcy.

The underlying district court denied a discharge on the grounds that the return was filed after the taxes were assessed based on a substitute return being filed by the Commissioner on the taxpayer’s behalf.  Although this holding is consistent with decisions in several other circuits, this opinion contains reasoned dicta that effectively says that tax obligations created by any late filed return are not dischargeable in bankruptcy. The Tenth Circuit’s opinion interprets Section 523(a) of the Bankruptcy Code, which excludes from discharge “any debt”

(1) for a tax or customs duty —

(B) with respect to which a return, or equivalent report notice, if required —

( i ) was not filed or given; or

( ii ) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

. . . .

For purposes of this subsection, the term ‘return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).

The Tenth Circuit in Mallo first refers to the decisions of a majority of the courts that have determined that returns filed after assessment are not returns under Sec. 523 of the Bankruptcy Act.  The Tenth Circuit noted that nearly all courts determined whether a document qualified as a tax return by applying a test fashioned from Justice Cardozo’s decision in Zellerbach Paper Co. v. Helvering,[2] and approved by the United States Court of Appeals for the Sixth Circuit in Beard v. Commissioner.[3] This test, often referred to as the Beard test, has four elements: “[f]irst, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.”[4]

Since the taxpayer in Mallo did not attempt to file a return until after assessment, the Tenth Circuit could have affirmed the denial of a bankruptcy discharge without analyzing whether any late filing eliminates the right to a bankruptcy discharge.  After summarizing the positions of both the Taxpayer and the Commissioner, the tenth Circuit concludes:

“…we agree with the Fifth Circuit’s decision in McCoy [666 F.3d 924 (5th Cir. 2012)] that the plain and unambiguous language of Sec. 523(a) excludes from the definition of ‘return’ all late-filed tax forms, except those prepared with the assistance of the IRS under Sec. 6020(a).”[5]

Although the law is not yet settled, anyone concerned about the ability to discharge tax liabilities through bankruptcy should make sure that all relevant tax returns are timely filed.  Also, the first funds available should be used to pay off tax liabilities attributable to delinquent returns in order to avoid the issue.

AVRAM SALKIN – For more information please contact Avram Salkin at AS@taxlitigator.com. Mr. Salkin 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

[1] Mallo et vir et al. v. United States of America, (No. 13-1464)  __   F.3d __  (10th Cir., December 29,2014, affirming Mallo v. United States, No. 1:13-cv-00098 (D. Colo. 2013)

[2] 293 U.S. 172 (1934)

[3] 793 F.2d 139 (6th Cir. 1986) (per curiam), aff’g 82 T.C. 766 (1984)

[4] Beard v. Comm’r, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986) (per curiam).

[5] The Tenth Circuit noted that the hanging paragraph added by Congress in 2005 defines return as a document that “satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” 11 U.S.C. section 523(a)(*). They then proceeded to the question whether the reference to “applicable filing requirements” includes the date a tax form is due, thereby excluding a late-filed Form 1040, which otherwise satisfies the Beard test, from the definition of return in section 523(a)(*). To determine what falls within that definition, they looked to the nonbankruptcy law found in the Internal Revenue Code noting that Chapter 61 of the Internal Revenue Code governs “Information and Returns.” In particular, subchapter A, Part V — Time for Filing Returns and Other Documents, provides:

“In the case of [income tax] returns, returns made  on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year and returns made on the basis of a fiscal year shall be filed on or before the 15th day of the fourth month following the close of the fiscal year.” 26 U.S.C. section 6072(a).

The Tenth Circuit noted that the “phrase ‘shall be filed on or before’ a particular date is a classic example of something that must be done with respect to filing a tax return and therefore, is an ‘applicable filing requirement.’ Indeed, in a different context, the Supreme Court has characterized the date a document ‘shall be filed’ as a ‘filing requirement.’ See Pace v. DiGuglielmo, 544 U.S. 408, 414-15 (2005). There, the Supreme Court concluded that timeliness was a ‘condition to filing’ as required for a habeas petition to be ‘properly filed,’ where the state rule listed as a mandatory condition that the petition ‘shall’ be filed within the time limit. Id. The court reasoned, ‘We fail to see how timeliness is any less a ‘filing’ requirement than the mechanical rules that are enforceable by clerks.’ Id. at 414-15. And this court has characterized a time limit in a different section of the Bankruptcy Code as a “filing requirement.” Matter of Colo. Energy Supply, Inc., 728 F.2d 1283, 1285 (10th Cir. 1984) (referring to a bankruptcy rule that a notice of appeal “shall be filed within 10 days”); see also United States v. Bourque, 541 F.2d 290, 293 (1st Cir. 1976) (characterizing a provision of the Tax Code that returns of corporations “shall be filed on or before March 15” as a “filing requirement”). We agree with these decisions and hold that, because the applicable filing requirements include filing deadlines, section 523(a)(*) plainly excludes late-filed Form 1040s from the definition of a return.”

 

 

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Posted by: khartwell85 | January 3, 2015

Application of TEFRA to Employment Tax Examinations By Krista Hartwell

On December 12, 2014 the Office of IRS Chief Counsel published Legal Advice Issued by Field Attorneys (LAFA) 20145001F, concluding that the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), as codified in Sections 6221 through 6324, “does not apply to employment tax examinations or worker classification proceedings for entities that are otherwise subject to TEFRA for income tax purposes. For that reason, there are no special procedures that revenue agents must follow when conducting employment tax examinations of TEFRA partnerships.”

TEFRA provides procedural rules that apply in most partnership audits. An audit of a TEFRA partnership begins with the issuance of a Notice of Beginning of Administrative Proceedings, which must be mailed to the Tax Matters Partner (TMP) and each “notice partner.”[i] All partners have the right to participate in a TEFRA proceeding.[ii]  Upon completing the TEFRA partnership audit, the revenue agent must send notice of the Final Partnership Administrative Adjustment (FPAA).[iii] If any partner protests the FPAA, the IRS will transfer the partnership case to the applicable Appeals Office. There are specific procedures applicable to TEFRA Appeals Office proceedings.[iv]  If any partner disagrees with the result at Appeals, Appeals will issue an FPAA that commences the ninety-day period in which the TMP may petition the Tax Court, the applicable district court, or the Court of Federal Claims for readjustment of the partnership items in the FPAA.[v]

Section 7436(a) provides the procedures for proceedings to determine employment status:

(a) Creation of Remedy

If, in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination that—

(1) one or more individuals performing services for such person are employees of such person for purposes of subtitle C, or

(2) such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual,

upon the filing of an appropriate pleading, the Tax Court may determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination. Any such redetermination by the Tax Court shall have the force and effect of a decision of the Tax Court and shall be reviewable as such.

Several of the deficiency proceeding rules apply in Section 7436(a) employment proceedings.  Section 7436(d) states that the principles of sections 6213(a), (b), (c), (d) (restrictions on deficiencies and Tax Court petition rules) and (f) (waivers of deficiencies); 6214(a) (Tax Court jurisdiction to redetermine deficiencies); 6215(a) (assessment of deficiencies found by the Tax Court); 6503(a) (suspension of limitations periods); 6512 (limitations in the case of Tax Court petitions); and section 7481 (date when Tax Court decisions become final) apply to Section 7436(a) proceedings.

The IRS concluded that an LLC is “subject to TEFRA for income tax purposes, but that the TEFRA procedures do not apply to employment tax examinations or to worker classification proceedings.”

In its analysis, the IRS noted that within the sections incorporated in section 7436, “the only references to TEFRA relate to suspending the statute of limitations and to the overpayments relating to partnership items… [and] the TEFRA statutes make no reference to I.R.C. § 7436 or to Subtitle C of the Code (Employment Taxes and Collection of Income Tax).”

The IRS also reasoned that under sections 6221 and 6231(a)(3), the TEFRA partnership procedures are limited to “partnership items,” which are items under Subtitle A of the Code, whereas employment taxes are imposed under Subtitle C of the Code. The IRS also stated that “employment tax liability…does not meet the I.R.C. § 6211(a) definition of ‘deficiency’ to which the TEFRA restriction on assessment under I.R.C. § 6225 could apply…[and therefore] no notice of final partnership administrative adjustment would be required under I.R.C. § 6225 in order to make an employment tax assessment.”

The IRS also cited Chef’s Choice v. Comm’r, 95 T.C. 388 (1990) for its assertion that “the intent of the intent of the TEFRA provisions was merely to aggregate the partners’ income tax deficiency proceedings into a single proceeding insofar as their income tax liability derived from a partnership. Since the partnership does not pay income tax, it is not even a party to the TEFRA proceeding relating to income tax determinations.”

LAFA 20145001F, which concludes that TEFRA does not apply to employment tax examinations, is legal advice prepared by field attorneys in the Office of Chief Counsel and is issued as legal advice to the revenue agent and team manager listed in the LAFA.  The LAFA is not to be cited as precedent.

KRISTA HARTWELL – For more information please contact Lacey Strachan at Hartwell@taxlitigator.com. Ms. Hartwell is a tax lawyer 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. Additional information is available at http://www.taxlitigator.com.

 

 

 

 

 

[i] 26 U.S.C. § 6223

[ii] 26 U.S.C. § 6224

[iii] 26 U.S.C. § 6223

[iv] See IRM 8.19

[v] 26 U.S.C. 6226(a)

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Posted by: Lacey Strachan | December 24, 2014

SECTION 6901’s TWO-PRONG INQUIRY by LACEY STRACHAN

Although shareholders are generally not liable for debts of a corporation, shareholders may be liable for a corporation’s tax liability if they are considered transferees under a state’s fraudulent conveyance laws.  Where such liability exists, § 6901 of the Internal Revenue Code (“IRC”) allows the IRS to assess and collect the tax liability from the transferee.  In a decision published December 22, 2014, the Ninth Circuit explains the two-prong inquiry required by this code section—a determination must be made under federal law of whether the IRS may procedurally assess the tax against a party if transferee liability exists, and an independent, substantive determination must be made under the applicable state law of whether such liability exists.

In Salus Mundi Foundation v. Commissioner, 2014 U.S. App. LEXIS 24240 (9th Cir. Dec. 22, 2014), the Ninth Circuit reversed the Tax Court’s holding that a foundation was not liable under IRC § 6901 as a transferee of a transferee for a corporation’s tax liability resulting from a “Midco” transaction.  In that case, the shareholders of the corporation Double-D Ranch, Inc. sold their stock in the corporation to an intermediary that had losses that the intermediary expected to be able to use to offset gains on the sale of Double-D Ranch, Inc.’s assets.[i]  The intermediary in turn sold the assets of the corporation, keeping the difference between the price it paid for the stock and the amount it received for the corporation’s assets.  However, after determining that the intermediary’s losses were artificial losses resulting from a Son-of-BOSS transaction, the IRS recharacterized the Midco transaction as a sale by the shareholders of the assets of Double-D Ranch, Inc., followed by a liquidating distribution to the shareholders.[ii]  The IRS assessed a capital gains tax liability against Double-D Ranch, Inc. for the gain on the sale of its assets, which the corporation did not dispute.[iii]

When the IRS was unable to collect the tax liability from either Double-D Ranch, Inc. or the intermediary corporation, the IRS pursued transferee liability under IRC § 6901 against the selling shareholders of Double-D Ranch, Inc.[iv]  Section 6901 allows the IRS to assess a tax liability against the transferee of assets of a taxpayer who owes the income tax liability, as well as against the transferee of a transferee.[v]  The term “transferee” is defined for income tax purposes as a “donee, heir, legatee, devisee, and distribute,” which includes, in pertinent part, the shareholder of a dissolved corporation and the successor of a corporation.[vi]  Section 6901 is a procedural statute that allows the IRS to collect taxes from a transferee, but it does not create a substantive liability—it is state law that determines the existence of a substantive liability.[vii]

On appeal, the Ninth Circuit clarified the two-prong test for liability under § 6901, which requires two inquiries: (1) is the party a “transferee” under § 6901 and federal tax law?; and (2) is the party substantively liable for the transferor’s unpaid taxes under state law?[viii]  The Ninth Circuit held that these two tests are separate and independent inquiries, concluding that the two prongs of § 6901 are “independent requirements, one procedural and governed by federal law, the other substantive and governed by state law.”[ix]  That is, the state law substantive inquiry of whether a transferee is liable for the transferor’s tax liability is independent of the procedural inquiry under Federal law of whether a party is considered a “transferee” under § 6901.

One of the shareholders of Double-D Ranch, Inc. was a charitable foundation that had distributed the proceeds of the sale to three foundations organized by the children of the foundation’s founder, one of which is the Salus Mundi Foundation, the appellee in this case.  The Tax Court had treated the two-prongs of section 6901 as independent inquiries, and held that the children’s foundations were not liable as transferees of transferees, because the shareholder foundation did not have actual or constructive knowledge of the entire scheme that renders its exchange with the debtor fraudulent, which is required under the New York Uniform Fraudulent Conveyance Act for a transaction to be recharacterized.[x]

On appeal, the IRS argued that the tests are not independent, such that the Federal tax law “substance over form” doctrine can be used to recharacterize a transaction for purposes of determining both whether a party is a “transferee” for procedural purposes under § 6901 as well as for purposes of determining a party’s substantive liability under state law.  The Ninth Circuit rejected this argument, and held that federal tax law cannot be used to recharacterize a transaction for purposes of determining whether a substantive transferee liability exists for the party under state law.[xi]

However, the Ninth Circuit found on appeal that the transaction should be recharacterized under the New York Uniform Fraudulent Conveyance Act, reversing the Tax Court’s finding that the foundation did not have constructive knowledge of the entire scheme.[xii]  The Tax Court’s holding had also been appealed to the Second Circuit by another of the foundations on the same issue, in the case Diebold Foundation, Inc. v. Commissioner, 736 F.3d 172 (2nd Cir. 2013).  In that case, the Second Circuit held on the same set of facts, issues, and applicable law that the foundation had constructive knowledge sufficient to support transferee liability under New York law.

The Ninth Circuit decided to follow the Second Circuit’s reasoning in vacating the Tax Court’s decision, explaining that “absent a strong reason to do so, we will not create a direct conflict with other circuits.”[xiii]  The Ninth Circuit concluded that “[w]hile the question of the shareholders’ constructive knowledge is a difficult issue, we conclude that the Second Circuit’s decision is not demonstrably erroneous.”   The Ninth Circuit accordingly reversed the Tax Court’s holding, and remanded the case to the Tax Court for a determination on (1) whether the foundation was a “transferee” under the first prong of the two-prong test; and (2) whether the tax was assessed within the statute of limitations.

LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a tax lawyer 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. Additional information is available at http://www.taxlitigator.com.

[i] Salus Mundi Found. v. Comm’r, 2014 U.S. App. LEXIS 24240, 9-12 (9th Cir. Dec. 22, 2014).

[ii] Id. at 12-15.

[iii] Id. at 15-17.

[iv] Id.

[v] IRC § 6901(a)(1)(A)(I), (c)(2).

[vi] IRC § 6901(h); Treas. Reg. § 301.6901-1(b).

[vii] Salus Mundi Found. v. Comm’r, 2014 U.S. App. LEXIS 24240 (9th Cir. Dec. 22, 2014) (citing Comm’r v. Stern, 357 U.S. 39, 42, 44-45 (1958)).

[viii] Salus Mundi Found. v. Comm’r, 2014 U.S. App. LEXIS 24240 (9th Cir. Dec. 22, 2014).

[ix] Id. at 22-23 (quoting Diebold Foundation v. Comm’r, 736 F.3d 173, 186 (2nd Cir. 2013)).

[x] Salus Mundi Found. v. Comm’r, 2014 U.S. App. LEXIS 24240, 17 (9th Cir. Dec. 22, 2014).

[xi] Id. at 19-23.

[xii] Id. at 23-25.

[xiii] Id. at 24 (quoting United States v. Chavez-Vernaza, 844 F.2d 1368, 1374 (9th Circuit)).

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Posted by: Taxlitigator | December 20, 2014

The Effect of Latent Tax Liabilities on Stock Values by Avram Salkin

The IRS has consistently taken the position that potential tax liabilities of C corporations, S Corporations, and individuals should not be considered when valuing stock or other assets.  For example, should the stock of an S Corporation’s stock be reduced if the corporation holds assets that are worth far more than their tax basis?  If the appreciated assets are depreciable or amortizable, should the loss of future depreciation or amortization diminish value? If inventory has appreciated, will a hypothetical buyer consider the taxes payable on sale of the inventory when determining price?

Interestingly, the Department of Justice has just taken the position that taxes count in its fraudulent conveyance complaint filed against Deutsche Bank in the Southern District of New York.[1]  Included among the allegations in the Complaint are:

“First, a Deutsche Bank entity sold the corporation holding the appreciated stock to BMY for a price that did not represent fair value of it in light of, at a minimum, the tens of millions of dollars of tax liabilities on the built-in-gains.”

“The economic value of the stock to the shareholders of the company owning the appreciated stock is less than the market price of the stock.  Other factors being equal, the economic value of the stock is the market price less the taxes that will be due when the stock is sold.”

“The approximately $150 million purchase price paid by Deutsche Bank for the Charter stock was significantly greater than the economic value of the Charter stock if the built-in-gains associated with the BMY shares owned by Charter are taken into account.”

“At a minimum, the sales price did not account for the tax liabilities associated with the built-in-gain on the BMY shares owned by Charter.”

If the Department of Justice is willing to make such allegations, it is difficult to understand how the National Office of the Internal Revenue Service can take the position that tax liabilities based on built in gains or reduced benefits available from depreciation on undervalued assets do not affect the value of stock. It is inconsistent for the Government to make the foregoing allegations in a fraudulent conveyance case while constantly claiming that transfer taxes are underpaid when appraisers consider tax liabilities as part of their valuation process. They have it right in the Deutsche Bank case -potential tax liabilities affect value.  They have backed off to some extent in C corporation cases, but should get it right in S corporation, partnership and individual cases where taxpayers’ valuations reflect built-in-tax burdens.

AVRAM SALKIN – For more information please contact Avram Salkin at AS@taxlitigator.com. Mr. Salkin  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

 

[1] See U.S.. v. Deutsche Bank (Tax Case) 14 Civ 9669 (SDNY, 12/08/14). A copy of the Complaint is available at  http://www.justice.gov/usao/nys/pressreleases/December14/DeutscheBankTaxCasePR/Deutsche%20Bank%20(Tax%20Case)%2014%20Civ%209669%20Complaint.pdf

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Posted by: Taxlitigator | December 7, 2014

How Long Should I Keep Tax Records?

Many taxpayers hoard records such that they can be appropriately prepared “if and when” an IRS examination occurs. Others often inquire as to which records should be maintained and for how long. Some routinely destroy relevant documents on the mistaken belief that an examination result will somehow be enhanced if certain documents simply don’t exist.

The length of time documents should be retained often depends upon the action, expense, or event the document records. Generally, records that support an item of income or deduction on a tax return should be retained until the applicable statute of limitations for that return runs out. The statute of limitations is the period of time in which return can be amended to claim a credit or refund, or that the IRS can assess additional tax. Returns filed before the due date are treated as filed on the due date.

General Rule. The general federal statute of limitations is 3 years from the filing date of the return. Many states have statutes that are one year beyond the expiration of the federal statute of limitations. However, the federal statute of limitations can be extended to 6 years in certain situations where there has been an omission of more than 25% of the gross income required to be hown on the return and is indefinite in the event of a civil fraud determination or the failure to file a return.

Taxpayers should keep copies of filed tax returns for at least 6 tax years to help in preparing future tax returns and making computations if an amended return is required. Generally:

  1. If the taxpayer owes additional tax and situations (2) and (3), below, do not apply; keep records for 3 years.
  2. If there is an omission of more than 25% of the gross income required to shown on the return; keep records for 6 years.
  3. If a return is not filed; keep records indefinitely.
  4. If a claim for credit or refund is filed after the filing of the original return; keep records for 3 years from the date the original return was filed or 2 years from the date the tax was paid, whichever is later.
  5. If a claim for a loss from worthless securities or bad debt deduction was filed; keep records for 7 years.
  6. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Are the records connected to assets? Keep records relating to property until the period of limitations expires for the year in which the property is disposed of in a taxable disposition. These records will be relevant for purposes of determining any depreciation, amortization, or depletion deduction and to figure the gain or loss upon disposition of the property.

Generally, for property in a nontaxable exchange, the tax basis in that property is the same as the bases of the property transferred, increased by any money paid for the acquisition. Retain records applicable to the old property, as well as on the new property, until the period of limitations expires for the year in which the new property was disposed of in a taxable disposition.

When records are no longer needed for tax purposes, do not discard them until determining whether the records might be needed for other purposes such as for insurance purposes.

Many people have moved forward into the electronic world and operate within a paperless environment. Electronic storage of relevant documents provides a hassle free method of retaining documents far beyond the confines of an upper shelf in a closet or garage. If comfortable with a paperless environment, consider retaining rather than destroying documents for a considerably longer period of time than referenced above.

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Posted by: Taxlitigator | November 24, 2014

Random Thoughts re IRS Examination Representation

It is extremely important to have a working knowledge and appreciation for the administrative process in which tax returns are fi led, reviewed and examined. This knowledge allows the practitioner an opportunity to provide an efficient, invaluable service to his clients and to the system of tax administration. The administrative process should not be abused merely because of the taxpayer’s desire to delay the determination and collection of any potential liability. Collection-related issues should be sorted out through an installment payment arrangement that would be negotiated through the normal collection process following conclusion of the audit.

ISSUE SPOTTING. A practitioner cannot know everything that one’s client will expect the practitioner to know. However, a practitioner should be able to “issue spot” matters within his field of expertise and, to a lesser extent, matters outside his field of expertise. The internet may be a practitioner’s best initial resource. There is a tremendous amount of information available on the Internet for the IRS and various state taxing authorities. Get comfortable accessing their sites.

Tax people need to be sensitive to non-tax issues. Otherwise, resolution of a tax dispute might inadvertently set up a securities case, a money-laundering structuring case, etc. against one’s client.

IRS AUDIT TECHNIQUES GUIDES. Be familiar with IRS Audit Technique Guides (ATG) when providing tax advice, preparing tax returns, preparing for an IRS examination and when preparing a client for an interview with the government. There are many publicly available ATGs that have been prepared by the IRS. Each ATG instructs the examining agent on typical methods of auditing a particular group of taxpayer, including typical sources of income, questions to be asked of the taxpayer and his representative during the audit, etc. These groups have been defined by type of business (i.e., gas stations, grocery stores, etc.), technical issues (passive activity losses), types of taxpayer (i.e., returns lacking economic reality) or method of operation (i.e., cash businesses).

A practitioner should not blindly proceed with an examination without being generally familiar with any potentially relevant IRS ATGs. Effective representation requires the ability to utilize all available resources, including the ATGs. Often, it may be beneficial to review relevant ATGs earlier in the process…perhaps while preparing the return. Preparers representing clients in an industry or having issues covered by an ATG should consider thoroughly reviewing the ATG with the client, before the return is filed.

ENGAGEMENT LETTERS. Engagement letters for tax-related matters should specify the scope and terms of the engagement. Services rendered should be within the scope of the engagement as clearly set forth in the engagement letter. If additional services are to be provided, additional engagement letters should be obtained. If a client relationship is terminated for any reason, written confirmation of the termination should be promptly provided to the client and the opposition. If the government has been involved, the government should also be clearly advised of the termination of the client relationship.

EXTENSIONS OF THE STATUTE OF LIMITATIONS. It is often a good practice to provide an extension of the applicable statute of limitations during the course of any audit or examination. However, it is also good practice to have extensions signed by the client, rather than the client’s authorized representative (even though authorized by a power of attorney). Years later, the client may not recall having given authorization to extend the statute of limitations. If their signature is on the extension (Form 872), the situation will not likely escalate. Further, it is almost always preferred to sign a limited extension with a specified expiration date (Form 872) rather than an indefinite extension for an unspecified term (Form 872-A).

FREEDOM OF INFORMATION ACT REQUESTS. It is often advisable to submit a request under the Freedom of Information Act (FOIA) following the unagreed resolution of a federal tax examination. It should also help tailor discussions at the next administrative level while providing insight into what the next government representative assigned to the case will be reviewing. The process is relatively simple and inexpensive. Relevant information regarding the submission of a FOIA request is readily available at irs.gov by searching “FOIA.”

TAXPAYER ADVOCATE SERVICE. If an examination problem seems overwhelming, consider contacting the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels or who believe that an IRS system or procedure is not working as it should.

RESPOND TIMELY AND SEEK RESOLUTION AT THE EARLIEST OPPORTUNITY. Throughout, treat all government representatives with respect and act like the professional that you want others to know and respect. Cooperate within your client responsibilities and respond timely to all requests, even if the response is a request for additional time to respond.

It is generally advisable to attempt to resolve any civil tax dispute at the earliest opportunity. A lengthy examination may be costly from the perspective of the expenditure of time and effort involved, as well as the taxpayer’s degree of frustration with the normal administrative process. Further, a prolonged audit is more likely to uncover potentially sensitive issues that could generate increased tax deficiencies, penalties or the possibility of criminal sanctions.

WHEN IN DOUBT . . . GET A DOG! A busy tax practice can be surrounded by minefields. Never underestimate the IRS’s ability, desire and resources to examine tax returns and collect taxes. Document your client advice in writing, limit the nature and scope of services to be provided in your engagement letter, establish a system of checklists (and follow the system) and use your best judgment.

If the taxpayer is unwilling to accept and follow your advice, strongly consider terminating the engagement. Life is short and the headaches of trying to convince someone to do the right thing may simply not be worth your effort. There is a reason many people become clients, and it is not because they routinely coordinate all relevant information necessary to the preparation of a return nor do they routinely provide such information in a timely manner. If you encounter an undeserving or possibly disrespectful taxpayer-client, let them go and move on with your practice.

Lastly, you cannot be all things to all people, regardless of the effort and personal sacrifice. Perhaps most importantly, remember that the taxpayer is your client, not your friend . . . if you feel the need for friends . . . get a dog!

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Posted by: Taxlitigator | November 20, 2014

AGOSTINO & ASSOCIATES NEWSLETTER – The Taxpayer Advocate Service: Guarantors of the Taxpayer Bill of Rights

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 November Newsletter https://drive.google.com/file/d/0B719qAMBEjGQUjlDb3VJTDVkZDA/view?pli=1

The Taxpayer Advocate Service – Guarantors of the Taxpayer Bill of Rights By Frank Agostino & Matthew Turtoro –  The Taxpayer Advocate Service (“TAS”) is often the most viable means available and is tasked with assisting taxpayers resolve problems with the IRS; identifying areas in which taxpayers have problems dealing with the IRS; proposing changes in the administrative practices of the IRS to mitigate problems; and identifying potential legislative changes that may mitigate problems. Tax professionals should understand that a TAS filing can help preserve the rights of their client and remedy IRS malfeasance.

Representatives must know when to contact TAS and how TAS may be able to provide immediate assistance for even the most difficult, complex scenarios. GREAT ARTICLE – FOR THE FULL ARTICLE SEE https://drive.google.com/file/d/0B719qAMBEjGQUjlDb3VJTDVkZDA/view?pli=1

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, contact Frank Agostino or Matthew Turtoro directly at (201) 488-5400 or visit  www.agostinolaw.com

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Posted by: Taxlitigator | November 18, 2014

Voluntary Disclosures by Non-Filers

Practitioners often struggle with the issue of whether a taxpayer can avoid a criminal tax investigation by making a disclosure to the IRS. A “voluntary disclosure” generally involves the process of contacting the IRS in some manner and voluntarily reporting previously undisclosed income (or false deductions) through an amended return or the filing of a delinquent return. A taxpayer’s timely, voluntary disclosure of a significant unreported tax liability is an important factor to the IRS in considering whether the matter should be referred to the U.S. Department of Justice for criminal prosecution. Properly resolving this issue can mean the difference between a taxpayer being criminally excused of a tax crime or being convicted on the basis of admissions derived from the voluntary disclosure itself.

Certainly, the IRS has a somewhat limited capacity to perform criminal investigations. However, a significant amount of time is not required to criminally investigate and prosecute a non-filer, particularly one who files delinquent or amended returns following an IRS inquiry. Without adequate representation, the perceived light at the other end of the voluntary disclosure tunnel . . . may be the IRS train coming straight at the taxpayer!

Why Consider a Voluntary Disclosure? Non-compliant taxpayers rarely do so as a result of some patriotic tendencies. Most often there is some type of triggering event that is causing sleepless nights such as a potential divorce or break-up of a business relationship that might uncover prior tax indiscretions.

IRS Voluntary Disclosure Practice.  Since 1952, the IRS has maintained an informal IRS voluntary disclosure practice[1] that creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for internal guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. A timely voluntary disclosure will not guarantee immunity from criminal prosecution, but a true voluntary disclosure will normally result in the IRS not even recommending a criminal prosecution to the Department of Justice.

A voluntary disclosure must be truthful, timely and complete, and the taxpayer must demonstrate a willingness to cooperate (and must in fact cooperate) with the IRS in determining the correct tax liability. The taxpayer must make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. Additionally, the policy only applies to income earned through a legal business – – so called “legal source” income. Al Capone could not take advantage of the policy.

To be timely, the disclosure must be received before: (i) the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; (ii) the IRS has received information from a third party (e.g., informant, other governmental agency, the media, or a soon to be ex- spouse or business partner) alerting the IRS to the specific taxpayer’s noncompliance; (iii) the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or (iv) the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

Any taxpayer who contacts the IRS regarding voluntary disclosure will likely be directed to IRS-Criminal Investigation (CI) for an evaluation of the disclosure. To determine whether the disclosure is truly voluntary, the IRS will review the actual status of any prior interest in the taxpayer, the taxpayer’s potential knowledge of such interest, and the taxpayer’s fear of some potential trigger that could have alerted the IRS. A voluntary disclosure cannot be made anonymously. Any plan by a taxpayer, or their representative, to resolve a tax liability, file a correct return, or offer payment of taxes for an anonymous client is not to be considered a voluntary disclosure.

A voluntary disclosure does not occur until IRS has actually been contacted. As such, it is imperative that the disclosure occur as quickly as possible. IRS will rarely recommend prosecution if there has been a timely voluntary disclosure. Since returns filed pursuant to a timely voluntary disclosure have significant audit potential, they should be “bulletproof” in correctly reflecting the taxpayer’s income and expense items.  Due to various federal-state information sharing agreements, any applicable state returns should be contemporaneously filed or amended with the federal returns. Returns for related entities should also be contemporaneously filed or amended. Questions or doubts should likely be resolved in favor of the government.  If a return filed pursuant to a voluntary disclosure is less than accurate, the taxpayer is compounding – – not helping the problem.

Disqualifying Factors. Counsel should inquire whether the taxpayer is currently the subject of a criminal investigation or civil examination; whether the IRS notified the taxpayer that it intends to commence an examination or investigation; whether the taxpayer is under investigation by any law enforcement agency; whether source of any income is from an illegal activity; whether the taxpayer has any reason to believe that the IRS has already obtained information concerning the tax liability to be reported pursuant to the voluntary disclosure.[2]

How many returns must be filed or amended? While there is certainly no well-established rule as to how many returns must be filed in making a voluntary disclosure, the general consensus is probably six tax years since the applicable statute of limitations for most tax related crimes is six years.  However, depending on the applicable facts and circumstances, a voluntary disclosure is sometimes limited to fewer than six tax years. The disclosure should eliminate any government concern that there might be any potential issues with respect to a particular tax year for which the applicable statute of limitations for criminal prosecutions has not already expired. In some situations, additional returns could be in order since the statute of limitations for a criminal prosecution is tolled for the period of time a taxpayer is outside of the United States or is a fugitive from justice.

Typically, in a civil context, it is also the IRS policy to enforce the filing of returns for the prior six tax years. In considering whether shorter or longer periods should be civilly enforced, the IRS will determine the prior history of non-compliance, the possible existence of income from illegal sources, the effect on voluntary compliance, the anticipated revenue in relation to the time and effort required to determine the tax due, and special circumstances existing in the case of a particular taxpayer, class of taxpayer, or industry, which may be particular to the class of tax involved.

Counsel must determine whether to contact the IRS before submitting a voluntary disclosure and actually filing the delinquent or amended tax returns. Some practitioners prefer to submit a Freedom of Information Act (FOIA) request or request IRS transcripts seeking income information already in the possession of the IRS before filing the returns.

No Specified Format Required. Information may be provided either verbally or in writing but must include a statement on behalf of the taxpayer indicating that they are willing to cooperate with the IRS in determining the correct tax liability and make good faith arrangements to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable in full. Some practitioners simply choose to file the delinquent or amended returns, with payment, with the appropriate IRS service center (now referred to as a “campus”) by certified mail, return receipt requested as set forth in Example 6.A of IRM 9.5.11.9  accompanied by a cover letter from a lawyer which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), and which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full. If pursuing a voluntary disclosure – specifically reference Example 6.A of IRM 9.5.11.9 in the lawyers cover letter accompanying the amended returns.

Finally, some practitioners prefer making the voluntary disclosure in a meeting with the Special Agent in Charge of the local IRS-CI where the investigation would be conducted. At this meeting, the potential voluntary disclosure would initially be discussed in a hypothetical format. Counsel would generally outline the facts in hypothetical form (probably in writing) and would request whether IRS-CI would consider the return filing to be a voluntary disclosure in order to avoid recommendation of a criminal prosecution. Counsel may also attempt to secure an IRS waiver of all applicable penalties before revealing the taxpayers identity.  In the event that IRS-CI responds affirmatively, counsel would then disclose the client’s identity and taxpayer identification number. However, IRS will assert that there has not been the requisite “disclosure” until the taxpayers information has been provided to the IRS.

Department of Justice – Onboard? The IRS investigates tax crimes and, when they deem it appropriate, makes a referral to the Tax Division of the Department of Justice for prosecution. The Criminal Tax Manual for the Department of Justice provides that whenever a person voluntarily discloses that he or she committed a crime before any investigation of the person’s conduct begins, that factor is considered by the Tax Division along with all other factors in the case in determining whether to pursue criminal prosecution. If a putative criminal defendant has complied in all respects with all of the requirements of the Internal Revenue Service’s voluntary disclosure practice, the Tax Division may consider that factor in its exercise of prosecutorial discretion. It will consider, inter alia, the timeliness of the voluntary disclosure, what prompted the person to make the disclosure, and whether the person fully and truthfully cooperated with the government by paying past tax liabilities, complying with subsequent tax obligations, and assisting in the prosecution of other persons involved in the crime.[3]

Further, the Policy and Procedures Memoranda for the Department of Justice acknowledges that the IRS’s voluntary disclosure policy remains, as it has “since 1952, an exercise of prosecutorial discretion that does not, and legally could not, confer any legal rights on taxpayers. If the IRS has referred a case to the Tax Division, it is reasonable and appropriate to assume that the IRS has considered any voluntary disclosure claims made by the taxpayer and has referred the case to the Division in a manner consistent with its public statements and internal policies. As a result, our review is normally confined to the merits of the case and the application of the Department’s voluntary disclosure policy set forth in Section 4.01 of the Criminal Tax Manual.”[4]

What to do? A taxpayer’s timely, voluntary disclosure of a significant unreported tax liability is an important factor to the IRS in considering whether the matter should be referred to the U.S. Department of Justice for criminal prosecution. Properly resolving this issue can mean the difference between a taxpayer being criminally excused of a tax crime or being convicted on the basis of admissions derived from the voluntary disclosure itself.

Counsel should likely determine whether to contact the IRS before submission of a voluntary disclosure and should be consulted before actually filing the delinquent or amended tax returns. If not properly coordinated (or not timely), submission of amended or delinquent returns might be deemed an important admission in a later criminal proceeding. If timely and submitted in accordance with the IRM, a timely voluntary disclosure can avoid a criminal referral and may significantly reduce or possibly eliminate the imposition of civil penalties on any resulting tax deficiency.

Generally, people who come forward and file returns prior to being contacted by IRS are not pursued through a criminal investigation, might be able to reduce or eliminate potential civil penalties, and may be able to coordinate an effective installment payment arrangement (or Offer in Compromise) for any resulting deficiencies. Regardless, a non-filer should not wait since the “first knock on the door” may be that of a special agent from IRS-CI.

[1] Internal Revenue Manual (IRM) 9.5.11.9

[2] IRM 9.5.11.9.5

[3] Section 4.01, Criminal Tax Manual, U.S. Department of Justice (2008)

[4] Policy Directives Memoranda, Section 3, Policy Directives and Memoranda, Tax Division, U.S. Department of Justice (02/17/1993)

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Posted by: Taxlitigator | November 3, 2014

Warning Signs of an IRS Criminal Tax Prosecution Referral

Every IRS examination potentially involving tax fraud requires a thorough examination of not only what transpired but, almost more importantly, why something did or did not transpire. Tax practitioners must understand the process by which a civil tax case winds its way through the system. Identifying the decision-makers and the factors they consider important may have an impact on the ultimate resolution of the examination. There is no substitute for mastering the facts and anticipating which, if any, “badges of fraud” may arise so as to be able to prepare a cogent response during the civil examination.

Of equal importance, counseling a client not to perpetuate possible badges of fraud during the investigation, including falsifying, destroying or altering records, continuing questionable practices into the present and future years, or transferring or concealing assets under investigation may be the difference between a civil resolution and a criminal referral.

IRS FRAUD TECHNICAL ADVISORS. The IRS has historically maintained a fraud referral program involving cases initiated by the civil examination and collection functions of the IRS, that are subsequently referred to IRS Criminal Investigation (CI) for criminal investigation and possible prosecution by the Department of Justice. When a civil revenue agent or revenue officer investigates a case and determines there are “firm indications of fraud,” they are to “refer” the case to CI for a criminal investigation.[i]

IRS Fraud Technical Advisors (FTA), formerly known as Fraud Referral Specialists, coordinate activities on behalf of both the civil and the collection functions of the IRS. FTA’s have been selected to target civil fraud cases for civil fraud penalty and criminal referral potential and serve as consultants to revenue agents conducting civil examinations. The FTA assists the examining agent in fraud case development identifying “badges of fraud,” often working behind-the-scenes coordinating the gathering of documentation and the interviewing of witnesses, including the taxpayer.

Knowing that an FTA could be consulting on an audit having issues with criminal potential, the issue of whether the taxpayer should submit to an interview by the civil agent is quite sensitive. The taxpayer may be forced to submit to an interview, but if asked a question which may be incriminating, the taxpayer should likely assert constitutional protections to avoid answering the questions. Claiming of a Fifth Amendment privilege, however, may merely confirm the agent’s suspicions and could encourage the agent’s referral to CI. Thus, the best course of action is often to allow experienced tax counsel to handle the interactions with the agent in hopes of persuading the agent to gather information through alternative means.

The IRS examiner, with assistance from the FTA, must know when to suspend action on a case and prepare a criminal referral when there is a firm indication of fraud. If the examiner stops too soon, all information necessary to document firm indicators (affirmative acts) of fraud may not be developed sufficiently for IRS Criminal Investigation (CI). The IRS examiner or group manager can not obtain advice and/or direction from CI for a specific case under examination. The FTA is available for this consultation.

WARNING SIGNS OF A CRIMINAL REFERRAL. The IRS investigates civil and criminal tax fraud; the Tax Division of the U.S. Department of Justice prosecutes criminal tax fraud cases, many of which have been referred for prosecution from the IRS. A long, unexplained period of silence after much investigative activity by the civil revenue agent or revenue officer during the civil examination should cause a degree of concern that an FTA has been consulted. Since civil agents are extremely discreet about informing the taxpayer’s representative that they are contemplating a criminal referral, experienced representatives have learned to identify certain activities by the agent, prior to the period of silence, as indicating a potential referral to CI.

In cases involving allegations of unreported income, the agent’s request and summonsing and photocopying of all bank account information could raise the specter of a criminal referral, especially if the agent has stumbled upon a “side account” which was not accounted for in determining the taxpayer’s income. By summonsing the information, the agent ensures that the case file will include copies of bank statements, deposited items, deposit slips, bank wire confirmations and canceled checks, which could be evidence of the unreported income.

A civil agent’s questions about the taxpayer’s “lifestyle,” expenditures and other information may indicate that the agent is undertaking a financial status type of an examination to determine whether the income reported on the return supports the taxpayer’s financial lifestyle. If the revenue agent requests information as to the taxpayer’s assets and liabilities at the beginning and end of a tax year, this could suggest that the agent has determined that the taxpayer’s books and records do not adequately reflect income and that an indirect method of proof of income, such as a net worth method, is being considered. The net worth and expenditures methods described in a previous Blog on this site are well-recognized indirect methods of proof that have often been used in reconstructing income in criminal tax cases.

A taxpayer’s representative may be alerted when the civil agent requests information such as supplier invoices, price lists, customer ledger cards, and other information that could be used as circumstantial evidence to prove unreported gross receipts. Also, if the civil agent requests the taxpayer either to submit to an interview or to answer questions in writing that relate to the taxpayer’s knowledge or intent of the facts and circumstances surrounding alleged unreported income or false deductions; or the agent refuses to discuss in detail the status of the audit and the possibility of concluding the audit in the near future, a criminal referral may be under consideration.

PARALLEL CIVIL AND CRIMINAL PROCEEDINGS. The IRS has dramatically altered its practices in conducting criminal investigations.  It had been long-standing IRS policy that the IRS did not engage in parallel civil and criminal enforcement activity.  If a civil audit unearthed a “firm indication” of fraud, the revenue agent has been directed to suspend the examination without telling the taxpayer and would prepare a Form 2797 (“Referral Report of Potential Criminal Fraud Cases”).  The FTA would be available to assist the agent in preparing this report which sets forth a detailed factual presentation of factors supporting the fraud referral, including (1) affirmative acts of fraud; (2) taxpayer’s explanation of the affirmative acts; (3) estimated criminal tax liability; and (4) method of proof used for income verification.[ii]

The fraud referral report is then transmitted to a CI Lead Development Center and is quickly followed by a conference between the referring civil agent and their group manager, the evaluating CI special agent and their supervisory special agent and the FTA. In this conference, tax returns, evidence and factors leading to the referral are reviewed and discussed.  Shortly thereafter, the same parties meet again at a disposition conference to discuss CI’s decision to accept or decline the referral. IRS Counsel may also be invited to this meeting to offer legal advice, if it is deemed necessary.[iii] A final decision as to whether the referral meets or does not meet the criminal criteria typically occurs shortly after the disposition conference.  This period of time, when the fraud referral is being considered, is usually marked by a long, unexplained silence on the part of the civil agent, which may indicate to the taxpayer’s representative that a referral has been made to CI.

Somewhat recently, the IRS has moved from this policy to a nearly opposite mode of operation. It was long thought bad policy to risk the perception that the IRS civil tax enforcement activities might be perceived as being used to develop criminal charges. Fundamental Constitutional rights not to provide evidence against oneself, to counsel, and to due process, are at some risk when a taxpayer is compelled to provide information to government taxing authorities. As a result, it had long been the IRS’s practice for civil examinations to defer to criminal investigations. At the conclusion of the criminal proceedings, the civil examination would resume.

In a dramatic and remarkable change, the IRS has shifted to practices that often include parallel civil and criminal proceedings. The IRM includes a provision that “[t]he criminal and civil aspects of a case do not present an either/or proposition. Rather, the criminal and civil aspects of a case should be balanced to the extent possible without prejudicing the criminal prosecution.”[iv]  Now, instead of the cessation of civil activity during the pendency of a criminal investigation, the IRS’s civil and criminal enforcement activities are expressly coordinated.[v]

Language in the IRM states that “a fraud case begins” when an IRS revenue agent engaged in civil examination or collection activities recognizes “affirmative indications and acts of fraud by the taxpayer.”[vi]  The IRM offers extensive guidance to the revenue agents as to how to identify or seek out information that may establish such “affirmative indications and acts of fraud.”  Revenue agents involved in civil examinations are told that the “discovery and development of fraud cases are a normal result of effective investigative techniques” and that their efforts “should be designed to disclose not only errors in accounting and application of tax law, but also irregularities that indicate the possibility of fraud.”  To expedite the process, they are encouraged to seek the assistance of FTA’s in these efforts.[vii]

Only after the revenue agent’s efforts lead to a conclusion that there is a “firm indicator” of fraud, beyond what is depicted by the IRM as “affirmative indications” of fraud, does the IRM state that a criminal referral should occur.[viii]  Until then, what a taxpayer perceives as a typical IRS audit may well involve a revenue agent who is looking to build a criminal case.[ix] The commencement of a criminal investigation still may not stop the civil enforcement efforts, however. Rather than cease the civil process while the criminal investigation goes forward, the efforts may now be more commonly coordinated.

A significant distinction between civil and criminal fraud is the differing burdens of proof. In a criminal prosecution, fraud must be proven beyond a reasonable doubt.[x] In a civil fraud penalty case, however, the government must prove civil fraud by “clear and convincing evidence.”[xi] However, if the government establishes that any portion of an underpayment of tax is attributable to fraud, then the entire underpayment is treated as attributable to fraud, unless the taxpayer establishes by preponderance of the evidence that it is not attributable to fraud.[xii]

The timing of which case proceeds can prove to be crucial. If the criminal case proceeds first, a conviction after a jury verdict or guilty plea under Code Section 7201 essentially precludes the defendant from litigating the issue of civil fraud in a subsequent civil tax proceeding, for the taxable year of conviction.[xiii] The defendant, however, may still litigate the tax deficiency in the civil proceeding.[xiv]   The collateral estoppel doctrine which results in a finding of civil fraud is based on the fact that the willfulness requirement of Code Section 7201 includes the specific intent to evade or defeat the payment of tax, which is the standard for proving fraud for purposes of the civil fraud penalty.[xv] If the Government proves willfulness under Code Section 7201 beyond a reasonable doubt in the criminal case, then that finding necessarily meets the clear and convincing standard of the civil fraud case.  On the other hand, a conviction for only subscribing to a false return under Code Section 7206 does not collaterally estop a taxpayer from contesting the civil fraud penalty since the elements for this offense do not mirror those for the civil fraud penalty.[xvi]

SOME LIMITS EXIST. In the context of parallel civil and criminal proceedings, IRS must remain “mindful” of the decision in United States v. Tweel.[xvii]  In Tweel,  an IRS CI special agent was involved with the civil audit of the defendant, but withdrew.  The accountant representing the defendant at the audit directly asked whether a special agent was involved, and the civil revenue agent responded in the negative.  As the court described, the revenue agent “did not disclose … that this audit was not a routine audit to which any taxpayer may be subjected from time to time,” but rather was being conducted at the specific request of the Department of Justice.  The defendant’s records were subsequently made available to the revenue agent for copying.[xviii]

The Fifth Circuit stated: “It is a well established rule that a consent search is unreasonable under the Fourth Amendment if the consent was induced by the deceit, trickery or misrepresentation of the Internal Revenue agent.”[xix] The court concluded that the revenue agent’s response to the accountant’s inquiry, while the literal truth, “was a sneaky deliberate deception by the agent … and a flagrant disregard” of the defendant’s rights.[xx]  The court suppressed the documents and reversed the conviction. The Tweel decision at one time had sufficient force to make the IRS wary of proceeding with parallel civil and criminal enforcement.  The IRS today goes forward with much less temerity.  The IRS does not suggest, however, that Tweel is not still good law, offering some safeguards to taxpayers.

CI ACCEPTANCE OF A CRIMINAL REFERRAL. What factors are most likely to influence a decision by CI to proceed with a criminal investigation?  A necessary element of every criminal tax felony, including tax evasion, is willfulness. This element is usually proven through evidence of the taxpayer’s conduct. The more egregious the conduct, the more likely it is that the resulting prosecution will be successful. Thus, CI looks for a pattern of understatements of income or non-filing over a period of years (usually three or more) as evidence of willfulness.[xxi]  In contrast,  where a taxpayer understated income for a single year and claims there was a mis-communication with a bookkeeper or gives some other plausible explanation for the income understatement, the government is presented with a more difficult case to prove willfulness.  A mere understatement of income by itself, even if it occurs over several years, is generally not enough to justify a CI investigation.  To buttress its argument for willfulness, the government often looks for other badges of fraud such as acts of concealment, destruction of records, altered documents and other conduct from which willfulness may be inferred.

Another factor CI considers in determining whether to accept a criminal referral is the amount of the tax loss involved.  The IRM section on fraud referrals states that the primary objective of CI is an investigation leading to the prosecution, conviction and incarceration of individuals who violate criminal tax laws and related offenses.[xxii] The IRM further states that since the Federal Sentencing Guidelines tie the period of incarceration to the monetary value of a tax violation, the amount of “tax loss” should be higher than minimum criteria set forth in the government’s internal Legal Enforcement Manual.  Moreover, CI recognizes that United States Attorneys are reluctant to use their offices’ resources to prosecute individuals who could not be sent to prison.[xxiii] The IRM, therefore, instructs persons reviewing a criminal referral to determine whether, based on the tax loss the taxpayer is likely to be incarcerated if convicted.

How much “tax loss” is enough to make incarceration likely? Under the advisory Federal Sentencing Guidelines, the threshold amount for incarceration is actually quite low considering criminal investigations typically cover multiple tax years and all related entities. For those convicted of tax crimes, a tax loss (generally defined as 28% of the amount of unreported income or false deduction) from $30,000 to $80,000 would likely result in a sentencing offense level requiring the defendant to serve a sentence of incarceration. As such, practically all cases investigated for criminal tax violations have the probability of landing the targeted individual in prison.  Since the amount of tax loss is the primary factor in determining the period of incarceration, the tax loss amount often leads a determination to accept a criminal referral.

IMPACT OF IRS ENFORCEMENT INITIATIVES. CI enforcement initiatives also play a significant role in determining whether a civil fraud referral is accepted for criminal investigation. “Legal source tax crimes” involve the traditional “garden variety tax criminal” who is involved in a legitimate business, but engages in illegal conduct to divert income, evade filing and payment obligations or assist others in similar conduct.  This tax compliance program is actively focused on abusive trust schemes which are elaborate tax evasion schemes set up to give the appearance of legitimacy through the use of a series of trusts, diversion of unreported income to offshore banks and other foreign financial institutions, health care fraud, employment tax fraud,  non-filer cases, and tax return preparer cases.

PUBLIC AWARENESS & THE SLAM DUNK. It is the government’s objective in criminal tax prosecutions to get the maximum deterrent value from every case that is prosecuted  which may be accomplished, in part, by targeting individuals who are perceived as being “highly visible.” The decision to accept a case for criminal investigation may be influenced by the taxpayer’s occupation, level of education, visibility within a particular community, high standing in a particular industry, either perceived or actual financial success, notoriety in a non-tax field, previous criminal background and other factors that could cause the government to “make an example” of a particular defendant.

During the late 1990’s, CI investigated a number of National Basketball Association referees for criminal tax violations relating to their exchanging of first class airline tickets for lesser priced coach tickets. The government achieved significant deterrence from these cases when an article concerning the investigations and how they affected the lives of the targeted referees was featured in Sports Illustrated magazine.[xxiv]  The government’s goal of maximizing the “deterrent effect” has often been served by pursuing persons in highly visible positions and obtaining publicity of these cases to achieve the broadest possible impact on compliance.[xxv]

FEEL LUCKY? There are many potential outcomes to a sensitive issue IRS civil tax examination. Certainly, very few examinations lead to a criminal tax prosecution and prison. However, some taxpayers go to prison for activities they believed would, at most, result in civil penalties. Those with potential civil or criminal tax fraud issues should immediately consult competent counsel.

[i].Internal revenue Manual (IRM) 25.1.2.1(2)

[ii] IRM 25.1.3.2 Preparation of Form 2797 (01-01-2003).

[iii] IRM 25.1.3.3 Referral Evaluation (01-01-2003).

[iv] Internal Revenue Manual § 38.3.1.8.

[v] E.g., Id.

[vi] Id. § 25.1.2.1(1).

[vii] Id. § 25.1.1.1

[viii] Id. § 25.1.3.2.

[ix] The more aggressive practices by the IRS, the damage to the tax system, and practical guidance for defense attorneys, is set out in a very thoughtful article by Martin A. Schainbaum entitled “The Reverse Eggshell Audit:  the Dangers of Parallel Proceedings,” The Journal of Tax Practice & Procedure (CCH), Dec. 2005 – Jan. 2006.

[x] Holland v. U.S., 348 U.S. 121, 126 (1954).

[xi] Code Section 7454(a); Rule 142(b) of the United States Tax Court Rules of Practice & Procedures; Edelson v. Commissioner, 829 F.2d 828, 832 (9th Cir. 1987) aff’g. T.C. Memo 1986-223; Castillo v. Commissioner, 84 T.C. 405, 408 (1985).

[xii] Code Section 6663(b).

[xiii] Tomlinson v. Lefkowitz, 334 F.2d 262 (5th Cir. 1964), cert. denied, 379 U.S. 962 (1965); McKinon v. Commissioner, T.C. Memo 1988-323 (granting summary judgment against taxpayer for fraud penalties on account of conviction for all years).

[xiv] Delgado v. Commisioner, T.C. Memo 1988-66.

[xv] Code Section 6663.

[xvi] Wright v. Commissioner, 84 T.C. 636 (1985) (“Thus, the crime is complete with the knowing, material falsification, and conviction under Section 7206(1) does not establish as a matter of law that the taxpayer violated the legal duty with an intent, or in an attempt, to evade taxes.”).

[xvii] Wright v. Commissioner, 84 T.C. 636 (1985) (“Thus, the crime is complete with the knowing, material falsification, and conviction under Section 7206(1) does not establish as a matter of law that the taxpayer violated the legal duty with an intent, or in an attempt, to evade taxes.”).

[xviii] Id. at 298.

[xix] Id. at 299

[xx] Id. at 300.

[xxi] Holland v. U.S., 348 U.S. 121 (1954); U.S. v. Magnus, 365 F.2d 1007 (2nd Cir. 1966)

[xxii] IRM 25.1.3.1.1 Background Criminal Referrals

[xxiii] Id.

[xxiv] “Called for Traveling” by Leigh Montville, Sports Illustrated, April 1998.

[xxv] U.S. Department of Justice Criminal Tax Manual, The Federal Tax Enforcement Program, Section 6-4.010, p.2-5.

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