Posted by: Taxlitigator | March 6, 2014

IRS-Criminal Investigation 2014 Investigative Priorities

Posted by: Taxlitigator | March 5, 2014

IRS Identifies the “Dirty Dozen” Tax Scams for 2014

Posted by: Taxlitigator | February 25, 2014

Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

Posted by: Taxlitigator | February 5, 2014

Criminal Tax Prosecutions Surge Under President Obama

Posted by: Taxlitigator | February 4, 2014

Civil Detention for Failure to Pay Taxes

Posted by: Taxlitigator | February 3, 2014

Badges of Tax Fraud – IRS Goes Undercover in a “Gentleman’s Club”

“If any part of any underpayment of tax required to be shown on a return is due to fraud,” Code section 6663(a) imposes a penalty of 75% of the portion of the underpayment due to fraud. A civil fraud penalty case may be developed based on facts and circumstances of a civil examination or result from a criminal investigation (CI) initiated case. Fraud is intentional wrongdoing designed to evade tax believed to be due and owing.[1] The existence of fraud is a question of fact to be resolved upon consideration of the entire record.[2] Fraud is not to be presumed or based upon mere suspicion.[3] However, because direct proof of a taxpayer’s intent is rarely available, fraudulent intent may be established by circumstantial evidence and reasonable inferences.[4] Fraud will generally involve one or more of deception, misrepresentation of material facts, false or altered documents, or evasion (i.e., diversion or omission).[5]

Fraud includes deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit. Tax fraud is often defined as an intentional wrongdoing, on the part of a taxpayer, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both a tax due and owing as well as fraudulent intent.

Avoidance of tax is not a criminal offense. “Tax avoidance” generally refers to legally permissible conduct to reduce one’s tax liability while “tax evasion” refers to willfully and knowingly fraudulent actions designed to reduce one’s tax liability.  Taxpayers have the right to reduce, avoid, or minimize their taxes by legitimate means. One who avoids tax does not conceal or misrepresent, but shapes and preplans events to reduce or eliminate tax liability within the parameters of the law. Evasion involves some affirmative act to evade or defeat a tax, or payment of tax. Examples of affirmative acts of evasion might include deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are. A classic description of “tax avoidance” was penned by Judge Learned Hand:

                “Anyone may arrange his affairs that his taxes shall be as low as possible.  He is not bound to choose the pattern which best pays the Treasury, there is not even a patriotic duty to increase one’s taxes.  Over and over again courts have said that there is nothing sinister in so arranging affairs has to keep taxes as low as possible.  Everyone does it, rich and poor alike, and all do right, for nobody owes a public duty to pay more than the law demands.”[6]

The Government satisfies their burden of proof by showing that “the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes.”[7] The taxpayer’s entire course of conduct may be examined to establish the requisite intent, and an intent to mislead may be inferred from a pattern of conduct.[8]

During a civil examination, an IRS Fraud Technical Advisor (FTA) may be involved to assist in developing a potential fraud case. The FTA will be consulted in all cases involving potential criminal fraud, as well as those cases that have potential for a civil fraud penalty.[9] The FTA serves as a resource and liaison to compliance employees in all operating divisions. The FTA is available to assist in fraud investigations and offer advice on matters concerning tax fraud. Upon initial recognition of indicators of fraud, the IRS examiner will discuss the case at the earliest possible opportunity with his/her manager. If the compliance group manager concurs, the FTA will be contacted immediately; and both the compliance group manager and FTA will provide guidance to the compliance employee on how to proceed.

Civil fraud penalties will be asserted by the IRS when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. Such evidence must show the taxpayer’s intent to evade the assessment of tax which the taxpayer believed to be due. Intent is distinguished from inadvertence, reliance on incorrect technical advice, honest difference of opinion, negligence or carelessness. In the case of a joint return, intent must be established for each spouse separately as required by Code section 6663(c). The fraud of one spouse cannot be used to impute fraud by the other spouse. Thus, the civil fraud penalty may be asserted on one spouse only.[10]

Circumstances that may indicate fraudulent intent, commonly referred to as “badges of fraud,” include but are not limited to: (1) understatement of income (e.g., omissions of specific items or entire sources of income, failure to report relatively substantial amounts of income received) particularly if part of a consistent pattern of underreporting over several years; (2) maintaining inadequate records or accounting irregularities (e.g., two sets of books, false entries on documents); (3) giving implausible or inconsistent explanations of behavior or other acts cts of the taxpayer evidencing an intent to evade tax (e.g., false statements, destruction of records, transfer of assets); (4) concealing income or assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal activities; (7) providing incomplete or misleading information to one’s tax preparer; (8) lack of credibility of the taxpayer’s testimony; (9) filing false documents, including false income tax returns; (10) failing to file tax returns; and (11) dealing in cash.[11] No single factor is dispositive; however, the existence of several factors “is persuasive circumstantial evidence of fraud.”[12]

Some factors have no application in a particular matter while other factors may be regarded as neutral. Typically, in litigation, the court will determine whether, on balance, the “badges of fraud” demonstrate that the taxpayer acted with fraudulent intent for each tax year at issue.

In a recent case involving a “gentlemen’s club,” IRS special agents (from IRS CI) engaged in an undercover investigation by posing as buyers interested in acquiring the business.[13] According to the opinion of the U.S. Tax Court, the owner assured the IRS agents that the club was much more profitable than it appeared. He explained that he deposited in the corporate account only enough of the business revenues to cover its expenses and that he wired the balance of its revenues to his personal bank account in Florida. Subsequently the club owner was criminally charged with eight counts under Code section 7206(1) and (2) for making and subscribing false tax returns, and for assisting in the preparation of false tax returns, for himself and the corporate owner of the club.

Ultimately, the taxpayer pleaded guilty to one count of making and subscribing a false Form 1120 on behalf of the corporate owner for a single tax year. Pursuant to his plea, the taxpayer was sentenced to 18 months’ prison time and supervised release for one year.

He was also ordered to pay restitution of $ 400,000. In the factual basis for his guilty plea, the taxpayer admitted under penalties of perjury that he willfully submitted false tax

returns for the corporation for the 2002-05 tax years; that he did not believe those returns to be true and correct as to every material matter; and that he had falsely subscribed those returns with the specific intent to violate the law. During his criminal sentencing the taxpayer stated: “I admitted I falsified my returns and so forth, and it [has] caused me a lot of problems.”

During the criminal investigation, IRS agents seized upwards of $ 200,000 in cash and obtained a second set of sales ledgers that apparently accurately tracked its daily receipts. These ledgers confirmed that annual receipts for 2002-05 were vastly in excess of the amounts that had been reported to the IRS. The difference between its actual gross receipts and the gross receipts reported on the company’s Forms 1120 for those years exceeded $ 2 million.

After the search by the IRS, when he knew he was under criminal investigation, the taxpayer provided his accountant additional bank account information for the 2003-05 tax years. His accountant used this information to file amended Federal income tax returns for those years, both for the corporation and for the taxpayer individually. The IRS assessed additional income tax and penalties (for late filing as well as civil fraud) on the basis of the amounts shown on the amended returns for 2003-05.

Extensive dealings in cash are a badge of fraud because they are indicative of a taxpayer’s attempt to conceal income and avoid scrutiny of his finances.[14] Fraudulent intent may be inferred when a taxpayer handles his affairs in a manner designed “to avoid making the records usual in transactions of the kind.”[15]

As a “gentlemen’s club,” petitioner’s business was a cash-based operation. Its sales receipts were derived principally from food and drink charges run through the cash register, door cover charges, juke box moneys, pool table receipts, and moneys paid to him by the dancers for the privilege of “dancing.” The taxpayer admitted that he weekly wired large amounts of this cash to his personal bank account in Florida. These wire transfers were invariably made in amounts less than $ 10,000 in order to avoid detection. During the search, IRS agents seized more than $ 200,000 in cash from the premises. Although conducting a cash business does not necessarily prove fraud, “[w]hen coupled with attempts to conceal transactions or avoid the requirement of reporting cash transactions, it becomes more probative.”[16]

The taxpayer contended that he lacked fraudulent intent because he is uneducated and unsophisticated and had to hire tax professionals to file his personal and corporate tax returns. However, the Tax Court determined that his lack of education and sophistication is irrelevant. In this context, the Tax Court stated that the tax laws he violated are not esoteric or complex.[17] Civil examinations involving sensitive issues must be handled cautiously. Amending returns during an examination might be the last link necessary for a civil examination to be referred to CI for a criminal investigation.

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. Filing current year returns during the examination requires extreme judgment since they will have an impact, although not always a taxpayer-favorable impact, on the process. 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.

[1] John M. Potter v. Commissioner,  T.C. Memo. 2014-18 (January 27, 2014);Neely v. Commissioner, 116 T.C. 79, 86 (2001)

[2] Estate of Pittard v. Commissioner, 69 T.C. 391, 400 (1977).

[3] Petzoldt v. Commissioner, 92 T.C. 661, 699-700 (1989).

[4] Grossman v. Commissioner, 182 F.3d 275, 277-78 (4th Cir. 1999), aff’g T.C. Memo. 1996-452.

[5] Internal Revenue Manual 25.1.6.3 (10-30-2009)

[6] Helvering v. Gregory, 69 F.2d 809, 810 (2nd Cir. 1934), aff’d 290 U.S. 465 (1935).

[7] Parks v. Commissioner, 94 T.C. 654, 661 (1990).

[8] Webb v. Commissioner, 394 F.2d 366, 379 (5th Cir. 1968), aff’g T.C. Memo. 1966-81; Stone v. Commissioner, 56 T.C. 213, 224 (1971).

[9] Internal Revenue Manual 25.1.6.1 (10-30-2009)

[10] Internal Revenue Manual 25.1.1.1 (01-23-2014)

[11] Spies v. United States, 317 U.S. 492, 499 (1943); Morse v. Commissioner, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d, 419 F.3d 829 (8th Cir. 2005); John M. Potter v. Commissioner,  T.C. Memo. 2014-18 (January 27, 2014).

[12] Vanover v. Commissioner, 103 T.C.M. (CCH) at 1420-1421.

[13] John M. Potter v. Commissioner,  T.C. Memo. 2014-18 (January 27, 2014).

[14] See Evans v. Commissioner, T.C. Memo. 2010-199, 100 T.C.M. (CCH) 215, 218, aff’d, 507 Fed. Appx. 645 (9th Cir. 2013).

[15] Spies, 317 U.S. at 499.

[16] Valbrun v. Commissioner, T.C. Memo. 2004-242, 88 T.C.M. (CCH) 385, 387.

[17] John M. Potter v. Commissioner,  T.C. Memo. 2014-18 (January 27, 2014)

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Posted by: Taxlitigator | January 17, 2014

Tax Enforcement Priorities for 2014 and Beyond !!

Contrary to popular belief, the IRS remains active in their core business operations of conducting taxpayer examinations. Returns are identified for examination through an internal IRS process designed to identify issues and returns having significant audit potential. The IRS has been attempting to identify and reduce non-compliance through efficiency, tax form simplification, education, and enforcement. In addition, the IRS has significantly modified its examination process in a manner designed to increase the available resources and experience of its examiners.

The international arena will continue to test the enforcement resources of the IRS for years to come. Issues regarding undeclared foreign source earnings and financial accounts (FBAR filings are due June 30 for the prior calendar year) will continue to generate considerable interest from the IRS and the Department of Justice. The IRS has long encouraged participation in the voluntary disclosure process for all taxpayers, those with interests in offshore accounts and otherwise. The Department has a somewhat similar policy regarding the non-prosecution of taxpayers who have made a timely voluntary disclosure. The IRS policy concerning voluntary disclosure provides that a taxpayer’s voluntary disclosure is a factor that “may result in prosecution not being recommended.” To obtain this qualified benefit, the disclosure must be “truthful, timely, complete,” and must demonstrate a willingness by the taxpayer to cooperate, and actual cooperation, in determining the tax liability, and must include “good faith arrangements” by the taxpayer to pay the tax, interest, and any penalties in full.

Those with interests in foreign financial accounts that have not previously been disclosed should immediately consult competent counsel. They likely remain eligible for the benefits of the current IRS Offshore Voluntary Disclosure Program (OVDP) or pehaps the longstanding IRS voluntary disclosure program mitigating the possibility of a future criminal prosecution. The IRS is expected to at least continue its current procedures for a criminal pre-clearance and for disclosures made according to the “three-page letter”. Undeclared foreign financial accounts present a target rich environment for the government. The IRS is committed to enforcement concerning offshore accounts and the changing environment concerning bank secrecy may lead the government to many taxpayers with undisclosed interests in foreign financial accounts. For those with undeclared foreign accounts, now is the time to come into compliance – waiting is not a viable option.

Other examination priorities based on a perceived degree of noncompliance include:

A. Mortgage Interest Deduction Limitations
Code Section 163(h)(3) limitations – $1 million acquisition indebtedness incurred in acquiring, constructing or substantially improving a qualified residence of the taxpayer secured by the residence; refinanced indebtedness but only to the extent the amount of such refinancing does not exceed the amount of the refinanced indebtedness; and home equity indebtedness to the extent it does not exceed the lesser of: (i) $100,000, or, (ii) the FMV of the residence reduced by the acquisition indebtedness of the residence. Acquisition and refinancing indebtedness.

B. Section 1031 Like-kind Exchanges Key examination issues include:
1. 45-Day Rule Violations – Like-kind property must be identified within 45 days following relinquishment of the taxpayers property. The identification period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the 45th day thereafter. This deadline is exactly 45 calendar days, so if the 45th calendar day lands on a Saturday, Sunday or legal holiday, the 1031 exchange due date is NOT extended to the next business day. The identification must be in writing, signed by the taxpayer and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified. Failure to identify like-kind replacement properties within the 45 calendar day window will result in a failed 1031 exchange transaction and the transaction must be recharacterized as a taxable sale transaction rather than a tax-deferred exchange. Treas. Reg §1.1031(K)-1 (Treatment of Deferred Exchanges).
2. 180-Day Rule – The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of the tax imposed for the taxable year in which the transfer of the relinquished property occurs.
3. If, as part of the same deferred exchange, the taxpayer transfers more than one relinquished property and the relinquished properties are transferred on different dates, the identification period and the exchange period are determined by reference to the earliest date on which any of the properties are transferred.
4. Replacement property is identified only if it is designated as replacement property in a written document signed by the taxpayer and hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to either – (i) The person obligated to transfer the replacement property to the taxpayer (regardless of whether that person is a disqualified person); or (ii) Any other person involved in the exchange other than the taxpayer or a disqualified person. Examples of persons involved in the exchange include any of the parties to the exchange, an intermediary, an escrow agent, and a title company. An identification of replacement property made in a written agreement for the exchange of properties signed by all parties thereto before the end of the identification period will be treated as satisfying the foregoing requirements.
5. Replacement property is identified only if it is unambiguously described in the written document or agreement. Real property generally is unambiguously described if it is described by a legal description, street address, or distinguishable name (e.g., the Mayfair Apartment Building). Personal property generally is unambiguously described if it is described by a specific description of the particular type of property. For example, a truck generally is unambigously described if it is described by a specific make, model, and year.
6. The taxpayer may identify more than one replacement property. Regardless of the number of relinquished properties transferred by the taxpayer as part of the same deferred exchange, the maximum number of replacement properties that the taxpayer may identify is – (A) Three properties without regard to the fair market values of the properties (the “3-property rule”), or (B) Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer (the “200-percent rule”). (ii) If, as of the end of the identification period, the taxpayer has identified more properties as replacement properties than permitted, the taxpayer is treated as if no replacement property had been identified. The preceding sentence will not apply, however, and an identification satisfying the foregoing requirements will be considered made, with respect to – (A) Any replacement property received by the taxpayer before the end of the identification period, and (B) Any replacement property identified before the end of the identification period and received before the end of the exchange period, but only if the taxpayer receives before the end of the exchange period identified replacement property the fair market vlaue of which is at least 95 percent of the aggregate fair market value of all identified replacement properties (the “95-percent rule”). For this purpose, the fair market value of each identified replacement property is determined as of the earlier of the date the property is received by the taxpayer or the last day of the exchange period. (iii) For purposes of applying the 3-property rule, the 200-percent rule, and the 95-percent rule, all identifications of replacement property, other than identifications of replacement property that have been revoked, are taken into account.

C. Real Estate Dispositions Key examination issues include:
1. Verifying the amount realized,
2. Verifying the adjusted basis of the property, and
3. Verifying the that the requirements for gain deferral are met timely.
4. Final Year Returns – Ensuring the proper recapture of items when a negative capital account exists.

D. Rental Income
Rental income includes any payment received for the use or occupation of property. Most landlords operate on a cash basis reporting payments as income in the period they are received and deducting expenses in the period they are paid. Other forms of rental income that may need to be declared may also include:
1. Advance rent payments
2. Early-termination fees on lease agreements
3. Expenses paid by tenant for the landlord (These may also be deductible as rental expenses.)
4. Property or services received in lieu of money.
5. Lease payments with option to buy (These payments are usually counted at rental income. If the tenant buys the property, payments received after the sale date are generally counted as part of the selling price.)
6. Payments for renting a portion of the taxpayers home may or may not be taxable income depending on certain thresholds. See IRS Publication 527, Residential Rental Property.

E. Final Year Tax Returns
Ensuring the proper recapture of items when a negative capital account exists.

F. Partnership Interests Key examination issues include:
1. Sales of Partnership Interests. Verifying that the interests are properly reflected, that income is properly recognized on distributions of installment notes, and that debt cancellation is correctly reported.
2. General income and expense items reported on partners’ tax returns, including checking that partners properly report items from their K-1s.

G. S-Corporations Key examination issues include:
1. Built-in-gains tax with emphasis on the valuations placed on the C Corporation assets on the date the entity converted to an S-Corporation.
2. Tax-exempt employee stock ownership plans (ESOP) acquiring an ownership of an S-Corporation in an attempt to shield from taxation the income the ESOP receives as flow-through income.
3. Verifying that installment income is correctly reported.
4. Verifying that tax credits are claimed correctly.
5. Wage Compensation for S Corporation Officers. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” See IRS Fact Sheet FS-2008-25 (August 2008).
6. Reasonable Compensation – S corporation and C Corporations. Relevant factors re the reasonableness of compensation include: Training and experience; Duties and responsibilities Time and effort devoted to the business; Dividend history; Payments to non-shareholder employees; Timing and manner of paying bonuses to key people; What comparable businesses pay for similar services; Compensation agreements; The use of a formula to determine compensation.

H. Estates and Trusts Key examination issues include:
1. Grantor trusts, and charitable remainder trusts.
2. Investment management fees deducted erroneously under IRC Section 67(e).
3. Valuations and discounts associated with closely-held entities and properties.
4. GRATS.
5. Sales that occur close to death.
6. Fractional interests.
7. Under-funded marital trusts and over-funded bypass trusts upon the death of the surviving spouse.

I. Employment Taxes and Worker Classifications
There have been approximately 6,000 National Research Program (NRP) examinations since February 2010 significantly focused on Worker classifications, executive compensation and fringe benefits.

J. Unreported Foreign Source Earnings and Undeclared Foreign Accounts. See above.

K. Non-Filers – a forever class of taxpayers challenging the desires and resources of the government. If discovered before coming into compliance, a non-filer can anticipate a long, sometimes unfriendly examination process, at best.

L. Return Preparers – those who prepare returns on behalf of others should exercise a significant degree of due diligence with respect to the preparation of their own returns. when discovered,the non-compliant preparer will likely be penalized.

M. NOL Carryforwards
Verification of losses incurred in the down economy of 2008-2013.

N. Schedule C Taxpayers and “Cash Intensive” Businesses. Audit or investigative techniques for a cash intensive business might include an examiner determining that a large understatement of income could exist based on return information and other sources of information. A cash intensive business is one that receives a significant amount of receipts in cash. This can be a business such as a restaurant, grocery or convenience store that handles a high volume of small dollar transactions. It can also be an industry that practices cash payments for services, such as construction or trucking, where independent contract workers are generally paid in cash.

O. Tax Exempt Entities
A few years ago, Form 990 was revised. Those operating within the tax exempt arena would be well served to identify the changes to the Form 990 as providing a roadmap of concerns the government may have regarding governance of non-profit organizations. Key examination issues include:
1. Executive compensation (upper management and key employees). Reasonable?
2. Conflicts of interest. Independence, family or business relationships; written policy?
3. Investments. Written procedures and policies? Outside investment advisors?
4. Fundraising costs reasonable?
5. Donor-Advised Funds. Can donor exercise control for private benefit? Relationship of fund to for-profit investment firms; donor control over investment decisions; and payouts.
6. Section 509(a)(3) Supporting Organizations. Do they actually support another public charity? Set up to avoid private foundation status?
7. Facilitating Abusive Transactions – Accommodation Parties.

If a notice of IRS examination is received, become familiar with IRS Audit Technique Guides (ATG). There are many publicly available ATGs that have been prepared by the IRS. The ATGs coupled with the government’s specialization of examiners is designed to improve compliance by focusing on taxpayers as members of particular groups. Each ATG instructs the agent on typical methods of auditing a particular group of taxpayer, including typical sources of income, questions to be asked of the taxpayer and their 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).

Before engaging an IRS examiner in an audit, review all potentially relevant ATGs. Preparation and diligence can will help streamline the examination process.

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Posted by: Taxlitigator | November 26, 2013

“FedEx Express Saver” is NOT Valid for Filing of a Timely Tax Court Petition (or Tax Return)

Following the examination of a taxpayer’s tax return, the Internal Revenue Service (IRS) might issue a Notice of Deficiency setting forth the proposed adjustments to a taxpayers tax return and the resulting liabilities for tax, interest and penalties arising from the underlying examination.

Section 6213(a) of the Internal Revenue Code (Code) provides that, without having to first pay the amounts in dispute, a taxpayer may file a Petition with the United States Tax Court for a redetermination of the amounts set forth in the Notice of Deficiency if the Petition is filed with the Tax Court within 90 days (or 150 days if the Notice is addressed to a person outside the United States) after the date on which the Notice of Deficiency is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day). Importantly, the Petition must be sent to the Tax Court in Washington, D.C., not to the IRS.

Timely Mailing, Timely Filing. Code Section 7502(a)(1) contains a “timely mailed, timely filed” rule providing that if a taxpayer actually sends their Petition for delivery to the Tax Court “by United States mail” before expiration of the foregoing 90 day (or 150 day) period prescribed for filing the Petition, and the Tax Court actually receives the Petition after the foregoing time period has expired, the date of the U.S. Postal Service (USPS) postmark on the envelope containing the Petition will be considered the date of filing the Petition.

Code Section 7502(a) also applies with respect to determining the timeliness of filing “any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws.” As such, the discussion below similarly applies to the timeliness of filing a tax return, claim for refund, etc.

If a Petition is sent to the Tax Court by USPS on or before expiration of the foregoing 90 day (or 150 day) period but is received thereafter, the filing of the Petition is deemed timely and the Tax Court has jurisdiction to hear arguments regarding the validity of the adjustments to the taxpayers return as proposed by the IRS Notice of Deficiency.

Unfortunately, however, if a Tax Court Petition is filed after expiration of the foregoing 90 day (or 150 day) period, the underlying liabilities must generally be paid and subjected to an administrative claim for refund. If the IRS denies the refund claim, litigation would only be available in either the U.S. District Court or the U.S. Court of Federal Claims (or, if appropriate, pre-payment in the U.S. Bankruptcy Court).

Limited Jurisdiction of the Tax Court. The Tax Court is a court of limited jurisdiction and may exercise jurisdiction only to the extent authorized by Congress.[1] Jurisdiction must be shown affirmatively, and the taxpayer, as the party invoking the Tax Court’s jurisdiction, bears the burden of proving that jurisdiction exists.[2] The Tax Court has no authority to extend the 90-day (or 150-day) period.[3]

Designated Private Delivery Services. Code Section 7502(f) extends the “timely mailed, timely filed” rule to certain private delivery services only “if such service is designated by the [Treasury] Secretary for purposes of” Code Section 7502(f).[4] The Treasury Secretary may designate a private delivery service only if he determines that it is at least as timely and reliable as the United States mail and that it meets other criteria specified in the statute.[5]

Almost ten years ago in Notice 2004-83, 2004-2 C.B. 1030,the IRS identified all of the approved private delivery services that have been designated by the Treasury Secretary under Code Section 7502(f).[6] Since January 1, 2005, the list of designated private delivery services is and has been as follows:

1. DHL Express (DHL): DHL Same Day Service; DHL Next Day 10:30 am; DHL Next Day 12:00 pm: DHL Next Day 3:00 pm; and DHL 2nd Day Service;

2. Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Priority, and FedEx International First; and

3. United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

Any other type of non-USPS, private delivery service (whether by DHL, FedEx, and UPS or otherwise) not specifically identified above is invalid for purposes of the “timely mailed, timely filed” rule set forth in Code Section 7502(f).

OOPS . . . Robert J. Eichelburg v. Commissioner. On November 25, 2013, in Robert J. Eichelburg v. Commissioner, T.C. Memo. 2013-269 (Docket No. 22837-12), Tax Court Judge Albert G. Lauber determined that the underlying Petition was filed late although it was sent before expiration of the foregoing 90 day (or 150 day) period prescribed in the Notice of Deficiency. Unfortunately, the taxpayer submitted the Petition by “FedEx Express Saver,” a private delivery service not specifically identified in Notice 2004-83. Since the Petition was not sent to the Tax Court by a specifically identified private delivery service, the mailing date of the Petition is not the date sent by the taxpayer but, instead, is the later date it is actually received by the Tax Court.

The Petition in Eichelburg was received after expiration of the foregoing 90 day (or 150 day) period prescribed in the Notice of Deficiency and the Tax Court therefore had no jurisdiction redetermine the disputed amounts set forth in the Notice of Deficiency. This very unfortunate result for Mr. Eichelberg could have been avoided had he merely sent the Petition on the same date by the USPS (hopefully by certified mail, return receipt requested) or by a private delivery service specifically identified in Notice 2004-83. 

The time for petitioning the Tax Court runs from the mailing of the Notice of Deficiency by the IRS. To be timely, the taxpayer’s Petition must be filed within the foregoing 90 day (or 150 day) period from the mailing of the Notice of Deficiency by IRS. Note that in Eichelberg, the IRS proved the timely mailing of the Notice of Deficiency by submitting a copy of USPS Form 3877, Firm Mailing Book for Accountable Mail, dated on the date of the Notice of Deficiency.

In Eichelberg, the Form 3877 listed, among the pieces received for mailing on that day, a letter with certified mail tracking number addressed to Mr. Eichelberg at his proper address. The sender is listed as IRS Detroit Computing Center, and “certified” is checked as the “type of mail or service.” In the upper right-hand corner of the Form 3877, the USPS stamped the postmark date for the Notice of Deficiency. Where the existence of a Notice of Deficiency is not disputed, a properly completed Form 3877 by itself is sufficient, absent evidence to the contrary, to establish that the Notice of Deficiency was properly mailed to the taxpayer on that date.[7]

Harsh Result. Judge Lauber acknowledged that the result in Eichelberg seemed “harsh”; that Notice 2004-83 was issued almost ten years ago; that private delivery companies have likely initiated delivery services resembling those listed in Notice 2004-83; and that many taxpayers may be unaware of the nuanced differences among such services.  However, the Tax Court may not rely on general equitable principles to expand the statutorily prescribed time for filing a Petition.[8] The Tax Court has limited jurisdiction under the “timely mailed, timely filed” rule only if a private delivery service has been “designated by the [Treasury] Secretary.”[9] Since “FedEx Express Saver” has not been designated in Notice 2004-83, the Tax Court determined that the Petition filed by Mr. Eichelberg was not timely.

[1] See sec. 7442; Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

[2] See David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 270 (2000), aff’d, 22 Fed. Appx. 837 (9th Cir. 2001).

[3] Joannou v. Commissioner, 33 T.C. 868, 869 (1960).

[4] Code Section 7502(f)(2).

[5] Code Section 7502(f)(2)(A)-(D); see Rev. Proc. 97-19, 1997-1 C.B. 644 (specifying criteria employed by the Secretary).

[6] The IRS Priority Guidance plan released November 20, 2013 indicates that Notice 2004-83 will be updated to add approved applicants for designated private delivery service status under Code Section 7502(f) “only if any new applicants are approved.”

[7] See, e.g., Coleman v. Commissioner, 94 T.C. 82, 90-91 (1990)

[8] See Austin v. Commissioner, T.C. Memo. 2007-11 (citing Woods v. Commissioner, 92 T.C. 776, 784-785 (1989)).

[9] Code Section 7502(f)(2).

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Posted by: Taxlitigator | November 10, 2013

New FBAR Form 114 and Revised IRS Appeals Procedures re FBAR Penalties

Posted by: Taxlitigator | November 1, 2013

IRS Warns of Telephone Scam Targeting Taxpayers, Including Recent Immigrants

The Internal Revenue Service warned consumers about a sophisticated phone scam targeting taxpayers, including recent immigrants, throughout the country. SeeIR-2013-84 (Oct. 31, 2013) at irs.gov NOTE: THE IRS WOULD RARELY, IF EVER, FIRST CONTACT A TAXPAYER BY TELEPHONE. THE FIRST CONTACT IS TYPICALLY IN WRITING AND WOULD BE RECEIVED BY U.S. MAIL. THE IRS WILL NEVER REQUEST CREDIT CARD INFORMATION OVER THE TELEPHONE.

Victims are wrongly told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

“This scam has hit taxpayers in nearly every state in the country.  We want to educate taxpayers so they can help protect themselves.  Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. “If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.” Werfel noted that the first IRS contact with taxpayers on a tax issue is likely to occur via mail.

Other characteristics of this scam include:

• Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.

• Scammers may be able to recite the last four digits of a victim’s Social Security Number.

• Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.

• Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.

• Victims hear background noise of other calls being conducted to mimic a call site.

• After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

• If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

• If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

• If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to phishing@irs.gov.

More information on how to report phishing scams involving the IRS is available on the genuine IRS website, IRS.gov.

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