Court Of Appeals Widens Circuit Divide on Basis Overstatement as to the Six Year Statute Of Limitations

/0 Comments/in , /by

On January 26, 2011, Judge Evans in writing for the 7th Circuit held that an overstatement of basis is an omission of income under Internal Revenue Code section 6501(e) thereby triggering a six year (as compared to three year) statute of limitations under section 6501(a). The trial court ? the U.S. Tax Court ? held that under U.S. Supreme Court precedent the overstatement of basis is not an omission of income for purposes of the extended statute of limitations.

The 7th Circuit distinguished the Supreme Court case of Colony, Inc. v. Comm’r, 357 U.S. 28 (1958) and noted that that Colony is factually distinguishable and did not control. The 7th Circuit pointed to changes in section 6501(e)(1)(A). In particular, the court noted the addition of two subsections (i) and (ii) that address the situation faced by the Supreme Court in Colony . Subsection (i) addresses when ?there is an omission of an actual receipt or accrual in a trade or business situation.? Subsection (ii) ?provides a safe harbor for improperly completed returns where the return on its face still provides a ?clue? to the omitted amount.?

The Court noted that some courts have found Colony not to apply to basis overstatements. See, e.g., Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968); Home Concrete & Supply, LLC v. United States, 599 F. Supp. 2d 678 (E.D. N.C. 2008), appeal docketed, No. 09-2353 (4th Cir. Dec. 9, 2009); Burks v. United States, 2009 WL 2600358 (N.D. Tex. June 13, 2008), appeal docketed, No. 09-11061 (5th Cir. Oct. 26, 2009); Brandon Ridge Partners v. United States, 100 A.F.T.R. 2d 2007-5347, 2007 WL 2209129 (M.D. Fla. Jul. 30, 2007).

While other courts have found Colony to apply. See, e.g., Salman Ranch Ltd. v. United States, 573 F.3d 1362 (Fed. Cir. 2009); Bakersfield Energy Partners LP v. Commissioner of Internal Revenue, 568 F.3d 767 (9th Cir. 2009); Grapevine Imports, Ltd. v. United States, 77 Fed. Cl. 505 (2007), appeal docketed, No. 2008-5090 (Fed. Cir. June 27, 2008).

The full decision can be found here:

https://www.ca7.uscourts.gov/tmp/551FETWN.pdf

The significance for taxpayers is that depending on where the taxpayer lives at the time his Petition for Redetermination is filed with the U.S. Tax Court, or which U.S. District Court he/she files a lawsuit against the U.S. Government, will govern the outcome of the case. Accordingly, two taxpayers with identical facts may have two different outcome based merely upon where they reside.

Lawyers at Fuerst Ittleman PL are experienced in handling tax litigation against both the IRS and the U.S. Department of Justice.

South Florida Residents Sentenced To 10 Years

/0 Comments/in , /by

On February 4, 2011, United States District Court Judge William J. Zloch sentenced Mauricio Cohen Assor, 77, and his son Leon Cohen-Levy, 46 each to 120 months, with additional orders of restitution in the amounts of $9.3M and $7..7M , respectively. Both men were convicted after a month long trial that took place in Ft. Lauderdale. Both men were accused of concealing assets from the U.S. Government and failing to report and pay income taxes on $49M to the IRS.

See the U.S. Dept. of Justice press release here

The Cohens used shell companies formed in countries that are often considered “tax havens” such as the British Virgin Islands, Panama, Switzerland, and Liechtenstein. United States persons are required under the Bank Secrecy Act to report their foreign bank accounts in which they have signatory authority and/or a financial interest in if the aggregate amount is greater than $10,000. The IRS has the authority to investigate violations of the Bank Secrecy Act and U.S. persons are required to file Form TDF 90-22.1 with the U.S. Treasury Department.

The Cohen prosecution was headed by an attorney from the Dept. of Justice, Tax Division and the U.S. Attorney’s Office for the Southern District of Florida. Of particular note is that the Southern District of Florida (which extends from Ft. Pierce to Key West and includes Miami, Palm Beach, and Ft. Lauderdale) has been particularly active in tax prosecutions. The significance for South Florida residents who have failed to properly report and disclose foreign bank accounts and who have failed to report all their income and pay the appropriate tax to the IRS is that their risk of investigation and prosecution is much greater than in other parts of the country.

The tax litigation and white collar defense lawyers at Fuerst Ittleman PL are experienced in handling all phases of criminal tax investigations and defend tax prosecutions.

Virgin Islands Economic Development Commission taxation issues escalate to the Third Circuit Court of Appeals

/0 Comments/in , /by

On Monday January 17, 2011, three taxpayers filed motions to intervene in the Third Circuit Court of Appeals case of Appleton v. Comm’r, docket # 10-4522.

In Appleton, the Government of the U.S. Virgin Islands (“USVI”) moved to intervene at as a party at the trial level – before the U.S. Tax Court. The Tax Court denied the USVI’s motion to intervene in a full Tax Court opinion, Appleton v. Comm’r, 135 T.C. 23 (2010) available here. A full discussion of the significance of the Tax Court’s opinion will be the topic of a separate post.

The USVI appealed the Tax Court’s decision to the Third Circuit and also moved for an expedited briefing schedule. On December 30, 2010, the Third Circuit granted the USVI’s motion in part and entered an abbreviated briefing schedule which will require the parties to fully brief their positions on or before February 18, 2011.

On January 14, 2011, the USVI filed its opening brief. On January 17th, less than one business day after the USVI filed its opening brief, attorneys at Fuerst Ittleman moved under a judicially crafted exception to the Federal Rules of Appellate Procedure (International Union v. Scofield, 382 U.S. 205, 217 n.10 (1965)) that only allow intervention in certain limited circumstances.

The issue that the Third Circuit will have to decide is whether other taxpayers who could, potentially, have the USVI intervene in their case before the Tax Court, can have input at the appellate level as to whether the USVI can intervene. However the more fundamental issue that we will be seeking to address is who are the proper parties to the USVI residency cases. It remains to be seen how Mr. Appleton, the USVI, and the United States government will view the motion to intervene before the Third Circuit.

The attorneys at Fuerst Ittleman have intimate knowledge of the USVI. In particular one of the attorneys is a member of the USVI bar and lived and practiced on the island of St. Thomas for years.

United States Tax Court Opines on its own Jurisdiction to Resolve USVI Tax Issues

/0 Comments/in , /by

On August 17, 2010, the Tax Court issued a full Tax Court Opinion in the case of Huff v. Comm’r, 135 T.C. 10 (2010) available here.

The issue before the Tax Court in Huff was whether the Tax Court had jurisdiction over the case given that the District Court of the Virgin Islands has “exclusive jurisdiction over the income tax laws applicable in the Virgin Islands” pursuant to 48 U.S.C. section 1612.

The Tax Court held that although this case involves putative Virgin Islands transactions, the notice of deficiency determines deficiencies in Federal income tax. Whether Petitioner satisfies all the requirements set forth in I.R.C. sec. 932(c)(4), and thus need not file a Federal tax return or pay Federal income tax for 2002, 2003, and 2004, is a matter which the Tax Court has jurisdiction to decide.

What is interesting to note is what is missing from the Court’s opinion. The Petitioner in Huff moved to dismiss on the grounds that 48 U.S.C. section 1612 divested the Tax Court of jurisdiction. However the Petitioner also moved to dismiss on forum non conveniens grounds citing the Supreme Court case of Sinochem Int’l Co. v. Malay. Int’l Shipping Corp. , 549 U.S. 422 (2007) (Ginsberg, J.) which stated:

“The common-law doctrine of forum non conveniens Ëœhas continuing application [in federal courts] only in cases where the alternative forum is abroad, and perhaps in rare instances where a state or territorial court serves litigational convenience best.”

The Tax Court never addressed this legal issue and even omitted any reference to it as if this argument never existed. The issue of what court has jurisdiction will soon be addressed as the attorneys at Fuerst Ittleman have sought certification on this very issue to the Third Circuit Court of Appeals.

The attorneys at Fuerst Ittleman handle all types of tax controversy and litigation including litigation with the IRS and USVI over USVI residency and income tax refunds. In fact one of the attorneys at Fuerst Ittleman lived and worked in the USVI and is a member of the USVI bar.

Enforcement Emphasis on Employee Classification is Likely to Decrease Payroll Tax Evasion

/0 Comments/in , /by

The Labor and Employment Relations Association (LERA) held its annual meeting on January 7 through January 9, 2011. Among the topics discussed by LERA speakers was the recent “crackdown” on employers who evade payroll taxes by misclassifying or underreporting their workers.

Unless otherwise excluded, IRC §3402(a) requires employers to withhold income taxes on the wages paid to all employees. Issues often arise with regard to employers treating workers as independent contractors instead of employees.

Rev. Rul. 87-41, 1987-1 C.B. 296, provides:

[a]n individual is an employee for federal employment tax purposes if the individual has the status of an employee under the usual common law rules applicable in determining the employer-employee relationship. . . An employee is subject to the will and control of the employer not only as to what shall be done but as to how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so. . . Conversely, individuals (such as physicians, lawyers, dentists, contractors, and subcontractors) who follow an independent trade, business, or profession, in which they offer their services to the public, generally are not employees.

Significantly, Treas. Reg. §31.3401(c)-1(e) provides that if an employer-employee relationship exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus, for a worker who constitutes an “employee” as described above, the employers erroneous issuance of a Form 1099 carries no weight.

Despite these principles offered by the Internal Revenue Service (IRS), Deputy Director and Chief Economist for the Fiscal Policy Institute in New York James A. Parrott reported that 95 percent of restaurants in Brooklyn have “some kind of misclassification.” Parrott also reported that New York enforcement sweeps targeting the restaurant industry identified nearly 500 million dollars in unreported taxes.

Data compiled by the Commerce Departments Census Bureau revealed a 20 percent increase in the number of New York workers who were paid as independent contractors and received IRS Forms 1099 between 2000 and 2005. During the same time period, private payroll employment in New York, which consists of workers who received W-2 forms, only increased by 0.5 percent.

Although misclassification was commonly attributed to illegal immigration, Matthew Capece, an attorney with the Carpenters and Jointers of America, indicated that it now “encompassed many documented citizens of the U.S.” Capece further described the severity of the problem in the construction industry, stating, “There is much more outright fraud and problems with nonreporting than unintentional or negligent behavior And this is not about ma and pa businesses renovating kitchens. Its about a problem that is widespread within the residential construction industry.”

Panelists at the LERA annual meeting described how numerous employers minimize payroll tax liabilities by treating workers as independent contractors or paying them cash “under the table.” Notwithstanding the amount of revenue lost by both the federal government and states, Panelists also emphasized the problems created by misclassification on the workers.

In addition to not being covered by workers compensation, unemployment insurance, or state temporary disability insurance, misclassified and underreported workers lose overtime pay and access to healthcare coverage and other benefits, such as retirement benefits and paid time off.

State enforcement agencies, such as the New York Enforcement Tax Force on Employee Misclassification, continue to conduct “sweeps” for worker misclassifications. Between September 2007 and March 2010, the New York Enforcement Tax Force on Employee Misclassification has identified nearly 35,000 cases of employee misclassification, $457 million in unreported taxes, $13.2 million in unemployment insurance taxes due, and $14 million in unpaid wages.

New Yorks and other states enforcement efforts are likely to reduce payroll tax evasion, as well as assist unaware employees who incorrectly receive Forms 1099 and consequently lose benefits to which they are entitled.

If you have any questions regarding payroll taxes, worker classifications, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

The IRS Indicates a Second Voluntary Disclosure Program for Offshore Assets is “Very Likely” But Continues to Remain Silent on its Terms

/0 Comments/in , /by

As we previously reported here, tax practitioners at the annual ABA Criminal Tax Institute lobbied for the Internal Revenue Service (IRS) to extend its voluntary disclosure program, which ended on October 15, 2009. The voluntary disclosure program permitted taxpayers who failed to report their offshore assets to voluntarily come forward in exchange for relief from criminal prosecution and partial relief from civil penalties.   

IRS Commissioner Douglas H. Shulman’s speech before the Annual Institute on Current Issues in International Taxation seems to show that these practitioners’ efforts were successful.  During his speech on December 9, 2010, Commissioner Shulman briefly discussed the first program and stated, “Given its success, we are seriously considering another special offshore voluntary disclosure program.”  While acting “in the interest of being fair to the 15,000 taxpayers who came forward in the first offshore voluntary disclosure program”, Commissioner Shulman also indicated that taxpayers coming forward during the second program would be subject to higher penalties and different terms of participation. 

Tax practitioners understand the need for the higher penalty, but believe “there is no need to raise it much beyond the previous 20 percent.” In short, a much higher penalty could deter taxpayers from entering into the program, since in some cases penalties already far exceed the tax owed.  Wish List for the Possible Second U.S. Offshore Voluntary Disclosure Program. 2011 WTD 9-1, Tax Analysts, Worldwide Tax Daily. January 13, 2010. 

It is important to note, however, that even penalties significantly exceeding the previous 20 percent are likely to be less than the “failure to comply” penalties imposed by new legislation. Earlier this year, we reported the enactment of the Foreign Account Tax Compliance Act (FATCA), which according to Commissioner Shulman, “provides the IRS with better tools to cracks down on Americans hiding assets overseas.” FATCA, which becomes effective in 2013, imposes significantly increased information reporting on taxpayers and financial institutions, requiring the disclosure of any information pertaining to U.S. taxpayers holding financial assets outside of the U.S.  Among the IRS’s newest “tools” are the severe penalties for failure to comply. 

The IRS hopes that imminent implementation of FATCA will seriously deter U.S. taxpayers from hiding assets overseas. Commissioner Shulman believes that the passage of FATCA “makes the world a riskier place for U.S. taxpayers still trying to hide their money anywhere around the world.”  Of course, this provides taxpayers currently holding assets overseas with greater incentive to disclose under a second voluntary disclosure program.    

Practitioners have expressed concerns regarding the lack of flexibility in the first voluntary disclosure program.  Including some who were completely unaware of their Foreign Bank and Financial Accounts (FBAR) filing obligations, many taxpayers who participated in the first voluntary disclosure program expressed frustration with IRS officials refusing penalty relief in situations with mitigating circumstances.  Critics of the original program who are lobbying for more flexibility in the new program have stated that “building flexibility into the systems would help lawyers reduce the concerns of prospective voluntary disclosure program participants who want to know that the IRS will at least hear them out.”   Wish List for the Possible Second U.S. Offshore Voluntary Disclosure Program. 2011 WTD 9-1, Tax Analysts, Worldwide Tax Daily. January 13, 2010. 

Such critics also support the idea of the IRS implementing a second voluntary disclosure program without a set expiration date. “Setting a firm deadline requires any subsequent program to have higher penalties, and higher penalties reduce the incentive to come in.” Id. Other practitioners have offered an alternative solution to the issues presented by an “end date” to the program.

A new VDP should be in the form of the mitigation guidelines in the Internal Revenue Manual (IRM) and reflect ongoing IRS policy with respect to previously undisclosed interests in foreign accounts.  Efforts to increase foreign account compliance should not be allowed to destroy the overall voluntary disclosure practice of the IRS and the Department of Justice.

Id.

The IRS’s current voluntary disclosure site directs taxpayers to click on a link to IRM §9.5.11.9 for “more information about the IRS’s voluntary disclosure practice.” This provision states:

It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel.  Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

This language is highly unlikely to entice taxpayers to come forward. Voluntary disclosure guidelines should require IRS personnel to impose criminal or civil penalties only after considering the wide range of circumstances in which taxpayers intentionally or unintentionally failed to report their offshore assets.  This type of ongoing approach is much more likely to meet Commissioner Shulman’s goal of “bringing taxpayers with underreported assets and income overseas back into the fold.”

Other than Commissioner Shulman’s speech portraying the likelihood of a second voluntary disclosure program, however, the IRS has yet to comment on when such a program may be implemented, much less its associated penalties or terms. 

If you have any questions regarding voluntary disclosure programs, IRS penalties, FBAR, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

FASB Clarifies Coming Guidance on Balance Sheet Offsetting

/0 Comments/in , /by

At its January 12, 2011 Board meeting, the Financial Accounting Standards Board (FASB) clarified the scope of coming criteria on when offsetting of financial assets and financial liabilities in the balance sheet is appropriate. These FASB guidelines will be critical to accounting for certain stock lending and stock borrowing transactions.

A year ago, in discussing International Accounting Standard (IAS) 32: Financial Instruments, the International Accounting Standards Board (IASB) and FASB noted that convergence was needed between IASB standards and FASB standards on the criteria for offsetting on the balance sheet. Therefore, FASB initiated a project to establish revised criteria on offsetting. However, in drafting the Exposure Draft for the Board, FASB staff noted that the scope of the project was not clearly defined and returned to the Board for clarification.

Currently, guidance on offsetting is contained in FASB Interpretation No. 39 (FIN 39), Offsetting of Amounts Related to Certain Contracts (March 1992). Nonfinancial assets and liabilities (and nonfinancial derivative products) are not within the scope of the Interpretation and, therefore, are not eligible for offsetting. However, under the IASB-FASB convergence project, the issue arose as to whether nonfinancial assets and liabilities should be addressed in the guidance. But on January 12, 2011, FASB decided that nonfinancial assets and liabilities are not within the scope of the project, thus offsetting is effectively not permitted for those assets and liabilities.

Although the Exposure Draft is not yet completed, past Board meetings have indicated that final FASB guidance will contain a requirement that entities offset a recognized financial asset and financial liability if the criteria for offset are met, whether the right of offset arises from a bilateral or a multilateral arrangement. Moreover, entities should information on the effect of those arrangements on an entitys net exposure, by category of financial instrument, including:

  1. The gross carrying amount;
  2. Amounts deducted as a result of the proposed offset criteria to determine the carrying amounts in the statement of financial position;
  3. The portion of the exposures that is covered by a legally enforceable netting agreement (other than in (2));
  4. The amount of financial instrument collateral (cash collateral and fair value of noncash financial asset collateral should be separately disclosed) obtained or pledged in respect to those assets and liabilities; and
  5. The net exposure after taking into account the effect of the items in (2) “ (4).

The Board has tentatively decided that such information should be presented in a single note and in a tabular format, unless another format is more appropriate. Additionally, financial assets and financial liabilities should be separately disclosed. Additionally, the Boards decided that an entity would also be required to provide a description of the nature of offset agreements for the amounts included in item (3) above.

While no deadline has been set by FASB for issuance of the guidance on offsetting, the Board has decided that the proposed Accounting Standards Update will have a 90-day comment period.

Let Fuerst Ittlemans Tax Planning Practice help your organization prepare for, and thrive in, the ever-changing tax and financial accounting landscape. Contact us today for a free consultation.

National Taxpayer Advocate Report Reveals the IRS’s Lack of Sympathy for Financially Struggling Taxpayers

/0 Comments/in , /by

In the National Taxpayer Advocate 2010 Annual Report to Congress, the Taxpayer Advocate Service (TAS) lays out numerous problems with the Internal Revenue Services (IRS) administration of federal income tax. TASs analysis includes counterproductive methods utilized by the IRS, which continue to compromise taxpayers rights. The full text of the report is available here.

Among TASs main concerns is the IRSs failure to recognize that taxpayers are currently “in the worst economy in at least a generation.” While making periodic announcements regarding future plans to assist financially struggling taxpayers, the IRS increased its annual lien filing by 550 percent since 1999. The most significant finding regarding this increase is the lack of a corresponding increase in revenue collection. As stated in the report:

If liens were clearly correlated with substantial increases in revenue collection, one could at least understand the IRSs position. But over the same period that the IRS has increased lien filings by 550 percent, revenue collected by the IRSs Collection function has remained flat . . . In fact, the IRS must pay filing fees to local county clerks offices an incur its own costs, making it questionable whether liens generate much, if any direct revenue.

The drastic increase in lien filing leads TAS to argue that the IRS focuses almost exclusively on tax collection and not on providing services to the taxpayers. Despite the IRSs extensive enforcement efforts, however, the vast majority of tax revenue is collected through the most inexpensive enforcement procedure, voluntary compliance.

The IRSs response portrays an unsupported rationalization for this result.

While we agree that the vast majority of revenue is collected through voluntary compliance, it is likely that the voluntary compliance rate would drop significantly if the IRS did not have a strong enforcement presence.

The IRSs “strong enforcement presence” ignores the likewise “strong enforcement presence” of creditors other than the IRS on taxpayers who are delinquent on their debts. When computing how much it believes the taxpayer can reasonably pay, the IRS makes no allowance for the taxpayer to pay other debts for which they remain liable. TAS, taking the current economy in account, recognizes the severe effects of IRSs computation.

[o]ther creditors will continue to press the taxpayer to repay these debts. A state agency does not stop garnishing a paycheck and a credit card collection company does not stop calling just because the taxpayer has committed to an IRS payment plan. Thus, the IRSs unwillingness to allow for payments to other creditors is often unrealistic.

The IRS easily ignores the debts to other creditors during its attempts to collect its own debts, but has no issues subjecting taxpayers to “discharge of indebtedness” income when it believes taxpayers have been freed from liabilities. TAS describes the IRSs often incorrect assumption regarding Form 1099-C, Cancellation of Debt.

As a general matter, the IRS assumes that when a creditor files a Form 1099-C, Cancellation of Debt, the creditor is reporting the actual cancellation of a debt and the amount shown on the form is correct However, the IRSs assumptions that a debt was cancelled and the amount reported by lenders is accurate may be incorrect for any of these reasons:

  • Creditors sometimes issue a Form 1099-C because Treasury regulations provide an incentive to do so or as a means of pressuring a debtor to pay “ even where they are not canceling the debt;
  • Creditors sometimes make errors on the forms that debtors then may have to wage an uphill battle to correct; or
  • IRS automated systems cannot distinguish taxpayers with canceled debts who have additional income and owe additional tax from taxpayers with canceled debts who are insolvent, have no additional income, and do not owe additional tax. As a consequence, the IRS may sometimes deny legitimate Earned Income Tax Credit (EITC) claims because it believes the taxpayers income is too high.

The IRSs less than helpful actions also include carelessness and manipulation prior to and during Collection Due Process (CDP) hearings. Congress established CDP hearings to provide taxpayers “with an opportunity to have IRS lien filings or proposed levy actions reviewed by an independent Office of Appeals.” Notably, IRC §6330(c)(3)(C) requires that the Office of Appeals considers whether “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive then necessary.”

TAS described IRS actions that arguably defeat the purpose of the CDP hearing.

In practice, the IRS frequently issues CDP notices without verifying the taxpayers liability or adequately analyzing his or her ability to pay. In addition, the IRS routinely asks taxpayers to withdraw their CDP hearing requests upon resolution of their cases, which imposes pressure on taxpayers and may cause them to forfeit their judicial review rights if their problems are not ultimately resolved.

We previously reported the Treasury Inspector General for Tax Administrations (TIGTA) findings regarding the effectiveness of controls and procedures (or lack thereof) utilized by the Internal Revenue Service (IRS). Notably, TAS reveals similar criticisms of the IRSs current operations.

In addition to reporting IRSs oppressive attitude towards struggling taxpayers, TAS also reveals the ineffective and inaccurate results of the IRSs reliance on automation. Specific instances of this, such as failures in Power of Attorney (POA) processes were mentioned in TASs report.

IRC processes and systems designed to recognize and record power of attorney (POA) form information continue to frustrate taxpayers and their representatives. Problems associated with POA processing can lead to a lack of representation, adverse IRS action (i.e. unnecessary liens and levies) and lengthy delays in processing tax returns and refunds.

Notably, the Internal Revenue Manuel §5.1.10.5.2 (08-21-2006) states that taxpayers have a right to representation in tax matters. Thus, these failures in POA processes continue to jeopardize taxpayer rights.

Also discussed by TAS is the overwhelming inaccuracy of the IRSs Reasonable Cause Assistant (RCA) program. RCA is “an interactive decision support program” used to “evaluate taxpayers request for abatement of certain penalties.”

[a] study conducted by the IRS itself found that RCA determinations were accurate in only 45 percent of the cases examined, even though all employees thought their determinations were correct. In other words, a coin flip would have procedures nearly the same level of accuracy as the RCA.

In its response to this, the IRS stated that it “is aware of issues related to the RCA and is taking steps to address this issue.” Significantly, the IRS response does not include any explanations for the failure, or the actual “steps” that will be taken in this matter. On numerous occasions, the IRSs response indicated that its software and programs were “up to industry standards.” Notably, however, the IRS has no response as to why its employees are relying almost entirely on automation to make decisions that severely affect taxpayers.

As TAS points out, IRS employees have no incentive to produce accurate results. In fact, the incentive systems currently in place reward those employees that perform their work as quickly as possible; not taking into account the IRSs need to later take corrective actions due to careless mistakes of its rushed employees.

An overemphasis on cycle time creates incentives for IRS employees to take actions quickly, even where doing so produces inaccurate results or delays the final resolution of problems. As a consequence, taxpayers may face inaccurate audit determinations or unwarranted collection actions.

The IRS clearly has no interest in “keeping track” of increases in corrective actions. As discussed by TAS:

Although the number of audit reconsiderations and tax abatements has significantly increased over the past three years, the IRS does not measure the impact of the growing number of audit reconsiderations and does not use the outcomes to improve procedures for original audits.

Notably, the IRS avoids responding to the increases in audit reconsiderations. Instead, in its response, the IRS defends itself by arguing the usefulness of a “cycle time” incentive system.

This analysis presumes that a given measure cannot serve multiple purposes . . . Clearly, cycle time is also closely related to “timelineness” as maintaining timely interactions throughout the collection process is an essential component of delivering cycle time goals. Moreover /timeliness/cycle time is a significant customer concern. The “amount of time you had to spend on this collection issue” was the top improvement priority for collection customers on the most recent collection customer satisfaction survey.

Although taxpayers may appreciate “timely interactions” during their collection procedures, the IRSs response does not take into account the numerous taxpayers who are the victims of inaccurate audit determinations and unwarranted collection actions.

IRS practices seem to suggest that its “concerns” do not revolve around customer satisfaction. Significantly, even if the IRS intends to provide taxpayers with at least satisfactory customer service, it is virtually impossible for it do so with its current resources.  TAS provides an example of this in its report.

Taxpayer Assistant Centers (TACs) are the main form of face to face IRS customer service available to taxpayers. However, the IRSs 401 TACs are within a 30 minute drive of only 60 percent of the taxpaying population. TACs remain out of reach for many rural taxpayers as most are located in more populous areas and only 55 percent are open 36 to 40 hours per week.

TAS continuously emphasizes the ineffectiveness of oppressive practices and reliance on automation. Although the IRS seems to believe otherwise, neither of these philosophies results in efficient tax collection. Research seems to suggest that the IRSs “strong enforcement presence” is less helpful than it believes.

In 2007, TAS examined tax compliance literature to identify factors that affect voluntary compliance. As discussed in TASs report:

Broadly speaking, the factors identified by the 2007 Study and other research include not only the expected likelihood and cost of getting caught cheating (called “economic deterrence”) , but other factors such as compliance norms, trust in the government, and the tax administration process, complexity and convenience of complying, and the influence of preparers. Perhaps surprisingly, this literature suggests that factors other than deterrence may have the greatest impact.

Current IRS practices arguably create additional distrust in the government and tax administration. As it is unlikely that the Internal Revenue Code will become any less complex, change in current IRS procedures, controls, and practices may be the only method to increase efficiency in tax collection. The IRS has to learn to balance “enforcement” with “service,” especially because tax collection is no longer its only role.

As the IRS prepares to administer large portions of the health care legislation, it will have to shift from being an enforcement agency that primarily says, in effect, “you owe us” into an agency that places much greater emphasis on hiring and training caseworkers to help eligible taxpayers receive benefits and work one-on-one with taxpayers to resolve legitimate disagreements.

This new role requires the IRS to oversee the distribution of social benefits to eligible taxpayers. TASs report shows how this function simply cannot be performed by an oppressive and collection-minded agency. Among other recommendations, TAS suggested that the IRS revise its mission statement “to reflect the two distinct administrative roles of tax collection and social benefits delivery.”

The IRS disagreed, stating,

While there are a number of very thoughtful and constructive ideas outlined in the Office of the National Taxpayer Advocates articulation of these issues, the IRS does not agree that the wording of the IRSs mission statement is one of the “most serious problems” faced by taxpayers.”

Here, the IRS once again avoids the issue presented by TAS. If the IRS does not consider the problems presented by TAS, it is unlikely that either of its roles will be effectively administered in the coming year.

If you have any questions regarding TASs report, IRS procedures, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

IRS Disagrees with TIGTA Report That Finds IRS Control Procedures and Employees To Be Ineffective

/0 Comments/in , , /by

Following its audits of the Internal Revenue Services (IRS) Large and Mid-Size Business (LMSB) and Small Business/Self Employed(SB/SE) Divisions, the Treasury Inspector General for Tax Administration (TIGTA) recently released its findings regarding the “the effectiveness of controls and procedures” utilized by the two Divisions. Among other reasons, these audits were conducted “to ensure tax returns with Abusive Tax Avoidance Transaction (ATAT) issues are properly examined for abusive tax avoidance.” The full report is available here.

ATAT is defined by the IRS as “a specific tax transaction/promotion that reduces a tax liability by taking a tax position that is not supported by tax law or manipulates the law in a way that is not consistent with the intent of the law.” The IRS seeks to stop the marketing and promotion of ATATs by completing investigations of the individuals or businesses that promote these schemes, as well as the promoter clients who participate in the schemes. As the taxpayers falling under the LMSB and SB/SE divisions are the primary targets of those individuals or entities promoting ATATs, both divisions have established offices dedicated to the ATAT Program.

TIGTA expressed numerous concerns regarding the effectiveness of these offices, specifically pointing out conflicts between the procedures utilized by the officers with the taxpayers rights. TIGTA found that IRS employees made decisions to survey tax returns without proper approval or adequate justification, often while “jeopardizing taxpayers rights.”

Specific findings from a statistical sample of 311 surveyed returns included:

  • TIGTA determined 246 of the 311 returns were subject to guidelines requiring approval from the Planning and Special Programs function to survey the tax return. Of these 246 returns, 238 (97 percent) were surveyed by group managers without the requisite approval.
  • 88 of the 311 surveyed tax returns did not include any justification in the case files as to why the tax return was surveyed.
  • For 278 (89 percent) of the 311 surveyed tax returns, TIGTA found that IRS employees did not follow procedures when surveying tax returns with ATAT issues.

In the IRSs response, Commissioner of the SB/SE Division, Christopher Wagner acknowledged that the applicable procedures were not always followed, but indicated that deviation from procedure did not mean that the IRS was not effective in its decisions to survey tax returns.

While our cases did not always conform to the prescribed documentation procedures, we found no cases where the decision to survey was improper. Many of the cases reviewed during this audit involved highly complex transactions. As noted above, in these cases, the IMT and the ATTI staff worked closely with the area managers, examiners, and PSP staffs to ensure survey decisions were consistent and appropriate.

TIGTAs report also emphasized a direct conflict with taxpayers rights, specifically in numerous instances when the IRS surveyed tax returns after contacting taxpayers. With regard to this concern, TIGTA recommended:

The Director, Examination, SB/SE Division, should strengthen existing controls to protect the rights of taxpayers by ensuring examinations of ATAT cases are completed once taxpayers, or their representatives, have been contacted by IRS employees.

The IRS disagreed with this recommendation, indicating that surveying tax returns after taxpayer or representative contact was permissible according to the Internal Revenue Manual. Relying on IRM §4.10.2.5.1(3), the IRS found no issue with the procedure utilized by its employees.

Included in TIGTAs report, however, is TIGTAs Office of Audit Comment, which points out that the cited provision, IRM §4.10.2.5.1(3), was not effective until April 2, 2010, and the tax returns in TIGTAs sample were all surveyed during 2006 through 2008. Thus, TIGTA projected that the IRS employees violated the rights of as many as 196 taxpayers.

We previously reported recent actions of the IRS that reveal its disregard for taxpayer rights and privacy in our discussion of the newly enacted regulations requiring Uncertain Tax Position (UTP) disclosures. Here, the IRSs response to TIGTAs report reinforces this lack of concern, and portrays its growing approval of IRS employees intentionally violating procedures designed to protect the rights of taxpayers.

If you have any questions regarding TIGTAs report, IRS procedures and examinations, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

Federal Prosecutors Focus On Payment Processors In Latest Effort To Prevent Online Poker Sites From Operating

/0 Comments/in , , /by

As the new year begins, federal prosecutors continue their efforts at cracking down on online poker in the US. The latest has not focused on the numerous online poker sites or the 2.5 million Americans that regularly play. Rather, the Department of Justice has focused its efforts on payment processors, the financial outfits that move money between online poker sites, their players, and the banks. Online pay for play poker sites generate over $30 billion annually.

Though there is no federal law directly addressing the regulation of online poker sites, the Department of Justice has consistently maintained the position that the operation of pay for play online poker sites violates federal law. Traditionally, the prosecution of individual bettors and intra-state gambling crimes has been largely left to the individual states, however, there are numerous federal gambling statutes that the Department of Justice has employed against large-scale gambling businesses and payment processors that operate interstate or internationally. These statutes include the Wire Act, RICO, the Bank Secrecy Act, civil forfeiture proceedings, as well as 18 U.S.C. § 1955 which makes it a crime, to conduct, finance, manage, supervise, direct, or own all or part of a gambling business, so long as it is illegal to operate such a business under state law.

The State of Washington provides a textbook example of federal prosecutorial action and the relationship between federal prosecutors and state law and law enforcement. Since October of 2010, the Department of Justice in conjunction with Washington State Gambling Commission have filed four civil forfeiture complaints against more than $20 million in cash in Bank of America, JPMorgan Chase, and Wells Fargo, belonging to various payment processing firms. The joint investigations began in 2009 shortly after the Washington Supreme Court upheld a state law prohibiting online poker for money in the state.

The largest of these forfeitures, involving $5.1 million, began after the government was notified that a player had received a payout check from Arrow Checks, a payment processor for online poker sites such as Pokerstars.net. During its investigation, the government was able to establish a series of wire transfers from other states, such as Texas, and from Canada to accounts in Washington. Payouts were then sent to players around the state. As a result of these investigations, the payment processors, which held the accounts, were charged with operating unlicensed money transmitting businesses and violating the federal wire act because online poker for money is illegal in Washington.

The Washington investigations come in the wake of the May 2010 guilty plea of Canadian payment processor Douglas Rennick for violations of the Wire act. Authorities alleged that Rennick processed over $350 million in payouts for internet poker companies. As part of the plea agreement, Rennick agreed to forfeit $583 million which included millions of dollars in payouts and funds belonging to various poker sites and players. However, the affected poker sites refunded any lost money to their players after federal authorities froze the assets of Rennick.

If you have questions pertaining to the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittlemans experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.