Forbes ran a really interesting read, which can be found here. The article is by Robert Wood and discusses how in tax cases, pleading the 5th can usually be used against you and at times, does not even work.
This really stresses the role practitioners can play by keeping the IRS away from clients. When the IRS is doing what they are supposed to, they do need to go through the practitioner before going to a client. That can help shield a client from some additional IRS scrutiny.
Tuesday, May 31, 2016
Circular 230 Section 10.36 and Monetary Penalties
Under Section 10.36 of Circular 230 two requirements arise for practitioners: first, they must have procedures to comply with Circular 230 and second, they must be following the procedures they created to comply with Circular 230. Failure to do either can subject a practitioner to sanctions from the IRS Office of Professional Responsibility.
The person in the firm that can get hit with a sanction under 10.36 is typically a partner, since the person needs to have principal authority and responsibility for overseeing a firm’s tax practice.
The interesting aspect is that firms need to have the rules and actually use them, so it really becomes a two prong analysis when analyzing any violation under this section. For most firms, this means having employees look over firm procedures and such. Some firms have the employees sign a document acknowledging that they have reviewed firm procedures. When doing Circular 230 audits, written acknowledgements one of the first policies I suggest firms start completing.
The reason 10.36 is so important is that it covers the entire tax practice of a firm. When looking at section 10.50(c)(2), the amount of penalty that OPR can assess, "shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty." This means a violation of Circular 230 10.36 could lead to a monetary sanction equal to the past five years of the firm's gross receipts for their tax practice. (OPR can only go back five years due to the statute of limitations imposed from the Baldwin case).
This is why all firms need a written policy covering Circular 230 procedures and need employee acknowledgement that they have read and understand the procedures.
Relevant Cites:
Circular 230
The person in the firm that can get hit with a sanction under 10.36 is typically a partner, since the person needs to have principal authority and responsibility for overseeing a firm’s tax practice.
The interesting aspect is that firms need to have the rules and actually use them, so it really becomes a two prong analysis when analyzing any violation under this section. For most firms, this means having employees look over firm procedures and such. Some firms have the employees sign a document acknowledging that they have reviewed firm procedures. When doing Circular 230 audits, written acknowledgements one of the first policies I suggest firms start completing.
The reason 10.36 is so important is that it covers the entire tax practice of a firm. When looking at section 10.50(c)(2), the amount of penalty that OPR can assess, "shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty." This means a violation of Circular 230 10.36 could lead to a monetary sanction equal to the past five years of the firm's gross receipts for their tax practice. (OPR can only go back five years due to the statute of limitations imposed from the Baldwin case).
This is why all firms need a written policy covering Circular 230 procedures and need employee acknowledgement that they have read and understand the procedures.
Relevant Cites:
Circular 230
Tax Court Jurisdiction - Corporation with Revoked Charter
In the recently released Tax Court Memo, Allied Transportation, Inc. (Allied) v. Commissioner, Allied was a Maryland corporation up until 2004 when Maryland revoked the corporate charter for the corporation. The corporation was revived and later forfeited for failure to pay associated fees in 2007.
Even though the corporation was considered forfeited, the taxpayer continued conducting business under the corporation. The IRS then audited the 2010 tax return for the corporation and assessed roughly $80,000 in tax. The taxpayer disagreed and petitioned the Tax Court.
Under Rule 60(c), a corporation's ability to litigate is based on the state it is organized. Pursuant to Maryland law, when a corporation is forfeited, "the powers conferred by law on the corporation are inoperative, null, and void as of the date of the proclamation [of forfeiture]" Md. Code Ann., Corps. & Ass'ns sec 3-503(d). Maryland does allow for a winding up period after the corporate charter is revoked.
Here, the court decided that 10 years was too long of a wind up period for the corporation. Since the corporation had forfeited its status as a corporation, the corporation lacked the power to petition the Tax Court.
Practitioners should take note of this case. When starting an audit representation for a client, practitioners should check the status of the client's entity registration. Failure to do so could lead to a case like this where you may lack jurisdiction to appeal to Tax Court.
Footnote 2 of this case stresses the importance of checking your state laws to see what the corporate status means, "Some States have a fixed time limit for winding up, but other do not. Compare Tex. Bus. Orgs. Code Ann. sec. 11.356 (West 2012) (providing a three year period for purposes of prosecuting or defending in the terminated entity's name) with Mich. Comp. Laws Serv. sec 450.1833 (LexisNexis 2014) (providing that dissolved corporations shall continue in existence for the purposes of wing up). Reviewing courts generally allow a reasonable period. See, e.g. Flint Cold Storage v. Dep't of Treasury, 776 N.W.2d 387, 395-396 (Mich Ct. App. 2009).
Relevant Cites:
Allied Transportation, Inc. v. Commissioner, TC 2016-102
US Tax Court Rules of Practice and Procedure - Rule 60(c)
Even though the corporation was considered forfeited, the taxpayer continued conducting business under the corporation. The IRS then audited the 2010 tax return for the corporation and assessed roughly $80,000 in tax. The taxpayer disagreed and petitioned the Tax Court.
Under Rule 60(c), a corporation's ability to litigate is based on the state it is organized. Pursuant to Maryland law, when a corporation is forfeited, "the powers conferred by law on the corporation are inoperative, null, and void as of the date of the proclamation [of forfeiture]" Md. Code Ann., Corps. & Ass'ns sec 3-503(d). Maryland does allow for a winding up period after the corporate charter is revoked.
Here, the court decided that 10 years was too long of a wind up period for the corporation. Since the corporation had forfeited its status as a corporation, the corporation lacked the power to petition the Tax Court.
Practitioners should take note of this case. When starting an audit representation for a client, practitioners should check the status of the client's entity registration. Failure to do so could lead to a case like this where you may lack jurisdiction to appeal to Tax Court.
Footnote 2 of this case stresses the importance of checking your state laws to see what the corporate status means, "Some States have a fixed time limit for winding up, but other do not. Compare Tex. Bus. Orgs. Code Ann. sec. 11.356 (West 2012) (providing a three year period for purposes of prosecuting or defending in the terminated entity's name) with Mich. Comp. Laws Serv. sec 450.1833 (LexisNexis 2014) (providing that dissolved corporations shall continue in existence for the purposes of wing up). Reviewing courts generally allow a reasonable period. See, e.g. Flint Cold Storage v. Dep't of Treasury, 776 N.W.2d 387, 395-396 (Mich Ct. App. 2009).
Relevant Cites:
Allied Transportation, Inc. v. Commissioner, TC 2016-102
US Tax Court Rules of Practice and Procedure - Rule 60(c)
Streamlined Applications for 501(c)(3)s
IRS released Revenue Procedure 2016-32 today. Under the Rev. Proc., the streamlined applications of 501(c)(3)s is now $275 instead of $400.
Relevant Cites:
Rev. Proc. 2016-32
Relevant Cites:
Rev. Proc. 2016-32
Monday, May 30, 2016
Freezing Refund Claim Statute
As previously discussed, the statute of limitations for claiming a refund with three years from the date the return was filed or two years from the date the tax was paid, whichever is later. However, the IRS allows that statute of limitations to freeze in one particular circumstance under IRC 6511(h).
Under IRC 6511(h), the taxpayer must be financially disabled in order to freeze the statute of limitations. Financial disabled means he is "if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months."
Congress also gave the IRS the power to determine the form of the proof that a condition existed. As such, the IRS requires a written physician's statement containing the following to prove a financial disability: (1) Name and description of physical or mental impairment, (2) Physician’s medical opinion that taxpayer could not handle his financial affairs, (3) Physician’s opinion on that it was likely taxpayer would die or be disabled for 12 months, (4) Specific time period taxpayer was impaired, (5) taxpayer needs to certify no one else was authorized to handle affairs.
The last requirement is the most important. If the taxpayer has someone authorized to handle his financial affairs during his disability, then the statute does not freeze. The thinking behind this is that the person handling the affairs could handle filing any claim for refund while the taxpayer was financial disabled.
Relevant Cites:
IRC 6511(h)
Under IRC 6511(h), the taxpayer must be financially disabled in order to freeze the statute of limitations. Financial disabled means he is "if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months."
Congress also gave the IRS the power to determine the form of the proof that a condition existed. As such, the IRS requires a written physician's statement containing the following to prove a financial disability: (1) Name and description of physical or mental impairment, (2) Physician’s medical opinion that taxpayer could not handle his financial affairs, (3) Physician’s opinion on that it was likely taxpayer would die or be disabled for 12 months, (4) Specific time period taxpayer was impaired, (5) taxpayer needs to certify no one else was authorized to handle affairs.
The last requirement is the most important. If the taxpayer has someone authorized to handle his financial affairs during his disability, then the statute does not freeze. The thinking behind this is that the person handling the affairs could handle filing any claim for refund while the taxpayer was financial disabled.
Relevant Cites:
IRC 6511(h)
Arbitrary and Capricious With A Levy
In the next couple of years, tax practitioners should get used to hearing the terms arbitrary and capricious. These terms comes from the Administrative Procedures Act (APA). Under the APA, courts can set aside agency actions that are arbitrary, capricious, or are otherwise not in accordance with the law.
In John Drew v. Comm, TC Memo 2016-97, this issue came up in regards to a levy. The courts founds that in order to not be arbitrary and capricious, the Revenue Officer must: "(1) properly verified that the requirements of any applicable law or administrative procedure have been met; (2) considered any relevant issues petitioners raised; and (3) considered whether 'any proposed collection action balances the need for the efficient collection of taxes with a legitimate concern of **** that any collection action be no more intrusive than necessary.'" These are the requirements set out in IRC 6330.
While this is not new or groundbreaking. Practitioners should be reminded of the second prong in this test: that the IRS needs to consider any relevant issues taxpayers raise. It would seem that if not considering relevant facts is arbitrary and capricious for a levy, then it would also be arbitrary and capricious in most tax decisions. Often Revenue Agents (in unagreed cases) or Revenue Officers (in rejections) will not properly discuss relevant issues brought up during the investigation. In these situations, it appears the final agency decision should be set aside.
Relevant Cites:
Drew v. Commish TC 2016-97
IRC 6330
In John Drew v. Comm, TC Memo 2016-97, this issue came up in regards to a levy. The courts founds that in order to not be arbitrary and capricious, the Revenue Officer must: "(1) properly verified that the requirements of any applicable law or administrative procedure have been met; (2) considered any relevant issues petitioners raised; and (3) considered whether 'any proposed collection action balances the need for the efficient collection of taxes with a legitimate concern of **** that any collection action be no more intrusive than necessary.'" These are the requirements set out in IRC 6330.
While this is not new or groundbreaking. Practitioners should be reminded of the second prong in this test: that the IRS needs to consider any relevant issues taxpayers raise. It would seem that if not considering relevant facts is arbitrary and capricious for a levy, then it would also be arbitrary and capricious in most tax decisions. Often Revenue Agents (in unagreed cases) or Revenue Officers (in rejections) will not properly discuss relevant issues brought up during the investigation. In these situations, it appears the final agency decision should be set aside.
Relevant Cites:
Drew v. Commish TC 2016-97
IRC 6330
Audit Reconsiderations
Often clients will be audited, receive an unfavorable determination and then later find documents that support their original position. Taxpayers can use the audit reconsideration process in order to abate the incorrect tax.
In order to get an audit reconsideration, the taxpayer must have:
1. Filed a tax return (no 6020(b) returns);
2. An unpaid assessment or the IRS reversed tax credits that are in dispute;
3. Identified which adjustments from the original audit he is disputing; and
4. New information, which was not considered in the audit.
The taxpayer can also show there was an IRS computational or processing error in assessing the tax.
Audit reconsideration will be denied if:
1. Taxpayer already had an audit reconsideration and failed to provide information;
2. Form 906 or 866 was used to close the original audit;
3. The tax due was from a compromise pursuant to IRC 7122;
4. The tax due was due to a TEFRA audit;
5. The tax due was from an agreement on Form 870-AD;
6. The US Tax Court, District Court or US Court of Federal Claims has made a final judgement on the tax due; or
7. The US Tax Court dismissed the case due to lack of prosecution.
** Practitioners should note too that the IRS has combat zone procedures and if an original audit was conducted while the taxpayer was in a combat zone (+180 days after leaving the combat zone), the IRS will reverse all assessments.
Relevant Cites:
IRM 4.13.1
In order to get an audit reconsideration, the taxpayer must have:
1. Filed a tax return (no 6020(b) returns);
2. An unpaid assessment or the IRS reversed tax credits that are in dispute;
3. Identified which adjustments from the original audit he is disputing; and
4. New information, which was not considered in the audit.
The taxpayer can also show there was an IRS computational or processing error in assessing the tax.
Audit reconsideration will be denied if:
1. Taxpayer already had an audit reconsideration and failed to provide information;
2. Form 906 or 866 was used to close the original audit;
3. The tax due was from a compromise pursuant to IRC 7122;
4. The tax due was due to a TEFRA audit;
5. The tax due was from an agreement on Form 870-AD;
6. The US Tax Court, District Court or US Court of Federal Claims has made a final judgement on the tax due; or
7. The US Tax Court dismissed the case due to lack of prosecution.
** Practitioners should note too that the IRS has combat zone procedures and if an original audit was conducted while the taxpayer was in a combat zone (+180 days after leaving the combat zone), the IRS will reverse all assessments.
Relevant Cites:
IRM 4.13.1
Sunday, May 29, 2016
Statute of Limitations on Refunds
One of the most confusing topics that comes up when I speak with tax practitioners deals with the statute of limitations on refunds. While at OPR, numerous practitioners would say they have three years from April 15 to file their tax return. Our response would be that they are confusing the statute of limitations on refunds and the filing deadline.
The statute of limitations on refunds is the later of three years after the return is filed or two years after the tax is paid.
For example, taxpayer files his return on 4/15/16. His tax due is $50,000, but he is unable to pay the tax. On 1/1/17, he pays $20,000 and on 9/25/18, he pays the remaining $30,000.
Had the taxpayer paid his taxes timely, he would have until 4/15/19 to file a claim for refund. Since he did not pay his taxes timely, he has until 1/1/19 to file a claim for refund up to $50,000. If he files a claim between 1/1/19 and 9/25/20, he can only claim a refund of $30,000.
Relevant Cites:
IRC 6511(a) - Statute of Limitations for Refunds
IRC 6072 - Tax Return Due Date
The statute of limitations on refunds is the later of three years after the return is filed or two years after the tax is paid.
For example, taxpayer files his return on 4/15/16. His tax due is $50,000, but he is unable to pay the tax. On 1/1/17, he pays $20,000 and on 9/25/18, he pays the remaining $30,000.
Had the taxpayer paid his taxes timely, he would have until 4/15/19 to file a claim for refund. Since he did not pay his taxes timely, he has until 1/1/19 to file a claim for refund up to $50,000. If he files a claim between 1/1/19 and 9/25/20, he can only claim a refund of $30,000.
Relevant Cites:
IRC 6511(a) - Statute of Limitations for Refunds
IRC 6072 - Tax Return Due Date
Contingent Fees for Refund Claims Under Circular 230
Circular 230 10.27(b) bans all contingent fees in tax matters except for three situations: during a challenge to a tax return, a claim
for credit or refund filed solely in connection with
the determination of statutory interest or penalties
assessed by the Internal Revenue Service, and any judicial
proceeding.
In 2014, the U.S. District Court decided Ridgley v. Lew. Ridgley sought "declaratory judgment that the IRS lacked statutory authority to promulgate contingent fee restrictions on those preparing and filing Ordinary Refund Claims pursuant to Section 10.27 of Circular 230." In the case, Ridgley prevailed and the IRS was enjoined was enforcing Circular 230 Section 10.27.
Practitioners are now able to use contingent fees with clients. However, it should be noted that CPAs and attorneys need to follow their state ethics rules, which may still ban these fees.
One interesting note from the case: "[b]ecause a CPA prepares and files an Ordinary Refund Claim before becoming a legal representative and presenting his case, preparing and filing such claims is not within the scope of the actions originally targeted by Section 330." This follows the ruling in Loving and seems to really restrict when Circular 230 actually applies to practitioners.
For example, Circular 230 10.30 bans certain types of advertising from practitioners. It would follow under the logic of Ridgley that this section would also be invalid since the advertising is done prior to "becoming a legal representative and presenting" a case before the IRS. It will be interest in the future to see if the IRS OPR narrows the scope of Circular 230 to follow Loving and Ridgley or if they will continue to enforce Circular 230 under the old regime waiting for further legal challenges.
Relevant Cites:
Ridgley v. Lew
Loving v. IRS
In 2014, the U.S. District Court decided Ridgley v. Lew. Ridgley sought "declaratory judgment that the IRS lacked statutory authority to promulgate contingent fee restrictions on those preparing and filing Ordinary Refund Claims pursuant to Section 10.27 of Circular 230." In the case, Ridgley prevailed and the IRS was enjoined was enforcing Circular 230 Section 10.27.
Practitioners are now able to use contingent fees with clients. However, it should be noted that CPAs and attorneys need to follow their state ethics rules, which may still ban these fees.
One interesting note from the case: "[b]ecause a CPA prepares and files an Ordinary Refund Claim before becoming a legal representative and presenting his case, preparing and filing such claims is not within the scope of the actions originally targeted by Section 330." This follows the ruling in Loving and seems to really restrict when Circular 230 actually applies to practitioners.
For example, Circular 230 10.30 bans certain types of advertising from practitioners. It would follow under the logic of Ridgley that this section would also be invalid since the advertising is done prior to "becoming a legal representative and presenting" a case before the IRS. It will be interest in the future to see if the IRS OPR narrows the scope of Circular 230 to follow Loving and Ridgley or if they will continue to enforce Circular 230 under the old regime waiting for further legal challenges.
Relevant Cites:
Ridgley v. Lew
Loving v. IRS
Saturday, May 28, 2016
Practitioner Tool: First Time Abatement
One often overlooked tool to help solve penalty issues for clients is the First Time Abatement policy the IRS has.
If your client has a clean filing history the past three years (has filed and paid or made arrangements to pay all required returns and no penalties related to the return you are seeking abatement for), then the IRS will abate certain penalties. If working a tax debt resolution issue, tax due in the year of the penalty is not considered when determining a clean filing history.
You can abate the following penalties:
If your client has a clean filing history the past three years (has filed and paid or made arrangements to pay all required returns and no penalties related to the return you are seeking abatement for), then the IRS will abate certain penalties. If working a tax debt resolution issue, tax due in the year of the penalty is not considered when determining a clean filing history.
You can abate the following penalties:
- Failure to File
- IRC 6651(a)(1) - Covers your individual returns
- IRC 6698(a)(1) - Failure to File Partnership Return
- IRC 6699(a)(1) - Failure to File S Corp Return
- Failure to Pay
- IRC 6651(a)(2)
- IRC 6651(a)(3)
- Failure to Deposit
- IRC 6656
As the name implies, first time abate can only be used once. When requesting first time abatement, it is always best practice to try a reasonable cause argument prior to your first time abate request if applicable.
Relevant Citations: IRM 20.1.1.3.6.1 (08-05-2014)
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