If you have a barred refund due to a Statute of Limitations rule, your client can still have a chance to get a refund under mitigation rules. In order to get the refund, the client must meet all four criteria in IRC 1312:
1. There was an error in a closed tax year
2. There is a determination in a non-closed tax year
3. The determination is due to a circumstance described in 1312.
4. There must be an inconsistent position
The IRS released Chief Counsel Advice 201622032. In the advice, the IRS looks at whether a stipulated decision in Tax Court is a determination for the purposes of the mitigation rules.
Under 1312(7)(a), "The determination determines the basis of property, and in respect of any transaction on which such basis depends, or in respect of any transaction which was erroneously treated as affecting such basis, there occurred, with respect to a taxpayer described in subparagraph (B) of this paragraph, any of the errors described in subparagraph (C) of this paragraph."
The IRS theory was that the settlement negotiations determined the basis of the asset, not the actual facts of what the basis should be. So, while the settlement appears to be a determination in form, it is was substantively not a determination.
Sometime next week, we will go into a more detailed discussion on mitigation.
Relevant Cites:
Forbes Article on Topic
IRC 1312
Thursday, June 2, 2016
Wednesday, June 1, 2016
IRS Released New Publication "Federal Tax Return Preparers: What You Need to Know"
The IRS released Publication 4938, Federal Tax Return Preparers: What You Need to Know. In it, the IRS discusses their new Annual Filing Season Program (AFSP) status, which replaces the RTRP status that was thrown out after Loving.
The AFSP program allows unenrolled practitioners to take CPE during the year in order to get limited representation rights for their clients. Becoming an AFSP also allows unenrolled practitioners to have their name in a searchable IRS database of all return preparers. Attorneys, CPAs, and EAs will have their names automatically entered into the database without need to report CPE to the IRS.
This is basically a compromise between the IRS and the unenrolled preparers after Loving. Now, unenrolled preparers will not need to pay a fee for a license and they can choose not to do CPE while still being able to prepare tax returns.
Relevant Citations:
IRS Publication 4938
The AFSP program allows unenrolled practitioners to take CPE during the year in order to get limited representation rights for their clients. Becoming an AFSP also allows unenrolled practitioners to have their name in a searchable IRS database of all return preparers. Attorneys, CPAs, and EAs will have their names automatically entered into the database without need to report CPE to the IRS.
This is basically a compromise between the IRS and the unenrolled preparers after Loving. Now, unenrolled preparers will not need to pay a fee for a license and they can choose not to do CPE while still being able to prepare tax returns.
Relevant Citations:
IRS Publication 4938
Tuesday, May 31, 2016
Pleading the 5th in Tax Cases
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.
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.
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)
Subscribe to:
Posts (Atom)