A Smattering of Tax Measure Legislation

It is always interesting to review what tax measures the Legislature is or has been considering.  Here are a few of the tax measures that are or were being considered:

Lifetime learning accounts.  Amends the Internal Revenue Code to: (1) establish a tax-exempt lifelong learning account for the payment of certain employee higher education and training expenses; (2) allow individuals a nonrefundable tax credit for contributions to such accounts; and (3) allow employers a business-related tax credit for contributions to such accounts.

Sales tax fairness.  Grants the consent of Congress to the Streamlined Sales and Use Tax Agreement (Agreement), the multistate agreement for the administration and collection of sales and use taxes adopted on November 12, 2002. Expresses the sense of Congress that the Agreement provides sufficient simplification and uniformity to warrant federal authorizations to states that are parties to it (member states) to require remote sellers (sellers without a physical presence in the taxing state) to collect and remit the sales and use taxes of such states and their local taxing jurisdictions.  Authorizes each member state, after 10 states (comprising at least 20% of all states imposing a sales tax) have petitioned for and become member states, to require all sellers, except those sellers with gross remote taxable sales nationwide of less than $5 million, to collect and remit sales and use taxes on remote sales owed to such member state under the terms of the Agreement.  Permits a federally recognized Indian tribe that imposes a generally applicable sales tax to petition to become a member state.   Allows any person affected by the Agreement to petition the Governing Board established by the Agreement for a determination of any issue arising under the Agreement. Provides for judicial review of Governing Board determinations by the U.S. Court of Federal Claims. Sets forth minimum simplification requirements for the Agreement.  Expresses the sense of Congress that member states should work with each other to prevent double taxation where a foreign country has imposed a transaction tax on a digital good or service.

Research tax credit.  Amends the Internal Revenue Code to: (1) modify the tax credit for increasing research expenses to establish a standard 20% credit rate for research expenses exceeding 50% of average expenses over the preceding three year period; (2) establish a uniform 80% reimbursement rate for all contract research expenses (100% for basic research payments); (3) make such tax credit permanent; (4) allow a tax credit for equity investments in small business innovation companies; and (5) allow the issuance of tax exempt facility bonds for research park facilities used in connection with research and experimentation.  Directs the Secretary of the Treasury to: (1) study and report to Congress on taxpayer compliance with the substantiation requirements for claiming the tax credit for increasing research activities; and (2) issue regulations on the application of private activity bond rules to the funding of federal research agreements.

Alternative minimum tax.  Amends the Internal Revenue Code to repeal the alternative minimum tax on individuals.

Business meals and entertainment expenses.  Amends the Internal Revenue Code to increase the income tax deduction for business meals and entertainment expenses from 50 to 75% of such expenses in calendar year 2007, and 80% in 2008 and thereafter.

College tax credit.  Amends the Internal Revenue Code to replace the Hope Scholarship and Lifetime Learning Tax Credits with an increased, partially refundable college opportunity tax credit to cover up to four years (currently, limited to two years) of the tuition and related expenses of full or part-time postsecondary and graduate students.

Health care insurance credit.  Amends the Internal Revenue Code to allow certain small business employers a partially refundable business tax credit for the health insurance costs of employees who are not otherwise covered by a spouse’s insurance or by a federal health insurance program.

Alternative minimum tax and dividend tax rate.  A bill to amend the Internal Revenue Code of 1986 to extend and expand relief from the alternative minimum tax and to repeal the extension of the lower rates for capital gains and dividends for 2009 and 2010.

Education savings accounts.  Amends the Internal Revenue Code to: (1) increase the maximum annual contribution limit for Coverdell education savings accounts from $2,000 to $5,000 and make such increase permanent; and (2) allow a tax deduction up to $5,000 for contributions to an education savings account.

State and local sales tax deduction.  Amends the Internal Revenue Code to make permanent the tax deduction for state and local general sales taxes.

Cell phone tax.  Prohibits states from imposing any new discriminatory tax on mobile services (cell phones), mobile services providers, or mobile services property for three years after enactment of this Act. Defines “new discriminatory tax” as a tax imposed on mobile services, providers, or property which is not generally imposed on other types of services or property or is generally imposed at a lower rate.

Telephone tax.  Amends the Internal Revenue Code to repeal the excise tax on communication services (i.e., local telephone service, toll telephone service, and teletypewriter exchange service).

Indian employment tax credit.  Amends the Internal Revenue Code to permanently extend the Indian employment tax credit and the depreciation rules for property used predominantly within an Indian reservation.

Marriage tax penalty.  Makes provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that eliminate the marriage penalty in the standard deduction, the 15-percent tax bracket, and the earned income tax credit, permanent.

Depreciable business property.  Amends the Internal Revenue Code to: (1) increase the expensing allowance for depreciable business property from $100,000 to $200,000; (2) make such allowance permanent; (3) increase to $800,000 the asset cost threshold for calculating reductions in such allowance; (4) allow an annual inflation adjustment to the expensing allowance and the threshold amount after 2007; and (5) allow a taxpayer to revoke an election to expense such business property without the prior consent of the Secretary of the Treasury.
Start-up business tax year.  Amends the Internal Revenue Code to permit certain small start-up businesses to elect a taxable year, other than the required taxable year, which ends on the last day of any of the months of April through November (or at the end of an equivalent annual period).

Retail improvement property.  Amends the Internal Revenue Code to allow qualified retail improvement property a 15-year recovery period for purposes of the tax deduction for depreciation. Defines such property as any improvement to an interior portion of a building which is nonresidential real property, if: (1) such portion is open to the general public and is used in the trade or business of selling tangible personal property or services to the general public; and (2) such improvement is placed in service more than three years after the date the building was first placed in service. Excludes specified improvements, including the enlargement of a building, any elevator or escalator, or the internal structural framework of a building.

Disabled veterans.  Amends the Internal Revenue Code to allow members of the uniformed services whose retired pay in any taxable year is reduced due to an award of disability compensation by the Department of Veterans Affairs an extension of the three-year limitation period for filing tax refund claims until one year after the date of a disability determination. Limits the period for which such refund claims may be filed to taxable years beginning less than five years before the date of a disability determination.

IRS private debt collectors.  Requires the Internal Revenue Service (IRS) to suspend the use of private debt collection companies to collect unpaid taxes and prohibits the use of any IRS funds for tax collection contracts with private companies.

Art tax rate.  Amends the Internal Revenue Code to: (1) eliminate the 28-percent capital gains tax rate for collectibles, thus allowing gain from the sale of collectibles (including art works) to be taxed at the 15-percent tax rate applicable to other investment property; (2) allow the creator of a literary, musical, artistic, or scholarly property a fair market value tax deduction for the donation of such property to a tax-exempt organization, if properly appraised and donated no sooner than 18 months after its creation.

Tax haven countries.  Amends the Internal Revenue Code to treat certain controlled foreign corporations created or organized under the laws of a tax-haven country as domestic corporations for tax purposes. Sets forth a list of “tax-haven countries” and grants the Secretary of the Treasury authority to remove or add a country from such list.

Timber tax.  Amends the Internal Revenue Code to allow a tax deduction (available to taxpayers whether or not they itemize deductions) for up to 60% of gains from certain sales or exchanges of timber.

Volunteer use of personal vehicles.  Amends the Internal Revenue to provide that volunteers who use their automobiles for the benefit of a charitable organization may exclude from their gross income reimbursements for their automobile operating expenses at the same level as business employees (i.e., 48.5 cents per mile in 2007).  Increases criminal sanctions and monetary penalties for: (1) underpayments or overpayments of tax due to fraud; (2) attempts to evade or defeat tax; (3) willful failure to file tax returns, supply information, or pay tax; and (4) fraud and false statements.

Electricity tax credit.  Amends the Internal Revenue Code to eliminate after 2006 the reduction in the rate of the tax credit for electricity produced from open-loop biomass, small irrigation power, landfill gas, trash combustion, and hydropower facilities (thus allowing the same credit rate for all renewable resource facilities).

Electricity tax credit.  Amends the Internal Revenue Code to include kinetic hydropower as a renewable resource eligible for the tax credit for electricity produced from certain renewable resources. Defines “kinetic hydropower” as: (1) ocean free flowing water derived from flows from tidal currents, ocean currents, waves, or estuary currents; (2) ocean thermal energy; or (3) free flowing water in rivers, lakes, man made channels, or streams.

Active duty military.  Amends the Internal Revenue Code to: (1) allow certain small business owners (with 100 or fewer employees) and self-employed individuals a tax credit for wages paid to members of the Ready Reserve of the Armed Forces and to temporary replacement employees for such members while on active military duty; (2) treat differential wage payments made to members of the Ready Reserve as earned income for tax withholding and retirement plan purposes; (3) allow the rollover of military death gratuities to individual retirement accounts, health savings accounts, Archer medical savings accounts, and education savings accounts; (4) increase the standard tax deduction by $1,000 in 2007 and 2008 for members of the uniformed services on active duty for more than 30 days; and (5) make permanent the taxpayer election to treat combat pay as earned income for purposes of computing the earned income tax credit.

Conservation easements.  Amends the Internal Revenue Code to make permanent the tax deduction for charitable contributions by individuals and corporations of real property interests for conservation purposes.

1031 exchanges.  Amends the Internal Revenue Code to allow tax-free exchanges of shares in certain mutual ditch, reservoir, or irrigation companies.

Tax rates.  Repeals the termination date in the Jobs Growth Tax Relief Reconciliation Act of 2003 for provisions reducing individual tax rates on capital gains and dividend income.

Long-term trust accounts.  Amends the Internal Revenue Code to: (1) establish tax-exempt long-term care trust accounts; (2) allow cash contributions to such accounts up to $5,000 annually; (3) allow an exclusion from gross income for certain distributions, including for long-term care services for chronically-ill individuals; (4) impose penalties for excess contributions to such accounts and for failure to provide required reports on such accounts; and (5) allow a refundable tax credit for 10% of the annual contributions to such accounts.

School teachers.  Amends the Internal Revenue Code to: (1) increase the allowable tax deduction for the expenses of elementary and secondary school teachers to $400; (2) allow the deduction of professional development expenses; and (3) make such deduction permanent.

Combat zone compensation.  Amends the Internal Revenue Code to make permanent the taxpayer election to treat combat zone compensation (otherwise excludable from gross income) as earned income for purposes of computing the allowable earned income tax credit.

Agricultural tax safety credit.  Amends the Internal Revenue Code to allow a retailer of agricultural products and chemicals or a manufacturer, formulator, or distributor of certain pesticides a business tax credit for 30 percent of costs for or related to the protection of such chemicals or pesticides, including employee security training and background checks, installation of security equipment, and computer network safeguards. Sets a $2 million annual limit on such credit and a per facility limitation of $100,000 (reduced by credits received for the five prior taxable years). Terminates such credit after 2010.

Exxon Valdez benefits.   Allows taxpayers who are plaintiffs in the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska), or their heirs or dependents, to: (1) elect to average, for income tax purposes, income received in settlement of such civil action for the period beginning on January 1, 1994, and ending on December 31 of the year in which any settlement income is received; and (2) make contributions of any amount of such settlement income to certain tax-exempt retirement plans in the year such income is received.

Employee benefit cafeteria plan.  Amends the Internal Revenue Code to establish a new employee benefit cafeteria plan to be known as a Simple Cafeteria Plan. Defines “Simple Cafeteria Plan” as a cafeteria plan which: (1) is established and maintained by an employer with an average of 100 or fewer employees during a two-year period; (2) requires employers to make contributions or match employee contributions to the plan; (3) requires participating employees to have at least 1,000 hours of service for the preceding plan year and allows such employees to elect any benefit available under the plan; (4) permits participation by self-employed individuals; and (5) includes long-term care insurance as an qualified benefit. Exempts employers who make contributions for employees under a simple cafeteria plans from pension plan nondiscrimination requirements applicable to highly compensated and key employees. Modifies rules applicable to employee benefit flexible spending arrangements, including health and dependent care arrangements, to permit participants to make or modify elections regarding covered benefits and to carry over up to $500 (indexed for inflation) of unused benefits to the succeeding year or transfer such unused amounts to another plan, including an individual retirement plan or a health savings account. Allows an exclusion from the gross income of an employee of up to $7,500 ($10,000 for employees with one or more dependents) for employer contributions to a flexible spending arrangement. Provides for a cost-of-living adjustment to such exclusion amounts beginning in calendar year 2007.

Adoption tax credit.  Exempts provisions expanding the adoption tax credit and adoption assistance programs enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 from the general terminating (sunset) provisions of that Act.

Stock broker basis reporting.  Amends the Internal Revenue Code to include within the reporting requirements of investment brokers the adjusted basis of any security owned by customers of such brokers.

September 8th, 2007 | No Comments »

IRS Spin on the Corporate Income Tax

The IRS recently made a series of public statements outlining its distaste with the corporate income tax system.  The purpose of these public statements is to encourage Congress to reduce the corporate income tax rate, in exchange for reducing corporate tax breaks.  The interesting part of this story is why the IRS – an entity which is supported by public tax monies – is openly stepping into the political/legislative arena.

The IRS’s stated position is that a lower tax rate would help keep US businesses competitive in light of slightly lower corporate tax rates enjoyed by corporations in many other industrialized nations.  The IRS cites the corporate research and development tax credit and the low-income housing tax credit as examples of corporate “tax breaks” that should be eliminated.

The other – yet unspoken – side of this one-sided IRS debate is that the corporate research and development and low-income housing credits present Congress with a means of incentivizing certain corporate activities, i.e., keeping the US economy competitive by spurring research and development and by encouraging corporations to provide housing to the poor. 

One can’t help but wonder why the executive office that is tasked with collecting taxes is taking the time to push for legislative reform in an effort to look out for the overall American economy (and why this agency apparently doesn’t like US-based research and development or housing for the poor)? 

The answer can be found by examining how the IRS is going about making these public statements.  The IRS’s most recent efforts consisted of holding a widely publicized meeting with the executives of many large US companies.  The IRS used the mainstream media to publicize quotes from several large US company CEOs who attended the IRS meeting and who indicated that they favored reducing the corporate tax rate in exchange for eliminating corporate tax breaks. 

What’s the problem with this?  First, I would guess that not one of the CEOs who were quoted actually understand the ramifications of what they were agreeing to.  I did not examine the public records for the CEOs who responded in this manner to see how the CEO statments would impact any one company, but I would guess that the tax department leaders for these corporations would not support the statments made by the CEOs. 

Second, and most importantly, almost no large US corporation pays ANY US federal income taxes (with a few exceptions, such as Exxon – see, e.g., the chart on page four here http://www.ctj.org/corpfed04an.pdf).  Why would the IRS hold a meeting with corporations who do not pay the tax in order to ask their opinion as to whether the tax rate should be reduced in exchange for eliminating corporate tax breaks?  Why would the IRS not invite the smaller US corporations that actually pay the federal income tax?  Could it be that those corporations that actually pay the federal income tax would not be so ready to give up tax breaks that allow them to continue operating in the US in light of increased foreign competition and the availablity of cheaper (research and development) labor forces abroad? 

With this in mind and with a bit more understanding of IRS enforcement efforts, it is apparent that the real reason that the IRS has stepped into the political/legislative arena to oppose corporate tax breaks is that the IRS is simply not able to administer the corporate income tax system.  Tax practitioners and those who follow the IRS enforcement efforts know that over time the IRS has made it clear that it is fighting a losing battle with the corporate income tax. 

The crux of the problem is that corporate tax departments document and report on billions or even trillions of transactions in any one tax period.  It is nearly impossible for the IRS to detect, examine, and determine that these billions or trillions of transactions are correctly reported for tax purposes.

So what the IRS is now saying is “hey, reduce the corporate tax breaks so that it will make our job easier.”  I can respect this position, although I do not necessarily agree with it (as explained below).  

I do not agree with the manner in which the IRS is opting to reach its desired result.  If the IRS is having a problem enforcing the corporate income tax, the IRS should just say so and ask Congress to help. 

The IRS should not be in the business of maintaining a public propaganda campaign to encourage legislative changes to the tax code (if the IRS were a 501(c)(3) not-for-profit, it would have to revoke its own tax-exempt status for such activities).  The IRS should not contrive an argument that our economy would benefit if we eliminated corporate tax breaks and reduced the corporate tax rate.  Personally, I feel that it is necessary (given our current economic/political system) for Congress to provide some tax incentives to encourage American corporations to do what they would not otherwise do – such as conducting research and development activities here in the US and not overseas and providing housing to low-income individuals. 

Is there a better way for handling these issues?  Perhaps.  But absent a major overhaul of our tax and political system Congress has to work with what it has – and what it has is a tax system that allows it to encourage businesses to act in ways that Congress deems appropriate.  Congress, as our elected representative body, is in the business of determing what is best for our country and establishing law pursuant to these determinations.  The IRS is merely in the business of enforcing the law that Congress makes.  The IRS may have an interest in informing Congress about changes it deems necessary for the efficient administration of our tax laws, but it has no place in trying to build public sentiment via publicity stunts to encourage Congress to change our tax laws.

August 6th, 2007 | No Comments »

Independence Day Tax History: Trends

Independence Day gives us all an opportunity to reflect on what it means to be an American.  Even a cursory review of our nation’s short history reveals some interesting tax tendencies.  Here is a very brief US tax history timeline:

Whether it is the Boston tea party or the Whiskey or Stamp Act riots, it appears that we Americans have a long history of being tax protesters – and physically violent tax protesters at that. 

 
The peaceful tax protesters who we refer to as such today, such as the individuals that are prosecuted by the Department of Justice Civil and Criminal Tax Divisions, are, well, bland when compared with the tax protester of yesteryear.  Modern-day peaceful tax protest leaders are also not celebrated as national heroes by the mainstream media as many historic tax protesters are (otherwise, the images of folks like Irwin Schiff would be found on US currency).

 
Just for fun, I often try to discuss these concepts to IRS auditors and tax collectors as they fuss over accounting for and collecting every penny from taxpayers.  I can tell you that this is probably the best way to generate a blank stare from IRS employees (I am not referring to an evil blank stare, but rather a “the internal computer can’t compute” blank stare). 

 
A second tax trend that is apparent is that we Americans fight quite a few wars, most often without the money to pay for our wars out of our current savings and earnings.  This seems to often result in higher tax rates and/or taxes being imposed after the war to pay for the war.   

 
Maybe Congress is changing this trend, as it is not talking about raising taxes but rather it is talking about collecting more of the taxes that are already levied (i.e., about closing the so-called “tax gap”). 

 
For the non-tax professional, closing the “tax gap” really refers to allowing the IRS to more aggressively collect unpaid taxes.  In other words, if you do not want a more aggressive IRS then you should pay attention to what political candidates support closing the “tax gap” – given the name, which is probably right about when you decide to change the TV channel – and if the candidate does support closing the “tax gap,” does he or she propose some alternative means to close the gap. 

 
I would guess that, if given a choice, more Americans would prefer higher tax rates than a more aggressive IRS.  What do you think? 

July 3rd, 2007 | No Comments »

There is no Place Like Home (or is There?)

Have you ever said something like “I can’t wait to go home?”  If so, you probably don’t know what the term “home” means.

What does the term “home” mean?  According to the IRS, the term “home” means the taxpayer’s “principal place of business.”  I am guessing that very few (if any) taxpayers would define the term in this manner.

Our federal tax code does not define the term “home,” even though it comes up in many tax contexts (such as whether travel expenses are deductible, whether income is excluded from income taxation pursuant to Section 911, and whether one or more states are able to impose their income and other tax on certain taxpayers).

Absent a statutory definition, various courts have stepped in to define the term “home.”  Many of these courts simply accept the absurd definition put forth by the IRS (see, e.g., Jordan v. United States).  More competent courts have at least put forth some effort to define the term on their own.  These courts have been less than successful, but at least they put forth the effort to try.

Take the Jordan case.  In this court opinion the eighth circuit court states:

A taxpayer’s “home” … “is his principal place of business, and the taxpayer is ‘away from home’ when required to travel to a vicinity other than his principal place of business for temporary work.”  As an exception to this rule, a taxpayer may also be considered “away from home” if his “‘employment outside the area of his regular abode will be for a ‘temporary’ or ’short’ period of time . . . .’”  With regard to the temporary employment situation, however, “the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year.”

In the Jordan case the taxpayer lived in Minnesota and his employer paid for him to commute to Alaska for work over a period that exceeded one year.  The court said that the travel expenses to travel to Alaska were not deductible becuase the taxpayer’s “home” was in Alaska.

It seems that the fear is that if the term “home” were to be defined in a way that is logical (i.e., to mean where the taxpayer actually lives), then taxpayers would opt to live in remote locations and use their travel expense deductions to offset their taxable income - which would make US business less productive at the expense of the US Treasury (i.e., everyone would live in Hawaii and work in the mid-west and deduct the travel expenses).

I can see that position, but, frankly, I don’t think that this is what the “law” says and I don’t think the courts are doing us any favors by making up a definition or following the absurd IRS definition.  It is a fundamental principle of law that where a statute contains an undefined term that is ambiguous, the courts MUST look to the common meaning of the term (For example, the tax court often refers to common definitions in the Merriam Webster dictionary).

I reviewed several dictionaries and I couldn’t find one definition that even came close to defining the term “home” as a place of business.

What makes this judicial farce even worse is that taxpayers can easily plan to avoid the rule.  For example, the analysis in the Jordan case would change dramatically if the taxpayer had a “home office” in his personal residence in Minnesota.  In that case he may have been able to successfully argue that his “home” really was in Minnesota, where he lived, becuase his business was also there - especially if he kept in contact with his “home office” via the internet and by making regular visits to the “home office.”  Sound absurd, well, the IRS supports the position (see Rev. Rul. 99-7).

It is this type of issue that wastes taxpayer time and government resources.  Congress should define the term “home,” the IRS should abandon its absurd definition, and/or the courts should be able to explain what the term “home” means.

June 21st, 2007 | No Comments »

Use of Tax Fraud Resources

The government has limited resources available to detect and prosecute tax fraud. This raises the question of whether it is a better to use our limited government resources to pursue taxpayers whose conduct barely amounts to tax fraud or if it is better to use government resources to pursue taxpayers who are blatantly committing tax fraud?

The United States v. Turturro case provides a good example of the blatant tax fraud type of case. The Turturro case is similar to other cases where one or more prisoners submit false tax returns with the hope of obtaining federal income tax refund checks from the US Treasury.

According to the court:

Turturro mailed the names and social security numbers to his wife, who prepared the returns, mailed them to the IRS, and received and cashed the refund checks. Turturro instructed his wife where to send the refund money after it arrived and how to look for bankrupt companies to use on the W-2 forms. When his wife withdrew from the scheme, Turturro recruited another woman to prepare the returns in her place.

As taxpayers become more and more sophisticated - especially as technology and the internet help disseminate information - this sophistication of this type of blatant tax fraud will no doubt increase.

For example, where the prior prisoner tax fraud cases involved prisoner tax information, the Turturro case involved bankrupt corporation tax information, and in the future it might involve deceased taxpayers [using information culled from the local probate records], small corporations that were sold to third parties via asset sales and not as stock sales [culled from state corporate filing records], or even international corporations [possibly those that have ceased doing business in the US].

This type of blatant tax fraud is more visible to the public and, theoretically, easier to detect and secure convictions for. Although, it is unlikely that these public convictions will deter taxpayers who are thinking about committing less blatant tax fraud from committing tax fraud.

This type of blatant tax fraud probably costs [in terms of tax revenues] the government much less than lesser conduct that barely rises to the level of tax fraud — such as sophisticated corporate tax planning and tax reporting.

June 18th, 2007 | No Comments »

To Be a Tax Controversy Attorney….

I get a number of inquiries from tax attorneys who are interested in adding tax controversy work to their law practices. I do my best to encourage other tax attorneys to pursue this practice area because there are not that many tax attorneys who want to do tax controversy work. At the same time I do feel the need to explain the frustrations that they will face if they start accepting tax controversy work. Here are a few of my favorite examples that I recently related to another Denver tax attorney who is thinking about starting tax controversy work to her practice:

1. During a phone call to the IRS tax practitioner priority hotline, the IRS employee accessed the taxpayer’s computer tax record, stated that she was going to place the tax attorney on hold, and, unbeknownst to the tax attorney, the IRS employee then left to go to lunch. The tax attorney waited for twenty minutes and called back. The second IRS employee was not able to access the taxpayer’s computer tax record because the prior employee’s computer still had the taxpayer’s record open. Fortunately, the second IRS employee recognized the other IRS employee’s initials and/or username because the first IRS employee sits two desks (or cubicles) over from the second employee - which is how the tax attorney discovered that the first IRS employee had left for her lunch break.
2. During a phone call to the IRS automated collection system (ACS) office, the IRS employee stated that she could not talk to the tax attorney about the tax matter because there was no Form 2848 power of attorney on file for the tax attorney. The tax attorney offers to fax in the Form 2848 while the IRS employee is on the phone - as he has done several hundred (possibly even thousands) of times. The IRS employee refused to give the tax attorney her fax number, insisting that no IRS employee or office can accept a Form 2848 that is faxed to the IRS. The tax attorney asked if this is just a unique aspect of the ACS office that this IRS employee is in (and, if so, why the IRS employee’s office even has a fax machine if it cannot be used). The IRS employee again stated that no IRS office or employee can accept a faxed Form 2848. The tax attorney quotes Publication 947 that states “The IRS will accept a copy of a power of attorney that is submitted by facsimile transmission (FAX).” The IRS employee responded by hanging up the phone.
3. During a phone call to the tax practitioner priority hotline, the tax attorney provided a Form 2848 to the IRS (via facsimile transmission), explained that the taxpayer had died more than a decade ago, and the tax attorney provided documentation showing that the personal representative for the estate signed the Form 2848. The IRS employee refused to discuss the case with the tax attorney explaining that the dead taxpayer was the only person who could legally sign the Form 2848.
4. During a phone call to the IRS ACS office, the tax attorney proceeded to provide the taxpayer’s financial data to the IRS employee. The IRS employee entered the financial data into the IRS computer and told the tax attorney that the IRS computer showed that the taxpayer could make a monthly payment of $XXX thousand dollars per month. The tax attorney explained that this could not be possible given that the taxpayer had no assets, the taxpayer did not even earn $XXX thousand dollars per month, and that the underlying tax liability was not $XXX thousand dollars in total. The IRS employee spent nearly two hours reviewing the information that she entered into the IRS computer only to verify that she did not know why the minimum monthly payment required was $XXX thousand dollars per month, that she was surprised that it was so high, but that that is what had to be paid because the computer said so.
5. During a phone call to the IRS ACS office, the ACS office answered the phone (after about thirty minutes) and the IRS employee immediately suggested that she needed to transfer the tax attorney to the New York large dollar IRS ACS office due to the size of the tax liability. Despite the tax attorney explaining that the tax liability is nowhere near large enough to involve the large dollar office, the IRS employee transferred the tax attorney anyway. The IRS large dollar office answered the phone (after another thirty minutes had gone by) only to confirm that the tax liability is too small for it to assist the tax attorney. The large dollar office transferred the tax attorney back to the regular ACS office. After about thirty minutes the ACS office answered the phone and, as luck would have it, the tax attorney was connected with the same IRS employee with whom he first spoke. The tax attorney explained that the case had been transferred in error. The IRS employee insisted that the case was not transferred in error. The tax attorney asked how the IRS employee had reached this conclusion. The IRS employee responded by not responding at all. The IRS employee sat in silence on the phone line. The tax attorney placed the phone call on speaker phone and started working on another client matter. After about an hour the IRS employee stated that it is time for her to go home and she hung up the phone.

I suppose it isn’t fair to provide only these examples. A more representative list would include:

1. The mysterious “twenty four hour manager call back” that never happens;
2. Being placed on hold for several hours only to be directed to a message saying that the IRS is now closed and you need to call back during regular office hours;
3. Back dated correspondence which imposes very short deadlines for responding;
4. Correspondence that has the wrong taxpayer, tax period, and/or tax issue;
5. Correspondence that misstates the facts and/or law and reaches a conclusion based on the misstatement;
6. Correspondence randomly being sent to the taxpayer and not to the tax attorney;
7. Mountains of redundant correspondence sent to both the taxpayer and the tax attorney (I have had one case where both my office and the taxpayer received over two hundred letters from the IRS that said the same exact thing);
8. Tax matters being assigned and reassigned to new IRS employees;
9. Endless requests for irrelevant information;
10. Response times that could last months or even years;
11. IRS employees telling you wrong information or out-and-out lying; and
12. IRS employees refusing to follow the express mandates set out in our tax laws and IRS policies and procedures - even after you point out their deficiency.

June 16th, 2007 | No Comments »

Court Says No Fraud, So IRS Finds Friendlier Court

Say you are convicted of a tax crime and the criminal judge finds that your conduct has not risen to the level of tax fraud. Should a civil court later say that this same conduct does in fact rise to the level of tax fraud? In Maciel v. Commissioner, the Ninth Circuit Court of Appeals says that the second court can make this contradictory finding that the same conduct amounted to tax fraud.

Maciel understated his income of several of his tax returns and the understatement was discovered by the IRS during a routine tax audit. The IRS charged Maciel with two counts of tax evasion and then reduced the charges to two courts of willfully filing a false tax return.

Macel entered into a plea agreement with the Department of Justice. During the hearing, the government made this very convincing argument: “there appeared to be ‘some intent on [Maciel’s] part to do something.’”

The judge explained that:

I think on balance I am satisfied that the intent here was not primarily to avoid payment of tax. I think the intent may well have been to divert corporate money to personal use which is not a good thing and certainly is not something that the Court should countenance and particularly since it did have a consequence in terms of the accuracy of Mr. Maciel’s tax returns. But I don’t think that the conduct looked at in its totality suggests that the reason Mr. Maciel diverted the money was to avoid paying money to the Internal Revenue Service.

Maciel was sentenced to three months of home detention.

The IRS then sent Maciel a Notice of Deficiency (in 2000) showing that he owed $300,000 in back taxes for 1990-92 and nearly $250,000 in civil fraud penalties. Maciel petitioned the tax court and argued that the IRS could not impose a fraud penalty when the prior court said that he did not commit fraud and, absent fraud, the time period that the IRS had to assess the additional tax had expired.

The tax court rejected Maciel’s arguments, noting that Maciel had done the following evil acts:

Maciel regularly commingled funds among his various businesses, engaged in large unexplained cash transactions, mislabeled certain transactions as loans, failed to report any earnings from certain unincorporated business ventures, failed to keep adequate business records, and failed to inform his accountants and bookkeeper of his activities.

Marciel raised the same arguments before the Second Circuit Court of Appeals and it affirmed the tax court decision. The second circuit stated:

It is apparent that the government had virtually no incentive to litigate the fraud issue at sentencing [in the criminal trial]. In some cases, the government’s obligation to seek a sentence consonant with a criminal defendant’s culpability will be incentive enough to ensure that relevant issues are litigated vigorously.

In other words, if Marciel’s tax liability would have been larger then the IRS would be precluded from having a second court find that he committed fraud, even though the first court said that he didn’t commit fraud.

June 11th, 2007 | No Comments »