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Taxpayer Anctics: Taxpayer Convictions

Taxpayers often make mistakes. It happens. But there are some times when you just have to ask “what was the taxpayer thinking?”

Take the recent United States v. Baucom (and combined United States v. Davis) case. Taxpayers Martin Louis Baucom and Patrick Grant Davis were convicted of conspiracy to defraud the United States and willful failure to file tax returns.

After being indicted the taxpayers were given the opportunity to hire a competent tax attorney. The taxpayers sent “questionnaires” to potential tax attorneys in an effort to hire tax counsel. The court informed the taxpayers that this was not an appropriate means for obtaining a tax attorney and it gave the taxpayers additional time to obtain tax counsel.

The taxpayers then asked the court to allow their non-attorney friend to represent them in their criminal tax matter. The taxpayers’ request – which was sent to the judge, who was also an attorney – stated:

Defendant . . . has little confidence in the legal profession . . . . Defendant is aware of a few attorneys he trusts, but their multi-thousand dollar fees are out of the question . . . . He does NOT trust just any attorney out of a grab-bag whom the government is willing to furnish; neither would this defendant be satisfied with such an “attorney’s” concept of the Constitution of the United States after the average attorney, full of law-school brainwashing, thinks that the Constitution is what the judges say it is, rather than what the Constitution itself, says it is.

The court admonished the taxpayers for “continuing to send questionnaires to potential attorneys after having been advised that this was not an effective means of obtaining counsel” and the court gave the taxpayers additional time to find a tax attorney.

The taxpayers responded by filing:

a document entitled “AFFIDAVIT & DECLARATION OF CONTINUED EFFORTS TO SEEK COMPETENT COUNSEL.” The document contained numerous citations of Washington State cases and procedural rules. Among other things, Davis asserted that “[t]his court has NO authority to appoint me counsel over my objections”; “I can and will sue any Attorney for ineffective assistance of counsel who is appointed to my case over my objections”; and that “I can and will sue the person who picked my attorney and appointed him to me over my objections if said attorney loses my case.”

Fifteen months after the indictments, the court finally said that the taxpayers had had sufficient time to obtain a tax attorney, they refused to do so, and, therefore, the criminal trial would proceed with the taxpayers representing themselves. The trial commenced and the taxpayers were convicted. The court sentenced Baucom to fifteen months imprisonment. The court considered Davis’ charitable works in imposing a light four years probation (conditioned on the service of 12 months of house arrest). The taxpayers appealed the convictions and they lost.

Notwithstanding the antics of the taxpayers, here is the interesting part of the case. The lower court judge refused to include the amount of the state taxes that the taxpayers failed to pay in determining the taxpayers federal sentence. The lower court judge said:

I don’t think I have the . . . jurisdiction to sentence this man for [a] violation of North Carolina law. I mean, it’s inconceivable to me that a federal judge would be sitting up here and saying you violated North Carolina law and I’m putting you in jail for it. It’s just–what happened to the whole notion of federalism? I don’t think I have the power to do that. And if I do, if I have discretion, I decline to exercise the discretion to do that. It’s not fair and I ain’t gonna. Y’all can all go to Richmond and they can tell some other judge what to do.

On appeal, the IRS attorneys argued that the judge did have this power and he should have exercised the power. The Fourth Circuit Court of Appeals agreed with the IRS.

The Fourth Circuit Court stated:

We also think that the sentences imposed by the district court fail to reflect the seriousness of the offense and do not provide just punishment”¦ Appellants failed to file taxes of any sort for twelve years before they were apprehended. Moreover, as the Government notes, neither Appellant began paying taxes until 2004, after his conviction. Finally, we note with respect to Davis’ sentence that we are troubled by the heavy reliance of the district court on Davis’ charitable works.

The appeals court affirmed the convictions, vacated the sentences, and remanded the cases to the lower courts to impose higher sentences.

IRS Tax Attorney Office Reorganizes

It appears that the IRS Office of Chief Counsel is doing some housecleaning (this office consists of tax attorneys who handle most of the civil tax court matters for the IRS).

IRS Office of Chief Counsel Notice CC-2007-012 specifies that the Procedure and Administration Section of the Office of Chief Counsel subsidiary legal divisions have been reorganized into seven new branches.

The notice lists these branches and their subject matter as:

Branches 1 and 2

Subject areas: Returns, information returns, withholding, statutes of limitations, interest, penalties, sanctions, ethics, practice before the IRS, Circular 230, innocent spouse, electronic tax administration, powers of attorney.

Branches 3 and 4

Subject areas: Payment, assessment, collection, liens, levies, collection due process, period of limitations on collections, trust fund recovery penalty, jeopardy and termination assessments, refunds, erroneous refunds, joint committee.

Branch 5

Subject Areas: Bankruptcy, installment agreements, offers in compromise, receiverships, closing agreements, attorney fees, low income tax clinics, user fees.

Branches 6 and 7

Subject Areas: Court procedure, confidentiality of return information, privacy act, FOIA, summonses, burden of proof, disaster relief, combat zone, examinations, informants, arbitration, mediation and alternative dispute resolution, Appeals, rules of evidence, mitigation and equitable doctrines, discover, Fed/State issues, judicial doctrines, privileges, Religious Freedom Restoration Act, Right to Financial Privacy Act.

The Notice goes on to provide new contact information for each branch. Taxpayers should take note of this new contact information, as contacting IRS tax attorneys directly is probably the most overlooked avenue for addressing the more challenging procedural tax issues.

City of Chicago Takes Church Property For Un-Owed Taxes

The recent Beth-El All Nations Church case shows just how far state and local tax collectors will go to collect taxes – even when the taxes are not owed.

Here are the facts set out by the court:

An employee of the City of Chicago mistakenly addressed a notice to Beth-El All Nations Church at 1534 East 63rd Street, instead of Beth-El’s true address, 1534 West 63rd Street. The notice was pretty important: it advised the Church of its right to redeem title to the 63rd Street property after the parcel was sold for delinquent taxes. Despite the misaddressed notice, the City acquired a tax deed to the 63rd Street property in 1998. Finally, after Beth-El’s failed attempts to challenge the tax deed through state postjudgment proceedings, the City sought to oust Beth-El from the property in 2006.

The opinion goes on to explain that:

The Church was not, however, deemed to be tax-exempt during the period from 1986 to 1995, and so real estate taxes, totaling over $ 100,000, were assessed by Cook County against the property. Because of the delinquent taxes, the property was sold at a “scavenger sale,” a sale authorized by Illinois law for properties that have been tax delinquent for more than two years, if annual forfeiture sales have not satisfied the delinquency.

After quite a bit of legal wrangling, the Church persuaded the District Court to issue an injunction to prevent the City of Chicago from taking control of the Church property. The District Court stated “In this country, even a church is entitled to its day in court. That did not happen in this case.”

The Seventh Circuit Court of Appeals disagreed and overturned the lower court’s injunction. The Seventh Circuit Court noted that the Church property was tax exempt and there were no taxes owing, but the federal court was not the proper forum and since the Church did not raise the proper argument in its state court wranglings the federal court injunction was not proper.

The end result: the City of Chicago will probably obtain possession of the Church property for taxes that were not owed.

Florida Department of Revenue Harasses Taxpayer

Some states have a very poor record with regard to collecting taxes via legal means. The State of Florida is one of those states. In the recent In re: Omine case the Eleventh Circuit Court of Appeals details the Florida Department of Revenue’s illegal collection activities.

The Omine opinion states that:

Gregg and Michele Omine filed for Chapter 13 bankruptcy protection in 2001. The Florida DOR then filed a proof of claim seeking to recover public assistance money Hawaii paid to Gregg Omine’s former wife and children, who resided there. This Hawaii debt was included among those to be paid in the Omines’ Chapter 13 plan. The Omines filed a motion for contempt and sanctions, contending that the Florida DOR had continued debt-collection efforts after the filing of the bankruptcy petition, in violation of the automatic stay. The Omines withdrew the motion in January 2002 after the Florida DOR assured them that no further actions would be taken against them, but that assurance proved illusory.

The court opinion goes on to say:

The following year, Gregg Omine’s employer received a letter from the Florida DOR directing the employer to garnish Omine’s wages in connection with the Hawaii debt. n1 After counsel for both sides conferred, the Florida DOR agreed to cease this garnishment, but then, a week later, Omine received a letter threatening him with various penalties if he failed to pay the Hawaii debt. Again, after the parties’ counsel conferred, the collection efforts were halted, albeit only temporarily.


The Florida DOR soon directed Omine’s employer to begin garnishing Omine’s wages again to pay the Hawaii debt, and counsel for each side again conferred and resolved to halt the collection effort. A few days later the Omines received a notice that their 2002 tax refund had been offset against the Hawaii debt. The Omines then filed a motion for sanctions that alleged the Florida DOR repeatedly violated the automatic stay.

The bankruptcy judge discharged the remainder of the Hawaii debt and awarded the Omines $1,000 in actual damages, plus $1,600 in attorney’s fees and costs. This monetary award, in my opinion, is very low given the State of Florida’s intentional and repeat violations of our laws. It sounds as if the Florida Department of Revenue has forgotten that its job is to administer our tax laws, not break them.

Prepayment: to Deduct in Year 1 or Year 2?

Say you are an accrual method taxpayer and you hire someone to provide a service to you in year one, the service is to be provided to you over a twelve month period, and you prepay the person for this yet to be provided service. When can you claim a deduction for this prepayment? The IRS Office of Chief Counsel recently said that accrual method taxpayers cannot deduct any portion in year one.

Accrual method taxpayers are generally entitled to a deduction when “all events” with respect to the liability have occurred and the amount of the liability is relatively certain. “All events” occur with regard to service contracts when the services are performed. There are two exceptions to this general rule, namely the taxpayer can deduct the expense if the services will likely be rendered in three and one half months or, if the payment is a recurring payment, if the services will be provided by September 15th.

The question then is can you deduct a portion of the expense for the three or nine month periods in the first year if the services will be rendered over a period that is beyond these time periods? In other words, must all services be rendered before these periods in order for taxpayers to deduct the prepayment expense?

According to the IRS, yes, all services must be rendered before these periods or else taxpayers cannot deduct the expense. The IRS attorneys held that the time periods are strict.

So if taxpayers want to claim a deduction in year one for a prepayment on a service agreement, taxpayers must structure the governing legal contract to fit within these time periods. Of course, the same rules apply (in reverse) for taxpayers who receive prepayments pursuant to a service agreement and who want to delay recognizing the income and paying tax on the income….

Offer in Compromise: The Coming Storm?

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) makes substantial changes to the IRS offer in compromise program. Most notably, TIPRA includes a provision in which taxpayer submitted offer in compromises are “deemed” accepted by the IRS.

The offer in compromise or OIC program for compromising tax debts for less than is actually owed. Taxpayers often refer to this program as the process of settling tax debts for pennies on the dollar.

The IRS offer in compromise process is notoriously slow, with the IRS appeals officer not even being assigned to a taxpayer submitted offer in compromise for upwards of six months.

Pursuant to TIPRA, subsection (f) was added to IRC 7122. This subsection indicates that the IRS is deemed to have “accepted” an offer in compromise if the offer in compromise is not withdrawn, returned or rejected within 24 months after the IRS received the offer in compromise. This new law is effective for offer in compromises submitted two months after May 2006. This means that we are one year away from the time when the first “deemed” accepted offer in compromises will start to show up.

Here are some general thoughts about this coming “deemed” offer in compromise scenario:

The offer in compromise process is a bargaining process. Taxpayers often submit an initial offer in compromise and then either amend or submit a new offer in compromise at the instruction of the IRS appeals office. It is not unusual for a taxpayer to submit two or three offer in compromises to the appeals office in this process.

The appeals office, in my experience, has and continues to only continue processing the one final offer in compromise. The others merely disappear. Apparently, the appeals office is not concerned about these other offer in compromises being “deemed” accepted – but it should be.

Also, the courts have said that the offer in compromise is a legal contract that is governed by state contract laws. This means that we will probably see some state law based litigation for these “deemed” offer in compromises. The issues could be very complex. Here are some examples:

If a first offer in compromise is ignored but then a second offer is accepted in the negotiating process, does the first offer then trump the second offer after the 24 month period? What if only the second offer is rejected, does that rejection apply to the first offer? What if there is confusion as to which offer was accepted, rejected, etc.?

What happens if the IRS and/or the taxpayer cannot establish the date on which the offer was received, rejected, withdrawn, or returned? Who has the burden to make that showing and, if it is the taxpayer, how does the taxpayer show that the IRS failed to issue a rejection letter or return the offer to the taxpayer? When is an offer in compromise withdrawn? Is it when the taxpayer calls the appeals office and says “I withdraw my offer in compromise,” when the taxpayer faxes or mails a letter to the IRS saying this, or when the IRS actually receives the fax or letter?

What state law applies if the taxpayer resides in State A at the time the tax obligation arose, moved to State B and negotiated the offer in compromise, moved to State C by the time the offer is “deemed” accepted and the IRS appeals officer is located in State D and the IRS center that received the offer is in State E (Tennessee)?

Also, there are significant federal tax law issues that remain to be resolved.

For example, how does a taxpayer tell the IRS collections function that the tax is not owed and that any future collection activities are illegal? What about getting a lien lifted because the tax debt is no longer enforceable because an offer in compromise was “deemed” accepted?

Taxpayers currently run into this situation where the IRS has let the collections statute expire (i.e., the CSED lapses). Taxpayers who are in this situation have no immediate way of telling the collection branch to stop its illegal collections activities and they have to write letter after letter and just hope that collection activity stops. In most cases the issue is beyond the grasp of IRS employees, who are merely able to read the CSED that shows up on their computer screen and assume that it is THE correct answer.

If collections doesn’t stop, then the taxpayer has to appeal the collection activity after the fact. Is this how “deemed” accepted offers will start showing up in the system? Is that the best way to handle them? Maybe the Advocates Office will start handling these cases?

The IRS has issued Notice 2006-68, which fails to address any of these “deemed” accepted issues. In fact, this Notice raises even more questions.

Even more disturbing, what if every taxpayer decided to start mailing in $1 lump sum offer in compromises every day for the next two years? Would the IRS be able to reject and keep track of each and every one of those offer in compromises?

Sure the taxpayer would have to worry about the new frivolous submission penalty, but that is just a civil penalty and it is only a very nominal amount and taxpayers could withdraw any submission that they were notified by the IRS that it was frivolous, thereby avoiding the penalty on the offer in compromises that the IRS caught.

Of course, I would never recommend something like this to any taxpayer. I merely point out the issue, as there very well could be a storm on the horizon with regard to “deemed” offer in compromises — a storm that could cost the US Treasury quite a bit of tax revenues.

“We the People Foundation” Loses Court Battle, Wins Publicity

“We the People Foundation” recently lost yet another tax-related court case, but, perhaps wining in court is not really what the group is after.

According to the court record, We the People have:

engaged since 1999 in “a nationwide effort to get the government to answer specific questions” regarding what plaintiffs view as the Government’s “violation of the taxing clauses of the Constitution” and “violation of the war powers, money and ‘privacy’ clauses of the Constitution.”

and they contend:

that the President, the Attorney General, the Secretary of the Treasury, the Commissioner of the Internal Revenue Service, and Congress neglected their responsibilities under the First Amendment to respond to plaintiffs’ petitions.

As a result, We the People brought suit claiming:

that government officials-by seeking to collect unpaid taxes-have retaliated against plaintiffs’ exercise of First Amendment rights.

We the People then asked:

the District Court to enjoin the Internal Revenue Service, the Department of Justice, and other federal agencies from retaliating against plaintiffs’ exercise of their constitutional rights (in other words, to prevent the Government from collecting taxes from them).

The district court held that the First Amendment does not provide plaintiffs with the right to receive a government response to or official consideration of their petitions. We the People then appealed this decision, arguing that:

they have a First Amendment right to receive a government response to or official consideration of their petitions. Second, plaintiffs argue that they have the right to withhold payment of their taxes until they receive adequate action on their petitions.

The court of appeals dismissed We the People’s claims. While the group lost the court case, it did get some excellent publicity for its “cause.”

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