Tax Lawyer's Blog

WebCPA reports that the IRS’s Criminal Investigation Division (CID) is getting closer to meeting its objectives for combating tax evasion, corporate fraud, financial crime and even terrorism, according to a new report from TIGTA:

[The] Treasury Inspector General for Tax Administration noted that the division’s current strategic plan calls for it to maintain a focus on legal-source tax investigations, to combat corporate fraud and terrorism, and to reduce the number of days to complete an investigation, among other priorities.

“Our report found that the IRS’s Criminal Investigation Division is generally reaching its objectives,” said TIGTA Inspector General J. Russell George in a statement. “The statistics validate that legal-source tax and tax-related investigations are a top priority for the CI Division.”

TIGTA found that CID demonstrated its commitment to pursuing legal-source tax and tax-related investigations as its top investigative priority. The CID achieved its fiscal year 2009 goal, spending 52.4 percent of its time on legal-source tax work and 72 percent on total tax investigations, a 10-year high in both areas.

This step up in criminal tax enforcement is evidence that the White House is serious about its efforts to close the tax gap.

The tax gap is the difference between the correct amount of taxes that the IRS should collect from taxpayers and the amount it actually does collect.

The IRS estimates the annual tax gap to be $300 billion.¹

The tax gap is a form of government waste and, while it’s complete elimination is, of course, impossible, the government has no business raising the taxes of honest, law-abiding Americans until it is reduced to a reasonable level.

Footnote:

¹  For a detailed discusion of the tax gap go to The Tax Policy Institute’s The Tax Gap: What is the Tax Gap?

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“Nothing concentrates a man’s mind like the prospect of being hanged in the morning.”

- Samuel Johnson -

The New York Daily News reports that day-trader Marcos Esparza Bofill has been hit with a $172,000,000 IRS tax bill:

He failed as a day-trader and barely survived in New York on a beer budget, but Marcos Esparza Bofill has been hit with a $172 million tax bill by the IRS.

Esparza Bofill didn’t file an income tax return for the year he was here swapping stocks – and that’s leading to big problems with Uncle Sam.

The feds tracked his every trade. But because Esparza Bofill never accounted for his losses or expenses in tax filings, the IRS presumed he made a pure profit – a staggering $500 million in income.

This case nicely illustrates the immense collection and enforcement power of IRS’s Substitute for Return (SFR) program.

Despite what the nutroot tax protesters say, you have a legal obligation to file a federal tax return. If you don’t file one, the IRS may file one for you. And, as Senor Bofill will now attest, this can be very ugly.

In short, the SFR is the mechanism the IRS uses to prepare and file a tax return for non-filers.

Here’s how it works:

• When you perform services for someone else, whether as an independent contractor or an employee, your principal or employer is required to report to the IRS the compensation it paid to you during the tax year.
• If you have other sources of income during the year, such as stock or real estate sales, the payors of those amounts are also required to report them to the IRS.
• The IRS, therefore, has a record of at least some of the income you earned during the tax year.
• The IRS uses this income information to determine whether or not you reported it properly on your tax return.
• If you did not file a tax return, the IRS will send you several letters instructing you to file.
• If you still do not file, it will prepare an SFR for you based solely on the income information reported to it.

This is bad news for you because the IRS has no way of knowing what, if any, deductions, losses or credits you may have had that would reduce that income. And, because you did not file, you cannot claim those offsets.

The SFR allows the IRS to make an assessment of tax, penalty and interest against you and begin the enforced collection of that assessment. And because you have not voluntarily filed your tax return, the 10 year statute of limitations on collections does not begin to run. In other words, the IRS has forever to collect an SFR assessment made against you.

The only way you can correct an SFR is by preparing and filing your tax return. The return you file will be treated as a request for audit reconsideration. If the audit reconsideration examiner accepts your return as filed, the IRS will replace the SFR with your voluntarily filed return.

Taxpayers who have a record of ignoring IRS notices rarely ignore the SFR notice.

Regardless of what you think about the ethics of the SFR procedure, it remains a highly effective IRS enforcement weapon.

Our Advice: Because the IRS closely scrutinizes returns filed after an SFR has been filed, it is always better to file your return before the IRS files one for you.

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Jacob Gershman  says that New York imposes a special sales tax depending on how you eat your bagel:

What’s the tax on a bagel? It depends how you slice it — or in the case of New York, if you slice it, The Wall Street Journal reported Tuesday.

State tax officials, under orders from cash-strapped Albany to ramp up their audit and compliance efforts, have begun to enforce one of the more obscure distinctions within the state’s sales tax law.

In New York, the sale of whole bagels isn’t subject to sales tax. But the tax does apply to “sliced or prepared bagels (with cream cheese or other toppings),” according to the state Department of Taxation and Finance. And if the bagel is eaten in the store, even if it’s never been touched by a knife, it’s also taxed.

That was news to one New York bagel-store owner, who found out he was out of compliance with the policy this summer when the state audited his company.

Kenneth Greene, the owner of 33 Bruegger’s Bagel franchises throughout New York, says the state demanded that he start charging taxes on all bagels, except for those that remain intact and are consumed off premises, and forced him to pay a “significant” sum in taxes that the state estimated he owed.

Greene says the extra charge, about eight cents a bagel, depending on the local rate, filled his customers with boiling rage. “They felt we were nickel-and-diming them. They thought we were charging them to slice a bagel,” he said.

To clear things up, he posted signs at the cashier informing customers that it was Albany, not Bruegger’s, to blame. “We apologize for this change and share in your frustration on this additional tax,” the signs read.

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Reuters reports that actor Paul Hogan, best known for playing an outback hunter in the “Crocodile Dundee” movies, has been stopped from leaving Australia until he pays a multi-million dollar tax bill:

The Australian Taxation Office (ATO) served U.S.-based Hogan with a departure prohibition order when he returned to Sydney last Friday for the funeral of his 101-year-old mother Florence, his lawyer Andrew Robinson said in a statement.

This prevents the 70-year-old actor from leaving Australia until any alleged tax debts are paid or arrangements made for the tax liability to be discharged.

“He is stunned and very disappointed that the government could treat him as a flight risk,” said Robinson.

“He denies the liability asserted by the ATO and has filed objections which have not been the subject of any response from the ATO. He will continue to defend his position through all available legal and other channels.”

Hogan is under investigation as part of a nationwide tax fraud probe over allegations that he put tens of millions of dollars in film royalties in offshore tax havens, a claim that he has denied, saying he had “paid plenty of tax” in Australia.

The tax office was reported to have served Hogan with an amended tax bill last month for tax on $37.6 million of undeclared income after a five-year long fight.

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If you’re an insomniac you may recognize Roni Deutch from her ubiquitous late night infomercials promising taxpayers pennies on the dollar settlements with the IRS:

Joe Kristan writes about yet another lawsuit against Deutch:

California’s Aspiring GovernorAttorney General Jerry Brown has sued Attorney Roni Deutch, who blogs as the “Tax Lady,” for “swindling” taxpayers who hire her to get taxes forgiven. From the AG’s press release: 

“Tax Lady Roni Deutch is engaged in a heartless scheme that swindled people with tax problems,” Brown said. “She promises to significantly reduce their IRS tax debts, but instead preys on their vulnerability, taking large up-front payments but providing little or no help in lowering their tax bills.”

Deutch manufactures credibility by boasting that her tax resolution law firm, which has annual revenues of at least $25 million, is the largest of its kind in the nation. She spends $3 million a year on advertising, much of it on late-night cable TV, and frequently offers tax advice on NBC’s Today Show, CNN, and CNBC. 

Desperate debtors turn to Deutch based on her misleading ads that feature fictional testimonials claiming she secured large reductions in the featured clients’ federal tax debts. 

Her blog has no mention of the suit yet. 

TaxGrrrl (“no relation”) notes that Ms. Deutch paid $300,000 to New York to settle similar claims. The California lawsuit seeks $34 million. 

While I have no insight on whether there is anything to the lawsuit, taxpayers shouldn’t assume that TV “tax settlement” outfits really can perform the magic they claim. The limited work I’ve seen from TV tax settlement outfits was very unimpressive — though I’ve never seen any work from the Deutch firm. The IRS usually will forgive debts only if you are really a “turnip” with no ability to ever pay the debt off. If you are that upside-down, though, you probably need more than just tax relief; you likely should be working with bankruptcy counsel. 

Joe is right. Offers in compromise (IRS settlements) are extremely difficult to get.

People like Ms. Deutch who advertise that they can get taxpayers “pennies on the dollar” deals without first obtaining and analyzing their detailed financial information, their bank statements and their prior tax returns are blowing smoke.

Over the last 20 years I have had hundreds of taxpayers hire me after they hired assembly-line tax outfits like Deutch, J.K. Harris and Tax Masters. 

They all tell the same story:

I met [talked on the phone] with someone locally and he told me that [insert tax outfit name] would get me an IRS settlement for just a fraction of what I owe. I paid him $5,000 and signed a power of attorney form. I have not heard from anyone since then. I have called them several times and each time I get a different person who knows nothing about my case.   

These scam outfits perpetrate the classic bait and switch. They hire salesmen to say whatever it is they need to say to get a taxpayer to part with his money. Once they have the taxpayer’s money, their enthusiasm about working on the case declines precipitously usually to the point of inaction. And there is little the taxpayer can do about it because the scammer’s operations are located out of state.

Attorneys like Roni Deutch conduct extensive advertising campaigns in states other than the one in which they are certified and regulated. This allows them to avoid the advertising rules that other lawyers practicing in the state are required to follow.

For example, because the Florida bar association does not have jurisdiction to discipline Ms. Deutch according to its own stringent advertising rules, Ms. Deutch is free to make promises and guarantees that if made by a Florida attorney would result in disbarment.

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The following two sentences are taken verbatim from Saturday’s New York Times editorial:

[Tom] DeLay, the Texas Republican who had been the House majority leader, crowed that he had been “found innocent.” But many of Mr. DeLay’s actions remain legal only because lawmakers have chosen not to criminalize them.

This is a stunningly brilliant deduction, don’t you think?

Good Lord!

The only reason the New York Times editorial board hasn’t been thrown in the hoosegow for this op-ed is that lawmakers have chosen not to criminalize authentic frontier gibberish (an example of which is shown in the  video below):

The Times should change it’s motto to “all the news that’s bullshit to print.”

(Hat Tip: Megan McArdle of The Atlantic)

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“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”

- Thirteenth Amendment to the United States Constitution -

CPA Kip Dillinger writing for Tax Notes says that a war is brewing between tax preparers and the IRS about how much due diligence is required before a tax preparer can sign a client’s tax return (emphasis is mine):

Recently there has been evidence that seems to confirm that we practitioners will have a battle with the IRS over what is considered adequate due diligence regarding return preparation. This looming battle may not be pleasant, and tax practitioners likely will be displeased with the outcome.

There’s plenty of evidence, anecdotal and otherwise: 

• More than a year ago, Treasury and IRS representatives,  encouraged by repeated comments from former Office of Professional Responsibility (OPR) Director Michael Chessman, asserted that Circular 230 practitioners had a duty not just to ask their clients if they had signature authority over a foreign bank account, but to have a specific conversation with every taxpayer client concerning the foreign account reporting requirements — even if there was no evidence the client had an account and even when the client had indicated ‘‘no’’ or ‘‘none’’ by checking a box in a tax organizer submitted for  return preparation. The unpleasantness of questioning a client’s veracity aside, this requirement (which  to date is still awaiting clarification) imposed onerous  time burdens on the tax practitioner.
• The national taxpayer advocate’s annual report to Congress for 2009 discussed the possibility, if not the likelihood, of imposing additional due diligence requirements on preparers (this was of course framed as a consumer protection issue). Although the report has not always carried great weight with Congress, Treasury, or the IRS, one can safely assume that when it comes to using the return preparer as an enforcement tool, it will receive the Service’s full attention.
• In January the IRS sent letters to 10,000 return preparers explaining a variety of due diligence responsibilities regarding return preparation, and in nearly all cases, the letter was followed by a meeting  between an IRS agent and the preparer at the preparer’s office that often lasted about three hours. The letter, and often the visiting IRS agents, misrepresented the due diligence requirements imposed on practitioners — by, for example, asserting that a preparer had a duty to verify client-submitted information for trade or business (Schedule C) income and to review bank statements to verify reported gross receipts. The AICPA brought the misinformation about verification  to the attention of the IRS, which promptly published a clarifying FAQ on the Web page describing the project. 
• As a tax professional who defends other tax professionals and teaches professional standards, I have seen a fair amount of evidence across the country that IRS examiners are asserting preparer penalties in instances when the preparer isn’t required to verify the specific items and appears to have properly  counseled the taxpayer about the rules and recordkeeping requirements for claiming the items on the returns. Return preparer penalty assessments have also been proposed in situations when the client understated business income gross receipts for the information provided to the return preparer — again, when it appears the return preparer had little reason to question or challenge the client’s provision of gross receipts on a tax organizer information sheet.

It would seem that the IRS is acutely aware that it is incapable of efficiently and cost effectively carrying out its own stated mission. Consequently, it is cynically attempting to draft private tax preparers and compel them, without compensation and against their will, to carry out that mission for it.¹

This is unacceptable and must be stopped.

Footnotes:

¹  The imposition on tax preparers of additional due diligence requirements will result in more work for tax preparers and, therefore, higher fees for the preparation of tax returns. Since this additional work is required by the IRS, perhaps it should use positive reinforcement and compensate tax preparers for doing it. This is absurd, of course. A tax preparer who is paid by the IRS would have a clear conflict of interest and no taxpayer in his right mind would hire him. But the same conflict exists when the IRS uses negative reinforcement to get tax preparers to do its bidding. 

Related Posts:

• IRS Disbars CPA for Relying on Client’s Income and Expense Numbers
• May Tax Advisors Tell Their Clients to Form S Corporations to Reduce Their Chances of Audit?
• 11th Circuit Case: Tax Preparer Escapes Death Penalty
• Tax Return Standard: Substantial Authority v. More Likely than Not
• 31 Congressmen Ask Geithner to Ease Up on Tax Preparer Regulations

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The Guardian reports that Swedish authorities have issued an arrest warrant for Wikileaks founder Julian Assange on suspicion of molestation and rape:

The warrant was issued late yesterday, said a spokeswoman at Sweden’s prosecutors’ office in Stockholm.

She said Assange should contact the Swedish police for questioning about the accusations of molestation and rape in two separate cases “so that he can be confronted with the suspicions”.

Assange has denied the charges, which were first reported by the Swedish tabloid Expressen, on Wikileaks’ Twitter account.

Naturally, Assange’s defense is that he’s being targeted because he published confidential U.S. military records:

He implied that [the charges] were linked to the release by the whistleblowers’ website of a huge cache of US military records about the Afghan war, which were published in collaboration with the Guardian and two other papers.

Assange said: “The charges are without basis and their issue at this moment is deeply disturbing.”

Targeted by the Swedes for disclosing U.S. military secrets? Um, I don’t think so.

The more likely culprit is Karma.

Related Posts:

• Wikileaks Treason

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WebCPA reports that a man who drove his SUV into an IRS building in Birmingham in 2008 has been sentenced to 52 months in prison:

Ernest Milton Barnett pleaded guilty in March to a two-count indictment that charged him with using a deadly weapon, specifically a Jeep Cherokee Sport Utility Vehicle, in his Aug. 26, 2008, assault on IRS employees. It also charged him with willfully damaging government property.

Judge Virginia Emerson Hopkins ordered Barnett, 50, on Wednesday to serve 52 months in prison, followed by three years of supervised release. She ordered him to report to prison on Oct. 12. The judge also ordered Barnett to pay more than $3,000 in restitution to the IRS and IRS employees injured in the assault.

“This defendant undertook a senseless and outrageous attack on a government building filled with people in order to protest a long-standing tax debt, and innocent and unsuspecting federal employees were injured,” U.S. Attorney Joyce White Vance said in a statement. “Such a premeditated and unwarranted assault against the federal government demands punishment.”

According to the government’s sentencing memorandum, Barnett conducted the assault as follows: He grew angry during a telephone conversation that morning with an IRS employee and left his Center Point home en route to the IRS building to exact revenge on the government agency.

He was seen driving in both directions around the IRS building before crossing over a curb onto a grassy area at the back of the building. He began to spin his vehicle around, then aimed it at the wall, accelerated and rammed into a window. As employees inside began to flee the breaking glass, Barnett backed up, re-aimed the vehicle and struck the building again.

Mounting a literal attack against the IRS is one of the worst ways to deal with an IRS problem. I recommend that whenever you get the urge to use your car as a missile, instead pour yourself a double Scotch and then lie down and wait until the feeling passes.

Related Posts:

• Characteristics of Extreme IRS Wackos
• Florida Contractor Hires Hitman to Have IRS Auditor Murdered
• Man Facing Foreclosure and Tax Liens Bulldozes his House
• Anti-rich Taxpayer Burns House, Crashes Plane into IRS Building

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Joe Kristan raises some excellent questions for tax increasers in It’s Okay to Feed Them to Piranhas, They’re Rich:

Anybody who wants to increase taxes on “the wealthy” should first address these questions:

- What rate do you want to see the “rich” pay? If it’s not the proposed 39.6% (or 43.4% under Obamacare), what is it?

- Is there some point where a taxpayer should have a right to keep his earnings, no matter how much?

- Does raising tax rates on “the rich” backfire at some rate? Is there a tax rate that damages the economy enough that the harm caused to the non-rich exceeds whatever benefits come from raising tax rates? What is that rate?

- Is there some point where you will say the government has enough money and power and shouldn’t get bigger? What is that point?

Until people who want the Bush cuts to expire answer these questions, I assume that the proposed Obama rate increase is just a down payment on their next tax increase.

Right on, Joe. Those who want tax increases on the rich will propose a second round of increases ten minutes after the first increases become law. It’s what they do.

Although I believe that slippery slope arguments usually make for bad law, in this case we should oppose even modest tax increases on the rich for the same reason pro-choicers oppose a ban on partial-birth abortions and gun rights advocates oppose a ban on assault rifles. 

They do not do so because they favor partial birth abortions and assault rifles, but rather because they know once their opponents ban those things they will set their sights on the banning of first trimester abortions and handguns.

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