As the Emails Churn…

Posted on June 17, 2014 by Russ

The IRS Scandal continues to get uglier. Joe Kristan called it, “The dog ate my email….” All I know is that I’d end up in a new profession if I tried the excuses the IRS has given. But it got worse today.

First, attorney Cleta Mitchell represents “True the Vote.” TTV has sued the IRS and a number of its officials (including Lois Lerner). One rule in a lawsuit is that you can’t knowingly destroy evidence. Ms. Mitchell penned a letter to the IRS which was given to the PowerLine blog. An excerpt:

Therefore, the failure for the IRS to preserve and provide these records to the Committees would evidence either violations of numerous records retention statutes and regulations or obstruction of Congress.

Federal courts have held, in the context of trial, that the bad faith destruction of evidence relevant to proof of an issue gives rise to an inference that production of the evidence would have been unfavorable to the party responsible for its destruction.

Even if the various Congressional committees don’t get an answer, the IRS will be forced to give one in court. The letter from Ms. Mitchell goes further than the excerpt; it should be read in its entirety.

The various laws on record retention also come into play. There’s this report in pjmedia, where a former IRS IT specialist says that,

The IRS IT projects were fully funded and never lacked for resources. To state ‘Backup tapes were reused after some short period’ is a complete joke. The IRS had thousands and thousands of tapes and ‘Virtual Tape Libraries’ (VTL or non-tape backups based on hard drive storage technologies). There was never a reason to reuse tapes.

The other shoe fell today: Eliana Johnson reported that emails from six other IRS employees related to the scandal can’t be produced.

Congressman Darrell Issa (R-CA) subpoenaed IRS Commissioner John Koskinen to appear next Monday (June 23rd) in front of the House Oversight and Government Reform Committee. That’s a very short time frame for a subpoena, and I am certain that a message has been sent: Cut the b.s. and stop the excuses.

“I will not tolerate your continued obstruction and game-playing in response to the Committee’s investigation of the IRS targeting,” Issa, R-Calif., said in a letter accompanying the subpoena. “For too long, the IRS has promised to produce requested – and, later, subpoenaed – documents, only to respond later with excuses and inaction.”

What I wrote over the weekend still holds: Either the IRS has the most incompetent IT department in the world or the IRS is lying.

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Soon: No More Circular 230 Notices

Posted on June 15, 2014 by Russ

When I attended the annual CSEA SuperSeminar, Karen Hawkins, Director of the Office of Professional Responsibility (of the IRS), told a luncheon crowd that a new version of Circular 230 will be released within two weeks. Well, that didn’t happen. However, it’s about to happen. The new version is out there so sometime really soon (now, probably within two weeks) enrolled tax professionals (EAs, CPAs, and attorneys) will have a new Circular 230.

The one thing that all my clients will notice is the elimination of the Circular 230 notice. You know, this:

CIRCULAR 230 NOTICE: This opinion is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this opinion and the opinion does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this opinion, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

Once the new version of Circular 230 is effective, those notices are a thing of the past. Since every email has had one of these notices, they’re ignored by every client (the boy who cried wolf syndrome). This change is welcome, and kudos to the IRS on this.

There are other changes, including changes in written advice, procedures to ensure compliance with “covered opinion” rules, general standard of competence, electronic negotiation of taxpayer refunds, expedited suspension procedures, and the scope of the Office of Professional Responsibility.

For tax professionals who provide written advice to clients, a full reading of the new §10.37 is essential. There are numerous other changes, most of which appear to be minor.

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The Two Year Gap

Posted on June 15, 2014 by Russ

Do you remember how the IRS scandal began? It began when Lois Lerner made a speech and noted that the IRS erred and targeted conservative and Tea Party 501(c)(4) applicants. This occurred on a Friday afternoon.

Shock of shocks, another bit of news came out on a Friday afternoon of similar importance. The IRS is claiming that they lost Lois Lerner’s emails. For reasons I’ll get to in a few moments, this simply fails the smell test. The IRS says that they’ve made heroic efforts in attempting to recover the missing emails which cover a two-year period.

The problem with the IRS statement is simple: Email moves through email servers. Here’s a post on this at the Blaze with details on how email works. Here’s the concluding paragraph:

“I don’t know of any email administrator that doesn’t have at least three ways of getting that mail back,” [Norman Cilio, a former program manager at Microsoft] added. “It’s either on the disks or it’s on a TAPE backup someplace or in an archive server. There are at least three ways the government can get those emails.”

Mr. Cilio’s conclusion: The IRS is lying.

As an owner of a business in a regulated industry, I’m required to keep my emails (both coming and going). I’m not a technology wizard, but my IT person has told me that we do various backups that keep the information and store them in multiple ways. We use RAID technology–basically, a system where one hard drive is a copy of the working hard drive so if the working hard drive crashes, the backup immediately takes over with no loss of data.

PowerLine has a post noting that the IRS uses similar systems. Lois Lerner’s computer shouldn’t be relevant at all; it’s the IRS email servers and backup systems that are relevant.

House Ways and Means Committee Chairman Dave Camp issued a statement that isn’t as pointed as it likely should be. An excerpt:

“The fact that I am just learning about this, over a year into the investigation, is completely unacceptable and now calls into question the credibility of the IRS’s response to Congressional inquiries. There needs to be an immediate investigation and forensic audit by Department of Justice as well as the Inspector General.

“Just a short time ago, Commissioner Koskinen promised to produce all Lerner documents. It appears now that was an empty promise. Frankly, these are the critical years of the targeting of conservative groups that could explain who knew what when, and what, if any, coordination there was between agencies. Instead, because of this loss of documents, we are conveniently left to believe that Lois Lerner acted alone. This failure of the IRS requires the White House, which promised to get to the bottom of this, to do an Administration-wide search and production of any emails to or from Lois Lerner. The Administration has repeatedly referred us back to the IRS for production of materials. It is clear that is wholly insufficient when it comes to determining the full scope of the violation of taxpayer rights.”

My conclusion is succinct: Either the IRS is deliberately lying or they have the worst IT department and policies of any company, organization, or government entity in the world. I am forced to conclude the IRS is lying.

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IRS Adopts “Taxpayer Bill of Rights;” Will Anything Change?

Posted on June 10, 2014 by Russ

With great fanfare the IRS today announced the adoption of The Taxpayer Bill of Rights. As noted in the IRS announcement,

The Taxpayer Bill of Rights takes the multiple existing rights embedded in the tax code and groups them into 10 broad categories, making them more visible and easier for taxpayers to find on IRS.gov.

Publication 1, “Your Rights as a Taxpayer,” has been updated with the 10 rights and will be sent to millions of taxpayers this year when they receive IRS notices on issues ranging from audits to collection. The rights will also be publicly visible in all IRS facilities for taxpayers and employees to see.

“The Taxpayer Bill of Rights contains fundamental information to help taxpayers,” said IRS Commissioner John A. Koskinen. “These are core concepts about which taxpayers should be aware. Respecting taxpayer rights continues to be a top priority for IRS employees, and the new Taxpayer Bill of Rights summarizes these important protections in a clearer, more understandable format than ever before.”

My question to the IRS: Will anything change? Let’s look at the IRS scandal and these rights. (Six of the ten rights appear to me to be directly applicable to the current IRS scandal.)

1. The Right to be Informed. “[Taxpayers] have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.” There are a large number of 501(c)(4) organizations that still don’t know exactly what happened.

2. The Right to Quality Service. “Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.” Again, a large number of 501(c)(4) organizations had nothing of the kind.

4. The Right to Challenge the IRS’s Position and be Heard. “Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.” That didn’t happen.

6. The Right to Finality. “Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt.” If not for TIGTA, there wouldn’t have been any finality with the 501(c)(4)’s.

7. The Right to Privacy. “Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.” No comment here is necessary.

8. The Right to Confidentiality. “Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.” Please see yesterday’s post.

Until the IRS comes clean on the IRS scandal, what was released today makes a great sound bite but is otherwise nothing new. The IRS appears to have violated six of the ten rights, and is still stonewalling Congress on the scandal. The IRS’s budget won’t be increased because of today’s press release.

For the record, I do want to note that most IRS employees are professional, courteous, and a pleasure to deal with. I had an Appeals hearing today, and though we did not agree on everything, the Appeals Officer explained his position, and listened intently to my position. This led to a fair resolution of my client’s case. In general, most IRS employees exhibit this behavior. It’s a shame that the IRS scandal is causing damage to the agency, but this scandal emanates from the top (or somewhere near the top).

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Perhaps This Is Why Lois Lerner Is Taking the Fifth

Posted on June 9, 2014 by Russ

You remember the IRS scandal? It’s still around, and it appears that the IRS (or highly placed individuals at the IRS) violated the law.

From Eliana Johnson comes a report that begins,

The Internal Revenue Service may have been caught violating federal tax law: In October 2010, the agency sent a database on 501(c)(4) social-welfare groups containing confidential taxpayer information to the Federal Bureau of Investigation, according to documents obtained by a House panel.

Congressmen Darrell Issa and Jim Jordan sent a letter to IRS Commissioner John Koskinen demanding information:

The Committee learned recently that the IRS transmitted 21 disks containing over 1.1 million pages of information about tax exempt groups to the Federal Bureau of Investigation in October 2010 in advance of Lois Lerner’s meeting with the Justice Department about potentially using campaign-finance laws to criminally prosecute certain nonprofit groups engaged in political speech. We were extremely troubled by this new information, and by the fact that the IRS has withheld it from the Committee for over a year. We were astonished to learn days ago from the Justice Department that these 21 disks contain confidential taxpayer information protected by federal law. We ask that you immediately produce all material explaining how these disks were prepared and transmitted to the FBI.

Here are the emails that show this happened:

Violating federal law is a very good reason to take the Fifth Amendment. Now, it might not have been Ms. Lerner who ordered this, but if it wasn’t her she definitely knows who it was.

Additionally, the IRS’s non-cooperation with the House Committee on Oversight and Government Reform and the general IRS attacks on the GOP don’t sit well with the GOP. Until it is learned who ordered the IRS policy on 501(c)(4) organizations, the IRS’s budget will be shrinking, not increasing. Based on what I just read, if anyone is expecting the IRS’s budget to increase this year, well, that has as much chance as it snowing here in Las Vegas tomorrow. (The high is expected to reach just 105 F.)

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More on the Hom Decision

Posted on June 9, 2014 by Russ

Jack Townsend of the Federal Tax Crimes Blog has a post on United States v. Hom today. In his post, he notes that Mr. Hom represented himself. Indeed, the court is still looking for a pro bono counsel to represent Mr. Hom:

Defendant John Hom is not indigent and therefore does not qualify for appointment of pro bono counsel with the Court’s federal pro bono project. This tax action, however, involves novel questions of law regarding the interpretation of the Bank Secrecy Act and related regulations. Accordingly, the Court seeks counsel to volunteer to represent defendant on a pro bono basis for the remainder of this action. Pro bono counsel will be allowed to re-brief the pending summary judgment motion, which is currently held under submission. In addition, a case management schedule has not yet been set.

If any counsel is willing to volunteer to represent defendant, please email the undersigned judge’s courtroom deputy, Dawn Toland, at whacrd@cand.uscourts.gov by JUNE 12, 2014.

While Mr. Townsend notes that the Court applied the duck test, I remain unconvinced that the Court got this right. It did if you had to decide that all three foreign accounts in this case were foreign financial accounts or none were; however, if the Court could look at each individually the Court likely would have come to a different conclusion.

In any case, as of today we’re stuck with this decision. And no, I haven’t heard from the FBAR group at the IRS yet.

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Another Example of a Regulated Preparer Committing Tax Crimes

Posted on June 9, 2014 by Russ

Yet another example of a regulated preparer committing tax crimes emerged this past week out of Ohio. Larry Couchot is a CPA in Ohio. He’s president and an owner of an accounting firm. Mr. Couchot also may be heading to ClubFed. Here’s what the Department of Justice noted:

According to documents filed with the court, during the period 2006 through 2010, Couchot was aware that these individuals used a substantial amount of company funds to pay for personal expenses, including payments for their personal cars, car insurance, country club dues, personal credit card charges and their individual income tax liabilities. Couchot also admitted that he was aware that one individual used company funds to pay for other personal expenses, including lawn services, repairs and maintenance to personal residences, granite counter tops and TV and audio systems.

One of the rules in tax is that if a preparer has personal knowledge of something, it must go on a tax return. We, too, sign the return under penalty of perjury. For example, if I know that you included $5,000 of granite countertops for your residence in “supplies,” it must be removed as a business expense. That’s what Mr. Couchot didn’t do. He’ll face sentencing later this year.

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It’s Only a 56% Tax Increase…

Posted on June 8, 2014 by Russ

In the, “Tales, I win, heads, you lose” news of the week comes word of a 56% increase in Chicago’s telephone tax. The tax increase might prevent a $50 million property tax increase…but then again it might not.

The issues all stem from the problems with pensions in Chicago and Illinois. For those who aren’t familiar with the issues, Illinois is so far underwater on pensions that the state is in even worse shape that California. Chicago city pensions are in a similar situation–badly unfunded.

I’ll let the Chicago Sun Times tell a little of the story:

Instead of asking the Illinois General Assembly to simply renew a $2.50-a-month surcharge on telephone bills due to expire July 1, cash-strapped Chicago seized the opportunity to get more money — by persuading state lawmakers to raise the cap to “the highest monthly wireline surcharge imposed by any county or municipality” in Illinois.

That means Chicago can go up to $3.90, and increase a transaction fee on prepaid cellphones from 7% to 9%. The tax increase overall is expected to bring in $50.4 million. Earlier, Chicago’s city council passed a $250 million property tax increase ($50 million a year for five years); the phone tax increase will bring in enough money to possibly stop the first year of the property tax increase. Of course, there’s no guarantee that the Board of Aldermen (the official name of Chicago’s city council) and Mayor Rahm Emanuel will actually stop a tax increase.

Perhaps the city might look at cutting costs, too. Perhaps I’m also dreaming….

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Back to the Past: Poker Sites and FBARs. Poker Sites Are Again Reportable Foreign Financial Accounts

Posted on June 5, 2014 by Russ

Back in the past, I asked the FBAR group at the IRS whether or not poker sites needed to be reported. In January 2009, they told me they did have to be reported. In prior years, the FBAR group said they did not have to. Thus, FBARs (then, Form TD F 90-22.1) were sent to FINCEN with poker accounts.

Come early 2011, FINCEN issued new regulations. These regulations made it clear at the time that poker accounts would no longer be considered reportable foreign financial accounts. However, yesterday a judge disagreed.

In United States v. Hom defendant Hom was charged with violating the Bank Secrecy Act for not reporting three accounts at FirePay, PokerStars, and Party Poker.

In the case, the Court decided:

Section 5312(a)(2) lists 26 different types of entities that may qualify as a “financial institution.” Based on the breadth of the definition, our court of appeals has held that “the term ‘financial institution’ is to be given a broad definition.” United States v. Dela Espriella, 781 F.2d 1432, 1436 (9th Cir. 1986). The government claims that FirePay, PokerStars, and PartyPoker are all financial institutions because they function as “commercial bank[s].” Section 5312(a)(2)(B). The Fourth Circuit in Clines found that “[b]y holding funds for third parties and disbursing them at their direction, [the organization at issue] functioned as a bank [under Section 5314].” Clines, 958 F.2d at 582 (emphasis added).

The biggest problem that I see for the defendant is that he had an account at FirePay. FirePay was a United Kingdom-based third-party payment processor similar to Skrill (Moneybookers) and Neteller. FirePay was absolutely a foreign financial account: It issued credit cards, debit cards, and had functions that almost anyone would say are akin to what banks offer.

In this case, the defendant argued that all of his accounts were not foreign financial institutions. He did not separate out the poker sites from the third-party payment processor in his arguments. He was almost certainly doomed on the FirePay account. Still, the Court ruled that PokerStars and Party Poker were banks. What does this mean for individuals who have poker accounts?

1. As of now, plan on reporting these accounts for both FBAR (Form 114) and Form 8938 purposes. When in doubt, report is a good rule of thumb.

2. Do poker accounts need to be reported? As of now, yes.

3. Do prior year FBARs need to be filed and/or amended for poker accounts? This is unclear, but the answer is probably so. The statute of limitations on FBARs is six years from the due date. Given the FBAR is due on June 30th of the year following, the statute is about to run out on 2008. (In any case, for calendar years 2008 and 2009 poker sites were considered foreign financial accounts.) However, I would think that 2010 and 2011 FBARs would need to be filed or amended.

4. Do tax returns need to be amended to note the presence of foreign financial accounts if you have an FBAR filing requirement for poker accounts? Almost certainly they do for any tax years open (2011 – 2013).

5. Also note that tax returns may need to be amended just by the presence of a foreign financial account. The IRS now asks on Schedule B whether you have a foreign financial account. Anyone with money at PokerStars in 2011 would need to answer yes.

I have sent questions to the IRS on this issue. (The FBAR group at the IRS is one of the few groups that accepts emails.) I have asked whether they want such accounts to be reported; whether back FBARs/amended FBARs should be filed; and whether tax returns should be amended. I will both post on the response I receive and update this post when I do receive the response.

A few other things to note about the decision. This is not a precedential decision; it is a decision of a District Court Judge. A Court of Appeals has not ruled on this. The defendant lumped an account that was clearly a foreign financial account with accounts that might not be. The Court looked at them in toto rather than individually. I suspect that if Mr. Hom appeals this decision, he will also argue that the poker accounts should be looked at differently than the third-party payment processor.

I am troubled by the Department of Justice looking at poker accounts as a foreign financial account. Still, there are some other issues regarding this decision that are unclear. FBAR charges are rarely brought in isolation. I don’t know what caused these charges to be brought.

In the end, this is not a good decision for poker players or tax accountants who service the poker world. Lots more useless paper will end up being generated as a result of this decision. (Well, electrons as FBARs now must be electronically filed.) Still, the old adage of better safe than sorry holds. As of today, reporting poker sites as foreign financial accounts is back on.

Posted in Gambling, IRS | Tagged | 2 Comments

Next Month Has Arrived (or, Deadlines for Us, But Not for Them, Part 3)

Posted on June 4, 2014 by Russ

I’m a Cubs fan. As such, I’m always waiting for next year.

I have a client who has been waiting since October to get his IRS notice issue resolved. I’ve written about it twice before. Back in March, we received a collection notice. I called the IRS up, and they put a nine-week hold on the account. That wasn’t long enough; last month, a second collection notice was received and another nine-week hold was put on the account. It turns out only four additional weeks were necessary.

Yes, I’ve been telling my client that next month would it would get resolved. (Luckily, I hadn’t said which next month.) Today, I received another IRS notice regarding this client. The IRS reviewed the paperwork I had sent back in October and agreed completely with what I sent. My client will get his $24 refund very soon. It only took a total of eight months.

There are two takeaways on this case. First, be patient. If you write the IRS, it could take a long, long time to get a resolution. I suspect the delays may vary by service center. This set of notices came out of Philadelphia; they appear to be having the lengthiest delays.

Second, the underlying notice was a math error (CP11) notice. The only problem with that is there were no errors on the original return. Somehow, the IRS computer took the numbers from an electronically filed return and made its own math mistake. Yet had we not challenged the notice, 60 days after it was sent my client’s only choice would be to pay the tax and then file a claim for refund.

In any case, this is finally resolved (and with a happy ending).

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