We Don’t Need No Stinkin’ Backups

Posted on June 22, 2014 by Russ

The IRS scandal continues to be the big issue. And lots more news came out over the weekend.

First, it turns out the IRS had a contract with an email backup company, Sonasoft; their motto is “Email Archiving Done Right.” But weeks after Lois Lerner’s alleged computer crash the IRS cancelled the contract.

Meanwhile PowerLine Blog has been noting that the IRS was required to archive their emails, and this was even noted in the IRS’s Manual on Managing Electronic Records (part of the Internal Revenue Manual).

On Monday, Darrell Issa’s committee will hold another hearing on the scandal. I don’t know if Commissioner Koskinen will be as arrogant as he was on Friday (see the post immediately below), but here are some questions I’d like to see asked and some actions I’d like the committee to do:

1. Commissioner Koskinen, does the IRS follow the federal law on recordkeeping? Are you aware that most emails–and certainly all interagency emails–must be archived under this policy?

2. Are all email servers backed up (archived) regularly? Was this policy in place in 2011? In 2009? Has a search been made of these archives?

3. Are there any other hard drives that have failed that relate to this investigation (besides the seven you’ve let the committee know of in the last week)?

I’d also like to see the committee subpoena as many people as they can find in the IRS IT Department and ask them, under oath, about these issues. I’d like the committee to issue a subpoena to the Federal Election Commission to obtain their email archives; to the White House to obtain their email archives; and to the Department of Justice to see theirs. (This would be all emails from 2009-2013 to or from Lois Lerner and related principals.)

Many of my Democratic friends think this scandal is a whole lot of nothing. It is possible it’s close to that but we have no way of knowing thanks to either the IRS’s deliberate obstruction or their incredible idiocy. It has exposed the IRS as an agency whose leadership has its head in the sand, that is arrogant beyond belief, and that expects honest taxpayers to keep everything for years but won’t follow the rules themselves. Congressman Ryan didn’t believe Commissioner Koskinen on Friday. Neither do I.

Posted in IRS | Tagged | 1 Comment

“I Don’t Think an Apology Is Owed”

Posted on June 20, 2014 by Russ

Congressman Paul Ryan is annoyed.

There is not much to add to what Congressman Ryan said today. For those who didn’t watch today’s hearing, FoxNews has an accurate summary:

Koskinen set a defiant tone during his testimony before the House Ways and Means Committee, telling lawmakers he felt no need for the agency to apologize amid accusations of a cover-up in the targeting scandal of conservative groups.

Republican lawmakers had demanded the emails between ex-IRS official Lois Lerner and other government officials – including some at the White House – be turned over to determine whether there was a coordinated effort to stymie conservative groups prior to the 2012 elections.

“I don’t think an apology is owed,” Koskinen said. “We haven’t lost an email since the start of this investigation.”

How nice–no emails were lost since the start of this investigation. It’s a shame so many were lost two years before it began when former IRS Commissioner Doug Shulman was lying misleading Congress about the IRS’s policies toward 501(c)(4) groups.

Of course, if I tried what the IRS is trying–the “my dog ate the receipts” excuse–I’d be laughed out of any audit or Tax Court. Well, possibly not in the future:

WASHINGTON — Taxpayers who do not produce documents for the Internal Revenue Service will be able to offer a variety of dubious excuses under legislation introduced by Rep. Steve Stockman (R-TX 36) a week after the IRS offered an incredibly dubious excuse for its failure to turn documents over to House investigators.

“The United States was founded on the belief government is subservient and accountable to the people. Taxpayers shouldn’t be expected to follow laws the Obama administration refuses to follow themselves,” said Stockman. “Taxpayers should be allowed to offer the same flimsy, obviously made-up excuses the Obama administration uses.”

Under Stockman’s bill, “The Dog Ate My Tax Receipts Act,” taxpayers who do not provide documents requested by the IRS can claim one of the following reasons:

1. The dog ate my tax receipts
2. Convenient, unexplained, miscellaneous computer malfunction
3. Traded documents for five terrorists
4. Burned for warmth while lost in the Yukon
5. Left on table in Hillary’s Book Room
6. Received water damage in the trunk of Ted Kennedy’s car
7. Forgot in gun case sold to Mexican drug lords
8. Forced to recycle by municipal Green Czar
9. Was short on toilet paper while camping
10. At this point, what difference does it make?

Of course, this legislation is meant just to highlight the ridiculousness of the IRS’s position (and the Obama Administration’s position of calling the IRS scandal a conspiracy theory).

Part two of Koskinen refuses to apologize is Monday in front of Congressman Issa’s committee.

Posted in IRS | Tagged | Comments Off on “I Don’t Think an Apology Is Owed”

Just File the FBAR

Posted on June 18, 2014 by Russ

Several of our clients have asked, “The decision on poker accounts being ‘banks’ is nonsensical. Do I really have to file an FBAR for those accounts?”

I am in general agreement with the individuals questioning the ruling. Banks and financial institutions generally offer investments, credit cards, loans, checking accounts, securities, and similar products. An online gambling site does take client’s money–but solely so that the client can gamble.

The United States has, for various laws, lumped casinos in with banks. For example, casinos fall under the same currency transaction reporting rules as banks. If you take $20,000 into your local casino and deposit it at the casino cage, a Currency Transaction Report is supposed to be issued. Casinos have to issue Suspicious Activity Reports.

If you go back to 2009, the FBAR was required for online gambling accounts. (That was the advice given to us from the IRS FBAR group.) In 2011, when new regulations came into play, the IRS no longer said that. The new regulations appeared to make an online gambling site not a reportable foreign financial account.

However, a federal judge disagreed.

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).

It may be that this decision will be reversed. It’s possible another court would come to a very different conclusion. But the laws on the FBAR are draconian, including willful penalties that are a minimum $100,000 fine. My thinking is simple: I’d rather be safe than sorry. Thus, my strong advice is, “Just file the FBAR.”

We sent out a special newsletter to our clients on this issue. Here’s what we wrote:

The FBAR is due June 30th and there are no extensions. There are significant penalties (including possible imprisonment) for FBAR mistakes.

The general rule on whether you have to file an FBAR is if you have $10,000 or more aggregate in one or more foreign financial accounts at any time during the year you must file an FBAR. If your aggregate balance remained under $10,000, you will not have an FBAR filing requirement.

Even if you don’t have an FBAR filing requirement you must still disclose your foreign financial accounts on your tax return. At the bottom of Schedule B are a few questions which include, “At any time during 2013, did you have a financial interest in or signature authority over a financial account, (such as a bank account, securities account, or brokerage account) located in a foreign country?” This question must be answered yes if you have a non-US based online gambling account.

There are two choices in filing an FBAR. We can file it for you (we would need you to complete and return Form 114a; if you need us to send you this form, let either Aaron or me know) or you can file it yourself at the BSA efile system.

Here are answers to some questions relating to this issue:

1. I had $6,000 maximum in my PokerStars account. I cashed it out and moved that same $6,000 into my foreign bank account. Do I need to file an FBAR? No. You never reached $10,000 aggregate in your foreign financial accounts.

2. I already filed my FBAR for 2013 but I have online gambling accounts that must be reported. What do I do? You will need to file an amended FBAR.

3. My tax return has already been filed; I did not note any foreign financial accounts on Schedule B. Will I need to amend that return? Yes.

4. Do online gambling accounts count for Form 8938 on the tax return? (Form 8938 is similar to the FBAR and reports certain foreign financial accounts.) Yes

5. Do I need to go back for prior years and file amended FBARs and tax returns? This is unclear at the present time, but the answer is probably yes. The statute of limitations on FBARs is six years from the due date, so 2009-2013 are open (2008 will be beyond the statute of limitations on July 1, 2014). However, gambling accounts were considered foreign financial accounts for 2009, so this impacts solely 2010-2012 for FBAR purposes. For tax returns, only 2011 and 2012 are open (assuming timely filing). Note also that the first year for Form 8938 was 2012.

I and other practitioners have asked the IRS and FINCEN for more information regarding this. I do expect to obtain a response regarding this within a couple of weeks. I will be updating this issue on my tax blog (https://taxabletalk.com) when I have more information.

6. My only online gambling accounts are in Nevada and New Jersey with the regulated sites in those states. Do I need to file an FBAR? No. Those accounts are not considered foreign financial accounts.

7. My online gambling accounts are with current US-facing sites; their legality is questionable. Must I report my accounts on an FBAR? Yes, as long as you have $10,000 or more aggregate in one or more such accounts.

8. Can I access my PokerStars and Full Tilt Poker accounts while in the United States? Yes, you can. PokerStars sent us instructions on how to do this:

Your deposit, cashout, transfer and playing transaction history is now available for request directly from the PokerStars software. To request this information from the PokerStars Lobby screen, select:
‘Requests’ -> ‘Playing History Audit’
From the pop-up window that appears, you can select a date range to request the specific information required. You will also need to select a password for the file. You may choose any password you wish; however, we do not recommend using the same password as for your PokerStars account. If you wish to view your FPP/VPP information, please ensure the relevant box is checked.
Finally, you will need to select the output format. The options available are Excel (97-2003), HTML and a text file. Then click on OK to submit the request. You will be prompted to enter your PokerStars password to confirm the request. An email with further instructions will be sent to your registered email address.
If the file provided will not open, it indicates you have an older compression program that does not support the encryption used on the file. To resolve this and open the file, you will need to update your compression program or download a new compression program. We recommend using WinZip 11 (or newer) or 7-zip which will allow you to open the file. You can access these programs from the following links:
WinZip – http://www.winzip.com/prod_down.htm (Choose ‘Download’ > ‘Get WinZip Free’)
7-zip – http://www.7-zip.org/

I will be posting a list of online gambling addresses next week.

Posted in FINCEN, Gambling | Tagged | 5 Comments

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.

Posted in IRS | Tagged | Comments Off on As the Emails Churn…

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.

Posted in IRS | Tagged | 1 Comment

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.

Posted in IRS | Tagged | 1 Comment

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).

Posted in IRS | Tagged , | 1 Comment

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.)

Posted in IRS | Tagged | 2 Comments

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.

Posted in Gambling | Tagged | Comments Off on More on the Hom Decision

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.

Posted in Tax Fraud | Tagged , | Comments Off on Another Example of a Regulated Preparer Committing Tax Crimes