From Russ Fox, EA, of Clayton Financial and Tax of Las Vegas, NV. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.
One of the things that I am asked at least once a year is about question 8 at the bottom of Schedule B of Form 1040: “During 2012, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If ‘Yes’ you may have to file Form 3520….” Of course, most individuals don’t have foreign trusts so this question is usually answered no.
However, when you are a tax practitioner in Southern California (which I was until late 2011), you will come across fideicomisos. These are Mexican land trusts. Under Mexican law (at least, how it’s been explained to me), non-Mexicans cannot own property in many areas of Mexico. So if an American wants to purchase a home in Mexico, a fideicomiso is used as the vehicle.
The problem is that these are a trust, and they’re clearly foreign, so that means that individuals who have these have to tangle with Form 3520. In 2012 there was a private letter ruling on this; unfortunately, a PLR is only applicable to the exact situation involved. Today the IRS announced in Revenue Ruling 2013-14 that common fideicomisos are not trusts under Section 301-7704-4(a). Thus, for most individuals who use fideicomisios, a nasty IRS form is now in the trash heap.
This is excellent news for Americans who hold Mexican property through fideicomisos. Tax professionals who have clients in a fideicomiso should still read the Revenue Ruling; if the fideicomiso has any other property (besides real estate), it appears that the fideicomiso would be considered a trust.
A lot has happened with the IRS scandal. A week has gone by, and there haven’t been any new Congressional hearings (because Congress was out of session last week). That will change this week. The White House is still stating the scandal isn’t political, and that it’s some number (2, 4, or 88) “low-level” IRS employees. Let’s look at what we really know, and don’t know, and what conclusions we can accurately draw.
First, CBS and McClatchey both noted that this scandal goes beyond organizations applying for 501(c)(4) status.
“The administration is still — their paid liar, their spokesperson, picture behind,” Issa said on CNN’s State of the Union this morning, where the set has a picture of Carney behind host Candy Crowley, “he’s still making up things about what happen[ed] and calling this local rogue.”
“The reason that Lois Lerner tried to take the fifth [amendment] is not because there’s a rogue in Cincinnati,” he added. “It’s because this is a problem that was coordinated. in all likelihood, right out of Washington headquarters.”
What this means, though, is that policy was spread over five groups. This isn’t just something that happened with one or two people in one group, or even a “rogue” GM. Somebody set a policy for an entire office, and made sure at least five Groups got the word. That could only have happened in writing, and must have come from at least two levels above the GM. The level above is a Branch Chief, and Branch Chiefs don’t make policy either. Neither does the level above that. Again, I don’t know exactly how Exempt Organizations is structured, but in CI, a Branch Manager (the Assistant Special Agent in Charge) wouldn’t have more than four groups. Policy comes from DC.
So let’s look at the possible sources of the scandal. They are:
Two or four ‘rouge’ IRS agents in Cincinnati decided to implement this policy; or
One or more mid-level managers in Cincinnati, Laguna Niguel, El Monte, and elsewhere implemented this policy; or
A high-level employee in Washington decided to implement this policy; or
The policy came from the White House.
Let’s look at each of these and see if we can determine if they’re still plausible.
1. Two or four ‘rogue’ IRS agents in Cincinnati implemented this policy. I put the chance of this at zero. There were too many IRS employees involved in offices throughout the country. Employees in Cincinnati forwarded information to Washington…and the policy wasn’t stopped. It fails both the smell test and the real world test. In all my dealings with the IRS bureaucracy one thing that has been emphasized is the rigidity of policy. Sooner or later my manager would scold me to high heaven if I were to do this. Additionally, those low-level employees have stated that the direction for this came from Washington. The current excuse being peddled by the White House is clearly wrong.
2. One or more mid-level managers in Cincinnati, Laguna Niguel, El Monte, and elsewhere implemented this policy. This also can’t be correct for the same reasons as above. Mid-level IRS managers don’t make policy, they implement it. Additionally, the policy existed nationally. The answer is not mid-level managers.
3. A high-level employee in Washington decided to implement this policy. High level employees at the IRS do make policy. Thus, let’s examine the structure of the Tax Exempt & Government Entities division of the IRS.
The IRS provides a web page noting how it is structured. At the top is the Commissioner of the IRS (currently Daniel Werfel is the Acting Commissioner). Underneath him are two Deputy Commissioners: Deputy Commissioner for Services and Enforcement (DCSE) and Deputy Commissioner for Operations Support. It’s DCSE where we need to go, as here there are nine reports, including the Commissioner of Tax Exempt and Government Entities Division (TEGE). The DCSE? Well, it’s listed as former IRS Acting Commissioner Steven T. Miller, the Acting Commissioner for Tax Exempt and Government Entities is Michael Julianelle. (You can see the top-level of the IRS Organization Chart here.)
As you might remember, Ms. Lerner took the Fifth when testifying before Congress. She made a statement where she said she wasn’t guilty of anything. That might be true. However, if she didn’t implement the policy, her bosses had to order her to do so. It could not have been at a level below hers. Indeed, I suspect it was done above her level…but that’s just a suspicion.
4. The policy came from the White House. Today, there is absolutely no evidence of this. But the IRS is part of the Executive Branch. Could this have been ordered from the White House? Certainly. (Note that when I say “from the White House” I do not mean it had to be President Obama. It could have been the President, the Secretary of the Treasury, the White House Chief of Staff, etc.)
The reason there are suspicions that this comes from above the IRS is the reports of individuals who filed the 501(c)(4) applications receiving scrutiny in other ways. The individuals were subject to audits (from another division of the IRS), scrutiny by the Bureau of Alcohol, Tobacco, and Firearms, the Department of Labor, etc. It is theoretically possible that these are all coincidences. Today, there’s no proof that these are not coincidences. But it sure feels improbable to me.
I’m reminded of one of my favorite lines in literature. Sir Arthur Conan Doyle wrote, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.” I think we can safely eliminate the first two possible causes (listed above). That leaves just two possible sources of the policy. Having dealt with the IRS for fourteen years, I can safely state that given that this policy was in force for over two years, there is no chance it was started by low-level employees or mid-level managers. It’s impossible.
[My thanks to my good friend Randy for inspiring me on this post.]
NBC News reported that they were shown proof that others besides two (or four) rogue Cincinnati IRS employees were involved in the scandal. The entire story should be read, as it appears to put an end to the first explanation of the scandal as offered by the IRS.
Jay Sekulow, an attorney representing 27 conservative political advocacy organizations that applied to the Internal Revenue Service for tax-exempt status, provided some of the letters to NBC News. He said the groups’ contacts with the IRS prove that the practices went beyond a few “front line” employees in the Cincinnati office, as the IRS has maintained.
“We’ve dealt with 15 agents, including tax law specialists — that’s lawyers — from four different offices, including (the) Treasury (Department) in Washington, D.C.,” Sekulow said. “So the idea that this is a couple of rogue agents in Cincinnati is not correct.”
So what are the big questions? Why did the IRS scrutinize “conservative” and “tea party” applications? It’s clear the orders came from Washington. Who ordered it? The IRS employees in Cincinnati were most likely just following the orders from Washington. Someone came up with the idea to have this scrutiny.
A friend of mine asked me if this scandal will still be talked about on August 1st. Given how the IRS, some IRS employees, and the Administration are currently acting–deny, evade, and possible lies–this scandal will still be talked about on August 1, 2014. If the truth comes out voluntarily by the end of June, the scandal would likely blow over.
My professional society, the National Association of Enrolled Agents (NAEA) is very much in favor of the regulations. Indeed, in last week’s newsletter (distributed by email to members of the NAEA) there were several paragraphs on Loving. As for what the NAEA would like:
Unfortunately for those who believe IRS should be providing some minimal oversight to a multi-billion dollar business conducted in part at kitchen tables by those who believe the costs of education would kill their business model, the fact that attorneys for the plaintiff/appellee don’t appear to know very much about either taxation or representation is probably not a significant stumbling block for their case, which centers on whether IRS has authority under Circular 230 to regulate return preparers.
So why am I against the IRS regulating unenrolled tax professionals? Quoting from the brief:
As an Enrolled Agent, Mr. Fox is not directly affected by the regulations. Nevertheless, based on his extensive experience in tax practice, he has a number of objections to the regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Fox objects to the regulations because the IRS already has ample statutorily authorized tools to apply against incompetent or unscrupulous tax-return preparers; because the regulations will not be effective in eliminating incompetent or unscrupulous tax-return preparers; because they will give a tacit stamp of approval to preparers who are not competent; because they will have the effect of driving many low-volume tax-return preparers out of business, thereby increasing the cost of tax-return preparation services for the clients of those preparers; and because administering the regulations will require scarce IRS resources that could be better used for other purposes, such as combatting identity theft.
There’s another reason, too: I don’t believe the IRS has the authority to regulate tax professionals. I believe that the Institute for Justice (the non-profit that has provided the legal counsel for the plaintiffs-appellees) is absolutely correct that the IRS doesn’t have authority to regulate tax professionals. That’s not covered in the amicus curiae brief because those arguments are part of the plaintiffs-appellees brief.
My fellow tax bloggers also have good reasons for joining the amicus curiae brief. Jason Dinesen:
As an Enrolled Agent, Mr. Dinesen is not directly affected by the regulations. Nevertheless, Mr. Dinesen believes the regulations would have an indirect adverse effect on his business (and on Enrolled Agents generally) because the Registered Tax Return Preparer designation created by the regulations would have the effect of diminishing the value of the Enrolled Agent designation in the market for tax-preparation services, largely because the number of Registered Tax Return Preparers would be substantially greater than the number of Enrolled Agents.
Joe Kristan:
As a CPA, Mr. Kristan is not directly affected by the regulations. Nevertheless, based on his longstanding and extensive experience in tax practice, Mr. Kristan has a number of objections to these regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Kristan objects to the regulations because they will reduce options for consumers of tax-preparation services by driving many low-volume but competent and conscientious tax-return preparers out of business because of the cost of compliance with the regulations; will increase the compliance cost and burden on low-volume tax-return preparers that remain in business; will increase the cost of tax preparation services without increasing the value of those services; will prompt some low-income individuals to resort to tax-return preparers who will evade compliance with the regulations; will prompt some low-income individuals to prepare their own returns, rather than using paid preparers, resulting in less accurate returns; will prompt some low-income individuals to cease filing altogether; will adversely affect Enrolled Agents by diminishing the value of their Enrolled Agent designation; and will likely ultimately be extended to CPAs, attorneys, and Enrolled Agents.
Both Jason and Joe note that the proposed RTRP (Registered Tax Return Preparer) designations would diminish the Enrolled Agent credential. I agree with that, though I think this is less of an issue for my business because I’m established. For potential new EAs competing against the possible huge numbers of RTRPs, this could be a real issue.
Additionally, the Tax Foundation joined the brief because, “[T]he Tax Foundation believes the costs of the regulations substantially exceed potential benefits.” Two unenrolled preparers, Tonda Gordon and Dennis Tafelski, also joined the brief. Ms. Gordon noted that she would be adversely effected (she had to increase her fees) and, “Ms. Gordon objects to the regulations because they are unnecessary, since, in Ms. Gordon’s experience, most tax return preparers to whom the regulations apply are competent and conscientious; and because the regulations are not targeted to the problems they are intended to address but instead are broadly applicable to many situations where no problems exist.” Mr. Tafelski’s objections are also germane:
In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, and the direct effects of the regulations on him, Mr. Tafelski objects to the regulations because they will result in substantially increased tax-return preparation fees for the types of retired individuals for whom Mr. Tafelski has prepared returns; because they contain no exemption for low-volume preparers such as himself; because the regulations’ exemption for attorneys and CPAs is unwarranted because of the normal absence of tax-specific continuing education requirements for attorneys and CPAs; and because the IRS has seldom made use of its existing statutorily authorized tools for regulating tax-return preparers, such as the tax-return preparer penalty.
The next brief due is the IRS’s reply brief to the plaintiffs-appllees brief. That’s due in a couple of weeks. The arguments in the case will likely be heard this fall.
It’s just about to be the Memorial Day Weekend. However, that weekend already started for the IRS. Tomorrow, Friday, May 24th, is the first of five “sequester” days off. All offices and employees of the IRS will be closed. Additionally, most IRS computer systems will be off until Tuesday at 9am EDT: The IRS computer systems will be down for planned maintenance.
Everyone’s hopin’ it will all work out…
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Now, that does not mean that Ms. Lerner is guilty of anything; she’s well within her rights to take the Fifth. However, it does indicate that in some manner she thinks her answers could cause her legal difficulties. It also indicates to the public that there is something here in this scandal.
We also have a report from the National Review that the direction for the “rogue low-level employees in Cincinnati” came from the Technical Unit of Rulings and Agreements Office in Washington. The idea that two (or four) low-level IRS employees in Cincinnati could have done this on their own has always been, for me, ridiculous. That said, the idea that a group of IRS lawyers decided to implement this policy doesn’t seem reasonable to me. Still, I think the answer is far more likely to be in Washington than Cincinnati.
Just a day after telling reporters that chief of staff Denis McDonough had learned of the situation about a month ago, press secretary Jay Carney revealed that White House officials had consulted with the IRS on how to initially present to the public the story that the agency had targeted conservative tax-exempt groups for extra scrutiny.
There was “discussion about the possibility of a speech” by Lois Lerner, who oversaw the IRS’s work on tax-exempt groups, Carney said, and conversation about testimony by the acting commissioner of the agency and “what he would say” if asked about the issue…
The press secretary said the Treasury Department worked with Mark Childress, a deputy White House chief of staff.
I’m pretty sure there will be a seventh version of events from the White House later this week.
Years ago, I had the misfortune to work for a business that committed a major faux pas. The company admitted its mistake saying the equivalent of “We goofed and we want to make things right.” There was no cover up, just a forthright admission of the facts and a desire (followed up by actions) to correct the problem. Here, we’re seeing what to me is looking like a cover-up. It might not be–it’s possible that the White House is clueless (that says something else, too)–but as my father once told me, “It’s the appearance of impropriety that matters.” When you combine the changing stories from the White House with a senior IRS employee taking the Fifth Amendment, you have a huge appearance of impropriety.
President Obama stated that he didn’t learn of the scandal until everyone did. I think the chance of that is about zero: I find it impossible to believe that Ms. Ruemmler didn’t tell the President when she learned of this. The bigger question is whether the scandal originated in the White House. I also find it hard to believe that two (or four) low level bureaucrats in Cincinnati decided on their own to target conservative groups.
Meanwhile, the Washington Post reported that there’s surprise among the IRS employees in Cincinnati over the scandal. “Everything comes from the top. We don’t have any authority to make those decisions without someone signing off on them. There has to be a directive.” The IRS employees interviewed believed it was middle managers who decided to implement this policy. That may well be the case, or it could be that they got directives. Sooner or later the full details will come out on this scandal.
A pair of reports from the South about elected officials (well, in one case former elected officials) in tax trouble. A longtime state representative allegedly took from charities while a former mayor may not have reported interest he received on personal loans.
Supposedly Mr. Brooks took the monies from the charity and moved them to his own bank account and paid personal expenses or just paid the personal expenses from the charity’s bank account. Additionally, he’s accused of naming individuals to the charity’s Board of Directors without their knowledge; of lying on solicitations for the charity; of telling the IRS that the charity had over $180,000 of various expenses while the year before he told the IRS that the expenses were under $9,000; of making false representations while soliciting for GABEO; and of filing false tax returns.
While the IRS is receiving criticism that’s well justified for the current scandal, IRS criminal investigation and the Department of Justice are slowly increasing their efforts on identity theft. Glenn Powell, Jr. of Alabama found that out.
Mr. Powell opened two bank accounts, and at least 49 false tax refund checks totaling over $95,000 were deposited into his accounts. Mr. Powell withdrew over $46,000 before the IRS put an end to his part in the scheme (overall, the scheme resulted in half a million dollars of false refunds). Mr. Powell pleaded guilty; he’s looking at a maximum of 10 years at ClubFed.
Some news came out of the first of what will be many Congressional hearings on the IRS scandal.
First, the question that occurred just one week ago and started the controversy–yes, it’s only been one week–was planted. The question came from Attorney Celia Roady. Per a spokesperson from her law firm:
“On May 9, I received a call from Lois Lerner, who told me that she wanted to address an issue after her prepared remarks at the ABA Tax Section’s Exempt Organizations Committee Meeting, and asked if I would pose a question to her after her remarks. I agreed to do so, and she then gave me the question that I asked at the meeting the next day. We had no discussion thereafter on the topic of the question, nor had we spoken about any of this before I received her call. She did not tell me, and I did not know, how she would answer the question.”
Why did it come out last Friday? That’s easy, the TIGTA report was going to be released the following week; maybe an apology on a Friday afternoon would diffuse a crisis. (Nope.)
I was talking with my mother this evening, and she said we’ll find out all of the truth when someone writes a tell-all book: “Targeted.” Given the magnitude of this scandal, I’m hoping we’ll find out the truth far sooner than that.
Some music from the 1980s which contains an apropos reference to the IRS:
Posted inIRS|TaggedIRS.Scandal|Comments Off on A Planted Question, Targeting, and Early Knowledge
