Will the Third Time be the Charm for Appeals?

Posted on February 5, 2013 by Russ

The IRS Office of Appeals describes its mission as,

[T]o resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.

A case decided in Tax Court yesterday isn’t making Appeals look good.

Jurate Antioco sold a bed and breakfast on Martha’s Vineyard in 2006 and came into some money. With the proceeds she bought an apartment building in San Francisco and lived in one of the units; she moved her ailing 96-year-old mother into another. Three other units are rented and she lives off that income.

What Ms. Antioco didn’t realize until April 2008 is that she owed taxes on some of that money, a tax debt of $170,000. With all of her money tied up in the apartment building she couldn’t pay the IRS. So she suggested an installment agreement. The IRS wanted to seize (levy) the apartment building.

Fast forward to 2009, when IRS Appeals gets the case for the first time. Ms. Antioco has issues with borrowing against her apartment building (the current lender wouldn’t agree to it), and she has obvious economic hardships. No matter, IRS Appeals denies Ms. Antioco’s request; she filed a Tax Court case.

Before the case was heard, the IRS moved to remand the case stating that the Appeals officer had abused her discretion. Yes, the IRS admitted that the Appeals officer erred. The case was remanded, with the Tax Court noting that new financial documentation (an IRS Form 433-A) should be reviewed. You would think things would go smoothly; after all, the Tax Court told the IRS to look again at the financial issues.

No. The new Appeals officer called Ms. Antioco requesting documentation:

[H]e called Ms. Antioco several more times that day and at one point told her she was being uncooperative and that she didn’t have to go through with the case. He also told her to “put your money where your mouth is” and that he had been a witness in Tax Court. Ms. Antioco felt so threatened by Mr. Owyang’s calls that she stopped answering and hired an attorney to help her.

The Appeals officer made a preliminary determination that, “Ms. Antioco could pay her liabilities but “simply chose not to do so.” [emphasis in original]” Indeed, the Appeals officer thought that fraud had occurred when Ms. Antioco added her mother to the deed. Only there wasn’t fraud; she had provided documentation and adding her mother to the deed was a requirement of a new lender.

The Appeals officer further called Ms. Antioco a “won’t pay taxpayer.” The only problem is that,

There is nothing in the record to support any of these conclusions either. The record in fact shows just the opposite: Ms. Antioco didn’t even find out she owed any tax for 2006 and 2007 until her accountant told her in April 2008.

The Appeals officer also didn’t consider her mother’s ill health. “These were precisely the reasons Ms. Antioco listed as grounds for entering into a short-term installment agreement until she could either obtain a loan or sell the building after her mother passed away.” Only the Appeals officer ignored this. Ms. Antioco also noted economic hardships; again, the Appeals officer ignored this.

We have found that Mr. Owyang abused his discretion in sustaining the proposed levy and that we cannot uphold the supplemental notice of determination on any of the stated grounds…We will therefore again remand the case to Appeals to consider Ms. Antioco’s proposed installment agreement, her financial information, and whether special circumstances or economic hardship exists.

Hopefully, the third IRS Appeals officer will actually get it right.

Case: Antioco v. Commissioner, T.C. Memo 2013-35

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How Government Stifles Entrepreneurship

Posted on February 4, 2013 by Russ

So you want to become a landlord in the District of Columbia. I saw an interesting piece on Slate that noted that a Washington, DC couple had to get three different sets of paperwork completed to rent out their condominium. As he noted in his conclusion,

Red tape, long lines, inconvenient office hours, and other logistical hassles probably won’t stop tomorrow’s super-genius from launching the next great billion-dollar company. But it’s a large and needless deterrent to the formation of the humble workaday firms that for many people are a path to autonomy and prosperity.

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IRS Loses Again to Institute for Justice

Posted on February 2, 2013 by Russ

Two weeks ago, a court ruled that the IRS had no legal grounds to regulate unenrolled tax preparers. The IRS filed a motion seeking a stay of the court’s injunction against the IRS. Late yesterday, Judge James Boasberg (the same judge who made the ruling two weeks ago) denied the IRS’s motion.

The IRS argued in its motion that the IRS would be irreparably harmed if a stay were not granted. The Court disagreed, and agreed with the Institute for Justice’s argument that most of the money that the IRS has received has been for PTIN registration, not the registration of unenrolled tax preparers. (PTINs–Preparer Tax Identification Numbers–are issued to tax professionals and are noted on every return filed. This identifies the preparer, and helps the IRS search for unscrupulous preparers.) But the PTIN program was never challenged (indeed, such a challenge would likely fail as the PTIN program is specifically authorized by statute), just the RTRP (Registered Tax Return Preparer) program. “As Plaintiffs point out, the IRS’s expenses and staff cover both the registered-tax-return-preparer program and the PTIN program, and Plaintiffs do not challenge the latter.”

The Court then throws cold water on the IRS’s argument of harm to the agency:

The IRS’s liability, moreover, turns on the case’s merits, not on the stay. If the Court issues a stay and its merits decision is affirmed above, then the IRS will be on the hook for even more money in refunds. In any event, why should tax-return preparers continue to pay into a system the Court has found unlawful?

The IRS further argues that there would not be harm to others if the injunction were lifted; one of the points the IRS makes is that Dan Alban’s interview with Kelly Erb in Forbes said that one of the three plaintiffs would prepare returns for this year. (Mr. Alban is the lead attorney for the plaintiffs.) But two plaintiffs would be out of business (at least; the other plaintiff might be going out of business after this tax season). The Court summarized it well:

[I]f the injunction is stayed, then all preparers are faced with a Hobson’s choice: they must decide whether (1) to skip the registration requirements, gambling on an affirmance by the Court of Appeals or a reversal that is issued early enough that they could still fulfill their requirements by the end of the year, or (2) to satisfy the testing and continuing-education requirements, knowing that this might well be wasted time, effort, and expense. The harm is thus considerable.

The IRS also lost on its argument that there would be a harm to the public interest by the injunction; “the granting of the injunction effects far less a change in the landscape of tax preparation than does implementation of the regulations.”

The next step for the IRS is to file an appeal to the Court of Appeals for the District of Columbia. The IRS can ask that court to stay the injunction. However, I suspect the DC Circuit will let the injunction stand until the decision is reached. I think Judge Boasberg’s decision makes sense. In any case, expect the IRS to ask the DC Circuit for a stay of the injunction within the next two weeks, and then expect the case to be argued there (regardless of whether the stay is granted or not) this summer or fall.

UPDATE: I just saw that the IRS has restarted the PTIN registration. Tax professionals do need a PTIN (so do those who are going to take the Special Enrollment Examination to become an Enrolled Agent). It appears that the Institute for Justice’s argument that the PTIN system and the RTRP program were easily separated was dead-on accurate.

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California Hasn’t Conformed to 2013 Debt Forgiveness…Yet

Posted on January 30, 2013 by Russ

Mortgage debt forgiveness was part of the “Fiscal Cliff” bill that passed Congress on January 1st. If you sell your primary residence in a short sale (or your home is foreclosed), the cancelled debt (up to $400,000) is generally not subject to federal taxation. California had a similar provision (but only up to $250,000); however, that provision expired on December 31, 2012.

Lawmakers in California are considering extending the legislation into 2013. The measure has bipartisan support, so it’s likely this (or something similar) will be signed into law. I would expect, though, that the dollar limit for the California measure would be less than the federal measure.

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1099, W-2 Mailing Deadline Is Tomorrow

Posted on January 30, 2013 by Russ

Thursday, January 31st, is the deadline for employers and others to put most 1099s and all W-2s into the mail or otherwise deliver them to recipients. This is a postmark deadline. This means that it might still be a week or more before you actually receive the 1099.

There are some exceptions to this rule. Form 1099-B’s have a deadline of Friday, February 15th. That same February 15th deadline holds for 1099-MISCs with amounts in Box 8 (substitute payments in lieu of dividends or interest) or Box 14 (gross proceeds paid to an attorney).

You have until Thursday, February 28th to mail Form 1099s (and the accompanying Form 1096) to the IRS and Forms W-2 (and the accompanying Form W-3) to the Social Security Administration. If you electronically file the forms, you get an extra month (the deadline will be Monday, April 1st because March 31st falls on a Sunday).

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Would You Deliberately Mail a Check to the Wrong Address?

Posted on January 28, 2013 by Russ

Seriously, would you?

Assume you owed a customer $1,000. The debt goes back over a year, and now you’re ready to pay. The customer notifies you that she’s moved, and provides you with her new correct address. How many of you would mail the return to the old incorrect address and wait for the check to come back before reissuing and sending it to her correct address? I’m guessing none of you.

Yet the Internal Revenue Service is going to do this to a victim of identity theft deliberately, with either malice aforethought or just plain indifference and stupidity. Jason Dinesen has more in his 11th part of a series that must be read from beginning to end to understand how broken the IRS’s ability to deal with identity theft really is.

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Form 8863 Added to Returns that the IRS Won’t Accept Just Yet

Posted on January 28, 2013 by Russ

From multiple sources comes word that the IRS will not accept returns with Form 8863 (Education Credits) at this time. Any returns with this form will also be delayed until (probably) March mid-February. While this form is not on the IRS list of forms that cannot be accepted on Wednesday, January 30th, both a post on Yahoo and Trish McIntire are reporting that the IRS announced this yesterday on a phone call with software vendors.

This will impact many taxpayers. While my tax practice will be less impacted than most, many tax professionals will have to delay submission to the IRS of many of their returns.

The blame here goes to Congress, not the IRS; had Congress acted responsibly and passed this legislation last Summer…of last Fall…or November, there likely would be no delays at all.

UPDATE: The IRS announced this afternoon that returns with Form 8863 will be accepted beginning in mid-February.

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Cash and Carry Doesn’t Work for Strip Club Owner

Posted on January 27, 2013 by Russ

A running theme of this blog is that it doesn’t matter how you are paid; income from cash is just as taxable as checks or credit cards. But it’s so tempting when you receive cash; who will notice if a few dollars go missing from your tax return?

That was apparently the idea of Kirk Roberts of Salina, Kansas. He owned the Wild Wild West Gentlemen’s Club in Salina. From 2006 through 2008 he carried his cash home and deposited it into his personal bank account rather than his business account. Strip, er, gentlemen’s clubs do take in a lot of cash, and the Department of Justice noted that Mr. Roberts understated his income by $537,942. That’s plenty of cash; I assume that either currency transaction reports or suspicious activity reports led to an investigation.

Mr. Roberts pleaded guilty last week to three counts of filing false tax returns; he’ll be sentenced on April 22nd. Given the tax loss of over $153,000, he may also be looking at a stint at ClubFed. Unlike the Wild Wild West, I don’t think there are any house dancers at ClubFed.

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What’s $62 Billion Among Friends?

Posted on January 27, 2013 by Russ

I used to live in California’s central valley. It’s prime agricultural land, with citrus, almonds, pistachios, stone fruits, grapes, and practically anything else that you can eat. The cities there aren’t big (Fresno is the largest), and poverty and unemployment are rampant.

The central valley is also where California will begin construction of a high speed rail network. The idea is to build the first stage from Madera (population 61,416) to Bakersfield (population 347,483). It will pass through my old hometown of Visalia (population 124,442) and Fresno (population 509,039). To date, California has raised $6 billion of the current cost estimate of $68 billion.

Most rapid transit needs subsidies; clearly, a rail line from Madera to Bakersfield is going to be a money-loser. Meanwhile, California has been raising taxes, driving businesses out of the Bronze Golden State. The state has yet to purchase any property that will be needed for the route (though approval was granted earlier this month to begin that process). Given that the land is of good use for agriculture, expect court battles to develop over what a fair price is.

Meanwhile, where is the other $62 billion going to come from? Given the recent uproar in Congress with the fiscal cliff and the upcoming uproar over the debt ceiling, I doubt any proposals for high speed rail will make it through. There’s also the basic problem that you can fly from Los Angeles to San Francisco in an hour; high speed rail will take just as long (or longer)…so there is no speed advantage. At least it’s no longer my state tax dollars going for this project.

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Alphabet Soup

Posted on January 22, 2013 by Russ

With the probable demise of the IRS’s initiative to create Registered Tax Return Preparers (RTRPs), the alphabet soup of tax professionals is now down to EAs, CPAs, CTECs, and JDs. While Robert Flach argues that RTRPs should be resurrected as a voluntary designation, I doubt that will happen (and I don’t see a benefit from it). Before I respond to his post and an excellent post by Jason Dinesen (an EA in Iowa), here’s my thoughts on the designations.

I’m an Enrolled Agent (EA). Enrolled Agents are one of three professions with full rights to practice before the IRS (the other professions are CPAs and attorneys (JDs)). To become an Enrolled Agent, you must pass a difficult three-part exam or have worked for the IRS for a number of years in a variety of assignments (I passed the exam back when it was a four-part exam). EAs specialize in tax; the slogan “We SpEAk Tax” is on my business card because that’s truly what we specialize in.

The public associates Certified Public Accountants (CPAs) as the tax professionals; however, that’s not really the case. While many CPAs do specialize in tax (such as Joe Kristan), many others work in accounting, audit, and consulting. CPAs are licensed by each state (EAs are licensed by the federal government). The CPA exam is not a tax exam. While EAs must take continuing education that is tax related, CPAs must take continuing education that is accounting related (but not necessarily tax related).

The other enrolled preparers are attorneys (JDs). Few of the attorneys who specialize in tax actually prepare many returns; for the most part, they deal with representation issues that may end up in Tax Court.

The majority of tax professionals are unenrolled preparers. They’re not licensed as CPAs, EAs, or attorneys. Most states don’t require tax professionals to have licenses (only California, Oregon, Maryland, and New York require licenses). In California, all tax professionals must have a license; if a tax professional is not a CPA, EA, or attorney, they must obtain a license from the California Tax Education Council (CTEC). CTEC professionals must take continuing education each year, too. However, a tax professional in, say, Iowa need only print business cards and he or she can compete against CPAs, EAs, and attorneys.

There are far more unenrolled preparers than enrolled preparers. Among enrolled preparers there are far more CPAs than EAs. There are 48,000 practicing Enrolled Agents, 225,000 CPAs, and 350,000 or so unenrolled preparers. The fact that someone has a designation of any sort doesn’t necessarily mean anything. My business is almost all referral-based; this is my fourteenth tax season and my advertising expense consists of this blog. If my designation were MTP (Martian Tax Professional) I doubt my preparation clients would care. (It would have an impact on representation, but that’s another story for another day.)

Jason Dinesen noted that his state organization, the Iowa Association of Enrolled Agents, has been decimated by the IRS’s new rules on continuing education. A little over a year ago, the IRS mandated that continuing education providers pre-approve continuing education courses with the IRS. While the California Society of Enrolled Agents (CSEA) and the Nevada Society of Enrolled Agents (NVSEA) have not had problems dealing with this, some state organizations have had problems; apparently, Iowa is one of those states. It is unclear if the new rules on continuing education will survive last week’s court ruling. The IRS has not publicly commented on the ruling (though the decision was announced late Friday and the IRS was closed yesterday for the MLK holiday). I do expect the IRS to appeal the ruling.

Enrolled Agents have a done a miserable job of promoting themselves. While I’m hopeful my new book will help with some publicity, the reality is that if I tell the average cab driver that I’m an Enrolled Agent, the response I’ll get is, “You don’t look like you’re in law enforcement.” Sigh….

My brother turned me on to books by Jack Ries and Al Trout such as Positioning: The Battle for Your Mind. Like it or not, CPAs have won the positioning war with tax preparation; Enrolled Agents aren’t going to win that battle. Perhaps we can win the battle for representation but I doubt it. Overall, the Enrolled Agent profession and the National Society of Enrolled Agents are not good marketers. Banging our head against the brick wall that CPAs own (to the public, CPA equals tax professional) is a waste of time.

So where am I going with this? This post was more of a stream of consciousness than anything specific. I’d love to see the EA designation in its right place in the forefront of the tax world; the reality is that it’s not going to happen in my lifetime. Jason Dinesen notes that the EA designation has been marginalized. Perhaps EAs should make the most of it. I remember a company called Curtis Mathes that promoted themselves as the most expensive television sets made. (The company began to decline in the 1980s after the death of its chairman in an airplane accident.) I wouldn’t mind being labeled as the “Rolls Royce of tax preparation.”

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