A Bad Day for the IRS in Court

Posted on March 22, 2016 by Russ

An appeals court decision today should end speculation on Democrats’ claims that the IRS scandal is a non-event. The Sixth Circuit Court of Appeals heard an appeal last week. The NorCal Tea Party Patriots had filed a class action suit regarding the IRS’s conduct in dealing with applications for non-profit status as a 501(c)(4) organization. The District Court had ordered the IRS to comply with discovery requests. The IRS asked for a “writ of mandamus;” basically, an order to stop the discovery. The first two paragraphs of the decision get to the crux of the matter:

Among the most serious allegations a federal court can address are that an Executive agency has targeted citizens for mistreatment based on their political views. No citizen—Republican or Democrat, socialist or libertarian—should be targeted or even have to fear being targeted on those grounds. Yet those are the grounds on which the plaintiffs allege they were mistreated by the IRS here. The allegations are substantial: most are drawn from findings made by the Treasury Department’s own Inspector General for Tax Administration. Those findings include that the IRS used political criteria to round up applications for tax-exempt status filed by so-called tea-party groups; that the IRS often took four times as long to process tea-party applications as other applications; and that the IRS served tea-party applicants with crushing demands for what the Inspector General called “unnecessary information.”

Yet in this lawsuit the IRS has only compounded the conduct that gave rise to it. The plaintiffs seek damages on behalf of themselves and other groups whose applications the IRS treated in the manner described by the Inspector General. The lawsuit has progressed as slowly as the underlying applications themselves: at every turn the IRS has resisted the plaintiffs’ requests for information regarding the IRS’s treatment of the plaintiff class, eventually to the open frustration of the district court. At issue here are IRS “Be On the Lookout” lists of organizations allegedly targeted for unfavorable treatment because of their political beliefs. Those organizations in turn make up the plaintiff class. The district court ordered production of those lists, and did so again over an IRS motion to reconsider. Yet, almost a year later, the IRS still has not complied with the court’s orders. Instead the IRS now seeks from this court a writ of mandamus, an extraordinary remedy reserved to correct only the clearest abuses of power by a district court. We deny the petition.

Oh, but hasn’t the IRS cooperated with the lawsuit? Hardly. “On the record before us here, the IRS’s response has been one of continuous resistance.” The Court is also making a point by the speed of the decision. This case was heard on March 16th; the decision was released on March 22nd. The Court is sending a message to the IRS: Stop the delaying tactics!

There’s a lot more in this decision, and I hope some tax blogger with far more free time than I do opines on the decision. I’ll end with the Court’s conclusion:

In closing, we echo the district court’s observations about this case. The lawyers in the Department of Justice have a long and storied tradition of defending the nation’s interests and enforcing its laws—all of them, not just selective ones—in a manner worthy of the Department’s name. The conduct of the IRS’s attorneys in the district court falls outside that tradition. We expect that the IRS will do better going forward. And we order that the IRS comply with the district court’s discovery orders of April 1 and June 16, 2015—without redactions, and without further delay.

Case: United States v. NorCal Tea Party Patriots, et al

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March 15th Tax Deadlines

Posted on March 14, 2016 by Russ

There are a number of tax deadlines tomorrow, March 15th. Here’s what you need to know.

Calendar Year Corporations: If you have a calendar year corporation, your Form 1120 or Form 1120S is due tomorrow. If you’re not ready to file, simply file Form 7004. That can be electronically filed, or mail it. If you mail it, use certified mail, return receipt requested.

State Corporate Returns: Calendar year state returns are mostly due tomorrow, though not every state shares the March 15th deadline. (For example, Florida uses April 1st as its deadline.) Most, but not all, states allow a federal extension to apply for their state. If in doubt, check! For example, Pennsylvania requires a separate extension.

Form 3520-A: This is one of the forms for foreign trusts, and it has a due date of March 15th. (The other main form, Form 3520, is due on the same date as your personal tax return including extensions.) You can file an extension for Form 3520-A using Form 7004. This extension must be mailed to the IRS, so use certified mail, return receipt requested. The IRS does currently accept foreign postmarks so if you’re outside of the US go to your post office and mail it. Or use an approved private delivery service.

Form 1042-S (and Form 1042 series): This is a report of income paid to non-Americans. The filing due date (either electronic of mail) is March 15th. Other Form 1042s are also due tomorrow (the 1042 series of forms notes withholding on income paid to non-Americans).

If you are in doubt as to whether or not you will get your return done in time, simply file the extension now. There’s no harm with filing an extension today and filing your return tomorrow. There’s a big penalty if you don’t file your extension today or tomorrow and file your return on Wednesday.

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Online Gambling Addresses Updated for 2016

Posted on March 8, 2016 by Russ

This list has been superseded by the 2017 list.

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year.

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

There is one major change for 2015. FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited
Douglas Bay Complex, King Edward Rd
Onchan, IM31DZ Isle of Man

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars
Douglas Bay Complex, King Edward Rd
Onchan, IM3 1DZ Isle of Man

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

Finally, I no longer have addresses for Bodog or Bovada. If anyone has a current mailing address, please leave it in the comments or email me with it.

Note: This list is presented for informational purposes only. It is believed accurate as of March 8, 2016. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

The list is in the cut text below.

If anyone has additions or corrections to the list feel free to email them to me.

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Annual Blog Hiatus

Posted on March 7, 2016 by Russ

It’s time for my annual blog hiatus. There will be occasional posts regarding deadlines (the corporate tax deadline is in one week–Tuesday, March 15th) and my annual Bozo Tax Tips will appear beginning on April 1st (no foolin’). If anything truly momentous in the world of tax happens I’ll interrupt my hiatus and post on it; otherwise, I’ll be back no later than April 25th.

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What Part of “Permanent Injunction” Didn’t You Understand?

Posted on March 6, 2016 by Russ

Last September, Gerardo Herrera found himself the target of the IRS and the US Department of Justice. Mr. Herrera owned a tax preparation business, El Lobo Multiservicios Professionales Inc. in Colorado. According to the indictment issued last September, Mr. Herrera and his business invented dependents, claimed personal expenses as business expenses, and added phony deductions. The DOJ press release notes that the IRS audited more than 200 of their returns and found misrepresentations on more than 99 percent of them.

It reads like “normal” return preparer fraud.

Come January, a federal court issued a permanent injunction:

A federal court has permanently barred a Colorado man and his tax preparation business from preparing federal tax returns, the Justice Department announced today. The United States filed a civil complaint against Gerardo Herrera and his business, El Lobo Multiservicios Professionales Inc., contending that they fraudulently reduced their customers’ tax liabilities by reporting extra dependents and claiming bogus deductions. After the defendants failed to respond to the complaint, on Jan. 7, 2016, Judge John L. Kane entered an order permanently banning Herrera from preparing returns.

Again, what you would expect. Mr. Herrera was told to stop preparing returns and to turn over his customer list (he had 45 days to do that).

He didn’t do either. He continued to prepare returns and he didn’t supply his customer list. If a federal court orders you to stop doing something, you don’t get a choice (other than the right to appeal that decision).

The injunction also directed Herrera to provide a list of his customers to the United States, notify his customers of the injunction and file a sworn statement attesting that he had complied within 45 days of the injunction. The United States asked the court to hold Herrera in contempt for his failure to comply with these provisions and alleged that he continued to operate two tax preparation offices and/or assist others in operating the offices. After hearing testimony from two Internal Revenue Service (IRS) witnesses who had visited Herrera’s offices, Judge Kane found Herrera in contempt and ordered that he be held in custody until he purges his contempt by, among other things, notifying all his prior customers of the permanent injunction, providing a list of his customers to the United States, surrendering his Preparer Tax Identification Number (PTIN) and posting a copy of the injunction in his place of business.

Mr. Herrera is being held at ClubFed until he closes his business and complies with the injunction. Mr. Herrera earned one other thing: He’s the first nominee for the 2016 Tax Offender of the Year Award! Congratulations!

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Koskinen Wins Public Service Award; Chaffetz Gets It Right

Posted on March 6, 2016 by Russ

IRS Commissioner John Koskinen was awarded the prestigious Elliot L Richardson Prize for Excellence in Public Service by the National Academy of Public Administration. According to the NAPA’s website,

Those individuals selected to receive the ELR Prize shall have demonstrated:

  • Achievement, by significantly advancing the public good;
  • Long-term dedication to public service, by serving the public interest in a public service capacity; and
  • Generosity of spirit, thoughtfulness in the pursuit of excellence in government, courage and integrity.

I have to ask the NAPA: What were you thinking? Yes, Mr. Koskinen has served for many years, and he may have generosity of spirit. But as Congressman Jason Chaffetz said, “If obstructing a congressional investigation and misleading Congress merits an award, then it seems like they have the right guy. I guess I define excellent public service differently.”

William Ruckelshaus, the former head of the EPA, also won the award. According to Government Executive, fund chair Michael C Rogers said, “[Koskinen and Ruckelshaus] are both strong role models for future generations of government leaders.”

I beg to disagree.

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Math Is Hard, IRS Addition

Posted on March 3, 2016 by Russ

This time I couldn’t resist.

A client received an IRS CP2000 notice. This is an Automated Underreporting Unit (AUR) notice, designed to look for things such as matching errors. In this case, a client didn’t include his dividend income on his tax return. He was guilty as charged and was prepared to pay the tax due, but he ran the notice by me. The notice correctly noted that the ordinary dividend income from his brokerage hadn’t been included, but it said that the qualified dividends had been included.

Think about that for the moment if you’re a tax nerd. How can you have qualified dividends without having ordinary dividends?

For those of you who aren’t tax nerds or who haven’t figured this out, qualified dividends are a subset of ordinary dividends. The total of qualified dividends cannot exceed the total of ordinary dividends. If ordinary dividends are zero, qualified dividends must be zero, too.

So this IRS notice was wrong–I’m not sure if it’s a programming error (a systemic error) or not, but there were two other issues with this notice (both of which I expected). Somehow the notice ignored the one stock trade my client had. Could it be because my client lost money so that would decrease his tax? I’m sure my cynicism is misplaced, right? The client also paid foreign tax on his dividends; that, too, was left off the notice.

Does my client owe some additional tax? Absolutely. However, he owes about one-third less than what the IRS alleges, mostly because the IRS notice is plain wrong regarding qualified dividends.

To my clients and anyone else who receives an IRS notice: IRS statistics show that two-thirds of IRS notices are wrong in whole or in part. Do not blindly pay the notice without checking with your tax professional to see if the notice is accurate unless you like paying tax you don’t owe.

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The Most Terrifying Words in the English Language Strike Again

Posted on March 2, 2016 by Russ

One of my favorite quotes is from President Ronald Reagan:

The most terrifying words in the English language are: I’m from the government and I’m here to help.

Yet another instance of this appears to be striking with the IRS.

Kristy Maitre of the Iowa Center for Agricultural Law and Taxation (at Iowa State University) reports tonight that scammers have apparently been able to crash the IRS’s online IP PIN system. This shouldn’t be a shock; as Kristy notes a TIGTA report released in December (though not on their website) and a Tax Analysts analysis highlighted this vulnerability.

This new vulnerability hits taxpayers whose lives have already been thrown in disarray by one identity theft case. Now they may have a second identity theft case. (If they’re lucky, the first case has been resolved by now.)

The only solution is for the IRS to shut down this vulnerability immediately. I’m not holding my breath, though, on that happening soon.

It’s apparent that the IRS needs to go back to square one in regards to their information technology. After all, “I’m from the government and I’m here to help.”

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Frivolity Has a Price: $19,837.50

Posted on February 29, 2016 by Russ

The Tax Court doesn’t like frivolous arguments by petitioners. Indeed, if you bring a frivolous argument to Tax Court you can be fined up to $25,000. But what happens when an attorney deliberately pushes a frivolous argument for his clients? That’s what the Tax Court had to decide today.

The underlying case was a collection matter relating to 1993 and 1994 taxes (there’s no typographical error there). The petitioners made two arguments, but the Court didn’t think much of them. As I wrote last year when this case first came to the Tax Court, the case itself wasn’t particularly interesting. But Judge Halpern didn’t like the delaying tactics used by the petitioners’ attorney. The Court then wondered if a sanction to the attorney was warranted.

We found substantial authority rebutting petitioners’ claim that Ms. Hernandez could not rely on computer transcripts to verify that their unpaid tax had been properly assessed. We stated: “Nothing in evidence indicates any irregularity in the assessment procedure that would raise a question that the assessments were not validly made in accordance with the requirements of section 301.6203-1, Proced. & Admin. Regs.”…

We likewise found substantial authority that respondent had satisfied his obligation under section 6203 to furnish petitioners with the records of assessments of their unpaid tax. We stated that the information in the account transcripts furnished to petitioners by Ms. Hernandez “constitutes all of ‘the pertinent parts of the assessment’, which, pursuant to section 301.6203-1, Proced. & Admin. Regs., on their request, respondent must furnish to them.”

The words “substantial authority” are key here. This means (to us laypeople) that the attorney should have known these were bad arguments, and shouldn’t have moved forward with them. The petitioners received a $5,000 penalty their frivolity. The petitioners’ attorney was told,

We contemplated levying excess costs on Mr. MacPherson for unreasonably and unnecessarily bringing and prolonging the proceedings. We said that we would accord him the opportunity to respond to that charge.

So what’s needed for such an award to occur:

Section 6673(a)(2) plainly imposes three prerequisites to an award of excess costs. First, the attorney or other practitioner (without distinction, attorney) must engage in “unreasonable and vexatious” conduct. Second, that “unreasonable and vexatious” conduct must be conduct that “multiplies the proceedings.” Finally, the dollar amount of the sanction must bear a financial nexus to the excess proceedings; i.e., the sanction may not exceed the costs, expenses, and attorneys’ fees reasonably incurred because of such conduct…The purpose of section 6673(a)(2) is to penalize an attorney for his misconduct in unreasonably and vexatiously multiplying the proceedings.

It gets worse for the attorney:

We have already found that petitioners’ assignments of error are frivolous and groundless and were raised primarily for delay…We believe that Mr. MacPherson intentionally abused the judicial process by bringing and continuing this case on behalf of petitioners knowing their claims to be without merit…

Moreover, as to petitioners’ remaining assignments of error, months before respondent made his motion for summary judgment respondent’s counsel put Mr. MacPherson on notice that respondent considered those arguments frivolous and contrary to established law. At Mr. MacPherson’s request, respondent’s counsel provided to him the authority on which counsel relied. And so Mr. MacPherson had further knowledge that his claims were without merit…

Mr. MacPherson further multiplied the proceedings and vexatiously impeded the resolution of this case by objecting to respondent’s motion for summary judgment on the grounds that there was a genuine dispute as to material facts and then, in less than a week, reversing course and suggesting that the parties submit the case to the Court fully stipulated under Rule 122 or make crossmotions for summary judgment…

Finally, we find Mr. MacPherson to have multiplied proceedings in his response to our order to show cause. He submitted over 400 pages purporting to support his claim that sanctions are not appropriate, but much of it consists of Mr. MacPherson’s persistence with arguments we have already told him are frivolous.

And the attorney, in the view of the Tax Court, violated American Bar Association rules that state, “A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law.”

So the Tax Court took the number of hours worked by the two attorneys in the IRS Office of Chief Counsel by their hourly rates and came to $19,837.50. And he’s lucky with that number,

Mr. MacPherson knew or should have known that this case should never have been commenced. And for that reason, we are inclined to hold that Mr. MacPherson is liable for all of the time spent by respondent, not to mention time expended by the Court in processing and reviewing all of Mr. MacPherson’s submissions. [emphasis in original]

The only case I remember that an attorney committed alleged misconduct was where an attorney filed a probate action on his mother’s estate and then filed a Tax Court action on the same estate. He told the probate court he was waiting on the Tax Court; he told the Tax Court he was waiting on the probate court. He did this successfully for twelve years. The 13th time didn’t go so well.

The goal of Tax Court is to bring the two sides together. Sure, if the IRS has erred, and no satisfaction could be reached before Court, then Tax Court is absolutely appropriate. However, when an attorney brings a case with no legs to stand on and where he knows there are no legs to stand on the attorney has a problem.

Case: Best v. Commissioner, T.C. Memo 2016-32

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Iowa Legislature Attacking EAs

Posted on February 29, 2016 by Russ

I’m exaggerating a bit, but I’m not happy when I find myself and my colleagues treated as second-class citizens. And that’s may become the case in Iowa.

There’s a proposal in the Iowa legislature to regulate tax professionals. CPAs are exempt; so are attorneys. However, Enrolled Agents are not exempt.

This is just bad legislation. Enrolled Agents are the only licensed tax professionals who must get all of their continuing education in tax. I’m pleased to note that the Iowa Society of CPAs is against this legislation.

Of course, this legislation has little to do with protecting the public and everything to do with the occupational licensing schemes of either making sure the current incumbents remain so or to raise money.

If you’re an Iowan, write your legislators to tell them they should have better things to do, like passing legislation so Iowans know what their 2015 state taxes will be. (Yes, Iowa hasn’t decided whether or not to conform to the changes made late last year to the federal tax code.)

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