AICPA Has Standing Per DC Court of Appeals; IRS’s Annual Filing Season Program In Jeopardy

Posted on October 30, 2015 by Russ

The American Institute for Certified Public Accountants (AICPA) filed a lawsuit in July 2014 challenging the IRS’s Annual Filing Season Program (AFSP). Almost exactly one year ago, a District Court for the District of Columbia ruled that the AICPA did not have standing to sue. The AICPA appealed that ruling, and in a decision announced today the Court of Appeals for the District of Columbia ruled that the lower court was wrong: The AICPA did have standing and the lawsuit will move forward.

To have standing, a plaintiff in a lawsuit needs three elements:

(1) plaintiffs must have suffered an injury in fact that is “concrete and particularized” and “actual or imminent, not conjectural or hypothetical”; (2) the injury must be “fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court”; and (3) “it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” [citation omitted]

For an association to be able to have standing,

“(1) at least one of their members has standing to sue in her or his own right, (2) the interests the association seeks to protect are germane to its purpose, and (3) neither the claim asserted nor the relief requested requires the participation of an individual member in the lawsuit.” [citation omitted]

The IRS challenged only the first of these issues. The AICPA gave three reasons in their lawsuit why they had standing. One of these, competitor standing, was the focal point of this decision.

Here, the Institute’s members, like the researchers in Sherley and the congressmen in Shays, will face intensified competition as a result of the challenged government action. Specifically, participating unenrolled preparers will gain a credential and a listing in the government directory. The Institute alleges—and we must accept as true for purposes of assessing its standing—that this will “dilute[] the value of a CPA’s credential in the market for tax-return-preparer services” and permit unenrolled preparers to more effectively compete with and take business away from presumably higher-priced CPAs.

The Court found that the AFSP harms the AICPA’s members even if it doesn’t cause confusion.

The Institute alleges that unenrolled preparers are part of the same tax return preparation market as its members. Indeed, the IRS itself reports that sixty percent of tax return preparers are unenrolled preparers. We see nothing at all speculative or attenuated about the Institute’s contention that “[u]nenrolled preparers with government-backed credentials will be better able to compete against other credentialed preparers, and especially against uncredentialed employees of [Institute] members.” Nor do we see anything speculative or attenuated about the allegation that CPAs and their firms are more likely to lose business to an unenrolled preparer with a Record of Completion and a listing in the government directory than to an unenrolled preparer with no credentials at all. [citations omitted]

The IRS then says because AFSP participants can’t use the words “certified,” “enrolled,” or “licensed” that there’s no problem with increased competition. The Court disagreed with that argument.

Without violating any of these restrictions, however, participating preparers remain free to tell potential clients that they have a Record of Completion demonstrating that they satisfied the Program’s educational requirements and passed the test. Indeed, that is the very purpose of the Program. Moreover, participating preparers’ names will appear in the Directory of Federal Tax Return Preparers alongside the names of CPAs and other credentialed preparers. As the Institute helpfully sums up, “because the Rule distorts the competitive marketplace and dilutes [Institute] members’ credentials by introducing a government-backed credential and government-sponsored public listing, it harms those members regardless of whether it also confuses consumers.”

The Court of Appeals reversed the lower court ruling, so the AICPA’s lawsuit will move forward.

So the AFSP is back on very thin ice. The original lawsuit claims by the AICPA look very accurate to me. And there’s a new one: Unenrolled preparers who do not participate in the AFSP will be denied the ability to represent taxpayers’ whose returns they prepared in examinations (as of January 2016). This makes the program look a lot more mandatory than voluntary. My suspicion is that the one and only tax season for the AFSP was the past filing season.

Posted in IRS | Tagged , | 1 Comment

California DMV Deliberately Overcharging on Sales Tax

Posted on October 29, 2015 by Russ

When you purchase a car in California, you owe sales tax based on where the car is registered. The California DMV uses a table based on ZIP Codes to determine what that should be. For 90% or more of California, it works fine; the sales tax rate in a ZIP Code is uniform.

However, California has numerous sales tax rates based on cities, counties, and special districts. Two individuals living in the same ZIP Code might have two different sales tax rates. The DMV has apparently programmed its computer to charge the higher of the two sales tax rates when registering a car purchase. An impacted consumer has to then apply for a refund (if he becomes aware of the issue).

Yet California’s Board of Equalization, the agency responsible for sales tax collection in California, developed an online tool to accurately show the sales tax rate for a location. Unfortunately, the DMV refuses to use it and told George Runner, a member of the BOE, that it would be several years before the problem is fixed.

Mr. Runner expresses surprise at the situation. I am anything but surprised. I suspect the DMV likes the current procedure because they show higher revenue generation (which will presumably increase their budget) and because of pride of ownership. ‘We can’t use a tool developed by the BOE,’ the DMV may be thinking. ‘It’s not ours, so how can we trust it? And it doesn’t directly interface with our computer system. We don’t want our clerks overriding a sales tax rate (even when it’s wrong). Let the consumer just apply for a refund.’

This is yet another reason why trust has fallen in government and regulators.

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Chaffetz Introduces Impeachment Resolution of IRS Commissioner Koskinen

Posted on October 27, 2015 by Russ

This past Friday the US Department of Justice announced that there would be no criminal prosecution of Lois Lerner related to the IRS scandal. I certainly wasn’t surprised. If you don’t remember, the Department of Justice won my Tax Offender of the Year award back in 2013 because the DOJ didn’t really investigate the scandal. I still don’t think that’s occurred. While it is theoretically possible that the IRS scandal is all due to an extraordinary amount of coincidences, it’s far more likely that one individual ordered it.

That brings us to today’s news. Congressman Jason Chaffetz (R-Utah) today filed an impeachment resolution against IRS Commissioner John Koskinen. Mr. Chaffetz is the chair of the House Oversight and Government Reform Committee. He accuses Commissioner Koskinen of violating the public trust.

He failed to comply with a congressionally issued subpoena, documents were destroyed on his watch, and the public was consistently misled. Impeachment is the appropriate tool to restore public confidence in the IRS and to protect the institutional interests of Congress. This action will demonstrate to the American people that the IRS is under repair, and signal that Executive Branch officials who violate the public trust will be held accountable.

Commissioner Koskinen is accused of:

  • Failed to comply with a subpoena resulting in destruction of key evidence.  Commissioner Koskinen failed to locate and preserve IRS records in accordance with a congressional subpoena and an internal preservation order.  The IRS erased 422 backup tapes containing as many as 24,000 of Lois Lerner’s emails – key pieces of evidence that were destroyed on Koskinen’s watch. 
  • Failed to testify truthfully and provided false and misleading information.  Commissioner Koskinen testified the IRS turned over all emails relevant to the congressional investigation, including all of Ms. Lerner’s emails.  When the agency determined Ms. Lerner’s emails were missing, Commissioner Koskinen testified the emails were unrecoverable.  These statements were false.
  • Failed to notify Congress that key evidence was missing.  The IRS knew Lois Lerner’s emails were missing in February 2014.  In fact, they were not missing; the IRS destroyed the emails on March 4, 2014.  The IRS did not notify Congress the emails were missing until June 2014 – four months later, and well after the White House and the Treasury Department were notified.   

The IRS, of course, disputes the allegations in the resolution and believes they have fully cooperated with all of the investigations.

The reality is that Commissioner Koskinen may be impeached by the House of Representatives, but it is very unlikely he’ll be convicted by the US Senate. It is highly doubtful that Democrats will vote to impeach Mr. Koskinen.

My view of this is simple: Mr. Koskinen has become a mouthpiece of the Administration rather than an independent head of the IRS. New leadership and a resolution of the IRS scandal is needed before the people regain full confidence in the IRS. Mr. Koskinen has failed in that task. The IRS’s budget does need to be increased, but that’s not happening until Mr. Koskinen leaves the agency (and the scandal is resolved). The Wall Street Journal’s conclusion on the impeachment mirrors my thoughts:

Yet the exercise will have the salutary effect of reminding executive-branch officials that they are not a government unto themselves. The U.S. Attorney has refused to honor Congress’s contempt charge against Ms. Lerner for refusing to testify, the Justice Department has closed its investigations into IRS targeting without prosecutions, and the press corps winks at abuses of power when conservatives are the targets. With an executive who refuses to honor the normal separation of powers, Congress is obliged to use its authority to hold government accountable.

Posted in IRS | 1 Comment

Over 1,100 Returns Filed from Two Addresses Lead to Two Heading to ClubFed

Posted on October 25, 2015 by Russ

Two separate cases out of Broward County, Florida highlight that if you submit lots of tax returns from the same address even the IRS will get suspicious. A former band director and another Floridian will be heading to ClubFed in separate identity theft cases.

In the first case, a former band director apparently used his position to steal 419 identities. From the DOJ press release:

According to court documents, IRS-CI investigators noticed that 419 suspicious tax returns claiming refunds totaling $754,470 were filed from Rogers’ residential address from January 25, 2014 to April 20, 2014. Based on this information, a search warrant was executed at Rogers’ residence and agents discovered and seized papers, notes, and documents containing thousands of PII (including names, dates of birth, and social security numbers) including PII contained in records of more than a dozen Broward County School District students, some dating back to the late 1990s and others into the late 2000s. Agents also seized numerous printed 2013 tax returns.

Delvis Rogers of Hollywood, Florida admitted when his apartment was searched (under a search warrant) that he had prepared and filed hundreds of phony tax returns from his apartment. Mr. Rogers pleaded guilty to two identity theft related charges. He received 61 months at ClubFed and agreed to make restitution to the IRS of $129,321.

In the second case, Keyiona Wright of Plantation, Florida pleaded guilty to conspiracy to commit wire fraud and aggravated identity theft. From the DOJ press release:

According to court documents, from March 25, 2014 to May 6, 2015, forty-six federal tax returns were filed with the IRS claiming refunds of $135,196 from an IP address in Plantation. From September 16, 2014 to May 5, 2015, at least 688 rejected federal tax returns, claiming refunds of $733,276, were electronically transmitted to the IRS from this same IP address. Agents confirmed that the IP address was assigned to an apartment rented by Wright.

A search warrant found notebooks, bags, documents, papers, and computers containing personal identification information. “A forensic analysis revealed that the documents, computers, and debit/credit cards seized from Wright’s residence contained identifying or account information for over 14,000 individuals.” And agents found another computer that had a video with Ms. Wright counting money. At least she didn’t post it on Facebook like the Queen of Tax Fraud.

In the end, Ms. Wright pled guilty. She’ll have plenty of time at ClubFed to think over her decisions; she was sentenced to 7 years.

Posted in Tax Fraud | Tagged | 2 Comments

Monsters Under the Bed

Posted on October 25, 2015 by Russ

Two Florida tax preparers (I hesitate to use the word “professionals” based on what they’re accused of) are facing a lawsuit from the Department of Justice seeking a civil injunction to prevent them from owning a tax preparation firm and preparing returns for others. This lawsuit is derived from other lawsuits against individuals related to LBS Tax Services.

It seems that Christopher Lawrence and Kenneth Aikens, proprietors of “Tax Mon$Ter” and “Tax Pros,” are accused of doing many of the practices that bad preparers use to get bad refunds: false earned income tax credit, incorrect filing status, phony businesses, fake unreimbursed business expenses, and one that we don’t see that often: unconscionable fees. From the DOJ press release:

According to the complaint, Lawrence and Aikens target primarily low-income customers with deceptive and misleading advertisements, prepare and file fraudulent tax returns to fraudulently increase their customers’ refunds and profit through unconscionable, exorbitant and often undisclosed fees—all at the expense of their customers and the U.S. Treasury.

There are two main points to realize from this story. First, if it sounds too good to be true it probably is. If your tax “professional” is promising you a huge refund but something doesn’t sound right, there likely is something wrong. Second, the IRS has methods today to go after bad tax professionals. Suppose I start inventing deductions and credits, adding phony dependents, and otherwise abuse the system, the IRS can come after me. Even unlicensed tax professionals can be gone after–and it appears that’s the case here.

Posted in IRS, Tax Preparation | Tagged | Comments Off on Monsters Under the Bed

Up In Smoke, Again

Posted on October 22, 2015 by Russ

A California non-profit corporation tried to find a way around Section 280E of the Tax Code at Tax Court. Would they be successful or would yet another marijuana business fall victim to the difference between federal and state law?

In 1996 California approved medical marijuana. However, federal law make marijuana a Schedule I controlled substance under Section 280E of the Tax Code. The petitioner in the case is a non-profit corporation (technically, a California mutual benefit corporation that is not for profit). The IRS had disallowed business expenses because of Section 280E of the Tax Code. The petitioner timely filed a Tax Court petition.

The problem that the petitioner faces is basically that federal law trumps state law. The Federal Drug Enforcement Administration lists marijuana as a Schedule I controlled substance. In Olive v. Commissioner, the Ninth Circuit Court of Appeals stated,

[T]he only question Congress allows us to ask is whether marijuana is a controlled substance ‘prohibited by Federal law.’ * * * If Congress now thinks that the policy embodied in § 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.

The petitioner tried to argue that he was in multiple lines of businesses, so that some portion of the business expenses would be deductible. The Tax Court was having none of that:

Because of the parties’ stipulation, we find that the sale of medical marijuana was petitioner’s primary source of income and that the sale of any other item was an activity incident to its business of distributing medical marijuana. We find that petitioner was engaged in one business–the business of selling medical marijuana.

With Section 280E prohibiting deductions for business expenses, the IRS’s deficiencies were upheld. Medical marijuana might be legal under California law, and expenses are deductible on California tax returns. However, until Congress changes the law business expenses for marijuana dispensaries cannot be taken on federal tax returns.

Case: Canna Care, Inc. v. Commissioner, T.C. Memo 2015-206

Posted in IRS, Tax Court | Tagged | 1 Comment

The Wagering Excise Tax and DFS

Posted on October 20, 2015 by Russ

I’m focusing on the tax aspects of daily fantasy sports (DFS) this week. It’s beneficial for DFS participants for the activity to be considered gambling. For political reasons (“gambling is a sin”) and regulatory reasons (gambling is regulated, skill contests are not), the DFS sites want to be considered skill games sites. There’s another reason that DFS sites don’t want to be considered gambling: the wagering excise tax.

The wagering excise tax is either a 0.25% or 2% tax on bets made on certain activities. It falls on wagers on sports events or contests, wagers placed in a wagering pool that involves a sports event or contest (if the pool is conducted for profit), and lotteries conducted for a profit. The tax is on the gross amount of wagers received, not the amount someone might win. Would this tax apply to DFS if DFS is considered gambling?

We can look at the Tax Code and the regulations promulgated under the Code to determine this. A wagering pool conducted for profit includes any method or scheme for the distribution of prizes to one or more winning bettors based on the outcome of a sports event, a contest, or a combination or series of such events or contests, if the wagering pool is managed and conducted for the purpose of making a profit. (Regulations 44.4421-1(c)(1) and 44.4421-1(c)(2)) DFS clearly meets the definition of a wagering pool.

So what’s a contest? Regulation 44.4421-1(c)(3) states that includes any type of competition involving speed, skill, endurance, popularity, politics, strength, appearance, etc., such as a general or primary election, the outcome of a nomination convention, a dance marathon, a log rolling, wood-chopping, weight-lifting, corn-husking, beauty contest, etc. Clearly, a weekend of NFL games (or anything else that DFS contests/bets are based on) would qualify.

You may have noticed there are two different tax rates (0.25% and 2%). The 0.25% tax rate applies on any wager authorized under the law of the state in which accepted (IRC § 4401(a)(1)), otherwise the tax rate is 2% (IRC § 4401(a)(2)).

It’s pretty clear to objective observers that DFS is a form of wagering (aka gambling). If that conclusion is accurate, the DFS sites will owe the wagering excise tax.

Posted in Gambling | Tagged | 1 Comment

The Future of DFS

Posted on October 18, 2015 by Russ

If you watch any sports television, you’ve almost certainly seen commercials for the two leading daily fantasy sports (DFS) sites, DraftKings and FanDuel. Last week the Nevada Gaming Control Board announced that DFS is gambling under Nevada law. The Nevada Attorney General’s office released a 17-page review of DFS that thoroughly explained the reasoning. What does this mean for the future of DFS in both Nevada and the US?

First, none of this should have been a surprise. In February 2014 I wrote,

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws. [emphasis in original]

Nevada is not going to be the only state that concludes that DFS is gambling. The head of the Michigan Gaming Control Board has publicly stated that DFS is gambling. Other states will conclude that under their laws that DFS is gambling and either needs a license or should be banned from the state. Nevada may have been the first state to draw this conclusion but it will not be the last.

The problem is how regulators look at something new. Generally, the view of a regulator is that if it hasn’t been made expressly legal under the law that it should be (and is, in their view) illegal. The mindset of most regulators will start with a “DFS is illegal” view. In my first job I learned that perception of reality is far more important than the reality itself. This does not bode well for DFS.

Meanwhile, there’s a federal grand jury investigation of DFS that’s ongoing in Tampa, Florida. This has caused some operators to pull out of Florida. While the DFS sites have proclaimed that the UIGEA (the Unlawful Internet Gambling Enforcement Act of 2006) made DFS legal, the analysis of the Nevada Attorney General puts a stake in that argument. DFS is exempted from the UIGEA but not from other federal and state laws related to gambling.

There’s also a huge risk for DFS from the IRS. What if the IRS concludes that DFS is gambling and that instead of issuing Form 1099-MISC’s to winners they should issue Form W-2Gs? This would be a national conclusion, and give a prima facie case that DFS is gambling. And this could easily happen.

There’s also reality: the duck test. If it looks like a duck, walks like a duck and quacks like a duck, then it just might be a duck. Many DFS participants view it as gambling. Apparently the executives at DraftKings share that view (see the Nevada Attorney General’s report). In the United States gambling is regulated at the state level (along with the federal level). Unless authorized by a state, most gambling in that state is illegal. DFS has not been authorized by any state. (The Massachusetts Attorney General recently stated that DFS was legal in that state. However, it has not been expressly authorized.)

So where does that leave DFS? Someone I know said, “In like 25 years when everyone with any power will have grown up with the Internet, will things be different?” That’s easy to answer: Yes. But we have to live in today’s world, not what it will be in 2040. I expect DFS to follow two different paths in the majority of states. Some states will simply declare it as gambling, making it effectively illegal in those states. Other states will tacitly declare it as gambling but allow regulation of the activity. There will be a minority of states that allow DFS to continue as an unregulated activity. Where one month ago you could play DFS in 45 of the 50 states, that number is down to 42 to 44 states (depending on the DFS site). I expect that number to continue to fall.

Could federal regulation happen? Certainly, but not out of this Congress in the next year. This isn’t a major issue for either party, and 2016 is an election year. Additionally, it’s possible that the next Speaker of the House will be Jason Chaffetz (R-Utah); he’s definitely not pro-gambling. There’s a better chance of the IRS budget being increased (and that has just about a 0% chance of happening) than pro-gambling (or pro-DFS) legislation passing Congress.

Overall, I’m painting a bleak future for DFS in the United States. Maybe I’ll be proven wrong, but the signs are there. Perhaps it was P.T. Barnum who said, “All publicity is good publicity.” (Like the duck test quote, this, too, has been attributed to many individuals.) The advertising and publicity have helped DFS short-term profits. The current publicity has not, though, helped DFS’s future.

Posted in Gambling | Tagged | 1 Comment

That Was the Year that Was

Posted on October 18, 2015 by Russ

Last November I wrote about “The Horrible, No Good, Very Bad Upcoming Tax Season.” This definitely wasn’t the best tax season but it also wasn’t the worst (but it was close to the bottom). The four issues that I identified as problems were tax extenders, the IRS budget, the Affordable Care Act (aka ObamaCare), and the IRS Property/Capitalization regulations.

Tax extenders were passed late, but there weren’t any surprises. Thus, the impact to the 2015 Tax Season was minimal.

The same can’t be true for the IRS budget cuts. This probably impacted me more than any of the other issues I faced. Calling the IRS was almost a joke. The “Practitioner Priority Service” hold times were so bad that I’d hate to think of what they were for regular numbers. Unfortunately, I see no improvement possible with the IRS budget until the IRS scandal is resolved. That’s not going to happen until we have a new President, so we have probably two more years of misery in dealing with the IRS.

(The Obama Administration promised to be the most transparent in history. Its record is one of obfuscation and deceit, not of being open and honest.)

For the most part ObamaCare did not impact many of my clients. Of course, for 2014 tax returns a client could self-certify they had health insurance. Coming for 2015 returns will be IRS Forms 1095-B and 1095-C. Almost everyone will need to provide tax professionals with a health insurance form.

The property regulations almost had a huge impact. A literal reading of the regulations was that everyone impacted needed to file a Form 3115. The IRS realized that they didn’t have the personnel to handle the incoming tsunami of paperwork and, at the last moment, issued procedures that basically mitigated the impact of the new regulations.

While I’ll post about the upcoming season in another month, it looks like deja vu all over again. Once more, tax extenders haven’t passed, we have another year of impacts of ObamaCare, and the IRS budget constraints will continue. Unfortunately, this year I’m not taking a vacation to New Zealand and Australia in December. In any case, tax professional will likely be grouchy next tax season, too.

Posted in IRS, Tax Preparation, Taxable Talk | Tagged , | 1 Comment

It’s October 13th and I’m Still Not Ready to File my Taxes; What Should I Do?

Posted on October 12, 2015 by Russ

Somewhere, there’s a procrastinator wondering that exact question. He’s likely thinking, “I don’t have to do anything; I have until October 15th!” That’s not a good answer (with one exception [1]).

First, most tax professionals will not be able to fit you in. I took in one new client appointment this week—and he’s filling a cancellation. Determine your income, gather all your documents, and do your best. Tax forms are available online (the IRS website is actually quite good). Commercial tax software, though flawed [2], is a good choice at this point in time.

If possible, file electronically. If you must mail your tax return, use certified mail, return receipt requested. That means going to a post office or using an automated postal center (there’s one at the supermarket near my house).

Normally it’s better to extend than amend. If you’re a procrastinator, you can’t extend. Thus, if you file your return and you’re still a bit uncertain, consider meeting with a tax professional next week. He or she can review the return and determine if your return needs to be amended.

The clock is about to strike midnight.

[1] I have one client who is on extension who was impacted by the terrible flooding in South Carolina. That client has a lot more to deal with right now than filing taxes. The IRS and the South Carolina Department of Revenue extended the tax deadline for impacted South Carolinians until February 16, 2016.

[2] I disagree with fellow tax professional Robert Flach on his description that all tax software is fatally flawed. For individuals in simple situation it works perfectly. It doesn’t make math mistakes. And it usually allows for seamless electronic filing. I agree with Robert that the ability to look at a return and evaluate what’s on it (does it pass the smell test) is vital but when you’re up against a deadline, you don’t have a choice.

Posted in IRS, Tax Preparation | 3 Comments