IRS

Describes motivation process for creativity with emphasis on intrinsic motivation by Corey K Katir

In a controversial decision today, the IRS squandered an opportunity to help close the tax gap by attracting more whistleblowers with significant information about large tax schemes. The public will suffer as a result.

Stubbornly, the IRS rejected calls for a common sense approach to rewarding tax whistleblowers, as it refused to modify a proposed rule that narrowly defines the categories of cases that should justify awards to whistleblowers.

At issue is what Congress meant by the term “collected proceeds”–an undefined phrase in the 2006 tax whistleblower law. This law unquestionably sought to expand the number and variety of whistleblower claims presented to the IRS.

As my colleague Richard Rubin and I pointed out in comments to the IRS, Senator Grassley modeled changes to this tax whistleblower law on the dramatically successful False Claims Act, the nation’s major whistleblower law. That law has returned some $30 billion to the Treasury by rewarding whistleblowers who help unearth fraud against taxpayers, and helps deter future fraud.

Today, Senator Grassley saw that some in the IRS want to undermine his efforts and ignore Congress’s plain intent–essentially supplanting Congress’s role as lawmaker. The IRS announcement has insisted on a narrow reading of that phrase. It rejected the commonsense notion that any whistleblower who can help provide a “net benefit to the Treasury” should be rewarded.

To illustrate, although the IRS’ own past guidance reveals that it formerly paid rewards based on criminal fines, it now has declared criminal fines off-limits from whistleblower rewards. The IRS also has refused to recognize all benefits provided in preventing improper use of net operating losses (NOLs), as well as a variety of other future benefits to the Treasury.

When Congress in 1986 amended the nation’s major whistleblower law that helped inspire the new IRS Whistleblower Program, the False Claims Act, it took a few years before the Department of Justice realized just how essential encouraging and rewarding whistleblowers is to enforcement of the law.

We wish a speedy learning curve for the IRS. With a tax gap of more than $350 billion annually in owed but unpaid U.S. taxes, the public needs the IRS to heed Senator Grassley’s words–that whistleblowers are to be welcomed–because the public sorely needs them.

The University of Miami’s Heckerling Institute last week brought together the nation’s leading estate planners, including attorneys, trust officers, accountants, insurance advisors, and wealth management professionals. For the first time, these estate planning professionals delved into how estate and gift tax issues are the subjects of many IRS Whistleblower claims.

This program was organized by Marty Basson, who recently retired from the IRS Whistleblower Office and hung out his shingle (now providing a wealth of knowledge to the private bar), after a distinguished career as the IRS authority on estate and gift tax issues.

Marty has long served on the Heckerling Institute faculty at the University of Miami. Marty is also a charter member of the IRS Estate and Gift Tax National Advisory Panel, a select group of IRS attorneys who assist in forming nationwide policy decisions in the estate and gift tax area.

Marty asked me to join him and Dawn Applebaum of the IRS Whistleblower Office for a Heckerling panel discussion last week on the IRS Whistleblower Program in the estate and gift tax arena. While a few professionals in attendance had already filed IRS Whistleblower claims, the vast majority had not.

Heckerling provided a first class forum to address many of the “hot” issues in the tax whistleblower program. I was honored to join Marty and Dawn as the private whistleblower attorney who provided the perspective of whistleblowers in the IRS Whistleblower Program.

Once Congress created the new IRS Whistleblower Program in December 2006, the IRS Whistleblower Office was unsure whether it would receive many estate tax and gift tax claims. It received far more estate and gift tax claims than anticipated.

Consider a typical case of a divorced couple who both know that a parent has hidden accounts offshore. When that parent dies, the estranged spouse knows that the offshore accounts will not likely appear on the estate tax return. Such information about tax evasion is very useful to the Service, so that honest taxpayers do not bear more than our fair share of the burden.

Our Heckerling discussion covered many, many aspects of the IRS Whistleblower Program in a spirited discussion that ran out of time. Marty was suddenly free to express his own observations, not simply the official position of the IRS.

Among the topics were recent Tax Court opinions on protecting the confidentiality of whistleblowers and of taxpayer information in appeals, and the protections of taxpayer information in proposed new Tax Court Rule 345.

I was asked to discuss steps to protect whistleblowers from criminal and civil liability, which has been an important issue in past presentations after UBS whistleblower Bradley Birkenfeld found himself prosecuted for a federal offense. Marty also asked me to discuss the view of numerous tax whistleblowers as their claims progress through the process.

At the Healthcare Fraud Institute this past week, I was asked to address what steps whistleblowers should take to ensure confidentiality of emails with their lawyers. Although qui tam cases under the False Claims Act were the focus of our discussion, the same principles apply to tax whistleblowers and SEC whistleblowers.

Potential whistleblowers should never use their company’s email system, or any email account shared with or accessible to another person, for communicating with their attorney or for gathering information or evidence to report to the government.

Although the law encourages whistleblowers to report fraud, whistleblowers can create unnecessary problems for themselves by not following this rule.

First, emails between whistleblowers and their attorneys are privileged and confidential, but the privilege can disappear and be waived if the communication is disclosed to others.

Second, qui tam whistleblower cases under the False Claims Act are filed with a court order “sealing” the case from public view, while the government investigates. If an email accidentally exposes the case, the whistleblower may have violated the court’s “seal” order.

Third, alerting a defendant company that the whistleblower has reported the company’s fraud to the government is almost certain to provoke retaliation against an employee who is a whistleblower. Immediate suspension or firing often follows. Although the False Claims Act and the SEC and CFTC whistleblower laws create remedies for retaliation, those remedies take time to achieve. They will not pay the whistleblower’s mortgage next month–or this year.

We advise all of our clients that they must protect the confidentiality of their emails. Many people do not realize that emails sent from a company’s computer system usually leave some record, even if the employee is accessing a personal Gmail account.

At this past week’s third annual “IRS Whistleblower Boot Camp,” Deputy IRS Commissioner for Service and Enforcement Steven T. Miller spoke of his “desire for the whistleblower program to grow.” A major announcement was that he would “push for” the IRS to begin using the expertise of whistleblowers who can help the IRS interpret information obtained in its audits..

In his remarks, Deputy Commissioner Miller described “offshore” tax abuses as a key area. He commented that whistleblower submissions have a “unique place” in “breaking bank secrecy.”

With budget reductions, the IRS is looking for ways to “leverage” its efforts. According to Miller, whistleblower submissions in at least three areas can help:

1. Promotion of abusive tax shelters known to potential whistleblowers

2. Tax violations in which sophisticated information technology systems pose a barrier to the IRS, unless a whistleblower can explain them

3. Inadequate information reporting that is required of third parties, and that whistleblowers can address

When it “makes sense” for the IRS to use the whistleblower’s expertise, Miller said he would encourage use of disclosure agreements with whistleblowers authorized under section 6103(n) of the Internal Revenue Code, which governs disclosure of taxpayer information. Examples he gave include review of information received in response to the Service’s information document requests, or explanation of information technology issues known to the whistleblower.

Sen. Chuck Grassley recently urged the IRS to make better use of expertise and resources that whistleblowers and their lawyers can provide, as the Justice Department does in False Claims Act cases.

This year’s IRS Whistleblower Boot Camp also included many other senior IRS officials. Whistleblower Office Director Steve Whitlock and his office’s Special Counsel Debra Bowe were major participants.

Once again, the Office of Chief Counsel’s Senior Counsel Tom Kane participated and was again very generous with his time, both during and after the program. He addressed various litigation issues that arise in whistleblower matters. Senior Program Analysts Dawn Applebaum and Kathy Onken also provided a great deal of knowledge and insight into how the program is operating.

The most fascinating issues to me were those involving the international and offshore efforts of the IRS, the subject of the session I moderated. On this panel, joining IRS Whistleblower Office director Steve Whitlock and Senior Analyst Dawn Applebaum were Toni Weirauch, Deputy Director of International Crimes in the IRS Criminal Investigation Division; and Donna Prestia of the new Global High Wealth Division. The attendees gained an appreciation of the considerations of representing whistleblowers who may be foreign nationals gathering evidence in ways that comport with U.S. law, but that may be contrary to other countries’ bank secrecy laws.

My colleagues Erika Kelton, Paul Scott, Linda Stengle, and Margaret (Peggy) Finnerty deserve thanks for their excellent presentations as well.

Each year’s “IRS Whistleblower Boot Camp” brings together senior officials of the IRS Whistleblower Office and tax whistleblower attorneys to explore the latest developments in the IRS Whistleblower Program. This year’s Boot Camp is November 15, 2011 in Washington.

Of special interest this year is that Deputy IRS Commissioner for Services and Enforcement Steven T. Miller will participate for the first time. Other IRS officials participating include (in order of appearance):

–Stephen Whitlock, Director of the IRS Whistleblower Office
–Debra Bowe, Special Counsel to the Director of the IRS Whistleblower Office
–Thomas Kane, Senior Counsel, IRS Office of Chief Counsel
–Dawn Applebaum, Senior Program Analyst, IRS Whistleblower Office
–Kathy Onken, Senior Program Analyst, IRS Whistleblower Office

Once again, I am looking forward to leading a panel discussion, this time on International and Offshore Issues. Panelists will include Steve Whitlock, Director of the IRS Whistleblower Office; Dawn Applebaum of the Whistleblower Office; and a representative of the IRS Criminal Investigative Division with expertise in international and offshore tax cases.

Other sessions will discuss new developments, including the debate over the IRS “collected proceeds” regulation that was the subject of the May 11, 2011 public hearing; litigation issues; and “hot topics.” My friends and colleagues Erika Kelton, Paul Scott, Linda Stengle, and Margaret Finnerty will also moderate panel discussions or serve as panelists.

Does Deputy Commissioner Miller’s involvement signal that the IRS as a whole is increasingly recognizing the vast benefits of encouraging tax whistleblowers to come forward?

Anyone interested in closing the “tax gap” should hope so. We certainly welcome his participation in this effort to educate attorneys further about the “best practices” in pursuing IRS Whistleblower claims.

Every two years, attorneys prosecuting or defending qui tam whistleblower cases under the False Claims Act and other whistleblower laws gather for the Whistleblower Law Symposium.

We have written much about aqui tama whistleblower cases under the False Claims Act. Since last yearas passage of the Dodd-Frank law, whistleblowers who help expose (1) violations of the securities laws or (2) commercial bribery of foreign government officials, now can receive rewards of 10-30% of money sanctions imposed under the new SEC Whistleblower Program. The new IRS Whistleblower program pays whistleblowers 15-30% of amounts recovered. These cases also help stop fraud against taxpayers and investors.

On October 21, an unusual group of national experts on these claims will gather for the Whistleblower Law Symposium, which our firm organizes every two years. Not only do we have senior attorneys from the Department of Justice and experienced whistleblower lawyers discussing qui tam cases, but the Director of the IRS Whistleblower Office Steve Whitlock will participate and explain the tax whistleblower program. Senior SEC attorneys also have stated that they wish to be part of our seminar to discuss the new SEC Whistleblower Program, and are seeking approval to participate.

This conference is broader in scope than any whistleblower law conference in the country of which I am aware, as we have a national faculty of lawyers on both sides of these cases, as well as some of the top government officials involved.

Registration is still open for those who want to register online here:

Please feel free to call or email me with any questions. The Agenda is below.

The promising new IRS Whistleblower Program that Congress authorized in December 2006 is the subject of a long-anticipated GAO Report released this morning.

Disappointingly, the report raised, but did not attempt to answer, fundamental questions that will determine whether the IRS realizes the full potential of the new program in helping close the “tax gap”–or settles for a fraction of what it can accomplish.

Inspired by the dramatic successes of the False Claims Act in combating fraud against the government through rewarding whistleblowers, Sen. Charles Grassley spearheaded the effort to create the first meaningful IRS Whistleblower Program in 2006.

Relying on data showing that whistleblower information had already proved extremely effective for the IRS (four cents invested produced one dollar in recoveries), Congress doubled reward percentages and made awards mandatory for whistleblowers. A small but impressive staff came together to run the program through the first IRS Whistleblower Office, led by Director Steve Whitlock.

Unfortunately, some in the IRS resisted implementing Congress’ direction that the IRS expand the number and types of whistleblower claims that the IRS pursues, and are instead creating obstacles and delays that never existed before. Thus, Congress prompted GAO to inquire.

I was one of several attorneys whom GAO contacted, at the IRS Whistleblower Office’s suggestion, to discuss these issues. I spent considerable time in more than one interview discussing what has made the False Claims Act so successful, and how the IRS can achieve similar success. We shared our written comments to the IRS at its recent hearing on the IRS Whistleblower rules.

The essential elements of any successful whistleblower program start with predictable and meaningful rewards to whistleblowers that are not left to the government’s discretion. In addition, the success of the False Claims Act is in its “public-private partnership” model, which allows the government to leverage its scarce resources by working hand-in-hand with whistleblowers and their attorneys to address fraud. These principles translate to the IRS whistleblower claims process under existing law, and if needed Congress can tweak the privacy statute (26 U.S.C. section 6103) and still preserve appropriate taxpayer privacy.

GAO’s report touches on these fundamental questions, but leaves them unanswered. Instead, it focuses on what its title suggests: “TAX WHISTLEBLOWERS:
Incomplete Data Hinders IRS’s Ability to Manage Claim Processing Time and Enhance External Communication.”

With no offense to the report’s authors at GAO, better data collection by the IRS Whistleblower Office will not determine whether the next big tax fraud scheme remains undetected, or is exposed by a whistleblower. These fundamental principles underlying any successful whistleblower program must be incorporated, so that the IRS Whistleblower Office is empowered to do its job most effectively.

The new IRS Whistleblower Program for tax whistleblowers will be featured for the first time at the nation’s leading conference for estate planners, the Heckerling Institute on Estate Planning.

The Heckerling Institute is known as the country’s “leading conference for estate planners, including attorneys, trust officers, accountants, insurance advisors, and wealth management professionals.” This is the 46th Annual Institute, named after late Professor Philip E. Heckerling, founder of the University of Miami Law Schoolas Estate Planning Institute. The conference will take place from January 9-13, 2012.

The IRS Whistleblower Program will be the topic of a special session, “Anyone Can Whistle–What You Should Know About the Newly Revised IRS Whistleblower Program.”

For years, Martin E. Basson, who is an Attorney-Advisor/Senior Analyst for the IRS National Whistleblower Office, has chaired a program for the Institute. I will join Marty and the IRS Whistleblower Office’s Dawn M. Applebaum, for what I understand is the Institute’s first program discussing the new IRS Whistleblower Program.

Marty Basson is known as the IRS Whistleblower Office’s expert on estate and gift tax issues. Dawn Applebaum, a Management Analyst with the Whistleblower Office, has been excellent in other programs such as the Whistleblower Law Symposium and the IRS Whistleblower Boot Camp. I will be the tax whistleblower attorney on the panel, as we discuss this “developing area of tax practice, and the practical realities of developing and pursuing tax whistleblower claims.”

Tax whistleblowers are making increasing use of the IRS Whistleblower Program to address tax fraud, tax evasion, and other violations of tax law. The estate tax area is fertile ground for these tax whistleblower claims, so this program should be especially interesting.

Withdrawals to pay education expenses from your employer’s retirement plan before you turn age 59 1/2 are NOT subject to the 10% early withdrawal penalty. Withdrawals for the same reason before age 59 1/2 ARE subject to the 10% additional tax when taken out of your IRA which you funded with a rollover from your employer’s retirement plan.

On May 9, 2012, the Seventh Circuit Court of Appeals in the case of Young Kim vs. Commissioner of Internal Revenue ruled in favor of the IRS that the taxpayer owes the 10% tax and, because he had not paid it, also owes a penalty for substantial underpayment of taxes.

Here’s the opinion in its entirety:

At age 56, Young Kim left his position as a partner in a law firm and enrolled in the London School of Economics. Employees who depart at age 55 and up may withdraw money from the employeras retirement plan. They must pay income tax (retirement plans contain pre-tax dollars), but they do not owe the 10% additional tax that the Internal Revenue Code imposes on most withdrawals before age 59A1/2. 26 U.S.C. ASS72(t)(1), (2)(A)(v). During 2005 Kim moved the funds from the law firmas retirement plan to an individual retirement account. A rollover is not a taxable event. 26 U.S.C. ASS402(c); 26 C.F.R. ASS1.402(c)a2. During 2006 Kim withdrew about $240,000 from the IRA. He paid the income tax but not the 10% additional tax. The Commissioner of Internal Revenue concluded that he owes the 10% tax and, because he had not paid it, also owes a penalty for substantial underpayment of taxes. 26 U.S.C. ASS6662.

Kim sought review by the Tax Court, which held a trial. The parties reduced the scope of the dispute because the money spent on tuition and other education expenses attending the London School of Economicsa and the amount Kim paid for his daughteras tuition and other education expenses at Bryn Mawr Collegeais not subject to the 10% tax. See 26 U.S.C. ASS72(t)(2)(E).

The Tax Court held that Kim owes the 10% tax on the withdrawn money that he had put to other uses and also owes the penalty for a substantially inaccurate return. The parties agreed that, if the Tax Courtas decision is correct, Kim owes $20,456.50 under ASS72(t)(1) and $4,091.30 under ASS6662. Judgment was entered to that effect. Kim asks us to hold that he owes nothingaor at least that he does not owe the accuracy-related penalty under ASS6662.

Kim relies on ASS72(t)(2)(A)(v), which provides that the 10% additional tax does not apply to a distribution from a pension plan amade to an employee after separation from service after attainment of age 55a. His immediate problem is that the distribution from the IRA was not amade to an employeea; he was not an employee of the IRAas custodian. He had been an employee of the law firm and therefore could have taken a distribution from its pension plan, but thatas not what happened.

Just in case this point was unclear, the Internal Revenue Code adds: aSubparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan.a 26 U.S.C. ASS72(t)(3)(A). Kim withdrew money from an IRA, an individual plan; subparagraph 72(t)(2)(A)(v) therefore ashall not applya.

Kim calls his account a aSEP IRAa (asimplified employee pensiona, see 26 U.S.C. ASS408(k)) as opposed to a atraditional IRA,a but ASS72(t)(3)(A) does not distinguish among flavors of individual retirement plans. Before reaching 59A1/2, Kim withdrew money from an individual retirement plan, rather than from his former employeras plan, and therefore must pay the 10% additional tax. Kim insists that this makes no sense. He could have taken the money from the law firmas pension plan without the 10% additional tax; why should it matter that the money went from the law firmas plan to an IRA before being withdrawn? The answer is that the Internal Revenue Code says that it matters, and Kim does not contend that ASS72(t)(3)(A) violates the Constitution.

Many parts of the tax code are compromises, and all parts reflect the need for lines that canat be deduced from first principles. Why can an employee withdraw money from an employeras plan without the 10% addition at age 55 but not age 54? Why does the 10% additional tax apply to withdrawals at age 59 and 181 days, but not 59 and 183 days? These questions cannot be answered by logical analysis. The Codeas lines are arbitrary. The law firmas pension plan put Kim to a choice between taking the money and moving part or all of it to an IRA. He chose to roll over the whole balance, because he did not want to pay any income tax immediately.

The Code allowed Kim to extend the tax deferral at the cost of the 10% additional tax if he later took some of the money before age 59A1/2. Money deposited in pension plans and many IRAs is not subject to income tax until the funds (including interest and capital appreciation) are withdrawn. Tax deferral is expensive to the Treasury, so the Code makes resort to some tax-deferral opportunities costly. Hence someone who puts money in an IRA canat take it out freely before age 59A1/2; the prospect of the 10% additional tax on early withdrawal makes IRAs less attractive (and the 10% tax also compensates the Treasury for some of the revenue foregone from deferred payment of the income tax on sheltered funds). Subsection 72(t)(2)(A)(v) offers an opportunity for avoiding the 10% tax on withdrawals between age 55 and age 59A1/2, but that opportunity is limited by the ato an employeea language and the proviso in ASS72(t)(3)(A), lest it effectively reduce the age of free withdrawal from 59A1/2 to 55. The interaction of these provisions is bound to seem irrational to many affected persons, but Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries. Fidelity Investments, which administers Kimas IRA, sent him a statement in 2006 informing him that he owed both income tax and the 10% additional tax. But the accountant who prepared his tax return omitted the 10% additional tax, which, coupled with the fact that the deficiency exceeded $5,000, led to the substantial-understatement penalty.

Section 6662 excuses the taxpayer if athere is or was substantial authority for [the tax returnas] treatmenta (ASS6662(d)(2)(B)(i)) or all relevant facts were disclosed on the return and athere is a reasonable basis for the tax treatment of such item by the taxpayera (ASS6662(d)(2)(B)(ii)(II)). Kim contends that there was asubstantial authoritya for his returnas treatment of the withdrawal, but there was and is no authority at all for it. Kim does not contend that any court has accepted his argument that an IRA (SEP flavor or otherwise) is the same as an employeras plan under ASS72(t)(2)(A)(v).

The Tax Court treats the areasonable basisa exception in ASS6662(d)(2)(B)(ii)(II) as applicable when the taxpayer furnishes accurate information to, and then relies in good faith on, the opinion of a competent tax adviser. See Neonatology Associates, P.A. v. CIR, 115 T.C. 43, 98a99 (2000), affirmed, 299 F.3d 221, 233a35 (3d Cir. 2002); 26 C.F.R. ASS1.6664a4(c). See also United States v. Boyle, 469 U.S. 241, 251 (1985). The record does not show what information Kim furnished to his accountant or whether the accountant competently analyzed the situation under ASS72(t). The Tax Court accordingly concluded that Kim could not take advantage of ASS6662(d)(2)(B)(ii)(II).

Kim observes that the Tax Court lacked any evidence from the accountant, but the shortfall is Kimas own responsibility. After the deadline for submitting expert evidence had passed, Kim filed a motion for a continuance, which the Tax Court denied. That decision was not an abuse of discretion. Kim might have asked the Commissioner to stipulate to what the accountant would have testified, but he did not make such a request. Nor did he make an offer of proof. So we have no idea what evidence the accountant would have provided. Kim testified at the trial but did not tell the Tax Court what information he had furnished to the accountant. With respect to the facts relevant under Neonatology Associates, the record is essentially empty. There is no warrant for upsetting the Tax Courtas decision. Finally, Kim asks us to order the Commissioner to abate interest on his underpayments. That subject was not before the Tax Court and therefore is not before us. CIR v. McCoy, 484 U.S. 3 (1987). Kim must ask for this relief from the Commissioner, and if he is dissatisfied with the Commissioneras decision he can file a separate petition in the Tax Court. See 26 U.S.C. ASS6404(e)(1); Bourekis v. CIR, 110 T.C. 20, 25a26 (1998). AFFIRMED

Here are seven of the most common forms of guidance in the form of documents and publications that provide assistance to charitable groups, business firms and taxpayers.

Notice

A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

Announcement

An announcement is a public pronouncement that has only immediate or short-term value. For example, announcements can be used to summarize the law or regulations without making any substantive interpretation; to state what regulations will say when they are certain to be published in the immediate future; or to notify taxpayers of the existence of an approaching deadline.

Private Letter Ruling

A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer’s return is filed. A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued.

Technical Advice Memorandum

A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally stems from an examination of a taxpayer’s return, a consideration of a taxpayer’s claim for a refund or credit, or any other matter involving a specific taxpayer under the jurisdiction of the territory manager or the area director, appeals. Technical Advice Memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued. Technical Advice Memoranda are generally made public after all information has been removed that could identify the taxpayer whose circumstances triggered a specific memorandum.

Revenue Procedure

A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. It is also published in the Internal Revenue Bulletin. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how those entitled to deduct certain automobile expenses should compute them by applying a certain mileage rate in lieu of calculating actual operating expenses.

Revenue Ruling

A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts. Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.

Regulation

A regulation is issued by the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to address issues that arise with respect to existing Internal Revenue Code sections. Regulations interpret and give directions on complying with the law. Regulations are published in the Federal Register. Generally, regulations are first published in proposed form in a Notice of Proposed Rulemaking (NPRM). After public input is fully considered through written comments and even a public hearing, a final regulation or a temporary regulation is published as a Treasury Decision (TD), again, in the Federal Register.

To consult with a qualified tax attorney on these or any other tax controversy, call Mitchell A. Port at (310) 559-5259

The IRS faces a 28% increase in the number of requests for Offers In Compromise. The requests by Californians and others behind in their tax payments to pay “pennies on the dollar” has reached almost 60,000 for 2011 when the data was last analyzed.

Why are Offers up? In part the struggling U.S. economy is responsible, and in part itas the IRSa own doing. Since the National Taxpayer Advocate labeled the offers in compromise program as one of the most serious problems facing taxpayers from 2001 through 2009, the IRS has been trying to improve and promote the program. It made the OIC form (Form 656) simpler, created a YouTube informational video and began a astreamlineda process for taxpayers with incomes of $100,000 or less and liabilities of $50,000 or less to make deals. A aFresh Starta initiative is also bringing in more taxpayers to the OIC program.

At the end of last month, the U.S. Treasury published a report entitled “Increasing Requests for Offers in Compromise Have Created Inventory Backlogs and Delayed Responses to Taxpayers” which is available by clicking here.

Forbes Online also has a good explanation of what’s going on at the IRS with regard to the OICs which is available at this link.

Get help from a tax attorney. Call Mitchell A. Port at (310) 559-5259.

When Is a Power of Attorney Not Required?

A power of attorney is not required in some situations when dealing with the IRS. The following situations do not require a power of attorney.

Representing a taxpayer through a nonwritten consent.

Allowing the IRS to discuss return information with a third party designee.

Allowing a tax matters partner or person (TMP) to perform acts for the partnership.

Providing information to the IRS.

Allowing the IRS to discuss return information with a fiduciary.

Authorizing the disclosure of tax return information through Form 8821.

Providing information to the IRS. If you are merely providing information to the IRS at the request of the IRS, a power of attorney is not required.

Disclosure of tax return information. You do not have to file a power of attorney to authorize the IRS to discuss and provide specific confidential tax return information to any organization you designate through the use of Form 8821, partnership, corporation, firm, trust, or individual. You may file your own tax information authorization without using Form 8821, but it must include all the information that is requested on the form.

Form 8821 is strictly a disclosure authorization form and cannot be used to designate an individual to represent you. If you want to name a representative, you should use
Form 2848.

With a Federal tax matters, like income or payroll taxes, you have the right to represent yourself or have someone represent you before the IRS. If you want someone to represent you before the IRS file form 2848, Power of Attorney and Declaration of Representative, with the IRS office where you want your representative to act for you. The most recent form has been revised as of March, 2012. Your representative must be a person authorized to practice before the Internal Revenue Service; I am an authorized representative. Your signature on Form 2848 allows the individual or individuals named to represent you before the IRS and to receive your tax information.

Call for proper representation. Call for a free phone consultation. Speak with Mitchell A. Port at (310) 559-5259.

The Government Proposes To Increase Certainty With Respect To Worker Classification

Current Law

For both tax and nontax purposes, workers must be classified into one of two mutually exclusive categories: employees or self-employed (sometimes referred to as independent contractors).

Worker classification generally is based on a common-law test for determining whether an employment relationship exists. The main determinant is whether the service recipient (employer) has the right to control not only the result of the workeras services but also the means by which the worker accomplishes that result. For classification purposes, it does not matter whether the service recipient exercises that control, only that he or she has the right to exercise it.

Even though it is generally recognized that more highly skilled workers may not require much guidance or direction from the service recipient, the underlying concept of the right to control is the same for them. In addition, only individuals can be employees. In determining worker status, the IRS looks to three categories of evidence that may be relevant in determining whether the requisite control exists under the common-law test:

(i) behavioral control, (ii) financial control, and (iii) the relationship of the parties.

For employees, employers are required to withhold income and Federal Insurance Contribution Act (FICA) taxes and to pay the employeras share of FICA taxes. Employers are also required to pay Federal Unemployment Tax Act (FUTA) taxes and generally state unemployment compensation taxes. Liability for Federal employment taxes and the obligation to report the wages generally lie with the employer. For workers who are classified as independent contractors, service recipients engaged in a trade or business and that make payments totaling $600 or more in a calendar year to an independent contractor that is not a corporation are required to send an information return to the IRS and to the independent contractor stating the total payments made during the year. The service recipient generally does not need to withhold taxes from the payments reported unless the independent contractor has not provided its taxpayer identification number to the service recipient. Independent contractors pay Self-Employment Contributions Act (SECA) tax on their net earnings from self-employment (which generally is equivalent to both the employer and employee shares of FICA tax). Independent contractors generally are required to pay their income tax, including SECA liabilities, by making quarterly estimated tax payments.

For workers, whether employee or independent contractor status is more beneficial depends on many factors including the extent to which an independent contractor is able to negotiate for gross payments that include the value of nonwage costs that the service provider would have to incur in the case of an employee. In some circumstances, independent contractor status is more beneficial; in other circumstances, employee status is more advantageous.

Under a special provision (section 530 of the Revenue Act of 1978 which was not made part of the Internal Revenue Code), a service recipient may treat a worker as an independent contractor for Federal employment tax purposes even though the worker actually may be an employee under the common law rules if the service recipient has a reasonable basis for treating the worker as an independent contractor and certain other requirements are met. The special provision applies only if (1) the service recipient has not treated the worker (or any worker in a substantially similar position) as an employee for any period beginning after 1977 and (2) the service recipient has filed all Federal tax returns, including all required information returns, on a basis consistent with treating the worker as an independent contractor.

If an employer meets the requirements for the special provision with respect to a class of workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively and even as to newly hired workers in the same class. Since 1996, the IRS has considered the availability of the special provision as the first part of any examination concerning worker classification. If the IRS determines that the special provision applies to a class of workers, it does not determine whether the workers are in fact employees or independent contractors. Thus, the worker classification continues indefinitely even if it is incorrect.

The special provision also prohibits the IRS from issuing generally applicable guidance addressing the proper classification of workers. Current law and procedures also provide for reduced penalties for misclassification where the special provision is not available but where, among other things, the employer agrees to prospective reclassification of the workers as employees.

Reasons for Change

Since 1978, the IRS has not been permitted to issue general guidance addressing worker classification, and in many instances has been precluded from reclassifying workers a even prospectively a who may have been misclassified. Since 1978 there have been many changes in working relationships between service providers and service recipients. As a result, there has been continued and growing uncertainty about the correct classification of some workers.

Many benefits and worker protections are available only for workers who are classified as employees. Incorrect classification as an independent contractor for tax purposes may spill over to other areas and, for example, lead to a worker not receiving benefits for unemployment (unemployment insurance) or on-the-job injuries (workersa compensation), or not being protected by various on-the-job health and safety requirements.

The incorrect classification of workers also creates opportunities for competitive advantages over service recipients who properly classify their workers. Such misclassification may lower the service recipientas total cost of labor by avoiding workersa compensation and unemployment compensation premiums, and could also provide increased opportunities for noncompliance by service providers.

Workers, service recipients, and tax administrators would benefit from reducing uncertainty about worker classification, eliminating potential competitive advantages and incentives to misclassify workers associated with worker misclassification by competitors, and reducing opportunities for noncompliance by workers classified as self-employed, while maintaining the benefits and worker protections associated with an administrative and social policy system that is based on employee status.

Proposal

The proposal would permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. The reduced penalties for misclassification provided under current law would be retained, except that lower penalties would apply only if the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency and if the service recipient had filed all required information returns (Forms 1099) reporting the payments to the independent contractors. For service recipients with only a small number of employees and a small number of misclassified workers, even reduced penalties would be waived if the service recipient (1) had consistently filed Forms 1099 reporting all payments to all misclassified workers and (2) agreed to prospective reclassification of misclassified workers. It is anticipated that, after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not have been clear. (Statutory employee or nonemployee treatment as specified under current law would be retained.)

The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. This would enable service recipients to properly classify workers with much less concern about future IRS examinations. Treasury and the IRS would be directed to issue guidance interpreting common law in a neutral manner recognizing that many workers are, in fact, not employees.

Further, Treasury and the IRS would develop guidance that would provide safe harbors and/or rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful for service recipients, it would generally be industry- or job-specific. Priority for the development of guidance would be given to industries and jobs in which application of the common law test has been particularly problematic, where there has been a history of worker misclassification, or where there have been failures to report compensation paid.

Service recipients would be required to give notice to independent contractors, when they first begin performing services for the service recipient, that explains how they will be classified and the consequences thereof, e.g., tax implications, workersa compensation implications, wage and hour implications.

The IRS would be permitted to disclose to the Department of Labor information about service recipients whose workers are reclassified.

To ease compliance burdens for independent contractors, independent contractors receiving payments totaling $600 or more in a calendar year from a service recipient would be permitted to require the service recipient to withhold for Federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor. The proposal would be effective upon enactment, but prospective reclassification of those covered by the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for independent contractors with existing written contracts establishing their status.

REVISED OFFER IN COMPROMISE APPLICATION RULES

I would like to pay particular attention to the presidentas recent budget proposals submitted to Congress that directly impact my clients who have IRS tax problems and disputes.

One proposal that would be effective for offers-in-compromise submitted after the date of enactment of the budget by Congress would eliminate the requirements that an initial offer-in-compromise include a nonrefundable payment of any portion of the taxpayeras offer.

As explained in other blog articles, the offer-in-compromise program is designed to settle cases in which taxpayers have demonstrated an inability to pay the full amount of a tax liability. The program allows the IRS to collect the portion of a tax liability that the taxpayer has the ability to pay.

Current law provides that the IRS may compromise any civil or criminal tax case before a reference to the Department of Justice for prosecution or defense. In 2006, a new provision was enacted to require taxpayers to make nonrefundable payments with any initial offer-in-compromise of a tax case. In the case of an offer-in-compromise involving periodic payments, the initial offer must be accompanied by a nonrefundable payment of the first installment that would be due if the offer were accepted. When the offer involves one lump sum payment, the new provision requires taxpayers to include a nonrefundable payment of 20 percent of the lump-sum with the initial offer.

The president believes that by requiring nonrefundable payments with an offer-in-compromise, access to the offer-in-compromise program may be significantly reduced. Reducing access to the offer-in-compromise program makes it more difficult and costly to obtain the collectable portion of existing tax liabilities.

EXTEND STATUTE OF LIMITATIONS WHERE STATE ADJUSTMENT AFFECTS FEDERAL TAX LIABILITY

In general, additional tax, interest, penalties and additions to tax must be assessed by the IRS within three years after the date a tax return is filed. If an assessment is not made within those three years, the IRS cannot assess or collect additional liabilities at any future time.

Similarly, the statute of limitations with respect to claims for refund expires at the later of three years from the time the return was filed or two years from the time the tax was paid. There are exceptions to the general statute of limitations.

State and local authorities use a variety of statutes of limitations for State and local tax assessments.

Pursuant to an agreement, the IRS and State and local revenue agencies exchange reports of adjustments made through examination so that corresponding adjustments can be made by each taxing authority. In addition, States provide the IRS with reports of potential discrepancies between State returns and Federal returns.

The problem perceived by the current administration is that the general statute of limitations serves as a barrier to the effective use by the IRS of State and local tax adjustment reports when the reports are provided by the State or local revenue agency to the IRS with little time remaining for assessments to be made at the Federal level.

Under the current statute of limitations framework, taxpayers may seek to extend the State statute of limitations or postpone agreement to State proposed adjustments until such time as the Federal statute of limitations expires in order to preclude assessment at the Federal level. In addition, it is not always the case that a taxpayer that files an amended State or local return reporting additional liabilities at the State or local level that also affect Federal tax liability will file an amended return at the Federal level.

The budget proposal would create an additional exception to the general three-year statute of limitations for assessment of Federal tax liability resulting from adjustments to State or local tax liability. The statute of limitations would be extended to the greater of: (1) one year from the date the taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local tax return; or (2) two years from the date the IRS first receives information from the State or local revenue agency under an information sharing agreement in place between the IRS and a State or local revenue agency.

The statute of limitations would be extended only with respect to the increase in Federal tax attributable to the State or local tax adjustment. The statute of limitations would not be further extended if the taxpayer files additional amended returns for the same tax periods as the initial amended return or if the IRS receives additional information from the State or local revenue agency under an information sharing agreement. The statute of limitations on claims for refund would be extended correspondingly so that any overall increase in tax assessed by the IRS as a result of the State or local examination report would take into account agreed-upon tax decreases or reductions attributable to a refund or credit.

The proposal would be effective for returns required to be filed after December 31, 2011.

Have a tax dispute with the IRS? Call Mitchell A. Port at (310) 559-5259 to speak with a tax attorney for help.

Internal Revenue Code Section 7430(a) provides that the prevailing party in any administrative or court proceeding may be awarded a judgment for (1) reasonable administrative costs incurred in connection with such an administrative proceeding within the IRS, and (2) reasonable litigation costs incurred in connection with such a court proceeding.

In addition to being the prevailing party, to receive an award of reasonable litigation costs a taxpayer must have exhausted all administrative remedies, shows that the position of the United States is not “substantially justified,” and must not have unreasonably protracted the court proceeding.

Section 7430(c)(4)(B)(i) makes it clear that the IRS bears the burden of proving that its position was asubstantially justifieda (i.e., the IRSas position has a reasonable basis in both fact and law and is justified to a degree that could satisfy a reasonable person). “Reasonable litigation costs” include reasonable court costs, expert witness fees, the cost of any study, analysis or project which is determined by the court to be necessary for the preparation of a taxpayer’s case, and reasonable attorneys’ fees. IRC Section 7430(c)(1). The amount of reasonable attorneys’ fees are limited. For an interesting Tax Court case deciding against the Internal Revenue Service and awarding fees to the taxpayeras attorney, read Arthur Dalton, Jr. and Beverly Dalton, Petitioners vs. Commissioner Of Internal Revenue, Respondent.

I found a handy chart that may help determine whether your attorney’s fees will be paid.

Do you qualify to have your attorneyas fees paid by the Internal Revenue Service? A tax litigation attorney can help. Call Mitchell A. Port at (310) 559-5259 to discuss it.

For 2012, no late filing penalties apply when missing the April 15 tax filing deadline. That’s because for this year, the federal tax filing deadline is April 17. Since April 15 falls on a Sunday, the deadline is moved to the following Monday; but because Monday is Emancipation Day in Washington, D.C., the filing deadline is moved to the following Tuesday, April 17. Here’s an explanation from the IRS in one of it’s “tax tips”.

Help from a tax litigation attorney is at hand. Call Mitchell A. Port at (310) 559-5259.

Right after the New Year, the Internal Revenue Service released new proposed guidelines designed to provide relief to more innocent spouses requesting equitable relief from income tax liability. In an earlier blog post, other rule changes were discussed.

A Notice proposing a new revenue procedure revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests.

“The IRS is significantly changing the way we determine innocent spouse relief,” said IRS Commissioner Doug Shulman. “These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.a

This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

Need help? Call a qualified tax litigation attorney at (310) 559-5259.

JK Harris & Co. – “the nation’s largest tax representation firm” – is in bankruptcy. It may stop trying to restructure its business to liquidating its business instead.

This case shows how hard it can be to settle tax disputes for apennies on the dollara. JK Harris advertised that it could resolve people’s tax debts for “pennies on the dollar.” It appears that it had its own problems: the cost of large settlements related to multiple claims that it misled consumers. In many cases, attorneys general complained that the company told consumers it could resolve their tax problems, and took their payments, when no such relief was possible for those particular clients.

Its own employees have now become creditors for unpaid wages. No doubt it has payroll tax problems with the Internal Revenue Service because if it didnat pay wages, it probably didnat pay payroll taxes. It probably wonat qualify for a settlement involving pennies on the dollar.

Company founder and Chief Executive Officer John K. Harris will likely be assessed by the IRS for all the unpaid trust fund taxes owed to the government if any are due and he’s found to be both willful and responsible for nonpayment. His personal assets will probably be subject to tax claims made by the Internal Revenue Service.

Work with a reliable attorney to resolve your tax problems. Call Mitchell A. Port at (310) 559-5259.

As of this past Monday, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

aOur focus on offshore tax evasion continues to produce strong, substantial results for the nationas taxpayers,a said IRS Commissioner Doug Shulman. aWe have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nationas tax system.a

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers a or decide to end the program entirely at any point.

aAs weave said all along, people need to come in and get right with us before we find you,a Shulman said. aWe are following more leads and the risk for people who do not come in continues to increase.a

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

You may be familiar with the so-called “national standards” used by the Internal Revenue Service in calculating repayment of delinquent taxes. As of October 3, 2011, new “standards” were issued. Those standards are used so that all taxpayers located in a particular locale are treated the same as every other taxpayer in the same locale; no longer does the Service retain the same degree of discretion it used to have when evaluating one’s ability to pay those taxes.

For instance, for Los Angeles County, the national standards for a family of 5 or more for housing and utilities is $2958 per month.

The maximum allowed for food, clothing and miscellaneous for a family of 5 is $1639 per month.

The maximum amount for vehicle ownership costs for 2 cars is $992 per month while the maximum operating costs for 2 cars is $590.

Separate from health insurance costs, the maximum allowed for out of pocket health care costs for those over age 65 is $144 per month and for those under age 65 is $60 per month.

To the extent the information on the form 433-A “Collection Information Statement” exceeds the maximum national standards for a category of expenditure, the Internal Revenue Service often simply treats the excess expenditure as if it was not incurred and thus the excess amount is counted as “available” to pay delinquent taxes. For example, $2958 is the maximum allowed for housing and utilities but you may actually spend $8389. The extra $5431 will likely be counted as “available” to pay taxes.

When the amount claimed on the form 433-A is more than the total allowed by the national standards, you must provide documentation to substantiate those expenses are necessary living expenses. The IRS won’t simply allow a large mortgage obligation to be sufficient to demonstrate that the expense is “necessary” since that might allow an unlimited amount to be spent on a mortgage and leave nothing left with which to pay delinquent taxes. The IRS will not subsidize your standard of living by allowing a large mortgage while taxes remain unpaid.

I hope this casts the proper light on what lies ahead when negotiating an installment agreement.

For tax help, call a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.

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