Bitcoin Revolution?

 Your brother-in-law told you to buy Apple when it was selling at $40 a share. You didn't listen, and he reminds you of the fact at every family gathering. Well, if you've been reading this blog diligently you learned some time ago of the “bitcoin” revolution. The bitcoin is a money alternative. You may have initially heard about this from your computer savvy child or in some cases, grandchild. The bitcoin is a virtual currency, of which I know little. But I do know this. Its value is doing much better than Apple. So if you would like to remove the stigma of failing to heed your brother-in-law's advice, listen up. For example, since 2012 when its value was nearly worthless the price of a bitcoin on an exchange that converts the currency to dollars rose to $780 on Monday, November 18, 2013. When first introduced, federal regulators were worried that the bitcoin would undermine the entire financial system in America. Now the tune has changed. In recent hearings before the Senate, a number of federal officials said the bitcoin may offer real benefits to the financial system even as they acknowledge, according to the New York Times, that the new form of digital money had provided avenues for money laundering and illegal activity. It appears that the government is not willing to stand in the way of the bitcoin development. This suggests that the bitcoin could become a lasting and significant part of the American financial landscape.  By the way, you can tell your brother-in-law to keep his Apple stock and that you are now into the bitcoin revolution or you can just wait for the next big thing to come down the pike. By next year who knows the bitcoin may be alongside the hoolahoop, a collector's item but no more. Already a number of new money alternatives are showing up and more will surely follow.

Undisclosed Foreign Bank Accounts

The Undisclosed Foreign Bank Account and the IRS          

The first version of the Broadway show “Evita” made its way to Broadway in 1979. The revival of the show in 2012 was a hit as was the movie starring Madonna. From that show, portending perhaps future IRS action, was the song called “And the Money Kept Rolling In”, lyrics by Tim Rice. For those who may have missed the production, the story of Eva Peron is classic. She was the second wife of Juan Peron, dictator of Argentina. She became famously loved by her Argentinean constituents for the Peron Foundation which extracted money contributions which were then given by Eva to the poor and destitute. Only an application to show need and her approval was required. One verse of that song is particularly appropriate for the current melee surrounding foreign bank accounts and the failure to properly report their existence and any tax required to be paid to the IRS.

If the Money keeps rolling in, what's a girl to do?

Cream a little off the top for expenses, wouldn't you?

But where on earth can people hide their little piece of heaven?

Thank God for Switzerland!

Where a girl and a guy with a little petty cash between them

Can be sure when they deposit no one's seen them

Oh, what bliss to sign your checks as 30127

Never been an account in the name of Eva Peron!!

                                                                                                                                                           

And so it was for many years, whether Americans were using these foreign bank

accounts for their convenience when working overseas or as their little piece of heaven

individual clients and their lawyers and accountants will have to determine. But the

secrecy surrounding the Swiss bank account has been broken. The IRS through an

informant laid rest the magic numbered bank account. The now famous case involves the Swiss bank called UBS. Threatening IRS criminal action against the bank UBS turned over the names of more than 4000 US taxpayers who had maintained Swiss bank accounts. More banks have been leaned on by the Internal Revenue Service and the government of Switzerland has vowed its cooperation with the Internal Revenue Service. Other countries have followed suit and more are likely to agree to cooperate with IRS under threat of IRS action against them.

IRS soon realized it had hit the tax mother lode. But instead of attempting to assign numerous agents to ferret out these undisclosed bank accounts the agency decided instead to create a voluntary disclosure program called the “Offshore Voluntary Disclosure Initiative”. It has been wildly successful and has brought in over $5 billion in taxes, penalties and interest from approximately 35,000 cooperating and scared taxpayers. The teeth in the IRS program is the potential for criminal exposure. Having a foreign bank account may be one thing, but spending time in a federal penitentiary as a consequence is an entirely different matter. As news of the breach in the wall of silence in Switzerland began to spread and the resulting cooperation of banks and securities firms overseas, clients began showing up on we lawyer’s door steps.The pace of investigation will not soon abate as IRS and Government generally get more computer savvy and taxpayers realize that it may be better to come clean about these accounts than be exposed to huge tax penalties and possible criminal sanctions. Eva would have been caught in a New York minute. 

The Business of Lawyering Part 3- The Mission Statement and Business Objective

The Mission Statement

One can argue that a written business plan for lawyers is unnecessary. Don't we know what we are about and what we plan to do? The answer is a surprising no. When first I started my own practice one of my first cases was a simple bankruptcy. Although my background was entirely in the IRS tax procedure area nonetheless I spent countless hours dealing with a single client and bankruptcy issues beyond my grasp. A simple mission statement would have caused me to analyze what it is I plan to do and who do I plan to do it for. In fact, it wasn't for many years, until I realized the potential  I had with all my prior IRS experience.

The purpose of the mission statement is to explain succinctly, what is the purpose of this business. What type of clients will you seek? How do you plan to operate this business? This statement can be as short as a paragraph or two. For example:

“The purpose of this practice will be to represent individual taxpayers and small businesses before all branches of the Internal Revenue Service, including representation in the United States Tax Court. The practice will be conducted as a sole proprietorship in Bergen County New Jersey.”

With this as my mission statement I would never have taken the bankruptcy case. Instead, I would have referred that matter to a bankruptcy attorney and perhaps given myself the opportunity to explain to him the limited nature of my tax dispute practice. In the long run, this would have better served to build my practice as he could have become a referrer of business in my chosen field.

Once the mission statement has been written, it should define many of the other aspects of the business plan. Needless to say with changing times, a mission statement may have to be rewritten. Without the simple mission statement a lawyer thrown into the private practice of law has no idea whether he or she is fish or fowl. Even the general practitioner must know and put some limits as to the type of client problems he will attempt to resolve, if for no reason other than to try to keep their own sanity.

As a suggestion ,it may be useful to include in this mission statement, what credentials or experience you believe you have which will likely bring success to the business. For example, adding this to my mission statement:

“As a former IRS agent and IRS District Council attorney in New York, New York and having numerous current IRS contacts, the purpose of this practice will be…..”

The mission statement is not only drafted for your own use. It may be useful for future

employees and clients to know exactly what your business of lawyering  is about. Perhaps one day it will appear as part of your marketing strategy brochure about your firm or in a private website.

Business Objective:

The business objective is the plan to obtain the mission. How will the mission be accomplished? These objectives are more specific than the mission statement. For example:

To create a law practice initially as a sole proprietorship with potential for future associates to be hired. To retain and train associates with a view toward eventually growing into a law firm, which will have at least two partners. The firm will take an active role in the County and State Bar Association and will obtain a reputation as the state's premier firm in its field. The practice will be able to support retiring partners by the addition of new associates and partners while maintaining a continuous high level practice standard.

While the mission statement is involved with branding, the business objective makes clear how the brand will be obtained.

Naturally the business objectives should change as circumstances in the legal world change. For example: a downturn in the real estate market and resulting claims for real estate appeals may suggest moving into that field. No one should hold onto an objective that doesn't work, nor change the one that does.

Perhaps objectives should be broken down into:

Immediate Objective: This can be something as simple as paying the bills and earning a living

Higher Objective: growth, reputation, even fame.

Highest Objective: a contributor to the legal field, mentor, teacher.

Many lawyers attempt only to meet their immediate needs, but the long-term satisfaction in the practice comes from objectives that may be greater than oneself.

No businessperson expects obtaining the objectives without some difficulty. Lawyers should anticipate being bored and stressed at times, but that is not reason enough to toss out the business objectives.

The personal and professional growth embodied in the business objective should be set out early in the business plan.

Same Sex Marriage and the IRS

Before I begin a discussion of what now may amount to old news, I wish to disclaim as follows. For some same sex marriage is a very emotional issue. And I am well aware that they are following it closely and therefore may know a great deal more than I.  Now that said, let’s get down to it. The Supreme Court has decided the Windsor case and has struck down section 3 of the Defense of Marriage Act which required same-sex spouses to be treated as unmarried for purposes of federal law. There, that seems simple enough. Now the sloppy part. A number of issues will have to be sorted out and IRS will have to get into the business of making important decisions in the very near future.  One example is whether the scope of the decision covers only same-sex couples married in a state that allows same-sex marriages and residing in that state. Will IRS look to the domicile of the same-sex couple to determine their rights? But the benefits to individuals who are properly covered by the decision are numerous. These persons will be entitled to file jointly. Unfortunately, they will also discover the pain of the marriage penalty depending upon the extent of their individual earnings. As was held in Windsor, married same-sex couples will be entitled to use the unlimited estate tax marital deduction and elect portability for any unused estate and gift tax exemption. For gift tax, they will qualify for gift splitting and transfers between them will be exempt. They will qualify for tax-free employer health coverage and may receive reimbursement under health flexible spending accounts. In the retirement area, married same-sex spouses will qualify for survivor death benefits under pension plans and favorable withdrawal rules will apply to those who inherit plans or IRAs. There is some question how IRS, reeling from scandal, losing its Commissioner, knee deep in health care reform rules and facing a reduced budget with forced closings and furloughs under sequester  will handle all of this. My guess will be poorly. Clients are perhaps best advised to file protective claims in anticipation of future IRS rulings. By this I mean, a claim for refund, deduction or credit must be timely filed pursuant to the revenue code. A protective refund claim hedges the client’s bet that any change will be favorable to their prior filed and paid tax returns. IRS has been receiving numerous such claims. Practitioners should note that a letter to IRS is most likely not sufficient to create a protective refund claim and that proper claims must be filed.

The Business of Lawyering- Part 2-Critical Essentials

 Often Lawyers will "know" what is needed for a client to succeed in business but will not apply that same advice to their own business of lawyering. Part 2 is about two critical essentials: Finding a mentor and the all important Business Plan

Find a Mentor:

“Luke, use the force”. If somehow you may have missed the Star Wars trilogy, and that phrase means nothing to you, it's time to take a look at the relationship between the characters in those movies. Luke Skywalker in possession of a powerful unearthly force is unaware of its utility. It is only through the gentle coaxing and guidance provided by his mentor Obi wan that he realizes his true potential. Naturally he goes on to defeat Darth Vader, the personification of evil. There you have it. There would have been no star wars trilogy without the mentoring.

Finding a mentor, before embarking on the practice of law may unleash your personal attributes and guide you to a successful practice.

Those are fortunate who perhaps have had lawyer family members, who will honestly assist them in understanding what the practice of law is all about. However, for the rest of us we, like Luke, must find our own way.

Many local bar associations have created buddy systems to assist new lawyers in discovering the use of the force. Lawyers you may know or former professors may be willing to take on the role of Obi wan. The importance of finding a mentor cannot be overstated. The ideal mentor is someone who has lived the life that you are seeking. Be wary of those giving free off the cuff advice as to what you ought to be doing if they have not ever done it themselves. Needless to say your mentor should exhibit the same personal attributes necessary for anyone to practice law. Keep in mind that many have gone before you, and there is no need to reinvent the wheel. For those lawyers currently employed in a legal position, be careful, also, of the undue influence of superiors, who may appear to you to be quite successful. The best mentor is not necessarily the person with the most income, assets or reputation. Next to your attitude, finding a solid mentor could be your biggest asset. That mentor can also help you devise a workable business plan.

Create a written business plan

I have a friend who teaches with me in the law and business programs at FDU. When students complain about having to drag heavy textbooks, computers, codes and regulations, Frank uses the analogy of a plumber going off to work. The plumber has a plan and knows the tools he needs in order to perform his services. A written business plan is a tool for success.

No bank allows a customer to borrow $.10 toward a new business without a written business plan. Lawyers who advise clients with new businesses hopefully make the same suggestion. But when it comes time to starting their own practice, few if any lawyers take the time to create a written business plan. We professionals should not be above taking our own advice.

The benefits of creating a written business plan are many:

1. It helps to organize your thinking goals and objectives.

2. It helps you to realize whether or not, success is in the cards.

3. It can be as simple or as detailed as you choose.

4. Should you have the need to borrow money, it can be presented to banks and others.

5. It helps keep you on track and can be amended as the practice grows.

6. Perhaps your employees or associates can better understand your practice.

7. The written business plan is free and can be a private document.

8. The business plan can include your best financial estimates as to income and expenses.

9. The plan can simulate the operation of your business and can cause you to rethink aspects of it without making costly errors.

10. There are many Internet sources that can assist you in creating your business plan depending upon your objectives.

Basic elements of the written business plan:

Ø      Mission Statement

Ø      Business Objective

Ø      Marketing Strategy

Ø      Analysis of Competition

Ø      Funding needs

Ø      Projections of Income and Expense

Ø      Summary/Conclusions

Each of these will be discussed in later posts.

The IRS Scandal Casablanca Style

       It's 1941 in Casablanca. The place to wait out exodus to Europe or America is Rick's Café. Humphrey Bogart as Rick, an ex-pat with a questionable background, dashing in a white dinner jacket is upset. Police Captain Louis Renault played by Claude Rains upon orders of evil Nazi Major Strasser blasts his Police Inspector whistle in the middle of the Café and orders it immediately closed. Bogart demands to know what is going on. Captain Renault responds tongue in cheek:  “I am shocked, shocked to learn that gambling is going on in this café”. Just at that moment the roulette croupier approaches Renault with his gambling winnings in hand, and Renault ,as suave as ever, pockets the francs and responds “Merci Beaucoup”. It is a beautiful scene and a touching comment about corruption in government. Now as a former IRS agent and IRS tax trial attorney, I too am “shocked, shocked to learn that the IRS could be used for some political purpose such as scrutinizing tax exempt organizations with Tea Party origins” Who would ever dream that such a thing was possible? The president is clearly playing the role of Captain Renault. He is shocked, outraged, discombobulated. He has defended and received the head of the Commissioner of Internal Revenue on a platter. Poor Commissioner Miller. In his ascent within the Internal Revenue Service it is a shame that perhaps Miller may have missed studying the classic film “Casablanca”. He would have fared better if he would have modeled himself after Rick, who “refused to stick his neck out for anyone”. On an ABC news program, one white house aide declared “the activity was outrageous and inexcusable and it was stopped and it needs to be fixed so we ensure it never happens again”. Well, you're not fooling me. Casablanca is one of my absolute favorite films.

Country Lawyers Wanted

   During the Watergate hearings Sam Ervin would often play down his acute legal acumen by referring to himself as just a “country” lawyer. Those Watergate folks as well as the then President of the United States learned the hard way that a country lawyer did not necessarily mean a bumpkin. But apparently in the United States in some rural areas a real country lawyer is hard to find. A recent front page article in the New York Times bannered: “No Lawyer for 100 miles. So One Rural State Offers Pay”. The article talks about Bennett County in South Dakota which is situated between two Indian reservations on the Nebraska border. One lawyer who has practiced there for 64 years is near retirement. After him the next working attorney is 120 miles away. So the state of South Dakota is planning to do something about this problem. South Dakota is not alone. States like Nebraska and Iowa are coming up with their own lawyer “seed” plans. The federal government has for years had a medical program called the National Health Service Corps which offers up to $60,000 in tax-free loan replacement for two years of medical service in under served areas of the country. That program consists of nearly 10,000 medical, dental and mental health professionals serving 10.4 million people almost half of which are in rural communities. South Dakota has come up with a similar plan for lawyers. Its new law which will go into effect in June 2013 requires a five-year commitment from the applicant and sets up a pilot program of up to 16 participants. Each “Go West” lawyer will receive an annual subsidy of $12,000. That doesn't sound like much to high powered corporate legal eagles. But for those interested in seeing real eagles fly, it may be just the ticket. By all accounts there may be plenty of work out there.

The Business of Lawyering Part 1

What does it take to practice law.  Do you have the right stuff?

Attitude:

The business of lawyering requires the same attitude as that of any new business enterprise. It is often said that attitude is in fact the most essential ingredient. You must have the desire to succeed. Being a business owner is different than being an employee. Some people make better employees. A simple but honest self assessment should tell you whether or not you really want to practice law as an owner, partner or rather as an associate/employee:

1. Do you have a passion for legal work?

2  Are you comfortable making decisions?

3  Can you be creative and innovative?

4  Do you have the discipline to work on your own?

5  Are you willing to continue learning in your field?

6   Do you have confidence in yourself to succeed?

7   Are you optimistic about the future of your business?

8       Do you know your personal, financial and spiritual needs?

9   Do you know your personal and family goals?

10.Do you have the desire to succeed?

The objective in the practice of law is also to be happy at it. In August 2011 my article called “Can Lawyers Learn to be Happy “was published by the Ali-ABA. It is available free on the internet and here on this blog. Perhaps it should be read before going any further.

Personal attributes:

                                             

      Problem Solving:

Perhaps there are as many types of personalities practicing law as there are in any other field. Unfortunately 52% of the lawyers in practice, say they are unhappy. This may mean they simply do not have the personal attributes for the practice of law. In order to practice law, the new lawyer must realize that his clients are retaining him in most instances to solve a problem. He must be a good listener, sociable and patient. Part legal wizard and part psychologist. Lawyering is a helping profession. Solving the client's dilemma must be personally satisfying to the lawyer as well. Those who enter the profession to simply make money should rethink the prospect. The national average for income for lawyers is well below that for many other professions and hovers somewhere around $75,000. If it is money you are after, consider a career in sales selling something other than legal services; preferably something large, like commercial real estate.

                                                      Confidence:

Most of the lawyers I have ever worked with who I believe would consider themselves successful, would also score high on the confidence chart. Clients are not inclined to follow lawyers who do not seem to be leaders. There must be an almost fearlessness in the face of questionable legal issues. The client is seeking an advocate in many cases, a clear explanation and a plan of action to resolve their legal issues. The business of lawyering is not about responding to client questions as you would on a tort or contract law school exam. While your professor there may have been interested in you turning up every possible legal issue, clients are not interested in the esoteric a of the law but rather answers to their particular problem. Those answers must be provided in a clear, confident and understandable fashion. We must remember as lawyers, that we are selling an intangible. If the advice rendered does not seem to be of value to the client disappointment and resentment may follow.

Along with confidence comes the ability to distinguish between true emergencies. I once worked as an associate for a lawyer who seemed to contrive his emergencies on Friday afternoon, guaranteeing a Saturday work schedule. It took me a while to realize that his sounding the alarm bell was simply his personality trait more than the demands of clients. Having a cool head under fire is certainly desirable. Right now, take a look at your fingernails. If they are bitten to the bone you may not have the right stuff for the practice of law and be happy at it. Perhaps when you were growing up, you were told that your argumentative nature would make you a natural candidate for the practice of law. This advice was most likely given by a non-practicing lawyer. An even temper without rage creates an atmosphere of success; that argumentative nature only leads to arguments. One must be firm and confident, not a bag of hot air. Remember the practice of law is a marathon not a sprint. Many try the practice for a few years, and then simply give it up.

                                                               Work Experience:

The practice of law draws people from most all academic majors. No particular college study necessarily prepares one for the practice of law. Having somewhat of an exposure to accounting and taxation or law for the small business owner may be ideal, but often these courses do not fit into the curriculum for a liberal arts degree at most colleges. And it is from the liberal arts colleges, where most lawyers hail.

Some types of prior work experience are ideal for the practice of law. Being a clerk for a popular judge in the state or federal courts can give one a leg up in understanding litigation practice. Being a summer clerk in a law firm practicing in an area of your interest can also help. These days, given the limited number of employment opportunities for lawyers as associates volunteering one's services to a law firm may get you in the front door. Even lawyers cannot resist the word free. There is also government service as an excellent intro into private practice. My own experience as an IRS agent and after law school, IRS District Council attorney was invaluable in creating a niche practice in the IRS tax dispute area. If all of these suggestions are beyond your reach consider that even being a camp counselor can be of value. In such a role, people are following your advice and you are learning how to give it. Obviously, no job experience should bring you in conflict with the law and a possible negative review by a character committee in your Bar Association.

The practice of law involves “branding”. So there may be some issues as to prior work experience. For example: if yours will be a local town practice being remembered as the clerk in a liquor store or a gas attendant may somewhat diminish your being viewed eventually as a successful attorney.

                                                       Love of Learning

The educational requirements for the practice of law should be clear by now. You have figured your way through law school, past all the necessary tests and have been admitted to a bar association or two. That shows you have the talents and skills to learn. But the real question is whether you love learning. The practice of law, unlike law school, has no final exam. It is a continuing research project. And unlike law school, the decisions you make will affect the lives of others, including your own.

It is true that some areas of the law can be reduced to a mechanical operation. In years gone by, law offices, which specialized for example, in residential real estate closings would arrange an assembly line of secretaries and paralegals who would conduct the necessary activities to bring about the closing. In some cases, this assembly line approach to the practice of law may still be possible. But be forewarned, the competition in the mechanical area of the practice of law can be overwhelming.

The practice of law continues to evolve and practitioners must evolve with it. For example: Being somewhat tech savvy, unheard-of in the past is now second nature in the practice of law. Having a presence on the Internet is almost as important as having an office downtown. Spanish as a second language was no necessary tool 25 years ago, but today it is the second most often spoken language in the United States.

Clients expect their lawyers to be at the top of their game in their chosen field of practice. Taking stale ideas from even the finest law school is no guarantee of success in the real world practice of law. Great success in law school does not prepare anyone for the business of lawyering.

However, if the law school experience, and the rigors of the research associated with going to school did not stimulate or interest you other than obtaining the necessary ticket to the bar exam, you may simply not be ready for the real practice of law.

The practice of law is dynamic not static and requires constant learning.

                                                  Life Philosophy

Before embarking on the practice of law one must soul search to determine his or her personal philosophy of life. In many ways the practice will alter one's lifestyle. How will this business venture coincide with that philosophy? There are many who take home way too many client problems, reviewing them over night instead of getting a good night sleep. They may ditch family and friends in favor of long hours at the office. Does the future practitioner have the support of his spouse or life partner? Do they understand that often the law is a jealous mistress? Many believe that when law school is over the tension and stress are over as well. Nothing could be further from the truth. Setting personal goals early in the practice may force the practitioner to align his decisions accordingly and sitting down with all concerned is a necessary first step.

It's not entirely uncommon for a person to go through their entire life without having a frank discussion with themselves about, what is in fact, their personal philosophy. In this regard, consideration must be given to not only the personal and financial aspects, but the spiritual needs which every person has in order to derive joy from work. Whether the practice of law is for you depends on who you think you are. It certainly is not for everyone. Many go through the education and will never practice law at all.

REITs- Bane or Blessing?

Wall Street and savvy investors are always looking for the next big thing. This “thing”, however, has been around since the days of Dwight Eisenhower. As a kid, Eisenhower reminded me of the uncle I wish I had. Hard to imagine such a politician. Ike was a real war hero who would take on full responsibility for the D day invasion in Europe that led to the end of World War II. It was during Ike's administration that the real estate investment trust (REIT) was invented. When it first came into existence, these trusts were designed to be passive investment vehicles owning real estate and deriving most all of their income from those real estate holdings. REITs were granted tax exemption because as trusts they did not do any business other than owning the real estate. Fast forward to today. Wall Street has discovered the game. Now companies operating businesses which include prisons as well as casinos are making what is called an “aggressive move” to have IRS declare them REITs. The prison company called Corrections Corp. successfully argued that the money they collect from government for holding prisoners is essentially rent. So too are companies that operate cell phone towers who have claimed that the towers themselves are real estate. One Wall Street firm was quoted in the NY Times as saying that “it is not a far stretch to envision REITs concentrating in railroads, highways, mines, landfills, vineyards, farmland or any other immovable structure that generates revenue”. There are more than 1000 real estate investment trusts, 10% of them are traded publicly. Other than the obvious loss of tax revenue for a society whose tax resources are rapidly evaporating both the companies and their shareholders are winners as REIT conversion seems to result in higher stock price and legal avoidance of the corporate tax.

How IRS Collects Taxes

IRS TAX COLLECTION

Any tax system is only as good as its ability to collect taxes. The American system of voluntary compliance is the envy of the world. Nowhere on earth do more people voluntarily pay their taxes. The IRS Collection branch tries to collect the maximum amount of taxes with the absolute minimum effort. Commentators and critics alike have leveled a barrage of complaints about IRS Collection practice in recent years. Understanding that they are indeed in the business of collecting taxes with minimum effort explains some of the tactics used to compel, trick, or cajole taxpayers into paying their tax bills. The 1998 IRS Restructuring and Reform Act resulted in monumental changes to collection procedure and the appeals available to taxpayers dealing with Collection issues. Sections 6320 and 6330 now permit taxpayers to seek IRS Appeals branch and judicial review of collection actions.

        The primary work of Collection is twofold:

·        To solicit unfiled tax returns; and

·        To collect open tax liabilities.

         The chief powers of Collection personnel are the powers to seize through levy and sell the property of the taxpayer. A levy on wages has been the stranglehold the IRS has used to collect taxes from wage earners. All enforced collection activity is intrusive to the taxpayer. To perform their duties, agents file liens and do financial investigations. The practitioner, in dealing with Collection, must respect the powers that have been given Revenue Officers to upset the taxpayer’s financial and personal life.

        The IRS attempts collection in several distinct ways:

        Service Center Taxpayer Contact: whether it is a notice generated from a filed tax return showing a balance due or an adjustment made by the Examination Division, the taxpayer’s first contact with the IRS Collection Branch will be by a notice issued by the IRS Service Center. Generally issued by the Service Center where the return was filed, a series of notices will be sent, usually four in number, the last of which is the IRS Notice of Intent to Levy, sent certified mail return receipt requested. Each of these notices carries addresses and telephone contact numbers which the practitioner should use to explain the taxpayer’s financial situation. When the taxpayer has been a previous delinquent (i.e., a notice has been sent within the last 12 months), the taxpayer will not receive four notices, but only two: the initial CP:501 and CP:504, which is the Notice of Intent to Levy. If the client tells the practitioner he or she received only two notices, this should tip the practitioner off to the fact that the client has been a previous delinquent. The notices issued by the Service Center are computer generated and no individual Agent is assigned to the matter.

        IRS Automated Collection System (ACS): These are IRS computer-assisted personnel who use computer screen prompts to obtain levy information from taxpayers and initiate enforced collection activity. ACS is manned at various sites in the taxpayer’s district. ACS personnel are probably the least trained and least sophisticated in both tax law and collection procedures, but are able within limited parameters to resolve collection matters.

        District Offices: Each district is broken into field offices staffed by Revenue Officers who are IRS Collection specialists. The Revenue Officer will receive a file if it could not be resolved by the Service Center or ACS Branches. IRS Revenue Officers will obtain financial information and do financial investigation and the necessary legwork through personal contact with the taxpayer in an attempt to obtain payment. Revenue Officers are given the widest latitude to resolve collection disputes. In the reorganized IRS, most collection Agents are aligned with the small business/self-employed operating division.

Receipt of the "Notice of Intent to Levy and Your Right to a Hearing" is the final step before IRS, 30 days later, will be permitted to seize a taxpayer's assets and must be responded to if levy is to be avoided.

VAT Flap

If you find yourself stuck at another boring dinner party and desperately seek some new topic which will get the attention of all in attendance just mention the federal VAT tax. Whether in lowly New Jersey, or in the stratosphere of Washington DC, federal lawmakers are being teased by the prospect of scrapping the entire Internal Revenue Code in favor of a federal consumption tax. Just imagine the income, estate gift and FICA taxes would all evaporate with a stroke of the pen. April 15 would be remembered only for the sinking of the Titanic and not the day that Americans suffered through the annual task of filing federal income tax returns. The Internal Revenue Service itself could perhaps be cut to a 10th of its size saving oodles on the federal payroll, perhaps to be used for more worth while pursuits. So what is this thing called VAT? From to time  I have referred to it simply as a sales tax. This short changes the idea. From the buyer's perspective, VAT in fact looks a lot like a sales tax, which is paid upon the purchase of listed items. However, from the seller's point of view and the tax collection authorities, it is not all that simple. Take a peak at what Wikipedia has to say about VAT tax:

A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.
The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.

A true sales tax lets a buyer potentially worm out of paying the tax by claiming that he is not in fact the ultimate consumer. Sellers are required to obtain certificates affirming that fact, but what is it to him? With a VAT tax the seller has his own head and money in the game:

Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the tax—persuade the seller that the buyer is not really an end consumer, and therefore the seller is not legally required to collect it. Therefore, the burden of determining whether the buyer's motivation is to consume or re-sell is on the seller, and the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax and eliminates a decision needing to be made by the seller about whether the buyer is or is not an end consumer.

So there you have it a short tutorial on VAT tax. Since Congress doesn't seem to be able to do much of anything these days some congressmen with time on their hands have actually put together a proposal called the Fair Tax. It is in essence a federal VAT. The tax rate would be 29.9%. Tax rebates would be provided to some taxpayers and some asset purchases would be exempt. Of course there are critics who say such a VAT tax would simply not raise sufficient revenue as the current system. But the reason may also be in our political system that it would be difficult for congressmen and senators to slip in as many exemptions for pet taxpayer contributors if such a simplified method of taxation were to be adopted. The current Internal Revenue Code is simply riddled with special interests. In fairness, the current tax code does raise substantial revenue, but it is also used for economic and social tinkering, and it is there where a VAT tax may not fill the bill.

The IRS Audit Lottery

Face it, the odds of winning the lottery, power ball or whatever it may be called are probably only slightly less then being hit by lightning on an absolutely clear winter evening. Twice. The odds of winning the IRS lottery are better. But not as good as you may think. Tax returns are not selected by random. Au contraire. The IRS does its best to use its limited resources laser like to select those returns which most likely present compliance issues. As computers become ever more sophisticated the process becomes more fine tuned. For the most part, audit selection is based upon the entries on the return. In a well kept IRS secret, a formula exists which when pumped into the IRS computers spits out tax returns which should at least be reviewed by a human and possibly further examined by the IRS examination division. Now as to the odds themselves: there are about 140 million individual income tax returns filed annually about 1.5 million are audited. That is approximately 1.1%. Most of these audits are conducted by correspondence. That is, lucky winners get mail from the IRS requesting explanation and verification of tax return entries. For business returns showing total gross receipts of $100,000-$200,000 approximately 4% are audited and for those returns with receipts of $200,000 or more 3.8% get to chat with IRS. For lucky winners with total positive income of 1 million or more, the rate may be as high as 12.5%. In all categories for recent years IRS claims that audit rates have increased slightly. How does one avoid winning this lottery? Recognize that the deductions, credits and allowances claimed on a tax return are actually compared to income and that the IRS formula also considers the likelihood of being able to survive on the amount of net reported income. IRS does also conduct special audit projects to identify non filers and problem cases and the agency may respond to hate mail from disgruntled spouses, employees and such. IRS has also gotten rather good at matching those pesky forms 1099 that are sent to taxpayers every year by all manner of income sources. Brokerage houses for example will be letting IRS know not only the gross sale proceeds of stock sold but also the tax basis or cost that is used to figure the taxable gain on the transaction.

Italian tax authorities have shifted their attention away from tax return numbers on their forms and toward finding out what Italians spend and then comparing that to their filed tax return. How did Mario have the lira to get that Maserati on the paltry income reported on his not so buono Italian tax return? As computers, iPhones, iPads and such track a taxpayer’s every purchase and preference, hiding from IRS or the Italian tax people for that matter, may become very difficult indeed.

Sequester and Weight Gain

  I have managed to gain 5 pounds. Don't give me this business about it to being the result of the holidays or cavorting in cafés in Miami Beach. While some of that may be true, my recent weight gain is much more serious. It is the fault of those damn Republicans in Congress. I have done the research. You may be comforted to know that your expanding middle may be the result of a minor bout with depression. Scientists say that in this part of the country the simple loss of sunshine can bring it about. Those who know me realize that I can hardly claim that defense. But there is something to this depression stuff. If you have been diligent in reading these tax blurbs of mine from this blog you know that the end of last year brought about the fiscal cliff scare. Congressman then batting around their party’s ideology certainly cost me a few pounds. But as that issue appeared to get resolved and just when it seemed weight loss was in the cards for me the new March 1 “sequester” darkened my bathroom scale. The New York Times stated that "House Republicans are resolutely opposing new tax increases to head off $85 billion in across-the-board spending reductions all but ensuring the cuts will go into force March 1 and probably remain in place for months, if not longer". This raises the potential of widespread disruption in government services and even military operations in the weeks and months ahead. There you have it. Depressing news and five extra pounds and counting. As the GOP continues to resist tax increases, my pants will no longer fit. By the way, there is a threat that the entire government will have to close down on March 1 although Congress appears ready to extend that deadline until September 30, the end of the fiscal year. The sequester cuts will be both arbitrary and deep to defense and domestic programs and to borrow a term from our own now beloved NJ governor “stupid”. Why not just call this silly sequester off if for no other reason so people like me can shed a pound or two.

Tax Crimes and Littering?

Where should tax crimes fall in the spectrum of criminal activity? In “Alice's Restaurant” a ‘60’s Vietnam protest movie, Arlo Guthrie tells the story of his avoiding the draft by having been arrested for littering in Vermont. The military was unwilling to take him into the Army knowing he had such a sordid past. In one famous scene, Guthrie is shunned by other inductees waiting psychoanalysis for their past criminal actions when they learn his only crime is littering. They welcome him back however, when he reveals a further charge of disorderly conduct. Now the people at the Immigration and Naturalization Service are permitted to deport aliens under United States Code Section 1227 if they have been convicted of an “aggravated felony”. That seems sensible. I can picture all types of terrible crimes that would fit that definition. But in Kawashima vs. Holder, the United States Supreme Court had to confront the important issue of whether filing a false income tax return with the Internal Revenue Service is such an “aggravated felony” as to require deportation of two natives and citizens of Japan who have been lawful permanent residents of the United States since 1984.The taxpayers went through hearings within INS and through the courts. After an exhaustive study of what the term aggravated felony means in the INS law, the Supreme Court in a 6 to 3 decision determined that such a tax crime was in fact an aggravated felony which can result in deportation. Lawyers should note that tax evasion is sometimes called the piggyback crime, at least by me, because it can be added to most financial crimes where income has been gained. The Internal Revenue Code makes income taxable from any source legal or not. So the thief is pursued by the police as well as by IRS agents. The mere non filing of returns can also result in a charge of tax evasion and taxpayers so situated should consider taking advantage of the IRS’ voluntary disclosure policy.

Who Are the IRS Agents?

No one likes contact from the IRS.  Which IRS agent is planning to visit? All IRS agents are not the same. It helps to understand the essential differences and what it means to the taxpayer or an attorney representing his client's interests.

The IRS Revenue Agent

 The most common contact will be the Revenue Agent. This person works in the examination branch. He often holds a CPA certificate or at least a solid background in accounting. Trained by IRS in substantive tax matters, he is the soldier in the trenches in the exam division of IRS. He will use predetermined audit guidelines to check tax compliance. Revenue agents are known for being thorough, documenting each step in the audit process. They will be fact centered and have sufficient knowledge of the tax laws or the backup to discover it, if need be, assistance being provided by IRS lawyers called Area Council.

Revenue agents will request information from the taxpayer and will issue information document requests (IDR) for information setting forth due dates to move the audit forward. Revenue agents like all IRS agents can issue administrative summons to obtain both testimony and documents from less than forthcoming taxpayers. This administrative action is not self enforcing and requires district court action brought by the Internal Revenue Service to enforce the demands made in the summons.

The IRS Revenue Officer

Possibly the most difficult and dangerous job at IRS is that of the IRS revenue officer. When we hear of IRS agents killed in the line of duty it is often from this unarmed tax agent’s ranks. He is the IRS collection expert in the field assigned to local IRS offices with a likely background in finance or perhaps a former business owner himself. He is primarily charged with collecting back taxes that are owed. His demand to tax debtors is simple: When are you going to pay the taxes you owe?

Revenue officers are also assigned taxpayer delinquent accounts where the taxpayer is a non-filer. This is the IRS civil attempt to obtain tax returns from the taxpayer. In all cases, revenue officers will check for current filing status and request that any open tax returns be filed directly with them.

Like revenue agents, revenue officers may issue administrative summons for information and like their examination brethren, if need be, they can make referrals to the criminal investigation division (CID) for possible criminal violations disclosed or suspected along the way.

The IRS Special Agent.

No practitioner or taxpayer should ever confuse the IRS special agent with either the revenue agent or revenue officer. The special agent has but one role in tax administration and that is to determine whether a criminal violation of the Internal Revenue Code has occurred. These violations may be found in Internal Revenue Code. section 7201 and following, the most popular of which is tax evasion and the filing of false and fraudulent tax returns. Special agents may have backgrounds in law enforcement and are the only IRS personnel authorized to carry guns. They take their work very seriously and are extremely good at it. IRS conviction and incarceration rates border on 100% in most criminal tax cases owing to the thoroughness of the special agent investigation. No lawyer or accountant unfamiliar with the work of the special agent should endanger his client by taking representation for a CID investigation which may go on typically 2 to 4 years. The statute of limitations for criminal violations is generally six years. Taxpayers who insist on representing themselves are simply arranging for “a vacation in New England” at a federal penitentiary.

IRS agents will identify themselves and Special Agents will display an unmistakable gold badge. Taxpayers and lawyers are well advised to appreciate the difference in the work they do for IRS.                                                               

TMD, Esq.

The IRS Dirty Dozen Tax Scams

 Every year, the Internal Revenue Service announces its “Dirty Dozen” ranking of tax scams. While the Service says many of these arise during the year, there is a scheme peak during tax filing season. IRS warns that “scam artists will tempt people in person, online and by e-mail with misleading promises about lost refunds and free money”. I am sure as a lawyer you have received notification from a Nigerian bank which desperately needs to wire transfer huge sums of money to your attorney trust account. All that is asked in return is the account and routing numbers to get in the game. Needless to say, this is not the most sophisticated scam in the world.

So here goes the rest from the most to least significant tax scams:

The winner, which has made the list for the last several years, is none other than identity theft. IRS sees identity thieves filing what appear to be legitimate tax returns requesting fraudulent refunds. In this case, IRS will notify a taxpayer that more than one return was filed in the taxpayer's name. That notice may be the first tip-off that the individual has been victimized. According to IRS in 2011 it stopped more than $1.4 billion of taxpayer refunds going into the wrong hands due to identity theft. IRS maintains a special identity theft page on its website IRS.gov/identity theft.

According to IRS, tax return preparer fraud comes in second on the list as tax return preparers have been known to skim off their clients’ refunds, charge inflated fees and attract new clients by promising guaranteed or extravagant refunds. In 2012 every preparer must have a preparer tax identification number which is entered on the tax return he or she prepares. Taxpayers should be alert to preparers who do not provide a copy of the tax return or charge a percentage of the refund amount as a preparation fee or add bogus forms to the tax return never before filed.

Rounding out the trifecta is Phishing. Here fake emails and websites request both personal and financial  information. IRS urges taxpayers to report any such contact to pfishing@irs.gov. There are a few fake IRS websites that truly look like the real McCoy.

Coming in just behind the leaders is hiding income offshore. The IRS is wising up to this technique which involves offshore banks, brokerage accounts, debit and credit cards or wire transfers to access funds. Taxpayers involved in undisclosed or illegal offshore accounts face both civil penalties and criminal prosecution. IRS does maintain come-clean disclosure rules. See IRS.gov for any current version.

In fifth position sweeping up the rear, is free money from the IRS or rebates from Social Security. You have to love this one. Among the pile of mostly useless e-mails all of us receive every day is often an urgent message that IRS is holding your money. IRS says scammers here prey on low income individuals and the elderly.The“elderly”now includes most of my friends.

False income and expenses. While once considered being the next Milton Bradley board game, the IRS does take a dim view of claiming deductions and expenses to which you are not entitled. Popular scam deductions and credits include the earned income tax credit, which by virtue of Congressional magic can result in a refund even when no tax payments have even been made.

Frivolous arguments. Now that is a catchy phrase. The IRS maintains a list of arguments it considers to be frivolous, which are unreasonable and outlandish claims to avoid paying the taxes owed. Take a look at the IRS website for help here.

Falsely claiming zero wages. Here the taxpayer is urged to file a substitute form W-2 or a corrected form 1099, thereby throwing the IRS computers into a tizzy and sending refunds out of nowhere.

Abuse of charitable organizations and deductions. IRS continues to examine intentional abuse of 501(c)(3) organizations using highly overvalued contributions by donors.

Disguised corporate ownership. In this scam third parties are used to request employer identification numbers and create corporations that obscure true ownership of a business. The new business may be used to claim false deductions and facilitate money laundering and other financial crimes.

The improper use of trusts. Promoters here urge taxpayers to transfer assets into trusts promising the reduction of income tax, deductions for otherwise personal expenses as well as reduced estate or gift taxes. According to IRS there has been an increase in the improper use of private annuity trust and foreign trusts.

There you have it. Happy Tax Season.