Tax Debtors to Lose Passports?

  It may be that the Internal Revenue Service feels that taxpayers who have tax liability of $50,000 or more should not be traveling out of the country. There may be a tiny bit of wisdom to that determination. It is a shame that the Constitution may have something to say about this idea. In the highway funding proposal a revenue raiser was included which would allow the State Department to deny or revoke passports if a taxpayer has had a notice of Lien or Levy filed against them. The proposal would exempt taxpayers who have confronted their tax liability and have entered into an installment agreement with the Internal Revenue Service. Anyone who has practiced in this field of IRS dispute work knows this is a disaster about to happen if it should become law. Both Notices of Lien and Notice of Levy are often incorrectly issued by the Internal Revenue Service. A lien is notice to the world that a tax is due and has not been paid. It covers most all of the taxpayer’s assets both real and personal and must be cleared to convey clear title. A Levy is the act of taking property by IRS and is only allowed in most cases with adequate notice to the taxpayer to object and request IRS Appeals Branch review. Having a Lien or Levy removed can present somewhat of a challenge and negotiating an installment agreement with the IRS as to becomes ever more shorthanded can be difficult as well.  It would seem that punishing tax debtors for their tax predicament would be invoking a debtor’s prison of sorts and an unjustified and perhaps unconstitutional extension of IRS power.  

Tax Free Spinoffs and the US Congress

  There is no better music to a tax lawyer’s ears than a business transaction being tax-free. And why not clients love it. A spinoff is a procedure whereby a corporation divides itself into at least two parts and then either sends one part to its old shareholders or creates a relationship of parent and subsidiary. If the rules are followed the new arrangement is tax free to all concerned. The House of Representatives had the nerve to recently consider legislation that would remove the tax free advantages of spinning off corporate real estate into a separate publicly traded real estate investment trust. According to the joint committee on taxation just this move would generate $1.9 billion in additional tax revenue over the next several years. Using spinoffs this way has been a way for companies to unlock cash by separating themselves from their real estate holdings. There have been 15 tax-free real estate spinoffs since 2010 that represented $21.6 billion. In September IRS had announced that it would no longer issue advanced private rulings on this type of tax free spinoff. Tax lawyers in this field are confident that no business would be willing to enter this type of corporate reorganization if the transaction was taxable. Before the ink was applied to the spinoff change however in rode the lobbyists to save the day and their clients at least a billion in potential additional taxes. Now congressmen being bought and paid for by many of the real estate players were quick to stick about 54 words in the 2000 page document to reverse the consequences of the potential taxable change. So the real estate spinoff lives on and another loophole remains in plain sight. Many congressmen in the past have come out and said they just don’t have the time to wade through volumes of tax legislation. Isn't that nice to know.

When the Sheridan Hits the Fan

           Why do litigation lawyers wake up in the middle of the night? Let’s not exclude mediators and arbitrators perhaps as well. It’s the ghost of Sheridan rapping at their chamber door. And who could get a decent night’s sleep when the parties to the upcoming courtroom battle are waging war over their marital or business issues and making veiled threats about the other’s tax deeds. We all know now that there is a third hostile party in court these days. It’s IRS. The courts and judges know that too. They did not get that seat on the bench being babes in the woods. How does this arise? Easy. One party alleges tax shenanigans: “You think he was cheating on me? Take a look at his tax returns.” The business partner who knows where the bodies are buried: “She’s deducted all her personal expenses through the company” Then to quote that great investigator: “The Game is Afoot”. Judges are required to seek IRS involvement. Now I confess my state court trial experience is limited at best as an expert witness in IRS tax matters. But after consulting with my brethren at the bar I can assure the reader that I know of what I speak. This is a problem. And it gets worst as we lawyers as officers of the court must deal with these issues ethically. Don’t ask, Don’t tell may not be the answer. Charlie Abut in July, 2008 did an article for the New Jersey Law Journal which I recommend as must reading. In essence Charlie agrees that looking the other way is not the answer. There is way too much at stake for all concerned. He suggests consulting the New Jersey rules of professional conduct and considering the risk /reward ratio. For lawyers who practice before the Internal Revenue Service knowledge about a client’s nonfiling or incorrect filing requires some action. Circular 230 is the conduct Bible. It requires that we tell a client of the error and advise them they must correct it. Those conduct rules do not require us to turn the matter over to the Internal Revenue Service. If clients have invested in their tax attorney hopefully they will be willing to take advice. For clients who refuse to take any action the only alternative may be to withdraw from the matter. In marital disputes where joint tax returns have been filed or are intending to be filed resting the client’s future on being able to claim innocent spouse status is shaky at best. Such status is far from automatic and actual knowledge and benefit could make such relief impossible. What then is the best answer in handling a potential Sheridan problem? Where tax problems raise their head a diligent lawyer should confront the issue. The purpose is to both insulate the lawyer from ethical issues and to assist the client to be in a better position as litigation goes forward. In difficult cases resort may be had to the IRS voluntary disclosure policy. Fixing the tax problem could be the most important service the lawyer will render no matter how the litigation turns out. There is certainly no easy solution and each case will stand on its own facts.