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.