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.

Sections of Circular 230: Practice Rules before the IRS

31 U.S.C. §330. Practice before the Department (a) Subject to section 500 of title 5, the Secretary of the Treasury may — (1) regulate the practice of representatives of persons before the Department of the Treasury; and (2) before admitting a representative to practice, require that the representative demonstrate — (A) good character; (B) good reputation; (C) necessary qualifications to enable the representative to provide to persons valuable service; and (D) competency to advise and assist persons in presenting their cases. (b) After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department, or censure, a representative who — (1) is incompetent; (2) is disreputable; (3) violates regulations prescribed under this section; or (4) with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented. The Secretary may impose a monetary penalty on any representative described in the preceding sentence

§ 10.1 Offices. (a) Establishment of office(s). The Commissioner shall establish the Office of Professional Responsibility and any other office(s) within the Internal Revenue Service necessary to administer and enforce this part. The Commissioner shall appoint the Director of the Office of Professional Responsibility and any other Internal Revenue official(s) to manage and direct any office(s) established to administer or enforce this part. Offices established under this part include, but are not limited to: (1) The Office of Professional Responsibility, which shall generally have responsibility for matters related to practitioner conduct and shall have exclusive responsibility for discipline, including disciplinary proceedings and sanctions;

(4) Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.

Subpart B — Duties and Restrictions Relating to Practice Before the Internal Revenue Service § 10.20 Information to be furnished. (a) To the Internal Revenue Service. (1) A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

§ 10.21 Knowledge of client’s omission. A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

§ 10.23 Prompt disposition of pending matters. A practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service.

§ 10.27 Fees. (a) In general. A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service. (b) Contingent fees — (1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service. (2) A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to — (i) An original tax return; or (ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return. (3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service. (4) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.

§ 10.29 Conflicting interests. (a) Except as provided by paragraph (b) of this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if — (1) The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner. (b) Notwithstanding the existence of a conflict of interest under paragraph (a) of this section, the practitioner may represent a client if — (1) The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; (2) The representation is not prohibited by law; and (3) Each affected client waives the conflict

§ 10.31 Negotiation of taxpayer checks. (a) A practitioner may not endorse or otherwise negotiate any check (including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to a client by the government in respect of a Federal tax liability.

§ 10.35 Competence. (a) A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. A practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting an expert or study.

The practitioner must— (i) Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events); (ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know; (iii) Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter; (iv) Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;

§ 10.51 Incompetence and disreputable conduct. (a) Incompetence and disreputable conduct. Incompetence and disreputable conduct for which a practitioner may be sanctioned under §10.50 includes, but is not limited to —

(1) Conviction of any criminal offense under the Federal tax laws. (2) Conviction of any criminal offense involving dishonesty or breach of trust. (3) Conviction of any felony under Federal or State law for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service. (4) Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon Federal tax matters, in connection with any matter pending or likely to be pending before them, knowing the information to be false or misleading. Facts or other matters contained in testimony, Federal tax returns, financial statements, applications for enrollment, affidavits, declarations, and any other document or statement, written or oral, are included in the term “information.” (5) Solicitation of employment as prohibited under §10.30, the use of false or misleading representations with intent to deceive a client or prospective client in order to procure employment, or intimating that the practitioner is able improperly to obtain special consideration or action from the Internal Revenue Service or any officer or employee thereof. (6) Willfully failing to make a Federal tax return in violation of the Federal tax laws, or willfully evading, attempting to evade, or participating in any way in evading or attempting to evade any assessment or payment of any Federal tax. (7) Willfully assisting, counseling, encouraging a client or prospective client in violating, or suggesting to a client or prospective client to violate, any Federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade Federal taxes or payment thereof. (8) Misappropriation of, or failure properly or promptly to remit, funds received from a client for the purpose of payment of taxes or other obligations due the United States. (9) Directly or indirectly attempting to influence, or offering or agreeing to attempt to influence, the official action of any officer or employee of the Internal Revenue Service by the use of threats, false accusations, duress or coercion, by the offer of any special inducement or promise of an advantage or by the bestowing of any gift, favor or thing of value. (10) Disbarment or suspension from practice as an attorney, certified public accountant, public accountant, or actuary by any duly constituted authority of any State, territory, or possession of the United States, including a Commonwealth, or the District of Columbia, any Federal court of record or any Federal agency, body or board. (11) Knowingly aiding and abetting another person to practice before the Internal Revenue Service during a period of suspension, disbarment or ineligibility of such other person. (12) Contemptuous conduct in connection with practice before the Internal Revenue Service, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter. (13) Giving a false opinion, knowingly, recklessly, or through gross incompetence, including an opinion which is intentionally or recklessly misleading, or engaging in a pattern of providing incompetent opinions on questions arising under the Federal tax laws. False opinions described in this paragraph (a)(l3) include those which reflect or result from a knowing misstatement of fact or law, from an assertion of a position known to be unwarranted under existing law, from counseling or assisting in conduct known to be illegal or fraudulent, from concealing matters required by law to be revealed, or from consciously disregarding information indicating that material facts expressed in the opinion or offering material are false or misleading. For purposes of this paragraph (a)(13), reckless conduct is a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances. A pattern of conduct is a factor that will be taken into account in determining whether a practitioner acted knowingly, recklessly, or through gross incompetence. Gross incompetence includes conduct that reflects gross indifference, preparation which is grossly inadequate under the circumstances, and a consistent failure to perform obligations to the client. (14) Willfully failing to sign a tax return prepared by the practitioner when the practitioner’s signature is required by Federal tax laws unless the failure is due to reasonable cause and not due to willful neglect. (15) Willfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the Internal Revenue Code, contrary to the order of a court of competent jurisdiction, or contrary to the order of an administrative law judge in a proceeding instituted under §10.60. (16) Willfully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when the practitioner is required to do so by the Federal tax laws unless the failure is due to reasonable cause and not due to willful neglect. (17) Willfully preparing all or substantially all of, or signing, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid preparer tax identification number or other prescribed identifying number. (18) Willfully representing a taxpayer before an officer or employee of the Internal Revenue Service unless the practitioner is authorized to do so pursuant to this part.

Time Limits for Filing a Claim for Refund with IRS

              The federal tax code provides numerous statutes of limitations. These include how long the IRS can question the taxpayer about a filed tax return. This could be three years, six years or forever depending upon the circumstances. There is also a collection statute that limits IRS ability to collect taxes to generally 10 years with appropriate extensions depending upon the tax filing activity of any particular taxpayer. Practitioners and taxpayers alike realize too late that there is also a statute of limitations to claim a refund of taxes erroneously paid. Generally that statute provides that such a refund claim must be filed within two years of payment or three years from the time a tax return was filed whichever expires later. Claims filed after those dates will result in the IRS rejecting any refund claim. When taxpayers or practitioners find themselves in that situation it should be remembered that over the years case law has developed a theory of the “informal” claim. What that amounts to is has the taxpayer properly noticed the IRS of his request for a return of taxes he has paid. While not taking the form of a formal claim like Form 843 or 1040X this may be no more than a letter to the IRS requesting such a refund. Lawyers should never rely on this fuzzy type of refund claim on which to base their case unless there is no other alternative. In a recent IRS Chief Counsel Advice 201540012, the IRS determined that a corporation which merely expressed its intent to file a formal claim in the future did not amount to sufficient notice to the IRS of a refund claim. Therefore the claim was denied and any tax unable to be refunded. A hard lesson to learn.

The Not So Innocent Spouse

              Matrimonial lawyers often are required to deal with tax problems. Certainly the New Jersey case of Sheridan  has made a minefield of litigation in this area. When confronted with difficult tax revelations on filed joint tax returns the concept of the innocent spouse is often bandied about. While the law has existed for many years current code section is section 6015. This section provides three specific areas where relief may be sought. In subsection (b) known as the “traditional” innocent spouse section what the requesting spouse knew or should have known as well as benefit derived become difficult issues. In subsection (c) and election exists to in essence provide an opportunity for the electing spouse who is divorced or separated to get out of joint and several liability from a filed joint tax return. This section permits income deductions credits and losses to be credited to the electing spouse separately. Actual knowledge of problems with the joint tax return if demonstrated by IRS can deny relief here. An amended tax return can be attached with the election form requesting (c) treatment. Lastly, subsection (f) provides for equitable relief based on all the facts and circumstances. Taxpayers seeking to take advantage of the innocent spouse rules have two years to file Form 8857 after collection action has begun against them. That form is seven pages and must be cautiously approached both as to content and likely consequences to the electing spouse. The form also warns that the non-electing spouse will be contacted. The easiest way to avoid the problem is to NOT file a joint tax return if the relationship is headed to the rocks. No joint tax return; no joint tax liability.

IRS Hacked

             It won’t be long before hacking is accepted as an Olympic sport. The IRS has had its own website hacked and financial information of taxpayers stolen by who knows who. IRS says this information is used by hackers to file bogus tax returns requesting refunds. The unsophisticated IRS programs simply punch out the refunds to these crooks. Well the agency now has another concern. At least two individuals have begun lawsuits against the IRS filing a class action claiming their personal tax information was stolen by hackers when the IRS’ “Get Transcript” web application was hacked. In making out their case, it seems the individuals are alleging that the IRS knew that its security system was not up to the task of preventing easy access to this confidential information. The failure to implement adequate security measures amounted to negligence by the agency. The agency is certainly feeling the heat. Recently IRS issued temporary regulations that ends the availability of automatic extensions for filing forms W-2. It has also proposed regulations that would end the availability of automatic extensions for other information returns as well. This is being done to combat fraud and to limit the ability of hackers to file fraudulent tax returns requesting refunds. When hackers file these false returns they do so early in the filing season. If IRS has not as yet received W-2 forms from employers it is not possible for the agency to check the accuracy of items listed on the return. The longer these forms are unavailable to the service the more likely that hackers will be successful in their quest for these refunds. It is certainly not a very sophisticated approach to stopping tax hackers but for an agency plagued by lack of funding it may be the best it can do right now. Sort of bringing the wagons into a circle as they did in the old western movies. But these bad guys are better at being bad than those back then.