Tax Litigation and Tax Controversy

Our Tax Attorneys Have Good News if you Didn’t Apply for a PPP Loan by the Deadline of June 30, 2020.

July 7, 2020 | by Dennis N. Brager

PPP Loans are an excellent way for small businesses with Covid-19 related financial issues to obtain a very low (one percent) interest loan from the government. Unfortunately, if you haven’t applied yet the time period for submitting an application expired on June 30^th. The good news is that the Senate and the House have passed a bill which extends the deadline to apply to August 8, 2020. President Trump signed the bill into law on July 4, 2020. While it seems that large businesses are the usual recipients of government money, this program reaches the smallest of businesses.

At the time of this writing it appears that there was still about $130 billion in loans still available. With an average loan size (the precise number keeps changing) of about $110,000 that means that up to about another 1.2 million businesses could take advantage of the PPP loan program.

If handled properly, the loan will be forgiven by the government. Therefore, it is essentially a grant by the government. When the loan is forgiven there will no discharge of debt income to take into account. However, businesses will be unable to deduct expenses paid with the forgiven loans on their income tax returns.

SBA Publishes Loan Forgiveness Form and Instructions for PPP Loans

May 18, 2020 | by Dennis N. Brager

Most, if not all, Payroll Protection Program (PPP) borrowers are focused on the question of whether they will be able to have their PPP loan forgiven. Many questions have arisen, and some but not all, have been answered by the Loan Forgiveness Application and instructions released by the SBA on Friday, May 15, 2020. Here are some of the highlights.

Annual “cash” payroll costs are capped at $100,000 per employee. While this is not news, the SBA calculates that this amount on a pro-rata basis for the 8 week “Covered Period” is $15,385. If you do the math, that is equal to 8 weeks per year divided by 52 weeks multiplied by $100,000. Some were hoping that those on a semi-monthly pay schedule could use a larger amount based upon 24 pay periods per year. Apparently not.
Alternative Payroll Covered Period. The Covered Period is generally eight weeks (actually 56 days) beginning on the date the loan is first funded. The Alternative Payroll Covered Period is only for employers with bi-weekly or more frequent payroll schedules. Therefore, it doesn’t appear to apply to employers who pay semi-monthly. It begins on the on the first day of the first payroll period following the PPP Loan Disbursement Date and ends 56 days later. The following example is provided: Alternative Payroll Covered Period: “… if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.” This suggests that one cannot include payments for a payroll period that begins before the PPP Loan Disbursement Date but is paid after that date. However, that is inconsistent with the Press Release issued concurrently by the SBA which states that the form and instructions provide “Flexibility to include eligible payroll and non-payroll expenses paid OR incurred during the eight-week period after receiving their PPP loan.” (emphasis supplied). See more below.

IRS Suspends Most Collection Activities due to COVID-19 Pandemic

April 17, 2020 | by Dennis N. Brager

Due to the ongoing COVID-19 Pandemic, the IRS has provided relief to taxpayers by extending filing and other deadlines. Now, in an internal memorandum from Fred Schindler the Director of Headquarters Collection (SBSE), the IRS continues to provide relief to taxpayers with tax debt by suspending most tax collection activities. These changes mirror the previous relief provided by the IRS, and restates the relief contained in the People First Initiative. Our tax litigation attorneys are advising our clients that they can expect enforced tax collection activities to be suspended unless there is an exigent circumstance including the loss of the opportunity for the government to collect taxes due. The expiration of the statute of limitations is one example.

The importance of the memo is that while it mostly repeats and fleshes out the People First Initiative, it is a direct “order” from the head of SBSE Collection to all Collection Executives. The People First Initiative is a bit more nebulous in terms of its actual impact on the activities of rank and file employees. The collection activities outlined in the memo include most activities related to the collection process such as meeting with taxpayers, filing new Notices of Federal Tax Liens (NFTL), issuing levies, taking or scheduling seizures actions, and pursuing civil suit proceedings. Automated tax levy programs are also suspended. The memorandum also directs Collections not to default installment agreements for missed payments due between April 1 and July 15, 2020 (the suspension period). Due to the ongoing and ever changing nature of the COVID-19 epidemic in the United States, the IRS may extend the suspension period and the incorporated relief provisions further.

It is important for taxpayers and their advisors to remember that even though collection enforcement activity will be rare from now through July 15^th, once the suspension period ends the IRS may begin filing liens and levies with a vengeance. Our tax lawyers are therefore recommending to our clients that, to the extent practicable, they position themselves to take appropriate action to forestall collection after the suspension period ends. This includes submitting offers in compromise, and requesting installment agreements now.

Not Just Another Covid-19 Announcement (Part II)

March 19, 2020 | by Dennis N. Brager

On Tuesday evening our tax lawyers sent out an announcement discussing some of the tax filing and payment implications of the Covid-19 virus. We indicated that Secretary of Treasury Mnuchin had announced payment and filing extensions for the 2019 income tax returns.

Mnuchin was quoted as saying “We encourage those Americans who can file their taxes to continue to file their taxes on April 15,” Mnuchin said. “Because for many Americans, you will get tax refunds.”

We took that to mean that the filing deadline as well as the payment deadline was extended. This is the problem with tax guidance by Tweet and press conference. On Wednesday morning the IRS issued an announcement which states that there is no filing extension.

Not Just Another Covid-19 Announcement

March 17, 2020 | by Dennis N. Brager

Some of you may be concerned about the impact of the Coronavirus aka Covid-19 outbreak on your taxes, and those of your clients. The news from the IRS has been slow in coming. On Friday of last week President Trump declared a National Emergency. At the same time, he directed Treasury Secretary Mnuchin to provide relief from “tax deadlines” to Americans who are adversely impacted by the emergency. This allows the IRS to extend various deadlines for up to a one-year period. This authority is not, however, self-executing. That is, the IRS must specify exactly which due dates, and for how long they are being extended.

Prior to President Trump’s announcement Secretary Mnuchin had told reporters that most deadlines would be extended for “small businesses” and most individuals other than the “super rich.” Our tax lawyers couldn’t find a definition of super rich anywhere in the Internal Revenue Code. Finally, this morning, Tuesday March 17^th, after partnership and certain LLC returns were already due, Mnuchin stated in a press conference that the filing deadline for the 2019 income tax return would be extended by 90 days. For individuals that would mean July 14^th. Presumably, the IRS will actually extend the date to July 15^th just to make things a touch easier. Individuals living overseas already have an extension to June 15^th so presumably they would have until September 15^th to file.

In addition to stating that the income tax filing deadline would be extended, Mnuchin also stated that the 2019 payment deadline for income taxes owed of less than $1 million dollars for individuals or $10 million for corporations. This would be an interest and penalty free extension. For those who are over the thresholds it is unclear whether the entire amount due would be subject to interest and penalties or just that amount over the threshold. It is also not clear whether the filing extension would apply to those who owe taxes in excess of the cut-off amount.

Dennis Brager Published in Fox News Article

January 22, 2020 | by Dennis N. Brager

Recently, Dennis was interviewed by Fox News on his thoughts on Prince Harry and Meghan Markle’s move to North America and how it may impact their taxes. Below is an excerpt of the quote:

“Basically speaking, the U.S. has a system of taxation which is different from the vast majority of countries in the world in that in the United States, if you’re a U.S. citizen, it doesn’t matter where you’re living in the world, you pay tax on all of your income wherever you earn it.”

He also went on to say, “So if Meghan takes a modeling job in the U.K., she still pays tax in the United States. She’s still subject to all the reporting requirements that U.S. citizens are.”

Don’t Always Believe What the IRS Tells You About Your Trust Fund Taxes (or Anything Else)

November 19, 2018 | by Dennis N. Brager

A 2017 case is a stark $300,000 reminder that the IRS is not bound by statements made by its employees, such as Revenue Officers. Tommy Weder was a responsible officer of a corporation which failed to pay its payroll taxes, and as a result, he was assessed a trust fund recovery penalty (TFRP) pursuant to IRC Section 6672. After he paid the $300,000, he filed suit in federal district court in Oklahoma requesting a refund. His theory was that the company had paid $300,000 towards the trust fund taxes, and that, therefore, his personal liability was reduced by that amount. In most cases, a taxpayer must pay any tax in full (not just a portion) before he or she can file a suit for a refund. However, under the so-called Flora rule, payroll taxes are divisible taxes, therefore, the taxpayer must only pay the tax due for one employee for one quarter.

The IRS took the position that the payment was not properly designated toward the trust fund, and that it was therefore entitled to, and did, apply the payment towards non-trust fund taxes owed by the company, which of course doesn’t reduce the trust fund recovery penalty. Weder didn’t dispute that there hadn’t been a written designation of tax. The payment had been made through the IRS’ EFTS system, and there was no designation. Weder argued, however, that the Revenue Officer that had been assigned to collection had met with representatives of the company, including its CPA, and that the Revenue Officer had demanded that the payment be made through EFTPS, and represented that the payment would be applied to the trust fund taxes.

The court ruled that absent a WRITTEN designation by the company, the IRS was free to apply the payment in the “best interest” of the government. The Court relied on Rev. Proc. 2002-26, which provides that absent written directions, the IRS “will apply payments to periods in the order of priority that the Service determines will serve the Service’s best interest.” It pointed out that prior to Rev. Proc. 2002-26 being promulgated, the prior IRS guidance was contained in Rev. Rul. 73-2. CB 43. That Revenue ruling only required that taxpayers give “directions.”

What is an IRS Summons?

November 2, 2017 | by Dennis N. Brager

An IRS summons is an official order to produce information or provide testimony to aid in an IRS investigation. Summonses may be issued to the taxpayer being investigated or to third parties who may have information that the IRS wants to use in the investigation. If you receive a summons, you should immediately consult with a tax litigation attorney to determine what information you are required to produce, what arguments you have for refusing to disclose certain information, and whether you may incriminate yourself by producing certain information.

Before you receive a summons, you should receive several other notices from the IRS, beginning with an Information Document Request (IDR). An IDR is a more informal notice, but will often be requesting the same information as the summons. The IRS would prefer that you respond and give them the information they want without requiring the issuance of an official summons, which can be enforced by a federal district court.

The IRS will have to prove to the court that the summons is necessary to obtain information that may be relevant to a legitimate investigation. The taxpayer will be asked to show why the summons is not proper, and a failure to respond to the summons after a district court orders it enforced will usually result in a citation for contempt which can include time in jail.

Which Court Should You Use For Your Tax Dispute

July 11, 2017 | by Dennis N. Brager

There are actually four different courts that can be used for tax litigation. The United States Tax Court is the most commonly used option, but other courts may have advantages in certain situations.

The four courts with jurisdiction to hear tax controversy cases are:

Tax Court

The IRS Is Not Always Right: How to Fight Back

March 9, 2017 | by Dennis N. Brager

Dealing with an IRS mistake can be a frustrating experience, but it happens fairly often. There are many different types of error the IRS can make:

Wrongful calculation of penalties and interest
Wrongful assessment of penalties