Tax Litigation and Tax Controversy

United States Tax Court Proposes Rule Changes Impacting Tax Litigation

April 10, 2009 | by Dennis N. Brager

Tax litigation in the United States Tax Court (Tax Court) would be affected by proposed changes to the Tax Court’s Rules of Practice and Procedure (Tax Court’s Rules). Several of the changes are intended to conform the Tax Court’s Rules with the Federal Rules of Civil Procedure which govern tax litigation in the District Courts. For example, Tax Court Rule 71 would be changed to limit the number of interrogatories served to 25.

The Tax Court has requested public comments on the proposed amendments. Written comments must be received by May 27, 2009.

If you have a tax controversy matter which you haven’t been able to resolve contact the tax litigation lawyers at Brager Tax Law Group, A P.C.

Madoff Ponzi Schemes, Securities Fraud and the Internal Revenue Service

January 6, 2009 | by Dennis N. Brager

Once investors get over their initial shock that they were being bilked by Bernard Madoff in a massive Ponzi scheme they will be looking for ways lessen the impact. One of those ways is through the tax laws. Our tax attorneys have identified at least two possibilities. The first is that investors may be entitled to a theft loss pursuant to Internal Revenue Code Section 165. Unfortunately the year the loss can be deducted will probably be the subject of a tax dispute. Generally theft losses are deductible in the year of discovery. However, if there is still a possibility of recovery the deduction may need to be deferred.

Another idea is filing amended income tax returns for the last three years, taking the position that the payments received which had been reported as capital gains, dividends or interest were in fact a return of capital, and therefore non-taxable. This position is supported by Greenberg v. Commissioner, a 1996 case decided by the United States Tax Court. The Internal Revenue Service (“IRS”) believes, however, that the rule in Greenberg only applies in limited situations. IRS Legal Memorandum ILM 200305028. It is likely that those who file amended returns will be subjected to a tax audit, and that barring a change of heart by the Internal Revenue Service will need to hire a tax litigation attorney to assist them.

Generally the tax law allows only three years from the date the original tax returns were filed to file amended returns. For most taxpayers this means that if they act quickly they can file amended returns for 2005, 2006, and 2007.

IRS Revises Foreign Bank Account Report (FBAR) Form 90-22.1

December 19, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has revised Form 90-22.1, Report of Foreign Bank and Financial Accounts, also known as an “FBAR.” Although the FBAR was released in October, it is only required to be used for FBAR filed after Dec. 31, 2008. The purpose of an FBAR is to report a financial interest in, signature authority, or other authority over one or more financial accounts in foreign countries. Failure to file an FBAR can result in criminal tax penalties as well as onerous civil tax penalties. The civil tax penalties can be as high as 50% of the highest balance in an unreported foreign bank account. The FBAR is due on June 30th of each year, and is not filed with the tax return. Instead it is filed with the IRS office in Detroit, Michigan. However, individual filers must check the box on Schedule B of Form 1040 indicating that they have a financial interest in, or signatory over an offshore bank account.

The FBAR has been in the news a great deal lately in light of the IRS’ stepped effort to combat offshore tax evasion. This increased focus on ensuring that U.S. citizens report their offshore bank accounts to the IRS can be seen in several recent developments including the signing of a new tax treaty with Lichtenstein, the indictment of UBS banker Bradley Birkenfeld and the IRS pursuit of holders of UBS Swiss bank accounts. According to published accounts Birkenfeld , who has pled guilty to various tax crimes, is naming names of individuals who held “secret” Swiss bank accounts.

Given the increased probability of being charged with tax fraud or tax evasion U.S. citizens would be well advised to consult a tax attorney to determine whether a voluntary disclosure to the IRS would be the best strategy.

IRS Signs Tax Treaty with Lichtenstein

December 12, 2008 | by Dennis N. Brager

On Dec. 8, 2008 Lichtenstein entered into a tax treaty, which will allow the Internal Revenue Service (“IRS”) access to foreign bank account information even though there is no evidence of tax fraud. The treaty, which is known as a Tax Information Exchange Agreement (TIEA), will provide the United States with access to banks and other information needed to enforce U.S. tax laws. The TIEA will apply in both civil and criminal tax cases. The TIEA provides that information will be provided without regard to whether or not the conduct being investigated would constitute tax fraud under Lichtenstein law. Nor is there any requirement that there be a tax fraud investigation under way in the United States.

The type of information available to the IRS is very broad. For example, the TIEA contemplates Lichtenstein to provide the following non-exclusive types of information:

1. Information held by banks and other financial institutions including nominees and trustees acting in an agency or fiduciary capacity;

Independent Contractor or Employee Brochure Release by IRS

October 30, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has released IRS Publication 1779 with guidance for workers to help them determine whether they are employees or independent contractors. Interestingly IRS Publication 1779, which is only two pages does not specifically mention the 20 factor test set forth in IRS Revenue Ruling 87-41, 1987-1 C.B. 296. Instead it groups various factors into three categories-Behavioral Control, Financial Control and Relationship of the Parties. For example under the category Behavioral Control it states that “if you receive extensive instructions on how work is to be done this suggests you are an employee.”

While the publication appears to be aimed at workers rather than employers, an employer could be lulled into a false sense of security by relying on the publication since among other things it fails to mention that even though an employer does not actually exercise control, if the employer maintains the legal right to control the worker those workers may well be employees.

Nor does the publication mention that Section 530 of the Revenue Act of 1978 also known as the “safe harbor rules” allows employers to treat individuals as independent contractors even if they do not qualify under the common law rules. For more information on that topic see our article Independent Contractor Treatment for Workers is Broadly Available.

Taxes Problems for Actor Paul Hogan

July 31, 2008 | by Dennis N. Brager

Australian actor Paul Hogan, better known as Mick Dundee from the popular Crocodile Dundee movies, apparently has tax problems in Australia. He recently filed a motion in the Central District of California to fight a move by the Australian Tax Office (ATO) to have the Internal Revenue Service (IRS) collect information about his personal finances.

The IRS issued five summonses to three U.S. banks for transaction information on Paul Hogan’s personal and business accounts from 1997 through 2006. Tax attorneys for Hogan claim the summonses are not authorized under the U.S.-Australian income tax treaty and the summonses have not been issued for an authorized purpose under Internal Revenue Code section 7602. Hogan claims none of the businesses in question operate with or in Australia and that he was a resident of the United States six out of the nine years under investigation.

The ATO began their investigation in 2006 after reports surfaced that Hogan and his business partner John Cornell committed tax fraud in Australia by hiding millions of dollars in film royalties in offshore trusts and companies they owned in Chile and the Netherlands Antilles.

Tax Evasion and Swiss Banking Giant UBS

July 18, 2008 | by Dennis N. Brager

Swiss banks have long held a reputation for being the place to go for secrecy. The mystique may, however be crumbling. Last month a District Court judge in Miami, Florida granted an Internal Revenue Service John Doe summons request. The court ordered UBS to turn over records with the names of US taxpayers who requested their accounts be kept hidden from the IRS. Undoubtedly the IRS believes that these taxpayers may have committed tax evasion by failing to report income. U.S taxpayers who have foreign bank accounts are generally required to report income from those accounts on their U.S. tax returns. In addition, they are required to declare the existence of these offshore bank accounts on their tax returns, and they are required to file Form TDF 90-22.1. Failure to file the Form TDF 90-22.1 can result in both criminal tax penalties, and civil tax penalties. The criminal tax penalties can result in a fine of not more than $ 250,000, or five years in prison, or both. 31 U.S.C. 5322(a).

The IRS has long had a voluntary disclosure program which provides some assurances to taxpayers who wish to go confess their sins to the IRS, before the IRS knows they have comitted tax fraud . It is questionable whether taxpayers who are clients of UBS meet the requirements of the voluntary disclosure program. Nevertheless there still may be room for avoiding tax evasion charges.

Still the civil tax penalties can be quite onerous. For willful violations occurring prior to October 23, 2004, a penalty not to exceed the greater of an amount equal to the balance of the account at the time of the violation (not to exceed $100,000) or $25,000.

Income Tax Evasion Scheme Thwarted By IRS

July 10, 2008 | by Dennis N. Brager

Michael Fuller, an accountant from Florida, and Carl Perry, a food broker from Greenville, South Carolina, were sentenced on May 5, 2008 in federal court for tax evasion. Fuller was found guilty by a jury in July of 2007 and Perry pleaded guilty in May 2007 for conspiracy to defraud the United States pursuant to 18 U.S.C. 371. United States Circuit Judge William Wilkins sentenced Fuller and Perry to twelve months and one day in prison and three years probation, respectively.

Fuller and Perry committed tax evasion during a period from the late 1990’s till 2001. According to the Department of Justice, Perry used offshore accounts and other entities, which were set up by Fuller, to hide income from the Internal Revenue Service (“IRS”). A credit card was also set up with another offshore bank which was funded with Perry’s untaxed income. Fuller filed false income tax returns and other documents with the IRS to hide their tax evasion scheme.

If you have been accused of tax evasion contact the Southern California tax lawyers at Brager Tax Law Group, A P.C.

Innocent Spouse Relief Granted by Tax Court

June 13, 2008 | by Dennis N. Brager

The United States Tax Court (Tax Court) granted innocent spouse relief to Chrystina Nihser, overturning a decision by the Internal Revenue Service (IRS) . Nihser v. Commissioner, T.C. Memo 2008-135. Ms. Nihser had applied for innocent spouse relief under Internal Revenue Code § 6015(f), so called “equitable relief.” This is, in my view, the most difficult type of innocent spouse relief to obtain.

In ruling that the IRS had abused its discretion in not granting innocent spouse relief, the Tax Court applied the eight-factor balancing test of Rev. Proc. 2000-15, 2001-C.B. 448. One of the eight factors is whether or not the requesting spouse suffered “abuse” at the hands of the non-requesting spouse, and the case contains a lengthy discussion of what constitutes “abuse” for the purposes of determining whether equitable innocent spouse relief is available. The Tax Court held that something less than physical abuse may qualify. The Tax Court looked to the medical literature to create at least a partial list of the factors deemed to be psychologically abusive. It determined that a psychologically abusive spouse is one who may: (1) isolate the victim; (2) encourage exhaustion by, for example, intentionally limiting food or interrupting sleep; (3) behave in an obsessive or possessive manner; (4) threaten to commit suicide, to murder the requesting spouse, or to cause the death of family or friends; (5) use degrading language including humiliation, denial of victim’s talents and abilities, and name calling; (6) abuse drugs or alcohol, including administering substances to the victim; (7) undermine the victim’s ability to reason independently; or (8) occasionally indulge in positive behavior in order to keep hope alive that the abuse will cease.

Based upon these factors the Tax Court decided that Ms. Nihser had been abused, and in part because she met that test, the IRS had abused its discretion in failing to grant her request for innocent spouse relief.

Innocent Spouse Relief Available Despite Incomplete Adminstrative Record

June 10, 2008 | by Dennis N. Brager

The United States Tax Court (Tax Court) has held that in innocent spouse cases under Internal Revenue Code (IRC) § 6015 it will consider evidence at trial that was not part of the administrative record. Porter v. Commissioner, 130 T.C. No. 10 (2008). The innocent spouse ruling in Porter was consistent with the Tax Court’s earlier ruling in Ewing v. Commissioner, 122 T.C. 32 (2004), vacated on unrelated jurisdictional grounds 439 F.3d 1009 (9th Cir. 2006).

Ms. Porter submitted a Form 8857, Request for Innocent Spouse Relief to the IRS. Ultimately, the IRS granted innocent spouse relief as to a portion of the tax liability, but denied innocent spouse relief with respect to the remainder. Ms. Porter filed a Petition with the Tax Court to dispute the Internal Revenue Service’s unfavorable determination. When she got to the Tax Court, the IRS tried to prevent Ms. Porter, who was not represented by a tax attorney, from presenting all of her evidence. The IRS tax attorneys argued that judge could only here evidence that had previously been submitted to the IRS. The Tax Court held that in cases where someone is requesting innocent spouse relief, he or she is entitled to a trial de novo. That is she is entitled to present all of her evidence without regard to whether it was previously provided to the IRS.

If you believe that you may be entitled to innocent spouse relief contact the tax attorneys at Brager Tax Law Group, A P.C.