Tax Litigation and Tax Controversy

New FAQs For Offshore Voluntary Disclosure Program (OVDP) Released by IRS

October 16, 2014 | by Dennis N. Brager

Our tax lawyers have reviewed the IRS’ newly issued FAQs for its Delinquent International Information Return Submission Procedures, the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States (SDOP), and the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States (SFOP). These programs are first cousins of the IRS’ Offshore Voluntary Disclosure Program (OVDP), but technically are not part of OVDP, and are options for individuals who have failed to report income from offshore bank accounts, and who may have failed to file a Foreign Bank Account Reports, FinCEN Form 114, formerly TDF 90-22.1 (FBAR) or other international information reporting returns.

Perhaps the most disturbing FAQ is the one issued for the Delinquent International Information Return Submission Procedures. The procedures replace former OVDP FAQ 18, and became effective July 1, 2014. Under old FAQ 18, if a taxpayer failed to file an information reporting form, but had reported all taxable income, and paid all the tax the IRS would not impose a penalty. Under the new Delinquent International Information Return Submission Procedures however, even if all income has been reported, and taxes paid, the taxpayer must submit a “reasonable cause statement” with each delinquent information return. Before the issuance of the new FAQ, many tax attorneys believed (hoped?) that if a taxpayer met the requirements of old FAQ 18 that no penalty will be imposed without regard to whether there was reasonable cause.

The FAQ makes clear that if the IRS does not accept the reasonable cause statement then penalties will be imposed. The FAQ states that the reasonable cause determination will be based upon longstanding authorities, and cites to Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3). The FAQ suggests that a statement of facts made under penalties of perjury should be included with the late filed returns.

Expect Increased Assessment and Collection of Trust Fund Recovery Penalties

August 22, 2014 | by Dennis N. Brager

Enforcement of The Trust Fund Recovery Penalty (TFRP) is a source of potential government revenue that, according to the Treasury Inspector General for Tax Administration (TIGTA), needs to be revamped to become more efficient. Under existing law, employers are required to withhold from their employees’ salaries amounts to cover Federal income, Social Security, and Medicare taxes. These are referred to as “trust fund taxes.” When the employer fails to pay these taxes, the IRS can collect them from “responsible persons,” who have willfully failed to pay them. In determining who is a responsible person, the critical test is whether the person has the effective power to pay the taxes owed.

As the taxes get older, the possibility of collection by the IRS continues to decrease. As of June 2012, employers owed the United States government approximately $14.1 billion in delinquent employment taxes. That’s one big employment tax problem! In their study of 265 statistically valid cases, TIGTA found that TFRP actions were not always timely or adequate in 99 cases. Sixty-five cases had untimely TFRP actions, twenty cases had TFRPs that could not be assessed because assessment statutes had expired, ten did not have adequate support for collectability determinations when the TFRP was not assessed, and nine cases with incomplete TFRP investigations were closed with an installment agreement or considered “currently not collectible” before determining whether a TFRP should be assessed.

TIGTA set forth a list of recommendations for the IRS with respect to the TFRP, which were all accepted and agreed to be implemented in the coming year. Many of the suggestions emphasized the responsibility of the group managers; for example, one recommendation was to emphasize to managers their responsibility to use the Automated Trust Fund Recovery System (ATFR) monthly and to increase the level of training offered.

The Family That Commits Tax Evasion Together May Go to Prison Together

October 4, 2013 | by Dennis N. Brager

While offshore tax evasion can sometimes be a family affair as well. U.S. Attorney Preet Bharara recently announced a prosecution of an offshore tax evasion case involving multiple family members. This case illustrates the dangers involved when an older family member passes on without cleaning up his Report of Foreign Bank Account (FBAR). Henry Seggerman, of New York and Los Angeles, pled guilty this summer to one count of conspiracy to defraud the U.S., as well as two counts of filing false tax returns in connection with his family’s Swiss bank accounts. While the DOJ did not say that either Henry Seggerman or any of his siblings actively assisted the late Harry Seggerman with his offshore tax fraud during his lifetime, Henry Seggerman allegedly filed false tax returns after his father’s death that grossly underreported the value of his father’s estate. Furthermore, the tax return that Henry filed on behalf of his father’s estate failed to disclose the over $12 million hidden in Swiss bank accounts.

According to the DOJ, Henry Seggerman and his family continued this offshore tax fraud scheme for over a decade after their father’s death. Seggerman was accused of taking further steps to set up new Swiss bank accounts to conceal the funds inherited by himself and his siblings. Aside from controlling his own offshore bank account, Seggerman was accused of helping his brother repatriate funds from a Swiss bank account to the U.S. under the guise of loans from a foundation that he controlled.

Similar to many others who have been accused of committing offshore tax evasion, Seggerman is expected to fully cooperate with U.S. authorities in exchange for the possibility of a reduced sentence. Seggerman is expected to testify on behalf of the U.S. in the trial of Michael Little, an attorney who advised the Seggermans on financial issues. Little, who is accused of operating an 11-year offshore tax fraud conspiracy, has pleaded not guilty and is awaiting trial. Additionally, three of Seggerman’s siblings have already pled guilty to conspiracy to defraud the United States and filing fraudulent tax returns. All three siblings are currently awaiting sentencing.

While no sentencing date has been set for Seggerman, he faces a maximum penalty of 11 years in federal prison. Additionally, he has already agreed to make a $600,000 restitution payment at the time of his sentencing; if the case follows past patterns it would not be surprising if the total restitution payments are in the 6 million dollar range.
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Tax Preparers Beware! 6th Circuit Court of Appeals Affirms Dismissal of Tax Refund Suit Due to Inability to Prove Timely Filing of Amended Return

April 11, 2013 | by Dennis N. Brager

The 6th Circuit recently taught an expensive lesson to a Michigan couple about carefully following procedure when dealing with tax problems and subsequent loss of their $64,000 refund occurred because of a seeming minor error. Following an IRS tax dispute began, as the IRS’ records stated that the envelope containing the Stockers’ amended 2003 return was postmarked four days late. Compounding the Stockers’ tax problems, the IRS failed to retain the postmarked envelope in question. Seeking help in their tax dispute the Stockers brought suit, but the District Court granted the IRS’ motion to dismiss for lack of jurisdiction due to the suit being barred as past the three-year period for filing a claim for a tax refund. On appeal, the 6th Circuit affirmed.

The 6th Circuit was unmoved by the Stockers’ attempts to prove the mailing date of their return through means other than those set forth in IRC Section 7502. As the IRS’ records indicated that the returns were postmarked four days late, the Stockers could not prove timely delivery under IRC Sec. 7502(a)(1), which states that the postmark of the returns establishes the date of mailing. Additionally, Mr. Stocker’s failure to obtain the certified mail receipt precluded the use of IRC section 7502(c)(1), which states that the “date of registration shall be deemed the postmark date”. The court rebuffed the Stockers’ attempts to prove timely delivery through circumstantial evidence; rather, the Court stated that its own precedent prevented any other method of proof. Finally, the court held that the District Court had not abused its discretion in refusing to draw the inference that the Stockers had timely filed their returns because of the IRS’ failure to retain the postmarked envelope in violation of internal policy.

Despite the seemingly minor nature of the Stockers’ mistakes, the 6th Circuit was highly unsympathetic to their plight. Ultimately, the court reiterated that only certain procedures are available to prove timely filing, and the Stockers’ own mistakes precluded them from receiving relief, despite their innocent nature. While calling it “unfortunate” that the Stockers could not prove the timeliness of their return, the court sent a strong message to taxpayers that it was unwilling to make exceptions for even the most innocent of mistakes.
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Prominent Tax Attorney Found Liable for Civil Tax Fraud Penalties Due to Finding of “Willful Blindness” to Underreporting of Income

March 20, 2013 | by Dennis N. Brager

After being convicted of criminal tax fraud and serving 18 months in federal prison, a prominent former California tax attorney recently found himself again the subject of an IRS investigation into his alleged tax fraud. After a criminal tax case that culminated in Owen G. Fiore’s guilty plea to tax evasion for the 1999 tax year, the IRS began to seek civil tax fraud penalties against Mr. Fiore for 1996 through 1999. Although Mr. Fiore conceded the tax disputes and the tax fraud charges for 1998 and 1999, he disputed his fraud liability for 1996 and 1997. While the Tax Court felt that it was unclear whether some of Mr. Fiore’s actions weighed in favor of a finding of tax fraud, the court took a novel approach and ultimately held that Mr. Fiore had been “willfully blind” to his unreported income, and consequently found him liable for tax fraud for the 1996 and 1997 tax years.

Borrowing heavily from criminal law principles and discussing relevant appellate jurisprudence on the issue, the Tax Court applied the infrequently-used (at least in the area of civil tax fraud) willful blindness concept to Mr. Fiore’s actions in the years in question. Specifically, the court stated that if the IRS could prove by clear and convincing evidence that Mr. Fiore was “aware of a high probability of unreported income or improper deductions” and “deliberately avoided steps to confirm this awareness,” the standard for civil tax fraud would be met.

Ultimately, the Tax Court found that Mr. Fiore met both prongs of the test for willful blindness. Discussing Mr. Fiore’s extensive work experience and education, the court found that such experience ensured that he was aware of the risk of underreporting his income through generally neglecting firm administration. Furthermore, the court discussed Mr. Fiore’s significant use of funds during the period in question, and inferred from this that he consciously chose to not pay taxes in order to have more funds on hand. As to the second prong of the test, the court found that since Fiore had access to bank statements, bills and deposit slips for each taxable year, yet failed to check them when preparing his tax returns, this constituted “deliberate” avoidance of steps to confirm the underreporting of his income.

After this discussion of Mr. Fiore’s tax return problems, the Tax Court concluded that the finding of willful blindness not only weighed in favor of tax fraud, but deserved “particular weight” in determining whether Mr. Fiore had committed tax fraud. When added to other factors such as Mr. Fiore’s repeated failure to cooperate in his IRS tax audits, consistent underreporting of income, and haphazard recordkeeping (none of which conclusively weighed in favor of a finding of tax fraud on their own), the court found that the IRS had met the burden of proof to show that Mr. Fiore committed tax fraud in 1996 and 1997.

San Diego Used Car Dealer Sentenced in Tax Fraud Case

January 28, 2013 | by Dennis N. Brager

Many people have the preconceived notion that used car salesmen are less than scrupulous and Mohammad Jafar Nikbakht didn’t do anything to help that stereotype. Late last year in the United States District Court for the Southern District of California, Mohammad Nikbakht aka Freydoon Nikbakht was sentenced to 15 months in prison for criminal tax fraud by filing fraudulent Forms 1040 for the years 2002, 2003 and 2004, again purposely understating his income. For the years 2006 and 2007 he didn’t file tax returns even though they were required. In his attempt to further criminally evade the income tax due and owing he operated a wholesale auto dealership under another dealer’s license and had all of his income payments made payable to either cash or his ex-wife in an effort to hide his income. He moved money into, out of and between various bank accounts to hide the money from the IRS and created a sham corporation, opening a bank account in that corporation’s name that he used to pay his personal expenses, again in a concerted effort to conceal his income.

Mr. Nikbakht eventually pled guilty to one count of the criminal tax indictment for 2007 with the remaining counts dismissed on the motion of the United States. In addition to 15 months in prison, Mr. Nikbakht was ordered to pay the IRS $124,454 in restitution and upon his release from prison will be on supervised release for three years. He will also be prohibited from opening checking accounts or incurring new credit card charges or opening additional lines of credit without approval of his probation officer.
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CPA Firm Dissed by 7th Circuit Court of Appeals

November 12, 2012 | by Dennis N. Brager

Our tax audits. The issue generally arises in closely held C corporations who pay out all of their profits as salary to the shareholders, rather than allocating any portion to dividends. The advantage is that salaries are deductible–dividends are not. An IRS tax audit can, however, result in the IRS denying a portion of the salaries as not being an ordinary and necessary business expense pursuant to tax attorneys that the CPA firm relied on the many individual employees of the firm who were “knowledgeable in income tax matters.” He wrote “… there was conflict in this case: taking advice from oneself.” But Judge Posner didn’t stop there. First he badmouthed the firm’s tax lawyers:

Remarkably, the firm’s lawyers (an accounting firm’s lawyers) appear not to understand the difference between compensation for services and compensation for capital, as when their reply brief states that the founding shareholders, because they “left funds in the taxpayer over the years to fund working capital,” “deserved more in compensation to take that fact into account.” True–but the “more” they “deserved” was not compensation “for personal services actually rendered.” Contributing capital is not a personal service. Had the founding shareholders lent capital to the company, as it appears they did, they could charge interest and the interest would be deductible by the corporation. They charged no interest (emphasis in original).

Not content with leaving it there Judge Posner finished up as follows:

We note in closing our puzzlement that the firm chose to organize as a conventional business corporation in the first place. But that was in 1979 and there were fewer pass-through options then than there are now; a general partnership would have been the obvious alternative but it would not have conferred limited liability, which protects members’ personal assets from a firm’s creditors.

Why the firm continued as a C corporation and sought to avoid double taxation by overstating deductions for business expenses, when reorganizing as a passthrough entity would have achieved the same result without inviting a legal challenge [citation omitted] is a greater puzzle.

The Tax Court was correct to disallow the deduction of the “consulting fees” from the firm’s taxable income and likewise correct to impose the 20 percent penalty. That an accounting firm should so screw up its taxes is the most remarkable feature of the case.

OUCH!
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Tax Evasion Conviction Affirmed by Seventh Circuit

August 14, 2012 | by Dennis N. Brager

The sentence of an individual who pled guilty to tax fraud was affirmed by the Seventh Circuit Court of Appeals. John McKinney was charged with eleven counts of tax evasion and conspiracy to defraud, impede, impair, obstruct and defeat the functions of the Internal Revenue Service (IRS) in the collection of income taxes. McKinney’s actions are a textbook example of how to turn a financial problem into a criminal tax problem.

McKinney and his brother owned a construction company. Mr. McKinney failed to pay his taxes seven years between 1999 and 2006. In 2003, the IRS placed federal tax liens against McKinney for taxes he owed. He avoided the taxes by transferring money earned from his company into separate nominee accounts, which the brothers used for personal and household expenditures. McKinney gave the IRS Revenue Officer false statements regarding his ability to pay his taxes.

When his wife and sister-in-law applied for residential mortgages, which McKinney was unable to qualify for because of the federal tax liens, McKinney falsely told loan officers that they were both full-time employees of his company. However, neither worked for the company or reported this employment on their tax returns. These financial transactions diverted business income earned by the brothers into assets owned by their wives, thereby avoiding IRS tax assessments and tax liens.

The brothers made false statements regarding their inability to pay income taxes, causing the unsuspecting IRS to close its investigation in 2007. However, the IRS discovered the brothers’ tax fraud, and charged the brothers in 2011. McKinney pleaded guilty to one count of conspiracy, one count of tax evasion and three counts of making false statements. He was sentenced to nearly five years imprisonment with three years of supervised release. The court also ordered him to pay $1.5 million in restitution.
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Builder’s Tax Problems are a Springboard to Criminal Tax Charges

August 8, 2012 | by Dennis N. Brager

A North Carolina residential builder was arrested on criminal tax charges stemming from his civil tax problems. The Department of Justice and the IRS announced that William B. Clayton was charged with one count of attempting to obstruct IRS efforts to collect his unpaid tax liabilities and one count of knowingly converting and disposing of U.S. government property.

According to the indictment Clayton failed to file income tax returns from 1999 to 2004. He never filed for extensions. In 2005 and 2006, the IRS began assessment and collection proceedings against Clayton. In 2007, Clayton hired a certified public accountant to represent him before the IRS, and the CPA prepared and filed delinquent tax returns for him. Based on these returns, the IRS reduced its prior tax assessments. However, Clayton did not pay his liabilities, and collection proceedings against him continued. No doubt that included tax levies, and tax liens.

Between 2007 and 2010, Clayton allegedly obstructed the IRS’ collection efforts. Clayton allegedly hid property located in Virginia, which he partially owned, from the IRS. According to the press release he destroyed property that he had previously built and owned but that the Service had seized. The IRS had planned to auction the property in an effort to pay down Clayton’s tax liabilities. However, Clayton allegedly destroyed parts of the property and vandalized others.

If convicted, Clayton could face a maximum potential sentence of three years in prison and a fine of $250,000 on the tax law obstruction charge, and 10 years imprisonment and a fine of $250,000 on the conversion of government property charge.

As the IRS and the Department of Justice point out in their press release an indictment is merely an accusation. The defendant is presumed innocent unless proven guilty beyond a reasonable doubt.

Still if the charges are true it should be a reminder to people not to allow their tax problems to turn into something worse. Depending upon Clayton’s finances, chances are he could have resolved his tax problems through an offer in compromise, or an installment payment agreement with the IRS, but instead he allowed things to proceed to a point where instead the IRS filed criminal tax charges.
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Preparers’ Tax Fraud Affirmed by the Fifth Circuit

August 6, 2012 | by Dennis N. Brager

The convictions of a couple that committed tax fraud were affirmed by the Fifth Circuit Court of Appeals. The husband and wife were the owners and operators of a firm that prepared personal income tax returns in Texas. Donald Womack misrepresented himself as an accountant who has previously worked for the IRS. His wife, Tonya, helped Mr. Womack with the business. Her role progressed until she began filing clients’ returns with the IRS electronically. The couple used the same electronic filing identification number (EFIN).

The IRS first noticed the Womacks based on the unusual deductions that were claimed on their clients’ returns. Several of the Womack’s clients testified against the couple, including one man who testified that Mr. Womack offered to provide false mileage logs to substantiate vehicle mileage deductions. Other former clients stated that they had never given the Womacks any information that would support the deductions that the couple claimed, such as charitable or mortgage-interest deductions. These clients are probably lucky they didn’t get charged with tax evasion themselves!

The government also used an undercover IRS special agent, who brought in his tax information to the couple. Although he had calculated that he owed $300, the Womacks gave him a choice of three tax refund amounts, ranging from $3,200 to $4,200. Mrs. Womack claimed that, although she had taken a tax preparation course, all of her errors were accidental. Mr. Womack did not offer any theory as to the cause of his inaccuracies.

A jury indicted the couple on 26 counts of conspiracy and aiding and assisting in the preparation of false tax returns. Mr. Womack was ordered to serve five years in prison, plus three years of supervised release. Mrs. Womack got off with three years of prison time, plus three years of supervised release. The court also ordered them to pay over $160,000 in restitution. This is over and above any civil tax preparer penalties that may be assessed against them under Internal Revenue Code (IRC) Section 6694.The Fifth Circuit affirmed their convictions in an unpublished opinion.
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