Tax Problem Attorney Blog

Dennis Brager Quoted in the Daily Journal

April 2, 2008 | by Dennis N. Brager

California Certified Tax Specialist Dennis Brager the founder of the Brager Tax Law Group, a P.C. , was quoted in an article published in the March 7, 2008 edition of the Los Angeles and San Francisco Daily Journal, a leading California legal publication. The article discussed a new law which provides tax benefits for federal judges who sell their proposal to avoid recusals. Specifically Internal Revenue Code § 1043 provides that certain government officials such as federal judges including United States Tax Court judges who sells property to avoid conflict of interest rules may defer gain on the property if they acquire certain replacement property until the replacement property is sold.

If you have a tax problem and would like to have your case heard in the United States Tax Court, call tax litigation attorney Dennis Brager.

California State Board of Equalization (BOE) Loses Sales Tax Case

March 21, 2008 | by Dennis N. Brager

The California State Board of Equalization (BOE or SBE) was handed a defeat by the California Appellate Court in Dell Inc. v. Superior Court of San Francisco 159 Cal.App.4th 911 (2008) . The court held that the value of the Dell service contracts purchased by consumers was not subject to California Sales Tax even though the price of the contract was not separately stated in the invoice. The case has potentially wide reaching application to other California sales tax audits.

The facts in Dell indicated that the service contracts were optional, and that they were priced separately from the underlying computer equipment. For example, a consumer purchasing a computer could check a box on Dell’s website to add a service contract for an additional $x. The amount would be added to the purchase price but the invoice issued to the customer would indicate a lump sum price for the computer and the service contract. Everyone agreed that if sold separately the service contracts were intangible property, not subject to California sales tax. It was also agreed that if the Dell service contracts were sold with computers they would not be subject to California sales tax provided that the price of the sales contract is separately stated in the invoice or other contract of sale.

The BOE argued, however, that in the absence of a separate statement of the charge for the service contracts they are subject to California sales tax. The Court disagreed, and found that the transaction was a “mixed transaction” involving separately identifiable transfers of goods and services. It differentiated the sale from a “bundled transaction” involving goods and services that are inextricably intertwined in a single sale. As such as long as the value of the separable identified parts can be established then the value attributable to the transfer of intangible property or services is not subject to California sales tax.

Tax Return Preparer Penalty Procedures Announced by Internal Revenue Service (IRS)

March 7, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has issued a memorandum outlining its procedures for investigating tax preparers who show patterns of abuse, and thus may be subject to tax preparer penalties. The memo sets forth some interesting information. At least in cases initiated through LMSB (Large and Midsize Business) Division the approval of the IRS Director of Field Operations is necessary. Once an investigation has been approved the IRS may select up to 30 tax returns prepared by the preparer, and a tax audit of those returns will be opened. Of course this means that the tax return preparer’s clients will be contacted, and once the preparer’s client’s realize that they are being subjected to a tax audit solely because of who prepared their tax return it is likely they will find a new tax preparer in short order. They may also tell their friends, who are also clients, about their tax audit. In short a preparer investigation can quickly devastate a thriving practice even if the tax preparer is ultimately determined to have acted properly. For this reason it is critical that any hint of an IRS investigation must be responded to quickly, with the hope of rapidly putting it to an end.

If you are a tax preparer, and believe you may have been targeted by the IRS for a tax preparer penalty investigation contact California State Bar Certified Tax Specialist Dennis Brager.

Court OKs Internal Revenue Service (IRS) Tax Levy on Couple’s Home

February 29, 2008 | by Dennis N. Brager

A district court in Michigan dismissed a complaint challenging an Internal Revenue Service (IRS) tax levy on a couple’s home. The couple owed income taxes of around $300,000 and payroll taxes of another $161,000. They filed a quite title action pursuant to 28 USC 2410, and they also filed an unauthorized collection action under Internal Revenue Code § 7433 seeking damages. The court held that it lacked jurisdiction to hear either claim. With respect to the quiet title action such actions are available if an IRS tax lien is filed, but not when a tax levy is served. As most tax problem attorneys know there is a big difference between a tax lien and a tax levy, and the court held that the proper method of fighting a tax levy is not through a quiet title action.

The court also dismissed the unauthorized collection action because the couple hadn’t exhausted their administrative remedies. Internal Revenue Code § 7433 allows a taxpayer to sue the IRS if it has engaged in unlawful collection actions such as an improper tax levy; however Treas. Reg. § 301. 7433-1(d) bars a suit until after a claim has been filed with the IRS. Even though the couple had notified the IRS of their claim the court held that the format they used was incorrect since they didn’t address the claim to the right individual at the IRS, list their current home address and telephone number, or meet several other formalities.

The results in this case were not particularly surprising. It does, however, once again point out the importance of completely understanding all of the IRS rules and tax procedures. It also once again illustrates that the IRS can and does seize taxpayers’ homes, and those who assume it can’t happen are mistaken.

California Employment Development Department (EDD) and Internal Revenue (IRS) to Collaborate

February 21, 2008 | by Dennis N. Brager

The California Employment Development Department (EDD) announced that it will be exchanging payroll tax information with the Internal Revenue Service (IRS) . The EDD is the state agency which includes in its duties making sure that employers withhold and payover state payroll taxes. The EDD programs include payroll tax audits of business owners to make sure that all workers who have been treated as independent contractors are truly independent contractors, and not employees. In determining whether workers are properly classified the EDD sometimes relies on the 20 factor test set forth by the IRS in Rev. Proc. 87-41. It also relies on a 9 factor test set forth in the California Supreme Court case set forth in Tieberg v. California Unemployment Insurance Appeals Board (1970), 2 Cal. 3d 943 P. 2d 975; 88 Cal. Rptr. 175. The factors listed are:

1) Whether or not the one employed is engaged in a distinct occupation or business;

(2) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal or by a specialist without supervision;

Franchise Tax Board (FTB) Files Tax Evasion Charges

February 17, 2008 | by Dennis N. Brager

The Franchise Tax Board (FTB) announced that it has filed tax evasion charges against a Diamond Springs, California couple who failed to file income tax returns, and failed to report all of their income from their painting businesses on their California State income tax returns for four years running. According to the press release issued by the FTB the total tax, penalty and interest due is relatively small– $29,000. Nevertheless it is possible that they could be sentenced up to 12 years in jail. The couple was booked into the El Dorado County, California jail.

Clients sometimes ask me whether failing to file tax returns is tax fraud or tax evasion. There is a common belief that it is better not file a tax return at all rather than file an incorrect one. While it is true that at the federal level the IRS Criminal Investigation unit generally prosecutes failure to file cases as misdemeanors that is not always the case. Furthermore, as this press release illustrates the FTB can and does prosecute failure to file a tax return as a felony.

Some clients, and their CPAs also sometimes believe that because the amount of tax owed is small they don’t have to worry about tax fraud charges. While it is certainly true that the larger the amount owed the more likely criminal tax evasion charges become this prosecution demonstrates that even small amounts of tax can result in tax fraud charges being filed by the FTB.

Internal Revenue Service (IRS) Appeals Officer Not Impartial

February 15, 2008 | by Dennis N. Brager

The 10th Circuit Court of Appeals has reversed a decision of the United States Tax Court (Tax Court), and held that an Internal Revnue Service Appeals Officer was not impartial within the meaning of Internal Revenue Code (IRC) § 6330. Cox v. Commissioner, No. 06-9004 (2008), reversing, Cox v. Commissioner, 126 T.C. No.13 (2006). A taxpayer is generally entitled to a collection due process (CDP) hearing before an impartial Appeals Officer before the IRS may levy on his property. If the IRS files a tax lien the taxpayer is entitled to a hearing to contest the tax lien, but only after the tax lien has been filed. In Cox, the taxpayer had received a CDP hearing for the years 2000. In that hearing the Appeals Officer determined that he could not recommend an alternative to a levy since among other things the Coxes hadn’t paid their estimated taxes.

Subequently, the Coxes requested a CDP hearing with respect to the taxes they owed for 2001 and 2002. When the same Appeals Officer was assigned the CDP hearing the Coxes asked the case to be reassigned to a new Appeals Officer since, they argued, the Appeals Officer was not impartial because of his prior involvment. The IRS refused, and ultimately the Coxes appealed to the United States Tax Court. The Tax Court reviewed IRS Treas. Reg. § 301.6330-1(d)(2) which provides that even though an Appeals Officer has had prior involvement with the same taxpayers for a different tax year the Appeals Officer may still conduct the subsequent CDP hearing. The Tax Court upheld the IRS Regulation. On appeal, however, the 10th Circuit reversed. Arguably the 10th Circuit’s decision may be limited to the facts since in Cox the Appeals Officer had reviewed the 2001 and 2002 as part of his decision in the 2000 CDP hearing. In any event the Tax Court is not bound to follow the 10th Circuit’s ruling in cases that are not appealable to the 10th Circuit. Golsen v. Commissioner,54 T.C 742 (1970). It is not, however, unusual for the Tax Court to re-examine its decision where it has been reversed by a Circuit Court of Appeal even though it is not required to do so.

If you have IRS tax problems or California tax problems contact Los Angeles, California State Bar Certified Tax Specialist Dennis Brager.

Ron Isley Tax Evasion Sentence Upheld

February 14, 2008 | by Dennis N. Brager

Ron%20Isley%20Picture.jpg In September 2006 Ron Isley, lead singer of the Isley Brothers, was of convicted five counts of felony tax evasion and one count of willful failure to file his income tax returns. According to the Internal Revenue Service (IRS) at trial it proved that between 1997 and 2001 Isley evaded payment of $3.1 million dollars of income tax debts. The District Court sentenced Isley to 37 months in federal prison despite the fact that Isley had a series of health issues including kidney cancer, diabetes and a recent stroke. Isley appealed his tax fraud conviction, and earlier this month the 9th Circuit upheld his sentence. According to one article Isley is currently incarcerated at a federal prision in Indiana, and he has a projected release date of April 2010. Isley’s tax problems don’t end there. In addition to serving his time in prison Isley will be expected to liquidate his assets to pay his tax debts.

If you have tax problems call us at Brager Tax Law Group, A P.C

Tax Lien Release Regulations Issued by Internal Revenue Service (IRS)

February 11, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has published final regulations on releases of federal tax liens and discharges of property. These regulations provide rules for how to go about obtaining the release of a federal tax lien after the tax debt has been paid, or in situations where the statute of limitations on collecting the tax liability has expired.

The regulations also provide rules for obtaining tax lien releases in other situations. For example the IRS may issue a certificate of discharge if the IRS interest in the specific property subject to the IRS tax lien is worthless. This can be useful if you own real property which you would like to sell, but is encumbered by an IRS tax lien. Say your property is worth $500,000, and there is a first mortage of $550,000, followed by an IRS tax lien for $300,000. You would like to sell the property, and the bank has agreed to a short sale. The title company will not issue title insurance, and therefore you want be able to close on the sale without a release from the IRS. The regulations allow for the issuance of a certificate of discharge in this circumstance because the value of the IRS lien is zero. However, it can take some persuasion to get the IRS to issue the certificate of discharge, and the IRS is not required to issue the certificate. Our experience is that the IRS can take 30 days or more to issue a discharge of the tax lien. We recommend applying for a certificate of discharge as soon as you know you want to sell the property.

An important change to the final regulations requires to issue a certificate of release of the tax lien in situations where only one year of a multi-year tax lien has been satisfied. For example, the IRS may have filed a tax lien for the years 2000 through 2004. If you paid the tax for the year 2000, the IRS would not issue a tax lien release for the 2000 year. Under the new regulations the IRS is required to do so.

California State Board of Equalization (SBE) Lists Largest Delinquent California Sales Tax Debts

February 4, 2008 | by Dennis N. Brager

By law the California State Board of Equalization (SBE) is required to publish each quarter a list of the 250 sales and use tax debts owed to the California. In order to make this list the California sales tax debt must be over $100,000. However, the tax debt will not be listed if the taxpayer has contacted the SBE and made an installment agreement, or other arrangements such as an offer in compromise.

For the last quarter of 2007 the California sales tax debts on the list ranged from $17.5 million down to a low of “only” $362,297.09. Except for admitted sales taxes liability reported on a sales tax return filed with the California State Board of Equalization, the SBE can not generally bill additional sales taxes without affording the taxpayer a hearing before the 5 member Board of Equalization. For more information about the appeals process read our article.

If you have a California Sales Tax problem in excess of $75,000 please call California sales tax problem attorneys at Brager Tax Law Group, A P.C.