Tax Problem Attorney Blog

Tax Audits by Internal Revenue Service (IRS) Up

January 30, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) says that tax audits have increased during the fiscal year ended Sept. 30, 2007. For example the IRS audited 84% more returns of individuals with income of over $1 million dollars than the previous year. This amounted to a tax audit rate of almost 10%.Tax audits of individuals with income of $200,000 or more rose almost 30%. Overall the IRS conducted tax audits of more individuals than at any time since 1998.

Business also came in for an increased tax audit rate. S corporation tax audits were up 26%, and partnership tax audits were up by almost 25%.

Tax levies, and tax liens by the IRS were also a growth area, with the IRS filing 3.8 million tax levies and almost 700,000 tax liens during 2007

United States Tax Court Amends Rules for Access to Tax Documents

January 29, 2008 | by Dennis N. Brager

Chief Judge of the United States Tax Court John Colvin announced the other day that the Tax Court has adopted amendments to the Tax Court’s Rules of Practice and Procedure. Most of these changes are effective as of March 1, 2008. However, the rules relating to remote access to electronic files will be effective at some point in the future on a date to be announced by the Tax Court. For most taxpayers the Tax Court is the only place for a tax controversy to be heard by independent judge, and not the Internal Revenue Service. It is where the bulk of federal tax litigation occurs.

In the past when a Tax Court Petition was filed the Tax Court’s rules required that the taxpayer list his or her social security number along with his address. Due to privacy concerns new U.S. Tax Court Rule 20(b) provides for the submission of a separate statement with the taxpayer’s social security number. That statement will not, however, be part of the Court’s file, and hence not available to the general public. New Tax Court Rule 27 directs all parties including the IRS to redact taxpayer identification numbers, dates of birth, names of minor children and financial account numbers in filings with the Tax Court.

In addition U.S. Tax Court Rule 27(b) provides for internet access to case documents to the parties and their counsel.

Trust Fund Recovery Penalty (TFRP) Deadlines Shortened by Internal Revenue Service (IRS)

January 26, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) ( has reversed its previous lenient policy of allowing the IRS Appeals Division to consider untimely protests of the Trust Fund Recovery Penalty (TFRP). First, what is a trust fund recovery penalty? Actually, its not really a penalty. It’s simply a collection tool that the IRS uses to collect payroll taxes owed by corporations. Under Internal Revenue Code § 6672 the IRS may collect the trust fund portion of the taxes owed by a company from so-called responsible officers who willfully fail to collect or pay over payroll taxes.

The TFRP used to be known as the 100 per cent penalty, but the name probably created too much confusion so it was changed. Before the TFRP can be collected from an individual the IRS must issue a 60 day letter, allowing for a tax appeal to the IRS Appeals Division. In the past IRS procedures provided that even if a protest was filed late it would be forwarded to the Appeals Division for review. See IRM 5.7.6.1.6(5) (04-13-2006)

The IRS has issued an internal memorandum which provides that if the tax appeal is not filed in a timely manner than the case will not be heard. It’s definitely not the kinder gentler IRS.

Tax Fraud Conviction Appeal Heard by Supreme Court

January 25, 2008 | by Dennis N. Brager

On January 8th the Supreme Court heard oral arguments in the criminal tax appeal of Michael Boulware. The case involved the return of capital theory in criminal tax evasion cases. To make a long story shorter, Boulware was convicted of tax evasion in violation of Internal Revenue Code § 7201. Basically, he took money from his closely held corporation, and didn’t report it as income on his personal tax return.

In the District Court he argued that the funds he received were a return of capital he had invested in the corporation, and therefore were not income, and thus there was no tax deficiency. Of course if there was no tax due Boulware could not be convicted of tax evasion. The District Court precluded Boulware’s evidence on this point, and he appealed to the Ninth Circuit Court of Appeals. The 9th Circuit upheld conviction.United States v. Boulware, 470 F.3d 931, 933 (9th Cir. 2006).

The Ninth Circuit’s view was that a defendant in a criminal tax evasion case must show at the time the payments were made by the corporation there was a contemporaneous intent that they be a return of capital. This is despite the fact that the Ninth Circuit admitted that in a civil tax case there is no requirement of contemporaneous intent. The Second Circuit has ruled that no such proof of intent is required. United States v. D’Agostino, 145 F.3d 69, 72-73 (2d Cir. 1998); United States v. Bok, 156 F.3d 157, 162 (2d Cir. 1998). The Supreme Court agreed to hear the case to resolve the conflict.

Internal Revenue Service (IRS) Payroll Taxes Collected from Sole Member of LLC

January 25, 2008 | by Dennis N. Brager

Small businesses which get behind on their debts also often fail to pay their payroll taxes resulting in payroll tax problems for the owners. Not paying payroll taxes is a big mistake since the Internal Revenue Service (IRS) can collect the trust fund portion of the payroll tax debt from responsible officers of a corporation under Internal Revenue Code § 6672. Not all corporate shareholders , however, are necessarily persons liable for trust fund taxes under Internal Revenue Code § 6672. For example, if the payroll tax problems were concealed from the owner he might not be personally liable. Some tax lawyers may have thought that an LLC would provide similar protection for its members, but that’s not always true.

According to the Second Circuit Court of Appeals in New York that’s not the case for a sole member of an LLC. McNamee v. IRS, 488 F. 3d 100 (2nd Circuit 2007). McNamee, who was apparently an accountant (I don’t know whether he was a CPA), represented himself in court, and didn’t have a tax lawyer. McNamee was the sole member of a limited liability company formed under Connecticut state law. Like most states, Connecticut provides that a member of a single owner LLC is generally not liable for its debts.

IRS regulations allow single-owner limited liability company to choose whether to be treated as a corporation–or to be disregarded as a separate entity. If an LLC elects to be treated as a corporation the owner is subject to double taxation–once at the corporate level and once at the individual shareholder level. On the other hand, the LLC may chooses not to be treated as a corporation, either by affirmative election or by the failure to make any election. In the later instance IRS regulations provide that the LLC is disregarded, and that the member is fully liable not just for the trust fund taxes, but all the payroll taxes including interest and penalties accrued on the overdue payroll taxes. The Second Circuit Court of Appeals found that the IRS regulations were valid, and in so doing hit McNamee personally with a large tax debt.

Wrongful Levy Claim Instructions Provided by Internal Revenue Service (“IRS”)

January 22, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has provided new instructions for persons who wish to file wrongful levy claims against the IRS pursuant to Internal Revenue Code § 6343(b). These instructions are set forth in IRS Publication 4528 (Rev. Nov. 2007). If the IRS were to take your property to pay taxes that someone else owed a wrongful levy claim is one of the ways to get your property back.

Why would the IRS seize your property to pay someone else’s taxes? Well it might just be a mistake, but that’s unlikely. One way it might happen is if a closely held corporation ran into IRS or California payroll tax problems. Perhaps the owner decided that rather than deal with this tax problem he would start another company; we will call it “Newco.” When the IRS gets wind of this if it determines that Newco is a transferee, nominee or alter ego of the original company (let’s call it “Oldco”) it will levy (that is seize) the assets of Newco to satisfy the payroll tax liability of Oldco.

Newco may have some defenses to the IRS levy. For example in some cases if Newco paid fair market value for the assets of Oldco it is possible that Newco may not be responsible for Oldco’s payroll taxes. In order to get the money back it would be appropriate to file a wrongful levy claim with the IRS. Another possible remedy is to file suit in United States District Court under Internal Revenue Code Section 7426(a)(1).

Internal Revenue Service (IRS) in Payroll Tax Dispute with FedEx

January 22, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) is in a payroll tax dispute with FedEx, and the IRS is proposing to assess tax and penalties against FedEx because it believes that the company has improperly classified its drivers as independent contractors rather than employees. According to FedEx if the IRS prevails the amounts due for 2002 will be in excess of $319 million. FedEx believes, however, it has “strong defenses.”

Payroll tax disputes with the IRS over whether workers are employees or independent contractor are quite common, in part because of the difficulty of determining the proper worker classifications. The IRS employees a 20 factor test in making this determination. This test has is set forth in IRS Rev. Rul. 87-41 . These factors are not weighted equally but must be evaluated in accordance with their significance in each particular case. No one factor is controlling. The 20 factors set forth in the ruling are:

1. Instructions

Internal Revenue Service (IRS) Warns About Tax Preparer Fraud

January 20, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has issued FS 2008-10 warning taxpayers about tax fraud by tax preparers. The IRS points out that while most tax return preparers are honest a few are not, and that taxpayers need to be careful when choosing a tax return preparer. While it may seem like a tax preparer who’s willing to break the rules may save you some money in the long run it’s the taxpayer not the tax preparer who will pay the additional taxes, plus penalties and interest. As the IRS points out tax evasion or tax fraud is a felony punishable by years in prison, and a $250,000 fine.

A few of the IRS suggestions for finding a reputable tax preparer include:

Avoid preparers who base their fee on a percentage of the amount of the refund.

Internal Revenue Service (“IRS”) Interest Rates Drops According to Notice 746

January 16, 2008 | by Dennis N. Brager

The Internal Revenue Service (“IRS”) has released Notice 746 which provides information about penalties and interest, and lists the latest interest rates. According to the notice interest rates will go down one percentage point in January.

Not surprisingly the IRS generally pays 1% less on money it owes to taxpayers (overpayments) then it expects taxpayers to pay to it (underpayments). Interest is compounded daily, and is in addition to penalties. The interest rates on underpayments and overpayments are as follows:

Periods	Percentage Rates
	Underpayment	Overpayment
July 1, 1996 through March 31, 1998	9	8
April 1, 1998 through December 31, 1998	8	7
January 1, 1999 through March 31, 1999	7	7
April 1, 1999 through March 31, 2000	8	8
April 1, 2000 through March 31, 2001	9	9
April 1, 2001 through June 30, 2001	8	8
July 1, 2001 through December 31, 2001	7	7
January 1, 2002 through December 31, 2002	6	6
January 1, 2003 through September 30, 2003	5	5
October 1, 2003 through March 31, 2004	4	4
April 1, 2004 through June 30, 2004	5	5
July 1, 2004 through September 30, 2004	4	4
October 1, 2004 through March 31, 2005	5	5
April 1, 2005 through September 30, 2005	6	6
October 1, 2005 through June 30, 2006	7	7
July 1, 2006 through December 31, 2007	8	8
Beginning January 1, 2008	7	7

Different rates may apply to corporations, or to certain tax motivated transactions. If you owe the IRS more than $75,000 and would like to find out if you can settle for less with the IRS contact tax problem attorney Dennis Brager.

Internal Revenue Service (IRS) Extends Trust Fund Tax Express Installment Agreements Program

January 11, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has extended its policy of granting express installment agreements for in business trust fund taxes through at least June 6, 2008. See IRS Memo dated June 6, 2007 Express installment agreements are available to in-business taxpayers who have payroll tax problems of less than $10,000. These taxpayers may allowed to enter into installment agreements without providing a completed Collection Information Statement (IRS Form 433-B). An express installment agreement can’t last longer than 24 months. Taxpayers requesting express installment agreements must be in compliance with all IRS tax deposit and tax filing requirements as set forth in Internal Revenue Manual (IRM) 5.14.1.5.1. In addition if a taxpayer qualifies for an express installment agreement then:

• No Trust Fund Recovery Penalty determination is required; however the revenue officer must ensure that the Assessment Statute Expiration Date (ASED) is protected.

• No managerial approval is required.