Source: http://federaltaxprocedure.blogspot.com/2012/
Timestamp: 2019-04-25 11:05:08+00:00

Document:
In ILM 201252015, here, the IRS reached some interesting conclusions regarding the statute of limitations. The ILM blazes no new legal trails, but is a helpful reminder of the rules that it applied.
I tried to develop a simplified set of facts that would illustrate the facts in the ILM but could not because there are some confusing dates which are identified by pseudonyms rather than actual dates. If I had the actual dates it would likely not be confusing. So, I will simply state the key legal propositions asserted in the ILM.
1. The normal statute of limitations is 3 years. Section 6501(a).
2. The normal statute may be extended by agreement. Section 6501(c)(4). In this case it was by Form 872 Consent, which extends to a date stated.
3. In the case of an amended return filed within the 60 day window of the statute expiration date (whether the normal statute or the extended statute), the assessment date expires no later than 60 days after the amended returns. Thus, for example, say that the year 01 return was timely filed on 4/15/02 and the normal statute date is 4/15/05. If the taxpayer files an amended return on 4/1/05, the statute to assess the tax reported on the amended return does not expire before 5/31/05 (60 days after 4/1/05).
4. Tax actually collected by the IRS while the assessment statute is still open is not an overpayment even if the IRS does not assess the tax until after the statute expiration date. Thus, in the above example, assume that the same example, except that (i) the taxpayer sent a payment of $100,000 with the amended 01 return filed 4/1/05; (ii) the IRS posts the payment to the year 01 on 4/3/05; but (iii) the IRS does not assess until 9/1/05 (well after the period for assessment, even after the Section 6501(c)(7) 60 minimum extension). There is still no overpayment because the IRS timely collected the tax.
With that background, the following legal analysis in the ILM is helpful.
UVA Law School, here, where I went to law school, has a much more diverse student body than when I went -- in a lot of ways. But more diversity is welcome. I offer the following picture from Staci Zaretsky, Caption Contest Winner: Law School Has Gone to the Dogs (Above The Law Blog 12/20/12), here. Wonder if dogs are graded on the same curve as other students?
In Ford Motor Co. v. United States, 2012 U.S. App. LEXIS 25725 (6th Cir. 2012) (unpublished), here, the Sixth Circuit denied the taxpayer a claim for refund for interest that the taxpayer alleged should have accrued in its favor while a remittance was on deposit with the IRS at the taxpayer's request. These were deposits for years prior to Section 6603's effective date (October 22, 2004); readers will recall that Section 6603, here, now provides a statutory regime for deposits for what previously was a court created regime emanating from Rosenman v. United States, 323 U.S. 658 (1945). Contrary to prior law (under Rosenman), Section 6603 does allow interest on the disputable amount of a deposit during the time of the deposit. But, as noted, that was not the law prior to Section 6603. At least that is what everyone except Ford Motor Co. and its counsel thought.
The government seizes upon the plain meaning of the word "payment," arguing that there can be no overpayment until there has actually been a payment—and there was no payment until Ford requested that its deposits be converted into tax payments. Prior to that point, Ford's remittances were, at its own request, treated as deposits in the nature of a cash bond and Ford could have requested their return at any time. As Revenue Procedure 84-58 § 2.03 clearly states, "[a] deposit in the nature of a cash bond is not a payment of tax." Accordingly, the government argues that it does not owe Ford interest from the date of the original remittances because they were indisputably made only as deposits, not as payments of any tax obligation.
But, wait, this taxpayer argued.
Ford counters that the "most appropriate starting point" is not § 6611, but rather § 6601, the provision that governs underpayment interest. First, Ford contends that these two sections should be interpreted symmetrically because they both use very similar language, compare § 6601 ("date paid"), with § 6611 ("date of the overpayment"), and both deal with the accrual of interest on tax payments. Second, Ford notes that under § 6601(a), only a "payment" stops the accrual of underpayment interest against a taxpayer, and since a deposit in the form of a cash bond stops the accrual of interest from the date it is remitted, Rev. Proc. 84-58 § 5.01, that deposit must be considered a payment under § 6601(a). And because a deposit is treated as a payment for underpayment interest purposes under § 6601, it should also be considered a payment for overpayment interest purposes under § 6611. In other words, if a mere deposit stops the accrual of underpayment interest, then a mere deposit must also start the accrual of overpayment interest.
Where the IRS satisfies the Code requirement of an explanation, there are some practical pressures to force the IRS to make it a reasonably good explanation. As noted above, the statute does require that the IRS determine a deficiency. One court has held that where the notice of deficiency explains the deficiency based on facts that patently do not exist, then the IRS has not met the requirement that it make a deficiency determination. In that case, Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), the notice of deficiency said that it was disallowing a deduction for certain tax shelter partnership items with respect to a named partnership. The taxpayer was not a partner in the named partnership. The taxpayer was a partner in a tax shelter partnership with another name, and it is likely that the IRS just plugged in the wrong name on the notice of deficiency. Moreover, the notice of deficiency indicated that the IRS had not actually examined the taxpayer’s return but just calculated the tax proposed in the notice at the highest marginal rate rather than the progressive income tax rates. The Ninth Circuit held that, on these facts on the face of the notice of deficiency, the IRS had made no determination as required by § 6212. The result was that the notice of deficiency was invalid. The invalidity of the notice of deficiency meant that the statute of limitations on assessment was not suspended under § 6503 and, by the time the IRS realized the error (i.e., when the Court of Appeals pronounced the notice invalid), the statute of limitations on assessments had likely expired. Cases since Scar have read the holding narrowly; a notice of deficiency will be not honored “only where the notice of deficiency reveals on its face that the Commissioner failed to make a determination.” As a result, Scar is an outlier, with its analysis and holding rarely invalidating a notice of deficiency.
The foregoing paragraph is a revision of the one currently appearing the 2012 versions as follows: footnoted version at pp. 450-451; and nonfootnoted version pp. 332-333.
Tax Courts Rejects the Accuracy Related Penalty in Hokey Tax Shelter (12/10/12).
In Rawls Trading, L.P. v. Commissioner, T.C. Memo 2012-340, here, the Tax Court (Judge Vasquez) bought the taxpayer's assertions that he had reasonable cause for relying upon the accountant referred to him by the promoter, Mr. Poster. The taxpayer used Mr. Poster for the partnership return instead of taxpayer's regular accountant. The law firm referred by the promoter, Lewis Rice, had drafted a more-likely-than-not opinion but declined to finalize it because of concern about one aspect of the opinion. The promoter explained to the taxpayer that the law firm was wrong. So, essentially, the taxpayer's reliance was upon the promoter and the accountant referred by the promoter.
This is an unusual win for the taxpayer, so practitioners wanting to replicate the win should pray for similar facts and Judge Vasquez to decide the issue when litigated.
We conclude that Mr. Rawls relied in good faith on Mr. Poster's advice. Mr. Rawls credibly testified that he was "very emphatic with Larry that we should absolutely be compliant with the Tax Code and complete in our disclosure, and he said we absolutely were." This is consistent with Mr. Poster's testimony that they had "always assumed that these transactions would be audited."
If any amount of tax is not paid on or before the last date prescribed for payment, interest on such amount at the underpayment rate established under section 6621 shall be paid for the period from such last date to the date paid. I.R.C. § 6601(a). Similarly, interest shall be paid on any unpaid amount of tax from the last date prescribed for payment of the tax (determined without regard to any extension of time for payment) to the date on which payment is received. Treas. Reg. § 301.6601-1(a)(1). The due date of a gift-tax return is generally April 15th of the year following the year in which the gift was made. I.R.C. § 6075(b). In general, the date prescribed for payment is the time fixed for filing the return, determined without regard to any extension of time for filing. I.R.C. § 6151(a). For determining interest on underpayments, "the last date prescribed for payment" is determined without regard to any extension for payment or filing. I.R.C. § 6601(b)(1). In this case, the assessment will be made for the Year 1 tax year; the due date of the Year 1 gift tax return was Date 1. Underpayment interest will thus run on the assessed deficiency from Date 1. I.R.C. § 6601(a).
A recent district court case denying a discharge in bankruptcy serves as a warning for taxpayers and practitioners. Rossman v. United States, 2012 Bankr. LEXIS 5615 (Bkr Ct D MA 2012), here. 11 USC § 523(a)(1)(C), here, titled Exceptions to Discharge, provides in part relevant that a discharge does not apply to any tax "(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." The question is whether nonpayment can constitute an attempt to evade or defeat tax.
The opinion is long, so I won't try to summarize it here. The tax arose from a tax shelter investment in the 1980s. The tax was thus a 1980s tax with resulting substantial interest now well exceeding the amount of the tax liability. The aggregate liability was now substantial. The shelter was a hokey shelter that has been litigated over many years, but by the early 2000s, although the taxpayer's case had not yet resulted in an assessment, the liability was clear and the assessment was only a matter of time. The assessment was made by 2004.
After the date that he knew of the liability and after the assessment was made, the taxpayer earned substantial amounts of income. Taxpayer made no payments. And, although there appeared to be no evidence of a profligate lifestyle, the taxpayer failed to explain why he could not have made substantial payments during the period, given the amount of his income.
The record is devoid of any direct evidence of the Debtor's willful intent to evade taxes in the form of implausible or inconsistent explanations of behavior; inadequate financial records; transfers of assets that greatly reduce assets subject to IRS execution; and transfers made in the face of serious financial difficulties. See Beninati, 438 B.R. at 758. Similarly, the Debtor did not engage in any manipulative conduct by failing to make estimated payments or failing to pay annual taxes after 1986 when due, and there was no evidence that he routinely applied for extensions of time within which to file returns. See Lacheen v. IRS (In re Lacheen), 365 B.R. 475, 484-86. Indeed, the Debtor testified, and the IRS did not dispute, that, with the exception of his tax liabilities from Rancho Madera Partners and Vista Ag-Realty Partners, Rossman paid all federal and state taxes on time and in full from 1987 to the commencement of his bankruptcy case.
We focus now on the issues confronting the taxpayer in making the payment of less than the amount of the IRS assessment. The question here is whether the taxpayer can designate as among the various components of aggregate tax owed (e.g., as among years or within the same year as among taxes, penalties and interest).
The taxpayer is permitted generally to so designate a voluntary payment to the IRS. Voluntary for this purpose means any payment not resulting from the Government’s compulsory collection measures (e.g., levy), that we discuss later in this chapter. If, however, the taxpayer fails to designate the application of the payment, the IRS can apply the payment as it sees fit.
I thought it might be helpful for students of the appellate process (hopefully some tax procedure students will be interested) to know of this article by Judge Diane P. Wood of the Seventh Circuit Court of Appeals: Diane P. Wood, When to Hold, When to Fold and When to Reshuffle: The Art of Decisionmaking on a Multi-Member Court, 100 Calif. L. Rev. 1445 (2012), here. Judge Wood makes some salient observations about opinion writing in the appellate process. Students can read and enjoy.
With regard to respondent's legal argument, we note generally that our jurisdiction in CDP cases is limited to a review of the Commissioner's CDP "determinations". Sec. 6330(d)(1). Once the CDP hearing is concluded, the statutory scheme provides a separate venue for review of a new collection alternative or to address a material change in a taxpayer's financial circumstance—namely, an appeal to the Appeals Office under its retained jurisdiction provided in section 6330(d)(2). The exercise of retained jurisdiction by the Appeals Office does not constitute a continuation of the original CDP proceeding, and the limitations periods that are suspended during CDP hearings are not suspended during review under section 6330(d)(2). The Commissioner's decisions made under section 6330(d)(2) cannot be appealed to this Court. See sec. 301.6320-1(h)(2), Q&A-H2, Proced. & Admin. Regs.; sec. 301.6330-1(h)(2), Q&A-H2, Proced. & Admin. Regs. Consideration and hearings under section 6330(d)(2) are subsequent to and separate from the original CDP hearing and are solely administrative.
Respondent disagrees with petitioners and with a suggestion made in a number of our opinions that we have the authority to remand CDP cases to the Appeals Office merely where a remand may be regarded as "helpful", "necessary", "productive", and/or due to "changed circumstances." See e.g., Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008); Lunsford v. Commissioner, 117 T.C. 183; Kuretski v. Commissioner, T.C. Memo. 2012-262, at *11; Churchill v. Commissioner, T.C. Memo. 2011-182. Respondent contends that, absent the exercise of an abuse of discretion by the settlement officer or a defective or incomplete administrative record, this Court lacks any remand authority in CDP cases.
In light of our factual resolution of the issue before us in these cases, we do not address that legal question.
We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques.
SSRN Link for download here.
Ms. Lederman is Professor of Tax Law at Indiana University Maurer School of Law. Her bio page at that law school is here.
Here is the Introduction to the Lederman article.
The Internal Revenue Code (Code) generally is the fi rst place to look when confronting a federal tax question, but it is important to recognize that much federal tax law is not statutory. The U.S. Department of the Treasury (Treasury) promulgates regulations, and the Internal Revenue Service (IRS) issues important guidance, such as Revenue Rulings, Revenue Procedures, and Notices (Hickman, 2009). Federal courts interpret all of these authorities. In order to understand and apply federal tax law, it is important to appreciate the role that federal trial courts, Courts of Appeals, and the U.S. Supreme Court play in developing the law. This essay provides an overview of federal tax litigation, discusses the deference courts give to guidance issued by the Treasury and IRS, and discusses when taxpayers have “standing” to challenge the tax laws in court. The essay also discusses cases in which Congress may step in to amend the Code following a court decision.
For thirty-five years, the 1944 case of Skidmore v. Swift & Co. presented the primary method for judicial review of administrative guidance created under Congress’s general grant of rulemaking authority. In 1979, a new standard was created in what became known as the tax-specific deference standard of National Muffler Dealers Association v. United States. Five years later, the Supreme Court held in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. that a separate and much more deferential standard should apply to final regulations drafted pursuant to a general grant of authority.
The Chevron decision cast doubt upon the viability of both Skidmore and National Muffler since it was unclear whether the decision applied to all regulations promulgated pursuant to general grants of authority and whether it applied to tax-related guidance. This confusion persisted until the Court decided two cases in 2000 and 2001 that distinguished between Skidmore and Chevron deference. Unfortunately, the Court’s distinction did not provide specific or uniform direction for the treatment of all general authority guidance and to this day the Court has failed to give clearer instruction.
In early 2011, the Court took a step closer to addressing the treatment of non-regulation general authority guidance by considering final regulations in the tax context. In Mayo Foundation for Medical Education and Research v. United States, the Court conclusively answered the question concerning which standard (Chevron or National Muffler) applies to final Treasury regulations promulgated pursuant to the general grant of authority. The Court concluded—without attempting to overturn or replace National Muffler—that all final regulations should be reviewed under Chevron. However, the court failed to address the still unsettled question of which standard to apply to guidance other than final regulations, which can come in many forms and accounts for the vast majority of guidance available to taxpayers. Presently, the default review standard is Skidmore, but National Muffler provides a more balanced approach that can be applied to all forms of general authority regulations rather than just non-regulation guidance.
This Essay explores the various standards of deference the Supreme Court has applied to general authority guidance over the past sixty-eight years and concludes that the Court should revive National Muffler as the dominant standard in the tax context. Part I discusses the role that deference plays in deciding tax-related issues in court, specifically presenting the current application of final Treasury regulations for background. Part II examines the path the Supreme Court followed in establishing and applying judicial deference from Skidmore through Mayo. Part III discusses the necessity of the Mayo decision, analyzes its holding, addresses the weaknesses of the existing standard for general authority guidance, and proposes a broad application of the former tax-specific standard from National Muffler. Part IV offers concluding remarks.
The JCT is a bipartisan committee of ten members of the House and Senate tax‐writing committees, and exists principally to provide justification for its staff. The committee does not report legislation, and rarely convenes hearings or performs other traditional functions of a legislative committee. The staff of the JCT — currently including about 50 economists, lawyers, and accountants — assists every member of Congress at each stage of the tax legislative process, and provides a source of tax expertise that is independent of the executive branch. The staff is nonpartisan rather than bipartisan; unlike staff supporting most other Congressional committees (including certain joint committees), the JCT staff is not affiliated with any party and is not separated into majority and minority party staff members.
Although the staff serves all of Congress, its principal duty is to be a policy advisor to the chairs, ranking members, and other members of the tax‐writing committees. In this role, the staff helps to develop, analyze, and evaluate many tax policy options for those committees and assists with all of the legislative tasks necessary for enactment of a bill. In addition, the staff provides the official revenue estimates used by Congress for all proposed tax legislation. The staff also reviews all tax refunds in excess of $2 million and monitors the administration of the tax laws by the IRS. Occasionally, the staff performs tax‐related investigations, such as examining President Nixon’s tax returns and the tax positions of the Enron Corp. The JCT and its chief of staff are given direct access to otherwise confidential tax return information and permitted to delegate that access to others.
In Tucker v. Commissioner, 676 F.3d 1120 (D.C. Cir. 2012), here, the D.C. Circuit rejected the taxpayer's Appointments Clause arguments that IRS Appeals personnel who hear CDP appeals are "inferior Officers" within the meaning of the Appointments Clause. The Apppointments Clause issue is an important, but arcane area of constitutional law, at least in the context of tax cases. So, I will not address that issue in this blog. The taxpayer filed a petition for certiorari on the issue. I have just reviewed the United States' Brief in Opposition, here, to the granting of certiorari and offer excerpts here to remind students of the background for CDP Appeals which is an important area of the tax practice.
1. After making an assessment of taxes, the Secretary of the Treasury, acting through the Internal Revenue Service (IRS), must notify the taxpayer of the assessment and demand payment. 26 U.S.C. 6303. If the taxpayer then neglects or refuses to pay such a tax, the (1) amount due becomes a "lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. 6321. That lien, however, is not self-executing. The IRS may file a notice of lien under 26 U.S.C. 6323 or seek to collect the tax by levy under 26 U.S.C. 6331(a).
In 1998, Congress enacted 26 U.S.C. 6320 and 6330, which generally give a taxpayer the right to a hearing that reviews the propriety of collection activity after a notice of federal tax lien is filed or a notice of intent to levy is issued. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3401, 112 Stat. 746. Such a hearing -- known as a "collection due process" or "CDP" hearing -- is "held by the Internal Revenue Service Office of Appeals" (Appeals Office), 26 U.S.C. 6320(b)(1), 6330(b)(1), and is "conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax" at issue. 26 U.S.C. 6320(b)(3), 6330(b)(3). If the only issue raised relates to collection, the person conducting the hearing will generally be a "Settlement Officer"; if the underlying tax liability is also disputed, that person will be an "Appeals Officer." See Pet. App. 61a; Internal Revenue Manual (I.R.M.) 8.22.4.5.1, 8.22.4.5.2 (Mar. 29, 2012).
The IRS has issued a new version of the Bankruptcy Tax Guide, Publication 908 (October 2012). The pdf version is here and the html version is here.
If you are a debtor in a bankruptcy case, the bankruptcy court may enter an order providing you with a discharge of debts. However, not all of your debts may be discharged. The scope of the bankruptcy discharge depends on the chapter you are in and the nature of the debt. Many tax debts are excepted from the bankruptcy discharge.
If you are an individual under chapter 7, the following tax debts, including interest, are not subject to discharge: taxes entitled to eighth priority, taxes for which no return was filed, taxes for which a return was filed late after 2 years before the bankruptcy petition was filed, taxes for which a fraudulent return was filed, and taxes that you willfully attempted to evade or defeat. Penalties in a chapter 7 case are dischargeable unless the event that gave rise to the penalty occurred within 3 years of the bankruptcy and the penalty relates to a tax that is not discharged. Corporations and other entities that are not individuals do not receive a discharge in chapter 7 cases.
The same exceptions to discharge that apply to individuals in chapter 7 cases apply to individuals in chapter 11 cases. Different rules apply for corporations. A corporation in chapter 11 may receive a broad discharge when the plan is confirmed, but secured and priority claims must be satisfied under the plan and there is an exception to discharge for taxes for which the debtor filed a fraudulent return or willfully attempted to evade or defeat, for bankruptcy cases filed after October 16, 2005.
In my Federal Tax Procedure course (and I presume similar courses taught by others), we cover the principal fora to litigate tax disputes. Historically, tax disputes were litigated in the district courts and sometimes in the predecessor to the Court of Federal Claims. With the enactment of the broader based income tax after the 16th Amendment, Congress felt that there were two key problems with the refund fora -- (i) the requirement of prepayment and (ii) the sometimes daunting technicalities of pleading and proof particularly in the district courts prior to adopt Federal Rules. Accordingly, Congress created the Board of Tax Appeals to offer a prepayment tax litigation forum and a less technically daunting litigation experience.
The Board of Tax Appeals and its predecessor Tax Court occasionally struggled with the issue of the precise relationship of its jurisdiction to resolve tax disputes in comparison to that of the district court. This struggled evidenced itself in the issue of whether the Tax Court had jurisdiction to consider equitable concepts such as equitable recoupment that district courts could apply in resolving tax disputes. In our class, I assign Estate of Branson v. Commissioner, 264 F.3d 904 (9th Cir. 2001) here, that presents this issue well. The Branson decision is by Judge Sneed (Wikipedia entry here), formerly a tax professor at several law schools and then Dean at Duke before being appointed to the Ninth Circuit. There are technical jurisdictional issues involved because the Tax Court is a court of limited jurisdiction whereas the district court is a court of general jurisdiction. However, I thought the issue should always turn upon whether, given the purpose of the Tax Court (and its predecessor Board of Tax Appeals), different substantive results should obtain in the district court than in the Tax Court when these equitable concepts otherwise could apply. I think that there is no evidence that Congress intended such different results. The Tax Court now has these powers.
Regarding the differences in the Tax Court and the refund fora, I just re-read a delightful decision by Judge Henry Friendly of the Second Circuit Court of Appeals. Judge Friendly was one of the leading jurists of all time (Wikipedia entry here). In Paddock v. United States, 280 F.2d 563 (2d Cir. 1960), here, the Court held that the same requirement that the Government prove fraud applied in the district court as applied in the Tax Court. Congress expressly so provided as to the Tax Court in the predecessor to Section 7454(a) but did not make that provision applicable to the other fora. So, in this refund case, the Government rotely chanted the "money had and received" refund burden in Lewis v. Reynolds, 284 U.S. 281 (1931), here, that the taxpayer must prove the right to refund, including the amount, and thus argued that the taxpayer must prove the absence of fraud where the taxpayer wants a refund of a civil fraud penalty he paid. Essentially, working in the reverse, Judge Friendly was persuaded that Congress could not have wanted the IRS to bear that burden in a Tax Court case but not in a refund suit.
Judge Posner has been much in the news recently. Last night in the UH Tax Procedure Class we covered the Trust Fund Recovery Penalty ("TFRP"), also known as the responsible person penalty. In my Tax Procedure Book, I conclude my discussion of the TFRP with an extended quote from Judge Posner's decision in Mortenson v. National Union Fire Insurance Co., 249 F.3d 677 (7th Cir. 2001). I have included that conclusion in a prior blog titled Trust Fund Recovery Penalty (TFRP) Procedures (10/3/12), here. I therefore won't repeat it here, but encourage readers to go to that blog entry to read it. Judge Posner just has a way to summarize key concepts in memorable ways.
Judge Posner expounds on topics well beyond the law. Judge Posner and his colleague, Gary Becker, co-host a blog where they interact on significant issues of the day, particular in the intersection of the law and the economy. The Blog is called the Becker-Posner Blog. Judge Posner's Wikipedia entry is here; Gary Becker's Wikipedia entry is here. They recently had this exchange in two entries:: Richard Posner, Luck, Wealth, and Implications for Policy--Posner (The Becker-Posner Blog 10/14/12), here, and Gary Becker, Luck and Taxation-Becker (10/14/12), here.
TIGTA issued a report on the First Time Abate Penalty waiver of failure to file (FTF) and failure to pay penalties under Section 6651(a)(1) and (2). TIGTA, Penalty Abatement Procedures Should be Applied Consistently to All Taxpayers and Should Encourage Volulntary Compliance, Treasury Inspector General for Tax Administration (Ref. No. 2012-40-113 9/19/12), here.
The FTF penalty is usually 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. This penalty will not exceed 25 percent of the unpaid taxes. If a taxpayer files his or her tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
If a taxpayer does not pay all taxes owed by the due date, he or she will generally have to pay an FTP penalty of one-half of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of the unpaid taxes. The FTP penalty will continue to accrue after the initial assessment if the taxpayer fails to pay the total tax due when the tax return was due.
The IRS can abate both penalties under certain circumstances. Relief from these penalties is generally granted to taxpayers who show they exercised ordinary care and prudence, and failure to file or pay was due to reasonable cause and not due to willful neglect. However, beginning in Calendar Year 2001, the IRS began granting penalty relief under an Administrative Waiver known as the First-Time Abate (FTA). Using the FTA waiver, the IRS grants relief to taxpayers who receive an FTF or FTP penalty but have a compliant tax history for the prior three years. The FTA waiver applies only to a single tax year.
For further background, see IRM 20.1.1.3.6.1 (11-25-2011), titled First Time Abate (FTA), here.
John R. Graham, Michelle Hanlon, Terry Shevlin and Nemit Shroff, Incentives for Tax Planning and Avoidance: Evidence from the Field (SSRN 9/12/12), here.
We analyze survey responses from nearly 600 corporate tax executives to investigate firms’ incentives and disincentives for tax planning. While many researchers suspect that reputational concerns affect the degree to which managers engage in tax planning, this hypothesis is difficult to test with archival data because it is only possible to observe the firms that engage in tax planning and that get caught. Our survey allows us to investigate reputational influences and indeed we find that reputational concerns are important – 69% of executives rate reputation as important and the factor ranks second in order of importance among all factors explaining why firms do not adopt a potential tax planning strategy. We also find that financial accounting incentives play a role. For example, 84% of publicly traded firms respond that top management at their company cares at least as much about the GAAP ETR as they do about cash taxes paid and 57% of public firms say that increasing earnings per share is an important outcome from a tax planning strategy. Finally, we examine whether FIN 48 and SOX affected tax planning and relationships with auditors, as conjectured in prior research. Executive responses confirm these conjectures.
In Hovind v. Commissioner, T.C. Memo. 2012-281, here, the Tax Court decided decided that the taxpayer had "had unreported Schedule C income and expenses (collectively, net profit) attributable to Creation Science Evangelism (CSE) and Dinosaur Adventure Land (DAL) for each of the years at issue; " (ii) that the taxpayer whether petitioner is liable for additions to tax under section 6651(a)(1) for failing to timely file her income tax return for each of the years at issue; and (3) and that the taxpayer is liable for the fraud penalty under section 6663(a) for each of the years at issue.
Mr. Hovind established CSE in 1989. CSE purported to be a nondenominational religious organization that advocated the message of creation science and opposed the theory of evolution. CSE promoted its message through live lectures by Mr. Hovind and Eric Hovind. Mr. Hovind frequently traveled, domestically and internationally, for speaking engagements, and petitioner occasionally accompanied Mr. Hovind on these trips.
Trust Fund Recovery Penalty (TFRP) - § 6672.
The Internal Revenue Code requires employers to withhold social security and federal excise taxes from their employees' wages. The employer holds these monies in trust for the United States.§ 7501(a). Accordingly, courts often refer to the withheld amounts as “trust fund taxes”; these monies exist for the exclusive use of the government, not the employer. Payment of these trust fund taxes is not excused merely because as a matter of sound business judgment, the money was paid to suppliers in order to keep the corporation operating as a going concern – the government cannot be made an unwilling partner in a floundering business.
The Code assures compliance by the employer with its obligation to pay trust fund taxes by imposing personal liability on officers or agents of the employer responsible for the employer's decisions regarding withholding and payment of the taxes. Slodov v. United States, 436 U.S. 238 (1978). To that end, § 6672(a) of the Code provides that “[a]ny person required to collect, truthfully account for, and pay over any tax . . . who willfully fails” to do so shall be personally liable for “a penalty equal to the total amount of the tax evaded, or not . . . paid over.” § 6672(a). Although labeled as a “penalty," § 6672 does not actually punish; rather, it brings to the government only the same amount to which it was entitled by way of the tax.
I normally did not stoop to politics (at least overtly) in this blog. (Outside this blog, I do have opinions and sometimes express them.) However, where politics intersects the criminal tax law, well, I feel it appropriate to post something on this blog.
The political backdrop is that presidential candidate Mitt Romney apparently did not claim all of his tax deductions for charitable contributions. For most of us, that would seem odd. At the most basic level, many taxpayers cannot afford to forego deductions -- they need the tax savings. But money is one thing Mr. Romney has in abundance, so he does not have the same level of need and, to put it another way, he can easily afford to pay more tax than the law says he owes. Besides, he had the goal of claiming to the American public that he has paid tax at something like 14% (rather than something less) and thereby can empathize with the taxpaying public.
But that does raise an issue as to how he presents the forebearance on his returns. By reporting his taxable income and tax liability without claiming the deductions, has Mr. Romney done something immoral or even illegal?
TIGTA has a new report titled "Fiscal Year 2012 Statutory Review of Restrictions on Directly Contacting Taxpayers," TIGTA Reference No. 2012-30-089 (9/4/'12), here The IRS should contact only the designated taxpayer representative except in certain cases where advance approval to "bypass" has been obtained. See 26 C.F.R. § 601.506(b), here (containing the conditions for the bypass authority); see also this IRS memo dated 8/26/05 here (stating also that, even if the taxpayer contacts the IRS, the IRS should not have substantive discussions outside the presence of the representative).
IRS employees are required to stop an interview if the taxpayer requests to consult with a representative and may not bypass a representative without supervisory approval. Between October 2010 and September 2011, TIGTA’s Office of Investigations closed 19 direct contact complaints involving IRS employees, of which eight were disciplined or counseled for their actions by IRS management officials.
This audit was initiated because TIGTA is required to annually report on the IRS’s compliance with Internal Revenue Code Sections 7521(b)(2) and (c). The overall objective of this audit was to determine whether the IRS complied with the legal guidelines addressing the direct contact of taxpayers and their representatives.
The IRS has a number of policies and procedures in place to help ensure taxpayers are afforded the right to designate a qualified representative to act on their behalf in dealing with IRS personnel in a variety of tax matters. However, TIGTA reviewed a statistical sample of 73 of 25,264 Small Business/Self-Employed Division closed field collection investigations and found that revenue officers were not always involving representatives appropriately in some key actions.

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