Source: https://procedurallytaxing.com/category/information-document-request-idr/
Timestamp: 2019-04-18 23:16:40+00:00

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A special thanks to our frequent guest blogger, Carlton Smith, who over the last few weeks has provided us with quite a few posts. Les, Keith and I have been extremely busy with various projects, which Carl knows, and he offered to do some extra writing to ensure the blog had quality content over that period. The posts have all been wonderful, and we are indebted to him for that.
This past June, the D.C. Circuit ruled that there was no separation of powers issue because (1) the Tax Court, while defined as an Article I (Congressional) court in section 7441, was really, for most constitutional purposes, an Article II Executive Agency exercising executive functions, and (2) there is no problem in the President, who heads the Executive Branch, ever having the power to remove officers of an Executive Agency.
The taxpayer has filed for cert., which has not yet been reviewed. Miami attorney, Joe DiRuzzo (who seems to get his hands on cases with most interesting procedure issues), in late December and early January, filed Kuretski-like motions in various Tax Court cases appealable to various Circuits asking the Tax Court to declare the 7443(f) removal power unconstitutional. In a couple of those cases, the Service was given a healthy amount of time to respond, until March 9th. The Service has requested another sixty days to coordinate its response at the highest levels of Counsel’s office (not a direct quote, but pretty close–we can provide a copy of the motion, if you are interested). That is a lot of time to coordinate a response, and it would be reasonable to assume this has something to do with what is or is not happening with the Kuretski. I’m sure we will have continuing coverage as this moves forward (or doesn’t move forward).
As Les discussed here, the IRS has completed a new online directory of tax return preparers …and in completely unrelated news has warned tax return preparers to watch out for new phishing scams from bogus emails targeting preparers.
Do you hate it when your clients fail to pay your bills? Want to stick it to them, and force them to pay tax on the discharge of that indebtedness by issuing a Form 1099-C. OPR thinks that might reflect negatively on your character and fitness to practice before the Service. OPR did not provide an opinion, but found that only an “applicable entity” had to file such a form, which is defined as various government entities, “applicable financial entities” or other organizations that engage in lending. Further, whether a debt can be discharged is a question of fact, and it “generally occurs when a taxpayer receives funds that are not includible in income, because the taxpayer is obligated to repay the obligation,” not when there is a disagreement about fees for services owed. OPR stated that if a practitioner was not following these substantive rules, that could be problematic for the practitioner under Circular 230, as the practitioner would have a duty to know those laws before issuing an IRS form. See in particular Circ. 230, Section 10.22(a).
The District Court for the Western District of North Carolina, in Carriker v. United States, has partially dismissed an accountant’s attempt to collect attorney’s fees for the accountant defending his CPA license before a state board that he claimed was related to an IRS controversy. The Court found these were not proceedings “by or against” the United States under Section 7430. Similarly, the Code did not provide for fees for the accountant’s time helping his lawyer on the project. The claims related to fees for the underlying IRS controversy were not dismissed.
The Service issued a taxpayer favorable PLR on seeking discretionary relief for late recharacterization of a Roth IRA conversion back to a normal IRA in PLR 201506015. Under the PLR, the taxpayer converted his IRA to a Roth, and a few weeks later invested in a company on his financial advisor’s advice. That company, through other investments, either stole or lost the money, and fraudulent provided incorrect statements regarding the investment’s value. Because of this, the taxpayer had no reason to recharacterize his IRA back to a Roth. After the period for making such an election, the taxpayer found out about the fraud. Taxpayers are, under certain circumstances, allowed to convert their traditional IRA to a Roth IRA. This requires the taxpayer to pay the income tax due on the distribution, but no penalty. If the value of the account decreasing significantly immediately after the conversion, taxpayers may want to recharacterize and obtain a refund of the tax due. There are certain time limits within which the election must be made. Under Treas. Reg. § 301.9100-3(b)(1), the Service has discretion to allow late relief in certain circumstances. One of which is when the taxpayer “failed to make an election because, after exercising due diligence, the taxpayer was unaware of the necessity for the election.” The Service found the fraud caused the taxpayer to be “unaware of the necessity for the election” and allowed the late election. This is arguably a broad, taxpayer friendly, view of when a taxpayer will be aware of something and what is a necessity.
The Service has issued its internal guidance regarding Letter 5262-D in estate and gift audits. This guidance discusses how the auditor should handle a case that was not settled based on how cooperative the taxpayer was. It covers when a 30 day letter can be issued, how additional information must be requested, and when a 90 day letter must go out. If you don’t respond to those IDRs, you are probably getting a ticket to Tax Court.
Next time the ABA Tax Section meets in San Francisco, we may need to take a field trip to the bar from this next case. In Estate of Fenta v. Comm’r, the Tax Court found the taxpayer was not entitled to litigation and administrative costs, as the IRS was substantially justified (too bad, because I think the fees would have gone to a low income taxpayer clinic). The action in this case surrounded the Lakeside Lounge, which might be this joint. The Lounge appears to be a dive bar, that earned a substantial portion of its income from the sale of booze, largely in cash transactions. In a fact pattern that would not be surprising to any IRS agent, it was believed that the bar was not reporting all of its income. Below is a quick note on how the Service calculated the deficiency and on why no costs were awarded.
The taxpayer wasn’t excited to hand over the books and records, and after a few summonses, the Service determined the business was not keeping adequate books and records. Using the invoices for the alcohol purchased by the bar, the Service applied the “percentage-markup” analysis (which the California taxing authority had previously used) to determine the under reporting of the income. This is one of the methods used by the IRS during audits of cash intensive businesses – here is a portion of the IRS’ audit guide on the topic. For bars, this is calculated by taking “liquor purchases divided by average drinks per bottle times average price per drink with allowance for spillage.” There are a lot of things practitioners and the Service can quibble about in this calculation. The Service issued its notice of deficiency, and the taxpayer petitioned the court. Prior to a hearing, the matter was largely settled and a stipulated settlement was filed with the court.
In the instant case, it does not appear a qualified offer was made, so the Tax Court did a Section 7430(c)(4)(A) review to determine if the taxpayer substantially prevailed. In this case, the Service largely argued that it was substantially justified in its position because Mr. Fenta failed to provide various receipts until after he filed his petition. Once the Service received those items, it settled. The Court agreed with the Service. Interestingly, the Court did not indicate whether the Service argued that the settlement precluded fees. I was too lazy (busy) to pull the briefs to see if the Service did not argue the same or if the Court found it more appropriate to only discuss the substantially justified argument.
whether a Massachusetts state income tax return filed after the date by which Massachusetts requires such returns to be filed constitutes a “return” under 11 U.S.C. § 523(a) such that unpaid taxes due under the return can be discharged in bankruptcy.
The Court, joining a recent Tenth Circuit decision, held “we conclude that it does not.” The Court found persuasive the holding in Mallo v. Internal Revenue Service, where the Tenth Circuit held late filed returns were not returns for the applicable paragraph in the bankruptcy code. Keith had a great write up of Mallo found here (comments are worth a review also).
From the Federal Tax Crimes Blog, Jack Townsend discusses the DOJ press release regarding another plea deal for a UBS client. Jack quotes the release and then covers his thoughts, which are insightful, as always. Great point about the taxpayer’s lie to the Service in a meeting potentially extending the statute on the underlying crime (and being a crime itself).
We hope you all had a wonderful 4th of July! Here is the Summary Opinions for two weeks ago, which would have been posted last week but we had too much other great content. Last week’s SumOp will be posted later this week.
Special thanks to our guest posters from two weeks ago. Stu Gibson wrote a really wonderful post on Clarke, highlighting the pros and cons of the decision. Not to be outdone, Professors Stephanie Hoffer and Christopher Walker provided additional commentary on the Kuretstki decision, including responses to comments made by Patrick Smith and Kristin Hickman.
From the Post and Shell E-Flash, comes an excellent write up of the In Re Kellogg Brown & Root case decided by the DC Circuit Court of Appeals reaffirming attorney-client privilege to documents created for internal investigations for corporate compliance. The post contains a nice summary of the background on privilege and the four main holdings in the case. The last of which the authors found to be the most important, where the Court reversed the District Court in applying the “primary purpose” test as a “but for” test or a “sole purpose” test. The post also contains a number of practice tips I would commend to readers, including when to mark documents as privileged and when to include counsel to ensure protection of communications.
Wells Fargo had a busy week last week. We will be writing up a post on a case decided last week in favor of Wells Fargo regarding what constitutes the “same taxpayer” in a merger, when offsetting underpayments and overpayments. The case was very timely, as it impacts interest calculations, and Les just submitted a revised Chapter 6 on Interest for Saltzman and Book, which should be available this fall. The US District Court for the District of Minnesota ruled against WF’s last week on its objections to the master’s application of privilege. The Court did not put stock in WF’s claim that the master lacked the authority to determine the matter, and quickly moved to the privilege question. The Court found there was no evidence that the in-house lawyers were reviewing the documents in question for legal accuracy or for legal advice, but instead only for factual accuracy. It is worth mentioning that the attorneys were not the original drafters off the board memorandums in question, and that the Court did not find actual evidence that the memorandums were actually reviewed by in-house counsel. I would suggest in-house and corporate counsel review the suggestions in the Post and Shell blog post above, as it is possible that these memorandums could have been privileged if handled in a different manner.
On Jack Townsend’s Federal Tax Crimes Blog, he has posted a letter from the IRS to Congressman Bill Posey defending the implementation of FATCA. And, also from Jack’s blog, an excerpt from the JCT report on proposed changes to the multilateral convention on tax administration, which has a summary of the laws of international enforcement.
Paul Daugerdas was sentenced last week to 15 years in the slammer for orchestrating one of the largest tax fraud schemes in US history. Here is the DOJ release. Tax Girl has some wonderful and comprehensive coverage here. Every time I see white collar criminals going to jail, I immediately think of Office Space. I would link to the scene, but I think it is too inappropriate for our blog.
I’m not sure this counts as procedure or policy, but we’ve reserved the right to write about other things that interest us. In United States v. Peters, the ED of Missouri, has held that a taxpayer could not characterize a sale forced by a court as an involuntary conversion under Section 1033. It appears that the taxpayers did not actually follow the Section 1033 requirements, which was probably fatal, but what I found interesting was that the holding states this would not have qualified because the taxpayers originally agreed to the sale of the property. Around closing, the taxpayers walked away from the sale, and the purchaser sued for specific performance, and won. The Court concluded that was a voluntary sale, and the other court was simply enforcing the terms of the contract. This makes sense to me, but I had never researched the issue and found the holding interesting. I couldn’t find a free link yet, but the case number is 4:12CV01395 AGF.
I am working with Les on Chapter 5 of Saltz and Book right now, which deals with statutes of limitations, and I think this Chief Counsel Advice will make its way into the revised chapter, as well as the revised chapter on returns (Chapter 4). In CCA 201425011, the Service indicated a P’ship or LLC return that was filed but not signed by an authorized person is not a valid return, but this does not impact the limitations period for the partners, as the partners’ returns are the applicable return for starting the statute. This does not offer any new guidance, but in the CCA the pass-through nature of the return alters the general rule that would otherwise provide that the failure to submit a valid return triggers an indefinite SOL on assessment.
If you intentionally ignore your mail and actively thwart delivery, you aren’t going to be able to claim you never received notice of your notice of deficiency and question the underlying tax. See Onyango v. Comm’r.
Daisy Barton, from www.accounting-degree.org, asked me to post this infographic her page created on tax policy and income inequality. I have not fact checked this content.
In honor of Presidents’ Day (yesterday), here is a copy of the NYT’s front page the day Vice President Agnew admitted to tax fraud. Also, a special thanks to Jamie Andree for her Valentine’s Day Innocent Spouse post. Good stuff this week. Updates on the IDR process, Ty Warner, and the King of Pop. Also some new summons cases, NPR commentary, and the depressing Treasury budget.
Oh, and Keith is featured in the newest edition of the Tax Lawyer, with his article, Taxation with Representation: The Creation and Development of Low-Income Taxpayer Clinics. TaxProfBlog has coverage.
The new IDR process for large cases, which Keith has discussed before here, has been delayed. Initially, the procedures were to be effective January 2, 2014, but have now been pushed out until March 3, 2014 to allow LB&I to clarify how they work. The news release can be found here.
The DOJ has filed a protective appeal in the Ty Warner case relating to the sentencing of the Beanie Baby mogul. Jack Townsend’s Federal Tax Crimes Blog has a post with more details and some quotes found here. Readers will probably recall that Mr. Warner only received probation for his substantial tax evasion. The protective appeal does not mean the DOJ will proceed with the appeal, but is simply a notice protecting its rights while it makes a decision. Mr. Townsend indicates in his post that although the sentence seemed light, the DOJ would likely have an uphill battle to overturn the Judge.
The Tax Times has a post regarding the new federal budget, and the 4.4% cut in the IRS budget for the year. It will be interesting to see what the IRS automates this year (link is to my post last week on the increased use of automated services, and the reduced ability to get advice from a person at the Service). USA Today had a related article about the poor customer service by the Service.
From the MauledAgain blog on February 14, James Maule wrote about income inequality in light of the debate about how terrible things are for the much maligned ultra-rich (except Ty Warner, who should be ecstatic about probation). Related, here is an article about Larry Summers and the Downton Abbey economy.
NPR Investments, LLC –which I’m fairly certain is how Nova, The Street, and Downton Abbey get all their scratch — lost again against the Service, with the Fifth Circuit upholding the District Court’s imposition of penalties, and which found the Service acted properly in issuing a second FPAA a few months after issuing a no-change letter for the same tax year. The Miller and Chevalier blog has coverage, and a copy of the opinion here. The M&C blog did not find the FPAA item as interesting as I did, but I will still cover it in a bit of detail. In general, Section 6223(f) provides that only one FPAA should be issued for any given year. Taxpayer success!?!? But, there is a provision that allows the Service to issue a second when the taxpayer is a real jerk (“absence a showing of fraud, malfeasance, or misrepresentation of a material fact”). The Fifth Circuit found that checking the box indicating the entity was not a TEFRA partnership on its return was sufficient to meet that jerk standard. I believe this is the only Circuit Court to have reviewed this matter. Interestingly, reliance by the Service and the intent of the taxpayer were not particularly important in the analysis.
Some of this has to be sensationalized, right? The Journal of All that is Correct and Respectable, TMZ, is covering the tax troubles of Michael Jackson’s Estate, which apparently took the position that MJ’s net worth at death was around $7MM. The Service, however, thought that amount was slightly closer to $1.125BB. What a Thriller. Dollar here, dollar there, and it starts to add up. The Service told the estate to Beat It and doubled the penalty due to the Bad numbers under Section 6662(h)(1). Apparently, the Service is seeking $702MM, which is enough to make you Scream. These matters are never Black or White, and the amount will probably end up in the middle, but the estate’s position seems Dangerous and borderline (Smooth) Criminal. It is Human Nature to want to reduce your tax bill…I should stop, this is getting pretty silly.
A few summons orders were issued. First, an order quashing an attempt to block the IRS from seeking information from banks in the United States that was done by the Service to assist the Competent Authority for India in investigating the taxpayer in India. The taxpayer argued an improper purpose, but the Court found the Service statements that the competent authority request was valid was sufficient to carry the Service’s slight burden. SCOTUS will be hearing an improper purpose case in Clarke shortly (covered in SumOp before), where it will determine if a taxpayer is entitled to a hearing after alleging improper purpose. We will be following Clarke closely.
The second summons case involved a tax attorney trying to quash a summons based on confidentiality, but the case was dismissed because of procedural defects. In Patel v. United States, decided in March of 2013, the Southern District of Florida dismissed the motion to quash because the filing party (a third party) was not entitled to file a motion to quash, which is reserved for only the taxpayer under Section 7609.
As the director of a low income taxpayer clinic, I do not expect the new Information Document Request (IDR) procedures to have much impact on my clients. I read the new provisions, however, with a smile on my face and will follow with interest their further development.
About 20 years ago the IRS began putting significant emphasis on large cases and obtaining legal assistance in those case. It was a good idea later carried out much more effectively in the reorganization of 1998 with the creation of a division within Chief Counsel’s Office just to provide assistance on these important cases. As with any good bureaucratic idea, the idea to get counsel more involved with large cases came with goals. In this instance the goals were placed on Chief Counsel field managers of which I was one. As the District Counsel in Richmond, I, and my fellow district counsels around the country, were given numerical goals of numbers of hours we were to have our offices devote to large cases. Using goals in this manner sought to ensure that we would not ignore large cases since doing so would adversely affect our evaluations.
So, I set out to offer the services of my office to the large case teams in Virginia auditing the Commonwealth’s largest corporations. The problem I encountered was that they did not want my services. Despite well-crafted explanations of how the attorneys in my office could assist them during their examinations of large corporations, I could not generate referrals of questions that would allow me to come even close to meeting the goal for hours for the year. The reason that the large case managers did not want the services of lawyers no doubt had many bases partially rooted in their culture which could not be changed with the insertion of a goal in my performance plan (and not theirs) and partially rooted in a failure to train them on the benefits we might bring. From my perspective, however, the principal reason I could not get the large case managers and their agents to call upon my office for assistance was grounded in one word – information.
Large case examiners work in teams and spend most of their time at the taxpayer’s worksite. They would get frustrated with the taxpayers for not providing information on a timely basis. Occasionally, they felt that taxpayers purposefully hid information or failed to produce it because the taxpayer knew that doing so would likely result in an adverse determination. In these circumstances, the large case examiners would come to my office and ask what they should do. We would politely listen to them and advise them that the information could be easily obtained through a summons.
Using the word “summons” had the same effect as suggesting there was a vampire in the room. The examiners would immediately do the IRS equivalent of holding up a cross to ward off the evil being and proceed to tell us how they could not possibly dream of issuing a summons. After going through this routine a few times, the large case examiners learned not to ask us for advice on how to get information the large corporations were reluctant to provide, and we learned that advising them to issue a summons was a useless exercise.
This brings us to the second lesson about the government and bureaucratic behavior. The first lesson perhaps too cryptically alluded to above was that goals are great to influence behavior but if only one party has the goal and the other party does not want your services, meeting the goal becomes impossible. Meaningful goals require situations in which the party upon whom the goal is placed has sufficient control of the situation to actually meet the goal. If insufficient control exists, the goal is simply an exercise in frustration.
The second lesson relates to the large case examiners perspective and needs. Twenty years ago these examiners had at least two reasons for not wanting to issue a summons and I suspect these two reasons still exist which is why the new procedures have been issued. The first part of this lesson relates to the professional goals of the large case examiners. They have time frames placed upon them within which they should complete their examinations. Issuing a summons can significantly delay completion and places control outside of the examiners and into the hands of attorneys and the courts. Even though the large case examiners lose control over the time frame for obtaining information they still must report on how their examinations are progressing and explain on a regular basis to higher and higher levels of the organization why they have not achieved the goals set for them. Sure, they can say it is out of their control but who wants to keep saying that. It does not make them look good. That was one of the biggest problems 20 years ago. I suspect it still exists as a reason for resistance to the issuance of summons. The lesson is that if you really want large case examiners to issue summons, reward them for doing so rather than punishing them. Bureaucrats respond to rewards. Of course, no one wants a system that rewards examiners for issuing summonses rather than obtaining the information through a voluntary exchange but rewards could come in ways that do not directly encourage the issuance of summons but rather focus on the quality of the information gathered in the most effective means while lessening the penalty of having to repeatedly write to explain the status of an overage case.
The second lesson has a personal aspect to it as well. As mentioned above, the large case examiners work on the site of the taxpayer. As such, they have strong personal incentives to maintain good relationships with the tax manager and the corporation they are examining. I felt that a subtle part of the reaction I received when suggesting that large case examiners issue a summons to the corporation they were examining came from the examiners’ desire to work in an office with a window rather than in the boiler room. I have no basis for that observation other than a general sense of human nature. I do not know enough about the dynamics of large case examinations to know how to fix this issue, if in fact it is an issue, but I think it is part of the dynamic that plays into the decision on whether to issue a summons. Once the summons is issued the cordial relationship that may otherwise exist between the large case examiners and those within the corporation with who they interface quickly breaks down as battle lines are drawn.
The new procedures clearly go to some lengths to seek to avoid battle lines being drawn. The statute in no way requires such an elaborate dance before issuing a summons but these procedures have a rather drawn out three step process with informal discussions followed by two warning periods. I generally do not like mandatory provisions such as these and think reliance on the judgment of the examiners should prevail; however, the dynamics at play in a large case examination make mandatory provisions a good buffer for the examiners trying to maintain good relations and meet time frames. The use of these procedures might sufficiently change the culture of large case examinations to make information gathering easier instead of the hide and seek game it can sometimes become.
Drawing on my current experience, I can offer a different type of solution. Low income taxpayers never meet the person examining their return because no one person examines their returns. The returns of low income taxpayers get examined in correspondence exam by a pool of IRS employees no one of whom has responsibility for the case. These employees build up no relationships with the taxpayers and have no difficulty at all setting arbitrary deadlines with short fuses. I suggest that each large case exam team have correspondence examination assigned to it for purposes of information gathering. When the large corporation does not quickly respond to the request for information, that information gathering aspect of the case is simply turned over to correspondence exam. Correspondence exam will set short, non-negotiable deadlines. The workers in correspondence exam will not feel any pressure of personal relationships since each time the corporate tax manager calls a different correspondence examiner will answer (after the appropriate wait time) and will accept few excuses for not providing the information within the somewhat arbitrarily set deadline. The correspondence examination function can then make the referral for summons enforcement if the information is not forthcoming with the stated time period leaving the large case examiners to continue their good relations with the corporate tax manager.

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