January 2008 Archives

Tax Audits by Internal Revenue Service (IRS) Up

January 30, 2008,

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

Contact Los Angeles, California Brager Tax Law Group, A P.C. if you or your business needs help with a tax audit, tax appeal or tax debt.

United States Tax Court Amends Rules for Access to Tax Documents

January 29, 2008,

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.

Although the U.S. Tax Court is located in Washington, D.C. it holds hearings around the United States including Los Angeles, San Francisco, San Diego, and Fresno, California.

If you have a tax dispute with the IRS, and need tax litigation or tax controversy help please contact the Southern California tax lawyers at Brager Tax Law Group, A P.C. We handle cases not only in the United States Tax Court, but also the federal district courts, and the United States Court of Federal Claims.

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

January 26, 2008,

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.

If you receive any notice from the IRS its very important that you respond in the manner set forth in the notice, and during the stated time frame. If you fail to do so you may lose important rights.

If you have received a notice from the IRS that you may owe payroll taxes totaling over more than $75,000 contact Los Angeles, California tax problem lawyer Dennis Brager.

Tax Fraud Conviction Appeal Heard by Supreme Court

January 25, 2008,

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.

The Ninth Circuit’s opinion in Boulware, which is based on it’s previous holding in United States v. Miller, 545 F.2d 1204 (9th Cir. 1976). Despite the fact that Miller has been on the books for over 30 years its implications are quite shocking. It appears that under the Ninth Circuit’s decisions Boulware could be go to prison, and yet ultimately the U.S. Tax Court could conclude that he owed no taxes. This leads to another question. Generally the sentencing guidelines are based upon the tax loss to the government. If there is no civil tax loss to the government shouldn’t the sentence be very low? Apparently not since Boulware was sentenced to 51 to 60 months on tax evasion and conspiracy charges.

Stay tuned to find out what the Supreme Court decides.

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

January 25, 2008,

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.

The rules are different for a multi-member LLCs which is classified by default as a partnership. According to IRS Revenue Ruling 2004-41, absent special circumstances such as transferee liability, members of such entities are not personally liable for payroll tax debts of the LLC without a separate assessment by the IRS under Internal Revenue Code § 6672.

If you or your company has a tax dispute contact Brager Tax Law Group, A P.C. Our tax lawyers represent companies and individuals all over California including Los Angeles County, Orange County, the Inland Empire, San Bernardino County, and Riverside County including the cities of Newport Beach, Laguna Beach, San Juan Capistrano, San Clemente, Mission Viejo, Laguna Niguel, Laguna Hills, Dana Point, Huntington Beach, Long Beach, Costa Mesa, Anaheim and Santa Ana with payroll tax problems with the California Employment Development Department (EDD), and the IRS.

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

January 22, 2008,

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).

Perhaps the most important thing to know about a wrongful levy claim is that it must be made within 9 months of the seizure, so you need to act very quickly. If you think that the IRS has improperly served a levy on your property please contact the California tax lawyers at Brager Tax Law Group, A P.C.

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

January 22, 2008,

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
2. Training
3. Integration
4. Services rendered personally
5. Hiring, supervising and paying assistants
6. Continuing relationship
7. Set hours of work
8. Full time required
9. Doing work on employer's premises
10. Order or sequence set
11. Oral or written reports
12. Payment by hour, week, month
13. Payment of Business and/or traveling expenses
14. Furnishing of tools and materials
15. Significant Investment
16. Realization of profit or loss
17. Working for more than one firm at a time
18. Making services available to the general public
19. Right to discharge
20. Right to terminate

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Brager Tax Law Group, A P.C. has successfully defended many payroll tax audits involving the classification of employees and independent contractors. Please contact Dennis Brager if you would like our help.

Internal Revenue Service (IRS) Warns About Tax Preparer Fraud

January 20, 2008,

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.

Review your return before you sign it and ask questions on entries you don't understand

Find out the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared

The IRS also states: “Reputable preparers will ask to see your receipts.” Here we have to disagree with the IRS. Many reputable tax return preparers DO NOT ask to see receipts; nor are they required to. Recent guidance, by the IRS with respect to tax return preparer penalties pursuant to Internal Revenue Code Section 6694 confirms this. See IRS Notice 2008-13. While it may be helpful for a tax return preparer to look at some of your receipts to get a sense of whether you are doing a good job with your recordkeeping looking at all your receipts will in most cases land you with a bill larger than necessary.

Brager Tax Law Group, A P.C. represents taxpayers who have had tax returns prepared improperly. We also represent tax return preparers including attorneys, CPAs and enrolled agents who have been accused of preparing improper tax returns for their clients. For more information contact California tax attorney Dennis Brager.

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

January 16, 2008,

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,

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.
• A lien determination is required.

Thus in all probability even if an express installment agreement is granted then an IRS tax lien will be filed. See IRM 5.12.2.4.2.

If you or your company owes in excess of $75,000 in payroll taxes to the IRS or have other IRS or California payroll tax problems call California tax attorney Dennis Brager.

California Franchise Tax Board (FTB) Must Send All Notices to Taxpayers’ Last Known Address

January 8, 2008,

The Internal Revenue Service (IRS) has long been required to send notices to a Taxpayer’s last known address. However, California state law has never specifically provided the address to which notices are sent, although according to the legislative history the California Franchise Tax Board (FTB) has as a matter of internal practice generally followed the IRS rules. New legislation which is effective on Jan. 1, 2008, now requires that the FTB send notices to a taxpayer’s last know address. Much like federal law the new state law defines “last know address” as the address that appears on the taxpayer's last return filed with the FTB, unless the taxpayer has provided to the Franchise Tax Board clear and concise written or electronic notification of a different address, or the Franchise Tax Board has an address it has reason to believe is the most current address for the taxpayer. Revenue and Taxation Code 18416(c).

TIP. If you move after you have filed your federal or state income tax returns it’s a good idea to notify both the IRS, and Franchise Tax Board, just in case they want to contact you. Who knows, sometimes they actually need your address to send you good news.

If you are undergoing a tax audit, and you move it would be foolhardy not to notify them. Why? This is one time when out of sight, out of mind it is not a good rule to rely on. If the IRS or the FTB sends a notice to your last know address, and you don’t get it because you have moved you are still responsible for responding in a timely fashion. If you don’t you could be subject to penalties, or lose various rights of appeal. In my practice I consistently meet with new clients who have lost their rights because they didn’t receive IRS and FTB notices because they moved, and didn’t notify the taxing agencies. On the other hand, Brager Tax Law Group has had great success helping clients who didn’t receive notices because the IRS failed to follow its own procedures in determining their last known address.

Offer in Compromise Rejected by United States Tax Court

January 8, 2008,

The United States Tax Court recently held that it could not consider a couple’s offer in compromise based upon doubt as to liability since it was a challenge to the underlying tax liability. In Baltic v. Commissioner, 129 T.C. No. 19 (2007) the Internal Revenue Service (IRS) had issued a notice of deficiency to the Baltics, but the Baltics did not file a Petition with the Tax Court. Later, after the IRS filed a lien, they filed a Request for a Collection Due Process Hearing, and submitted an offer in compromise based upon doubt as to liability, arguing that the notice of deficiency was in error. The IRS Appeals Officer refused to consider the offer in compromise, and the Baltics appealed that decision to the Tax Court.

Not surprisingly, the Tax Court held the offer in compromise based upon doubt as to liability was simply a method of challenging the underlying tax liability, and since the Baltics could have filed a petition with the Tax Court at the time they received their notice of deficiency they were barred from disputing the tax liability in the Collection Due Process Hearing.

The Baltics could have filed an offer in compromise based upon doubt as to collectibility, and the IRS would have been forced to act on it, and if it was denied then the Baltics could have had the Tax Court review that determination. Perhaps the Baltics didn’t file an offer in compromise based upon doubt as to collectibility because they thought they wouldn’t have qualified for one, but whatever the reason their attempt at getting the Tax Court to consider whether they actually owed the amount the IRS claimed was rebuffed.

The Brager Tax Law Group, a P.C. has filed many sucessful offers in compromise. If you owe $75,000 or more please contact us.

Internal Revenue Service’s (IRS) Taxpayer Advocate Releases Annual Report

January 7, 2008,

The Internal Revenue Service’s (IRS) Taxpayer Advocate Nina Olsen has released her 2007 Annual Report to Congress. It consists of two large volumes outlining:

• The Most Serious Problems Encountered by Taxpayers
• Key Legislative Recommendations, and Additional Legislative Recommendations
• Most Litigated Issues
• Case and Systemic Advocacy.

The Taxpayer Advocate’s Report has a great deal to say, and we will be commenting on many of those items over the next months. Number 9 on the list is tax preparer penalties, and the bypass of taxpayer representatives including tax attorneys, and CPAs. The Taxpayer Advocate’s Report criticizes the IRS for not doing more to enforce tax preparer penalties. She notes that only $2.8 million in penalties were assessed for FYE Sept. 2007. However, this is about a 50% increase over the prior year.

The Internal Revenue Service’s top tax attorney, IRS Chief Counsel Don Korb has already been quoted in IRS Notice, IR-2007-213 as saying that looking at the tax preparer penalty regulations will be a “top priority” for the IRS in 2008. It looks like a bumpy ride for tax preparers, tax attorneys, and CPAs in 2008.

If you are a tax preparer, tax attorney, or CPA who has been targeted by the IRS, contact California State Bar Certified Tax Specialist Dennis Brager.

California Franchise Tax Board (FTB) Tough on Missing Forms 1099 and W-2s

January 5, 2008,

The California Franchise Tax Board (FTB) has been given the green light by the California Legislature to disallow deductions for payments made for personal services if the payor fails to provide a Form 1099 or a W-2. For many years the California Revenue and Taxation Code has provided that the FTB may disallow any deductions for personal services if the individual making the payments fails to file the appropriate reporting forms when due. An identical statute applies to corporations. There was some concern that there were technical problems with the statute so the FTB sponsored a bill to “clarify” the statute. That bill became effective on January 1, 2008.

Note that the statute says “may” not must or will. This leaves some room for arguing that this discretion should not be exercised, perhaps because the failure to file the documents wasn’t willful, or was otherwise due to excusable neglect.

In addition to the deductions being disallowed taxpayers can be hit with a penalty of $50 for each form not filed. Perhaps that’s not much for each form, but for even a mid-size company it can add up pretty quickly. In addition the Internal Revenue Service (IRS) imposes a $50 penalty under Internal Revenue Code § 6721, and in cases of intentional disregard of the filing requirement the penalty goes to $100 per form.

If you have a California income tax audit or a IRS or California tax dispute, and you need tax representation call the Southern California tax lawyers at Brager Tax Law Group, A P.C. We represent clients with California tax problems in Los Angeles County, Orange County, Riverside County, and the rest of Southern California, and the country.