Recently in Tax Disputes Category

Tax Preparers Beware! 6th Circuit Court of Appeals Affirms Dismissal of Tax Refund Suit Due to Inability to Prove Timely Filing of Amended Return

April 11, 2013,

The 6th Circuit recently taught an expensive lesson to a Michigan couple about carefully following procedure when dealing with IRS Tax Problems. In Stocker v. United States (6th Cir. 2013), the 6th Circuit affirmed the dismissal of Robert and Laurel Stocker's suit against the IRS challenging the IRS' denial of a $64,000 tax refund, holding that because the Stockers could not prove the timely filing of their amended federal tax return under the methods established in Internal Revenue Code (IRC) Section 7502, the District Court for the Western District of Michigan was correct in dismissing the case.

The Stockers' tax problems and subsequent loss of their $64,000 refund occurred because of a seeming minor error. Following an IRS tax audit of a business in which the Stockers had invested and lost money, Mr. Stocker's CPA prepared amended 2003 federal tax returns for the Stockers that entitled them to a $64,000 refund. Mr. Stocker's CPA advised him that the returns had to be mailed by October 15, 2007 to comply with the tax law. Unfortunately, though Mr. Stocker testified that he mailed the returns on that day, he neglected to bring copies of the certified mail receipts to the post office, therefore failing to obtain date-stamped receipts. Apparently this was because although the CPA's office manager prepared postage prepaid, certified mail return receipted requested envelopes for the Stockers she mistakenly retained the customer copies of the certified mail receipts for the 2003 amended returns, rather than giving these copies to Mr. Stocker so that he could present them at the post office as he mailed the returns.

This left the Stockers at a disadvantage when their tax dispute began, as the IRS' records stated that the envelope containing the Stockers' amended 2003 return was postmarked four days late. Compounding the Stockers' tax problems, the IRS failed to retain the postmarked envelope in question. Seeking help in their tax dispute the Stockers brought suit, but the District Court granted the IRS' motion to dismiss for lack of jurisdiction due to the suit being barred as past the three-year period for filing a claim for a tax refund. On appeal, the 6th Circuit affirmed.

The 6th Circuit was unmoved by the Stockers' attempts to prove the mailing date of their return through means other than those set forth in IRC Section 7502. As the IRS' records indicated that the returns were postmarked four days late, the Stockers could not prove timely delivery under IRC Sec. 7502(a)(1), which states that the postmark of the returns establishes the date of mailing. Additionally, Mr. Stocker's failure to obtain the certified mail receipt precluded the use of IRC section 7502(c)(1), which states that the "date of registration shall be deemed the postmark date". The court rebuffed the Stockers' attempts to prove timely delivery through circumstantial evidence; rather, the Court stated that its own precedent prevented any other method of proof. Finally, the court held that the District Court had not abused its discretion in refusing to draw the inference that the Stockers had timely filed their returns because of the IRS' failure to retain the postmarked envelope in violation of internal policy.

Despite the seemingly minor nature of the Stockers' mistakes, the 6th Circuit was highly unsympathetic to their plight. Ultimately, the court reiterated that only certain procedures are available to prove timely filing, and the Stockers' own mistakes precluded them from receiving relief, despite their innocent nature. While calling it "unfortunate" that the Stockers could not prove the timeliness of their return, the court sent a strong message to taxpayers that it was unwilling to make exceptions for even the most innocent of mistakes.

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FBARs and More FBARs

May 11, 2010,

I just returned from an ABA meeting of tax lawyers in Washington, D.C. It seemed like all of the tax attorneys (or at least the tax litigation attorneys) could find nothing to talk about, but Foreign Bank Account Reports, i.e. TDF 90-22.1 (FBARs),voluntary disclosures, and offshore bank accounts. Over a period of two days I spend at least 8 hours in formal meetings with other tax lawyers talking about FBARs, and more hours over drinks and food talking about FBARs. The main theme was that the rules surrounding tax amnesty are being enforced more harshly than many tax attorneys had hoped would be the case. A few highlights of what I heard, the good, the bad, and the ugly:

• 225 revenue agents have been assigned to conduct civil tax audits in voluntary disclosure of offshore bank account cases
IDRs (Information Document Requests) can be expected in most offshore bank account cases within the next few weeks
• The goal of IRS management is to close a “substantial portion” of the tax audits by the end of 2010
• IRS has started to identify taxpayers who made quiet voluntary disclosures of their offshore bank accounts, and these cases will be worked as “full blown” civil tax audits—meaning these taxpayers are potentially subject to multiple 50% FBAR penalties
• It is too soon to tell how post Oct. 15th voluntary disclosures will be treated for civil tax purposes—speculation continues to center on 25 to 35 per cent
• IRS has rolled out a “third generation” IDR which the IRS believes is more streamlined
• Basis issues will be negotiable, i.e. if basis information is unavailable revenue agents will likely accept reasonable alternatives, e.g. value security as of 1/1/2003
• Even if a timely 2008 FBAR was filed, if the highest offshore bank account value was in 2008, the 20% penalty will be calculated based upon 2008 value
• Revenue Agents do not “currently” have the authority to waive de minimus violations – there is no such thing as being half pregnant.

If you have a foreign financial account call the tax litigation lawyers at Brager Tax Law Group, A P.C. to get more information on voluntary disclosures and FBARs.

Deportation for Tax Fraud and Other Tax Crimes

February 11, 2010,

Filing a false tax return in violation of Internal Revenue Code (IRC) Section 7206 can result in deportation of a resident alien, i.e. a green card holder, according to the 9th Circuit Court of Appeals. Kawashima v. Holder (9th Cir. 2010). In a long running case Mr. Kawashima pled guilty to subscribing to a false tax return in violation of IRC Section 7206(1). His wife pled guilty to aiding and assisting in the filing of a false tax return in violation of IRC Section 7206(2).

Generally green card holders can be deported for committing an “aggravated felony.” Tax fraud or tax evasion in violation of IRC section 7201 is specifically defined by the immigration laws as an aggravated felony. Aggravated felonies also include any offence that involves fraud or deceit which exceed a loss to the victim of more than $10,000. The Kawashimas argued that since tax fraud was specifically defined as an aggravated felony Congress meant to exclude all other tax crimes including filing a false tax return. The 9th Circuit disagreed, holding that under the plain language of the statute not only was tax evasion a removable offense, but so was filing a false tax return.

This is just another reminder that the collateral consequences of a criminal tax conviction can reach far beyond the potential prison time.

If you or a loved one has been accused of civil or criminal tax evasion contact the tax lawyers at Brager Tax Law Group, a P.C. for a consultation.

Fourth UBS FBAR Tax Fraud Defendant Pleads Guilty

August 17, 2009,

A Los Angeles, California man pled guilty to one count of failing to file a Foreign Bank Account Form TDF 90.22-1 (FBAR) pursuant to the Bank Secrecy Act 31 USC 5314. This is the fourth person with a UBS Swiss bank account to plead guilty to tax evasion charges. John McCarthy admitted that he skimmed funds from his business, and sent it to an offshore bank account at UBS held in the name of his Hong Kong corporation. According to the plea agreement it was UBS, and his Swiss lawyers who came up with this idea that created all of McCarthy’s offshore tax problems. The IRS found out about McCarthy when UBS turned over his name as part of the criminal tax case against UBS that was resolved earlier this year. The maximum penalty that the Court can impose is five years in prison; a fine of $250,000, or twice the amount of gross gain or loss from the offense whichever is greater. Sentencing hasn’t yet occurred. In addition, McCarthy agreed to civil FBAR penalties equal to 50% of the highest year balance in the account will be imposed, along with a 75% civil tax fraud penalty.

Most interesting to me about the case is that the IRS is reaching lower down the food chain. The amount of the unpaid tax was somewhere between $200,000 and $400,00 spread over a 5 year period. Assuming a 33% tax rate this suggests unreported income of as little as $120,000 per year. While this is hardly chicken feed, it shows the IRS willingness to prosecute medium size tax evasion cases.

If you have a foreign financial account, or any kind of tax problem contact the tax lawyers at Brager Tax Law Group, A P.C.

UBS Offshore Tax Evasion Case Moves Closer to Disclosure

August 13, 2009,

On Wednesday, the UBS offshore tax evasion case moved one step closer to UBS disclosing the names of persons the IRS believes have committed tax fraud and/or failed to file TD F-90-22.1, Foreign Bank Account Report (FBAR). The IRS announced that it had “initialed a settlement” with the Swiss government to settle the suit seeking the names of 52,000 U.S. persons with offshore UBS bank accounts. The terms of the settlement has not yet been disclosed, but most tax attorneys believe that it will require UBS to provide the names of thousands of Swiss bank account holders. The IRS has said that the terms will not be disclosed until final signatures have been obtained on the settlement, and that could occur as early as next week.

Some tax lawyers speculate that it will be only the names of the largest UBS account holders that will be disclosed, but I tend to disagree. Any settlement would have to provide the Swiss with a fig leaf to argue that they had not compromised their privacy laws. One way of doing this would be to loosen the interpretation of tax fraud under Swiss law, and provide the names of individuals who engaged in some activity suggesting they were covering up the existence of the offshore account. For example, holders of numbered accounts, or accounts held in the name of dummy corporations or trusts, or perhaps dual citizens of the U.S. and other countries who did not use their U.S. passports to open the accounts.

Once the settlement terms have been announced it is unknown how quickly names of UBS Swiss bank account holders will be turned over. However, once the IRS has the names it will be too late for those individuals to participate in the IRS tax amnesty, and receive the benefits of the offshore voluntary disclosure program.

If you have questions about the FBAR tax amnesty or have other tax problems feel free to contact the tax controversy lawyers at Brager Tax Law Group, A P.C.

UBS FBAR Summons Case Settlement Reached

August 3, 2009,

On Friday it was announced that UBS and the Internal Revenue Service had reached a settlement in the IRS lawsuit against UBS. The lawsuit sought to require UBS to turn over the names of 52,000 U.S persons with Swiss bank accounts at UBS. The IRS believes that the owners of some of these offshore accounts failed to file foreign bank account reports (FBARs), and may also have engaged in tax fraud. Settlement negotiations have been ongoing, and apparently those discussions have focused on how many offshore account holder names will be turned over to the IRS. The terms of the deal have not been announced, and the parties have agreed not to reveal the details at this time. The final settlement papers are due to be filed on August 7th, at which point I expect that the IRS will reveal how many offshore account holders names will be turned over.

This puts the holders of offshore financial accounts at UBS in a precarious position. Once UBS turns over the information those folks will no longer be eligible to make a voluntary disclosure under the IRS tax amnesty program, and will subject the owners of these Swiss bank accounts at risk for the 50% FBAR penalty, possible criminal prosecution for tax evasion, and a pile of other tax problems.

UBS Swiss bank account holders would be well advised to speak with a tax attorney to decide whether or not to participate in the tax amnesty because the window may be closing very shortly.

The former IRS tax attorneys at Brager Tax Law Group, A P.C. are ready to advise offshore bank account holders of their options.

Offshore Account Information Still Wanted by the Internal Revenue Service to Pursue Alleged Tax Evasion

July 29, 2009,

The past few months have been filled with contention from the Swiss government and UBS in response to the Internal Revenue Service’s (IRS) “John Doe Summons,” which seeks to have UBS turn over the names of their US account holders. So far, UBS has been unwilling to provide the names of all but 250 or so Swiss bank accounts holders. UBS officials argue that disclosing names is a violation of Swiss law.

Several days ago Department of Justice (DOJ) filed a legal brief arguing that its summons to obtain offshore bank account information is enforceable under both US and Swiss law. DOJ points out that Swiss secrecy laws provide disclosure exceptions for certain circumstances – such as when providing information to an “authority,” and if approved by a UBS “regulator.” The fact that the law explicitly states there are exceptions, and that a person who violates this law can be exonerated in certain circumstances, leads the DOJ to conclude that Swiss law permits UBS to release the names of US taxpayers with offshore accounts.

Without commenting on the merits, it would seem that those with Swiss bank accounts have two basic choices:

1 - They can wait until the case is resolved, hoping that the IRS loses and UBS Swiss bank accounts remain secret. This option carries the risk of prosecution for criminal tax fraud and onerous civil tax penalties for failure to file foreign bank account reports (FBARs) in the event that the IRS prevails; or

2 - They can come forward now while the IRS still has its tax amnesty program, and protect themselves from criminal tax charges. Before coming forth under the tax amnesty program anyone with an offshore bank account, whether held at UBS or elsewhere, should consult with a knowledgeable tax attorney to determine if a voluntary disclosure is right for them.

If you have a UBS or other offshore bank account and have questions about avoiding tax evasion charges, or would like more information about the IRS Amnesty program, or have any other tax problems, contact the tax litigation attorneys at Brager Tax Law Group, A P.C.

Tax Amnesty Requests Result in 30 Questions to Offshore Bank Account Owners

July 21, 2009,

When the Internal Revenue Service (IRS) released its FBAR tax amnesty FAQs it stated that there would be no standard list of questions asked of foreign bank account holders who made a voluntary disclosure. The Wall Street Journal reported that at least one tax attorney has stated that his clients have been asked 30 standard questions. None of the questions are particularly surprising and are in line with questions our clients have been asked under the IRS’ previous voluntary compliance initiative (VCI). Nevertheless no-one who is filing for the FBAR tax amnesty should consider answering them without a tax attorney present, and maybe not even then. The questions appear designed to probe for signs of tax evasion, or tax fraud, as well assure the IRS that all Foreign Bank Account Reports Form 90-22.1 (FBARs) being filed are accurate. More troubling to tax preparers is that some of the questions are also designed to see if the tax preparer was complicit in the non-filing which could expose him or her to tax preparer penalties, or even criminal tax charges. It seems a CPA or other tax preparer who prepared the original tax returns must consider very carefully whether he has a conflict of interest before he represents that person in making a voluntary disclosure.

According to the Wall Street Journal those questions were:

• Is it your statement that the tax payers are willing to comply with the IRS and make a good faith arrangement to pay all taxes, penalties, fees and interest?
• Where are the funds held regarding the disclosure?
• Do you have any records? If not, whom are you working with at the bank? (Note: If the taxpayer is a UBS client and if they don't have the records, IRS will attempt to assist them in record retrieval).
• When was the account opened?
• How was the account opened?
• Who assisted you with the account opening?
• Who told you about the bank and how to initiate opening of the account?
• Do you have a trust set up relating to the account or the funds?
• How did you deposit money into the account?
• How did you withdraw money from the account?
• Did you have any credit or debit cards associated with the account?
• How did you correspond with the bank? Do you have records relating to the correspondence?
• Who is your current point of contact at the bank?
• Did you ever meet face to face with anyone from the bank? If so, where? When?
• Did you travel outside of the U.S. to conduct business relating to your account and or tax activities?
• Where was your bank statements sent?
• Who has ownership of the account? Is it a joint account?
• What is the source of the funds?
• Do you have tax returns?
• Have you prepared amended tax returns? If so, have you submitted them to the IRS?
• Who prepared your returns?
• When were your returns prepared?
• Did they know about the issues discussed today?
• Did you file FBARs? If not, why not?
• (For those who inherited the account) when did you take control of this account? And, all the related questions a 'yes' answer makes us ask.
• Did you trade US and/or foreign securities with this account? If yes, describe the mechanism for doing that (buy/sell orders, etc.)?
• Did you file returns?
• Do your or have you directly or indirectly controlled any foreign entities? Did you file the required returns for them?
• For UBS clients in particular – Have you been notified that the US requested information relating to your accounts?
• What countries do you have accounts in?

If you have questions about the questions, feel free to contact the tax attorneys at Brager Tax Law Group, A P.C.

FBAR (Foreign Bank Account Report TD 90-22.1) Tax Audits

June 30, 2009,

I have been speaking a lot lately to the Internal Revenue Service’s (IRS) FBAR (Foreign Bank Account Report) tax amnesty hotline to obtain answers to the many practical questions that have arisen under the IRS FBAR Tax Amnesty a.k.a. Voluntary Disclosure Program. One question I have had is, “Where in the country will the civil tax audits under the tax amnesty program take place?” The agent that I spoke with at the tax amnesty hotline told me the current belief among IRS employees is that the tax audits will be centralized. Twenty revenue agents have undergone tax amnesty training in New York, and additional revenue agents will be trained — probably in California.

According to what I was told, the tax amnesty revenue agents have only just begun looking at civil tax audits, and these are for voluntary disclosures that were made before the IRS issued its tax amnesty guidelines. My guess is that voluntary disclosures being filed now will not undergo a civil tax audits by the IRS for another 6 months.

If you are considering a voluntary disclosure under the IRS tax amnesty program, contact the tax attorneys at Brager Tax Law Group, A P.C. for a consultation. No one should consider contacting the IRS without first having spoken with a qualified tax litigation attorney who understands all of the details of your case.

New Foreign Bank Account Report (FBAR) FAQs Issued

June 25, 2009,

The IRS has just issued new FAQs related to the tax amnesty for failing to file Foreign Bank Account Reports (FBAR). There are 21 new FBAR FAQs. I wanted to make them available as quickly as possible so haven’t had much time to think through all of their implications. However, a major disappointment is FBAR FAQs # 34 and 35. They say that the IRS will not negotiate the 20 percent offshore financial account penalty as part of the FBAR voluntary disclosure process. The IRS says that if any part of the penalty structure is unacceptable, the case will follow the standard audit process. According to the IRS, “At the conclusion of the examination all applicable penalties (including information return and FBAR penalties will be imposed)…” For a recap of potential FBAR and other penalties see my prior post. If the taxpayer disagrees with the imposition of the penalties then the taxpayer may go to the IRS Appeals Division.

It is unfortunate that the IRS has chosen to take this draconian stance with respect to the FBAR amnesty. It makes the decision to come forward much more difficult.

Our tax litigation attorneys are currently advising clients with FBAR problems on how to best proceed. If you would like a consultation contact the tax attorneys at Brager Tax Law Group, A P.C.

Tom Daschle Has Tax Problems

February 2, 2009,

According to CNN former Sen. Tom Daschle, President Barack Obama's nominee for secretary of Health and Human Services has some tax problems. CNN says he failed to pay taxes on a car and driver he had been loaned by a wealthy friend, and failed to disclose it on his tax return. At first it was not clear why he should have reported it on his tax return since it sounded more like a gift. However, a later report by The Wall Street Journal says that the car and driver was provided to him by InterMedia Advisors LLP, an investment firm specializing in buyouts and industry consolidation where Daschle served as chairman of the firm's executive advisory board after he left the Senate. That should have been reported, but there might be a partial offset as an employee business expense, and the firm should have included it on his W-2, or included it on his Form 1099 if he was an independent contractor.

If you have tax problems you can call our tax attorneys whether or not you are a former senator.

IRS Taxpayer Advocate Issues Report

January 9, 2009,

Nina Olson, the National Taxpayer Advocate, issued her annual report to Congress in which she lists the 20 most serious tax problems as required by Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III). They are:

1. The Complexity of the Tax Code
2. The IRS Needs to More Fully Consider the Impact of Collection Enforcement Actions on Taxpayers Experiencing Economic Difficulties
3. Understanding and Reporting the Tax Consequences of Cancellation of Debt Income
4. Employment Taxes
5. IRS Process Improvements to Assist Victims of Identity Theft
6. Taxpayer Service: Bringing Service to the Taxpayer
7. Navigating the IRS
8. IRS Handling of ITIN Applications Significantly Delays Taxpayer Returns and Refunds
9. Access to the IRS by Individual Taxpayers Located Outside the United States
10. Customer Service Within Compliance
11. Local Compliance Initiatives Have Great Potential But Face Significant Challenges
12. Customer Service Issues in the IRS’s Automated Collection Syste (ACS)
13. The IRS Should Proactively Address Emerging Issues Such as Those Arising From “Virtual Worlds”
14. Suitability of the Examination Process
15. The IRS Correspondence Examination Program Promotes Premature Notices, Case Closures, and Assessments
16. The Impact of IRS Centralization on Tax Administration
17. Incorrect Examination Referrals and Prioritization Decisions Cause Substantial Delays in Amended Return Processing for Individuals
18. Inadequate Files Management Burdens Taxpayers
19. The IRS Miscalculates Interest and Penalties But Fails to Correct These Errors Due to Restrictive Abatement Policies
20. Inefficiencies in the Administration of the Combined Annual Wage Reporting Program Impose Substantial Burden on Employers and Waste IRS Resources

Tax Problem 21 was an update of a previous item. According to the National Taxpayer Advocate the IRS’s private tax debt collection initiative is failing In most respects.

More detail on some of these tax problems in future blog posts. For the moment you may wish to check out the post at ataxingmatter describing the National Taxpayer Advocate's previous criticisms of the private tax debt collection initiative here.

If you are having tax problems contact the tax attorneys at Brager Tax Law Group, A P.C.

Madoff Ponzi Schemes, Securities Fraud and the Internal Revenue Service

January 6, 2009,

Once investors get over their initial shock that they were being bilked by Bernard Madoff in a massive Ponzi scheme they will be looking for ways lessen the impact. One of those ways is through the tax laws. Our tax attorneys have identified at least two possibilities. The first is that investors may be entitled to a theft loss pursuant to Internal Revenue Code Section 165. Unfortunately the year the loss can be deducted will probably be the subject of a tax dispute. Generally theft losses are deductible in the year of discovery. However, if there is still a possibility of recovery the deduction may need to be deferred.

Another idea is filing amended income tax returns for the last three years, taking the position that the payments received which had been reported as capital gains, dividends or interest were in fact a return of capital, and therefore non-taxable. This position is supported by Greenberg v. Commissioner, a 1996 case decided by the United States Tax Court. The Internal Revenue Service ("IRS") believes, however, that the rule in Greenberg only applies in limited situations. IRS Legal Memorandum ILM 200305028. It is likely that those who file amended returns will be subjected to a tax audit, and that barring a change of heart by the Internal Revenue Service will need to hire a tax litigation attorney to assist them.

Generally the tax law allows only three years from the date the original tax returns were filed to file amended returns. For most taxpayers this means that if they act quickly they can file amended returns for 2005, 2006, and 2007.

If you have a tax problem call certified tax specialist Dennis Brager.

Independent Contractor or Employee Brochure Release by IRS

October 30, 2008,

The Internal Revenue Service (IRS) has released IRS Publication 1779 with guidance for workers to help them determine whether they are employees or independent contractors. Interestingly IRS Publication 1779, which is only two pages does not specifically mention the 20 factor test set forth in IRS Revenue Ruling 87-41, 1987-1 C.B. 296. Instead it groups various factors into three categories—Behavioral Control, Financial Control and Relationship of the Parties. For example under the category Behavioral Control it states that “if you receive extensive instructions on how work is to be done this suggests you are an employee.”

While the publication appears to be aimed at workers rather than employers, an employer could be lulled into a false sense of security by relying on the publication since among other things it fails to mention that even though an employer does not actually exercise control, if the employer maintains the legal right to control the worker those workers may well be employees.

Nor does the publication mention that Section 530 of the Revenue Act of 1978 also known as the “safe harbor rules” allows employers to treat individuals as independent contractors even if they do not qualify under the common law rules. For more information on that topic see our article Independent Contractor Treatment for Workers is Broadly Available.

If you are an employer and the IRS or the California Employment Development Department (EDD) has challenged your treatment of workers as independent contractors, or you have other payroll tax problems, contact the tax problem attorneys at Brager Tax Law Group for assistance.

UCLA Tax Controversy Institute Taxpayer Advocate Panel

October 13, 2008,

On Oct. 28th I will be moderating a tax controversy panel at the 2008 UCLA Tax Controversy Institute. The panel will include Steve Sims, Taxpayer Advocate, Franchise Tax Board, Todd Gilman, Taxpayer Advocate, State Board of Equalization, Michelle Mosley, Taxpayer Advocate, Employment Development Department, Dorothea T. Curran, Local Taxpayer Advocate, Internal Revenue Service (Los Angeles).

Other tax panels include:

Innocent Spouse
Independent Contractor Audits and
Criminal Tax Audits

If you would like to attend contact UCLA at