Articles Posted in Tax Disputes

Most, if not all, Payroll Protection Program (PPP) borrowers are focused on the question of whether they will be able to have their PPP loan forgiven.  Many questions have arisen, and some but not all, have been answered by the Loan Forgiveness Application and instructions   released by the SBA on Friday, May 15, 2020.  Here are some of the highlights.

  • Annual “cash” payroll costs are capped at $100,000 per employee. While this is not news, the SBA calculates that this amount on a pro-rata basis for the 8 week “Covered Period” is $15,385. If you do the math, that is equal to 8 weeks per year divided by 52 weeks multiplied by $100,000. Some were hoping that those on a semi-monthly pay schedule could use a larger amount based upon 24 pay periods per year. Apparently not.
  • Alternative Payroll Covered Period. The Covered Period is generally eight weeks (actually 56 days) beginning on the date the loan is first funded. The Alternative Payroll Covered Period is only for employers with bi-weekly or more frequent payroll schedules. Therefore, it doesn’t appear to apply to employers who pay semi-monthly. It begins on the on the first day of the first payroll period following the PPP Loan Disbursement Date and ends 56 days later.  The following example is provided:  Alternative Payroll Covered Period: “… if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the  Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”  This suggests that one cannot include payments for a payroll period that begins before the PPP Loan Disbursement Date but is paid after that date. However, that is inconsistent with the Press Release issued concurrently by the SBA which states that the form and instructions provide “Flexibility to include eligible payroll and non-payroll expenses paid OR incurred during the eight-week period after receiving their PPP loan.” (emphasis supplied).  See more below.

Due to the ongoing COVID-19 Pandemic, the IRS has provided relief to taxpayers by extending filing and other deadlines. Now, in an internal memorandum from Fred Schindler the Director of Headquarters Collection (SBSE), the IRS continues to provide relief to taxpayers with tax debt by suspending most tax collection activities. These changes mirror the previous relief provided by the IRS, and restates the relief contained in the People First Initiative.  Our tax litigation attorneys are advising our clients that they can expect enforced tax collection activities to be suspended unless there is an exigent circumstance including the loss of the opportunity for the government to collect taxes due. The expiration of the statute of limitations is one example.

The importance of the memo is that while it mostly repeats and fleshes out the People First Initiative, it is a direct “order” from the head of SBSE Collection to all Collection Executives. The People First Initiative is a bit more nebulous in terms of its actual impact on the activities of rank and file employees.  The collection activities outlined in the memo include most activities related to the collection process such as meeting with taxpayers, filing new Notices of Federal Tax Liens (NFTL), issuing levies, taking or scheduling seizures actions, and pursuing civil suit proceedings. Automated tax levy programs are also suspended. The memorandum also directs Collections not to default installment agreements for missed payments due between April 1 and July 15, 2020 (the suspension period).  Due to the ongoing and ever changing nature of the COVID-19 epidemic in the United States, the IRS may extend the suspension period and the incorporated relief provisions further.

It is important for taxpayers and their advisors to remember that even though collection enforcement activity will be rare from now through July 15th, once the suspension period ends the IRS may begin filing liens and levies with a vengeance. Our tax lawyers are therefore recommending to our clients that, to the extent practicable, they position themselves to take appropriate action to forestall collection after the suspension period ends. This includes submitting offers in compromise, and requesting installment agreements now.

An article this summer in Tax Notes Today examined the United States government’s ability to tax cryptocurrencies. The article came days before cryptocurrencies saw another bullish run in which the value of a single unit of bitcoin once again passed $10,000. Additionally, the article references the comments of IRS special agent Gary Alford who stated the IRS is ready to enforce the taxation of a U.S. taxpayer’s gains from cryptocurrencies. Special agent Alford argues that the public’s familiarity with cryptocurrencies will make it easier for the IRS to file criminal tax cases against some taxpayers who evade their tax reporting obligations. Given this new warning from Alford, criminal tax attorneys need to be prepared to defend their clients who hold cryptocurrencies.

In Notice 2014-12, the IRS wrote that it considers cryptocurrencies to be property and, as such, the disposition or exchange of cryptocurrencies will be taxable. A clear example of a taxable event is where a bitcoin holder exchanges a single bitcoin (or any fraction thereof) for fiat currency. Fiat currency is understood to be currency backed by a national government, e.g. the Euro or U.S. dollar.

A tricky issue for taxpayers may be determining the adjusted basis of their holdings in a cryptocurrency to determine realized gain. Sometimes a single unit of cryptocurrency may have been involved in multiple exchanges and transactions before the taxpayer finally reports to the IRS he or she holds the cryptocurrency. The taxpayer is placed in the difficult task of proving the correct basis of the cryptocurrency. A taxpayer who provides an inaccurate basis is likely to be subject to penalties in addition to the amount in taxes owed.

In Greek mythology, King Sisyphus is punished by the gods and forced to roll a huge boulder up a hill only for it to roll down as it nears the top. No matter how much effort Sisyphus puts into attempting to push the boulder over the crest of the hill, it always come tumbling back down. He is doomed to push the boulder up the hill for all eternity. Sometimes collecting payroll taxes can be a “Sisyphean task” for the IRS. At least, that is what the 11th Court of Appeals wrote in a recent decision.

United States v. Askins & Miller Orthopedics, involved a private medical practice which refused to pay payroll taxes. The IRS first tried to negotiate an installment agreement with the medical practice’s business owners, but the business owners would ultimately renege on any agreement. Then the IRS issued a tax levy on property held by the medical practice in various entities, but the business owners would simply shift property to new entities out of reach of the power of the levies. Believing it was out of options, the IRS requested a permanent injunction from the district court to compel the taxpayers to perform and pay their employment taxes now and into the future.

The district court rejected the IRS request because the court argued that the IRS had yet to suffer irreparable harm. The district court reasoned that the IRS could still sue for monetary damages once the taxpayers again failed to pay their employment taxes. This is in spite of the fact that the district court conceded that the taxpayers exhibited a pattern of unlawful conduct likely to persist. In other words, the taxpayers would continue to find ways to not pay their taxes.

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A 2017 case is a stark $300,000 reminder that the IRS is not bound by statements made by its employees, such as Revenue Officers. Tommy Weder was a responsible officer of a corporation which failed to pay its payroll taxes, and as a result, he was assessed a trust fund recovery penalty (TFRP) pursuant to IRC Section 6672. After he paid the $300,000, he filed suit in federal district court in Oklahoma requesting a refund. His theory was that the company had paid $300,000 towards the trust fund taxes, and that, therefore, his personal liability was reduced by that amount. In most cases, a taxpayer must pay any tax in full (not just a portion) before he or she can file a suit for a refund. However, under the so-called Flora rule, payroll taxes are divisible taxes, therefore, the taxpayer must only pay the tax due for one employee for one quarter.

The IRS took the position that the payment was not properly designated toward the trust fund, and that it was therefore entitled to, and did, apply the payment towards non-trust fund taxes owed by the company, which of course doesn’t reduce the trust fund recovery penalty. Weder didn’t dispute that there hadn’t been a written designation of tax. The payment had been made through the IRS’ EFTS system, and there was no designation. Weder argued, however, that the Revenue Officer that had been assigned to collection had met with representatives of the company, including its CPA, and that the Revenue Officer had demanded that the payment be made through EFTPS, and represented that the payment would be applied to the trust fund taxes.

The court ruled that absent a WRITTEN designation by the company, the IRS was free to apply the payment in the “best interest” of the government. The Court relied on Rev. Proc. 2002-26, which provides that absent written directions, the IRS “will apply payments to periods in the order of priority that the Service determines will serve the Service’s best interest.” It pointed out that prior to Rev. Proc. 2002-26 being promulgated, the prior IRS guidance was contained in Rev. Rul. 73-2. CB 43. That Revenue ruling only required that taxpayers give “directions.”

How to Respond When the IRS Makes a Mistake
Charged with administering, enforcing, and collecting taxes from millions of Americans, the IRS understandably makes mistakes. If the IRS is trying to charge you penalties or assess taxes incorrectly, or is attempting to seize your bank account or put a lien on your house, you have options for disputing the IRS action and arguing your case.

How to Handle Incorrect Tax Assessments

If the IRS sends you a Notice of Deficiency and you do not believe you actually owe the tax, you should file a petition in Tax Court. You have 90 days from the date of the notice to file your petition. If you miss this chance, you will only be able to argue your case in court AFTER paying the full amount and filing a refund claim.

Which Court Should You Use For Your Tax Dispute
There are actually four different courts that can be used for tax litigation. The United States Tax Court is the most commonly used option, but other courts may have advantages in certain situations.

The four courts with jurisdiction to hear tax controversy cases are:

  • Tax Court
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