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Articles Posted in Tax Preparer Penalties

In a 2019 U.S. Tax Court case, Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4, (2019) (Palmolive II), the Tax Court held that both penalties determined by the Revenue Agent in a tax audit and additional penalties later determined  by an Appeals Officer in the IRS Independent Office of Appeals met the written approval requirements of I.R.C. § 6751; thus making Palmolive Building Investors, LLC (Palmolive) a two-time loser. Palmolive was initially in Tax Court in 2017 (Palmolive I) over a disallowed charitable deduction for a façade easement.  As the owner of a historical building in Chicago, it had donated a façade easement to a conservation organization and took a large charitable deduction for the easement. In addition to questioning the $33,410,000 valuation of the easement, the IRS argued that the mortgages on the building limited the easement’s protection in perpetuity. The Tax Court agreed and concluded that the façade easement was not protected in perpetuity and therefore failed to qualify for a charitable deduction under I.R.C. § 170(h)(5)(A).

Following the disallowance in Palmolive I, the taxpayer returned to the Tax Court to dispute whether the penalties assessed by the IRS complied with the provisions of IRC Section 6751(b)(1).  During a tax audit, a Revenue Agent had asserted in a 30-day letter that Palmolive was responsible for a 40% penalty for a gross valuation misstatement and a 20% negligence penalty. These two penalties were approved on Form 5701 by the Revenue Agent’s supervisor. Subsequently, a 60-day letter was issued. The taxpayer took its case to the IRS Office of Appeals. The Appeals Officer assigned to the case proposed four penalties: the two assessed by the Revenue Agent and the Substantial Understatement and Substantial Valuation Misstatement penalties. The Appeals Officer’s immediate supervisor approved all of these penalties on Form 5402-c. In Tax Court, Palmolive argued that the initial determination of penalties was made by the Revenue Agent who did not assert the Substantial Understatement and Substantial Valuation Misstatement penalties; therefore the penalties asserted by the Appeals Officer were not approved as part of the first determination of the penalties.

In examining the validity of the penalty assessments, the court cited I.R.C. § 6751(b)(1) which states that penalties can only be assessed when the initial determination of such penalties are approved in writing by the immediate supervisor of the person making the determination. The court also pointed out that the Congressional motive behind enacting this provision was to make sure penalties were not used as bargaining chips. The court first noted that all penalties were approved in writing. The next issue was what defines an “initial determination” for the purposes if I.R.C. § 6751(b)(1). The court held that the initial determination is when the penalties were first communicated to the taxpayer. The court stated that the Revenue Agent’s 2008 mailing of the 30-day letter was the date of the initial determination and the Appeals Officer’s 2014 issuance of the Notice of Final Partnership Administrate Adjustment are both initial determinations. Since the IRS forms were signed by the respective supervisors prior to the time of the initial determinations, the penalties met the requirements of Section 6751(b) (1).

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.

With What IRS Penalties and Charges Can Tax Preparers Be Charged
The IRS can go after professional tax preparers with many different penalties related to filing inaccurate or fraudulent tax returns. Targeting tax preparers allows the IRS to affect a large number of tax returns because each tax preparer can be responsible for completing tax returns for hundreds of taxpayers.

Some of the penalties related to understatement of tax that the IRS can charge tax preparers with include:

IRC § 6694(a) – Understatement due to unreasonable positions.  The penalty is the greater of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim for refund.

Taxes
Most accountants, CPAs, and certified tax preparers are honest, hardworking people who are dedicated to their profession. Most tax professionals simply want to secure the best possible tax deal for their clients while following all best practices regarding accuracy. However some tax professionals may over emphasize their ability secure favorable tax treatment for their clients and may cross the line into overly aggressive tax minimization strategies. Even more troubling, other tax preparers may be corrupted by greed and act dishonestly by improperly obtaining or using client tax refunds or other client funds.

If you are a tax professional, you already understand the devastating impact allegations of this type can have on your professional reputation and livelihood. Therefore any tax professional potentially facing an investigation or referral to the IRS Office of Professional Responsibility (OPR) should immediately retain tax counsel. However laypeople may not understand that mistakes or other improprieties found in tax filings are ultimately the responsibility of the filer.

#1 Tax Lady Indicted for Tax Fraud

tax preparer.jpgTax scams have likely been around for as long as taxes have been collected. In light of the significant penalties, fines, prison sentences and other consequences that can be imposed for tax non-compliance issues, taxpayers have good reason to be apprehensive or nervous if they are contacted by someone claiming to represent the Internal Revenue Service (IRS). Thus, if you are contacted by an IRS agent, it is always prudent to verify their identity, the fact that they are employed by IRS, and request a callback number at the IRS where the agent can be reached. Furthermore, if you are contacted by an individual claiming to represent the IRS or the US government, an experienced tax professional can often more readily recognize the signs of a tax scam.

At the Brager Tax Law Group we recognize that well-meaning taxpayers can face serious consequences if they are taken in by a tax scam. This post will identify and discuss a number of the more common tax scams and their consequences as identified by the IRS.

Tax preparer fraud can result in new tax problems

Our tax audits. The issue generally arises in closely held C corporations who pay out all of their profits as salary to the shareholders, rather than allocating any portion to dividends. The advantage is that salaries are deductible–dividends are not. An IRS tax audit can, however, result in the IRS denying a portion of the salaries as not being an ordinary and necessary business expense pursuant to tax attorneys that the CPA firm relied on the many individual employees of the firm who were “knowledgeable in income tax matters.” He wrote “… there was conflict in this case: taking advice from oneself.” But Judge Posner didn’t stop there. First he badmouthed the firm’s tax lawyers:

Remarkably, the firm’s lawyers (an accounting firm’s lawyers) appear not to understand the difference between compensation for services and compensation for capital, as when their reply brief states that the founding shareholders, because they “left funds in the taxpayer over the years to fund working capital,” “deserved more in compensation to take that fact into account.” True–but the “more” they “deserved” was not compensation “for personal services actually rendered.” Contributing capital is not a personal service. Had the founding shareholders lent capital to the company, as it appears they did, they could charge interest and the interest would be deductible by the corporation. They charged no interest (emphasis in original).

Not content with leaving it there Judge Posner finished up as follows:

We note in closing our puzzlement that the firm chose to organize as a conventional business corporation in the first place. But that was in 1979 and there were fewer pass-through options then than there are now; a general partnership would have been the obvious alternative but it would not have conferred limited liability, which protects members’ personal assets from a firm’s creditors.

Why the firm continued as a C corporation and sought to avoid double taxation by overstating deductions for business expenses, when reorganizing as a passthrough entity would have achieved the same result without inviting a legal challenge [citation omitted] is a greater puzzle.

The Tax Court was correct to disallow the deduction of the “consulting fees” from the firm’s taxable income and likewise correct to impose the 20 percent penalty. That an accounting firm should so screw up its taxes is the most remarkable feature of the case.

OUCH!
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