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Monthly Archives: September 2018

Understanding the New IRS Tax Transcript

On August 23, 2018 we posted IRS to Introduce New Tax Transcript as of 9/23/18!  where we discussed that the IRS announced in IR-2018-171 that it is moving to better protect taxpayer data, in a new format for individual tax transcripts that will redact personally identifiable information from the Form 1040 series. 

This new transcript replaces the previous format and will be the default format available via Get Transcript Online, Get Transcript by Mail or the Transcript Delivery System for tax professionals as of September 23. Financial entries will remain visible, which will give taxpayers and third-parties the data they need for tax preparation or income verification.

The IRS is now published a fact sheet and FAQsto help you better understand the new IRS tax transcripts.

Here is a sample: New Tax Transcript (PDF)

Because the taxpayer’s SSN no longer can be used as a tracking number for third-party requesters, the IRS is creating a Customer File Number that third parties may use as an identifying number. The Customer File Number created by third party on Form 4506-T/T-EZ, Request for Transcript of Tax Return, will populate on the transcript, allowing a redacted transcript to be matched to a taxpayer.  

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The IRS Still Does Not Make Effective Use Of Currency Transaction Reports

The Treasury Inspector General For Tax Administration (TIGTA) issued on September 21, 2018 a Report Reference Number:  2018-30-076 to the Commissioner of Internal Revenue concluding that the Internal Revenue Service Still Does Not Make Effective Use of Currency Transaction Reports.

Highlights of Reference Number:  2018-30-076  to the Commissioner of Internal Revenue.
The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to assist U.S. Government agencies by filing reports concerning currency transactions.  One such report is known as the Currency Transaction Report (CTR), which financial institutions are required to file with the Financial Crimes Enforcement Network for currency transactions that exceed $10,000 or multiple currency transactions that aggregate more than $10,000 in a single day.
Congress believed that the reports required by the Bank Secrecy Act, including the CTRs, would be useful for numerous purposes, including tax compliance purposes.  TIGTA previously recommended that the IRS make greater use of CTR data to pursue potential nonfilers and underreporters, and the IRS agreed to the recommendation.  This audit was initiated to determine how effectively the IRS uses CTR information to select and examine taxpayers.

The IRS still makes no systemic use of CTR data in examinations.  Although IRS management agreed with TIGTA’s recommendation in a September 2010 report and cited steps taken to develop examination referrals from the CTRs, the IRS is still not systemically using the CTRs to identify and pursue potentially noncompliant individuals. It is also not effectively tracking information referrals from Bank Secrecy Act examiners to the Examination function.  Finally, some examiners are not documenting that they are considering available CTR information in their audits.


During the fieldwork for this review, TIGTA also found that CTR data stored in the Integrated Data Retrieval System incorrectly aggregated CTR amounts for multiple individuals and showed the same CTRs total dollar amount for these individuals.  We have initiated a follow-up audit to determine the extent and potential causes of this issue.

TIGTA recommended that the IRS:
  1. Establish formalized procedures for processing Bank Secrecy Act Program referrals and begin tracking the time required to send referrals to the Field Exam Support Team, and
  2. Clarify formal Internal Revenue Manual procedures to assist examiners in their consideration of CTR data in examinations.  
IRS management agreed with the recommendations and plans to take corrective actions.
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Ad Exec Appealed His $10M Tax Refund Denial and Won

According to Law360 a former ad agency executive won his appeal for more than $10 million in tax refunds when the Ninth Circuit ruled on September 24, 2018 that he had fulfilled a legal requirement to report inconsistencies between his personal tax return and that of his now-defunct advertising placement company.

Thomas Rubin had sued the Internal Revenue Service, claiming the agency had denied him a tax refund even after being advised that the bankruptcy trustee for Focus Media Inc. had incorrectly accounted for nearly $67 million of cancellation of indebtedness income and more than $23 million of bad debt expenses that Focus was entitled to write off.

The IRS had argued that Rubin had failed to meet a statutory requirement to report inconsistencies between the corporate and shareholder returns. Even though Rubin filed a statement explaining how his income flowed from Focus and provided information on where he disagreed with the bankruptcy trustee, the IRS said he did not identify the right inconsistencies.

 The Ninth Circuit disagreed with the IRS, saying there is nothing on the form for reporting inconsistencies that “directs or requires the taxpayer to report figures taken directly from the corporation’s return.”

The three-judge panel also rejected the IRS’ contention that the 20-plus pages of information that Rubin filed to explain the inconsistencies were unduly burdensome.

“That fact does not … impose such a burden that the IRS could not reasonably accomplish its duty, particularly in light of the size of the claimed refund,” the panel said.

The ruling reverses an October 2016 decision from a lower district court in favor of the government. That decision, from U.S. District Judge R. Gary Klausner, concluded that the pro forma tax return Rubin had attached for Focus to his individual amended tax returns did “not constitute an an attempt to amend Focus’ tax returns.”

The case now returns to Judge Klausner’s court for further proceedings.

Rubin had claimed in his lawsuit that the net income for Focus had been substantially overstated for the 2000 tax year, and since the company’s income flowed through to him, he ended up owing substantially more in income tax payments.

According to court documents, Focus’ largest customers had become concerned about the possible misuse of funds and sued the company to prevent further payments. Eventually, Focus’ creditors put it into involuntary bankruptcy, and a bankruptcy trustee was appointed. The trustee deemed the company’s receivables worthless.

Rubin initially filed his personal tax return based on the income reported in Focus’ return for 2000. He later filed an amended return for that year as well as the two preceding years. He also filed a pro forma amended tax return for Focus reflecting the different treatment of bad debt expenses and cancellation of indebtedness income, according to the Ninth Circuit’s opinion.

The opinion also noted that Rubin had submitted a chart and explanations describing amounts as they were originally reported, the net change and the amended amounts. The case is Thomas Rubin v. USA, case number 16-56633, in the U.S. Court of Appeals for the Ninth Circuit.

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Tax Shelter RICO Suit Dismissed for Seyfarth

According to Law360 an Illinois federal judge has dismissed a Racketeer Influenced and Corrupt Organizations Act suit accusing Seyfarth Shaw LLP of selling a client an illegal tax shelter, saying that the man had failed to establish that the alleged fraud was part of the firm’s usual way of doing business or that it was an ongoing practice.
U.S. District Judge John Robert Blakey ruled that even after updating the complaint to include details on three other alleged victims, Steven Menzies still hadn’t established facts that suggested the other victims were deceived into buying tax shelters, which would be necessary to establish a pattern for a RICO claim.

“The [second amended complaint] is devoid of any allegations that defendants’ conduct actually deceived other investors,” the decision said. “Plaintiff’s failure to plead such facts is particularly problematic in a case, like this one, where the purported victims knowingly entered into tax shelters, which by their nature are designed to avoid taxes.”

The judge also dismissed the remaining claims, which were brought under state law, as untimely.

Menzies sued Seyfarth, Northern Trust Corp. and Christiana Bank & Trust Co. in 2015, want to get a bottle water something before go through this to sell him the tax scheme when he sought help on taxes coming out of a 2006 sale of $64 million in Applied Underwriters stock to Berkshire Hathaway Inc.

Northern Trust pitched Menzies on the tax shelter scheme and then guided him to co-conspirators Christiana and Seyfarth, which facilitated the scheme and convinced him it was aboveboard, according to the suit.

 Menzies was specifically sent to former Seyfarth partner Graham Taylor, who issued opinion letters that Menzies believed would convince the IRS of the tax shelter’s legality if he was audited, the suit says.

A few years later, Taylor pled guilty in a $20 million tax fraud conspiracy case. He had a long history of issuing opinion letters on tax shelters that contained false information when he was hired at Seyfarth, according to Menzies.

The IRS audited Menzies in 2009, determining that the shelter he relied on was not legal, according to his complaint. Part of the agency's determination was based on the fact that Taylor, who by then had pled guilty to tax fraud, acted as Menzies’ adviser, the suit alleges.

The IRS claimed Menzies underpaid his taxes by $45 million, and threatened him with large fines, penalties and potential criminal liability, according to his suit. In December 2012, Menzies settled with the IRS for approximately $10.4 million.

Judge Blakey initially killed off Menzies’ RICO claims in a July 2016 opinion, saying that describing a scheme involving only one victim was not enough. He allowed Menzies to refile his complaint.

On September 21, 2018, however, the judge ruled that Menzies still had not established a pattern. Although he had included details for additional alleged victims, he did not specify how they had been deceived by Seyfarth, or even whether Seyfarth had misled them into using tax shelters. Indeed, for one alleged victim, the new complaint stated it was “reasonable to assume” the firm lied about the shelters’ legality.

The new complaint also did not establish that this was the firm’s usual way of doing business or that there was any evidence that the firm continued to behave this way even after Taylor’s arrest and conviction, the decision said.

The case is Menzies v. Seyfarth Shaw LLP et al., case number 1:15-cv-03403, in the U.S. District Court for the Northern District of Illinois.
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