Monthly Archives: May 2019

Now that Tax return filing season has just past, a recent US Court of Appeals for the Fifth Circuit decision, Haynes v. United States, No. 17-50816 (5th Cir. Jan. 29, 2019), indicates that many of those taxpayers will face uncertainty if their returns are late due to preparer errors or technological issues when electronically filed (e-filed).

The court in Haynes declined to rule on whether the Supreme Court decision in United States v. Boyle, 469 US 241 (1985), applied to e-filing a tax return. The court instead remanded the case to resolve factual issues.

To exacerbate this uncertainty or solidify the IRS' continue position that United States v. Boyle, 469 US 241 (1985), should be applied to not allow reasonable cause for taxpayers who rely on their accountant to e-file their return, unless they request proof of e-filing; the government notified the court that the IRS had refunded the late-filing penalty at issue, effectively mooting the case and leaving this issue unresolved.

Internal Revenue Code Section 6651(a)(1) excuses a taxpayer from penalties for failure to file a return on time if they show the failure was “due to reasonable cause and not due to willful neglect.”

In Boyle, an estate executor hired an experienced lawyer to prepare estate tax returns, but the lawyer failed to put the filing date on the calendar. Nevertheless, the court held that determining a deadline and meeting it did not require any special skills, and therefore relying on an agent was unreasonable. Accordingly, the Court in Boyle did not excuse late filing, and the taxpayer was subject to penalty.

How Boyle applies to e-filing original tax returns remains an open question; as Boyle was decided in 1985 when e-filing did not exist. In late February, the taxpayer in Haynes filed a petition for rehearing with the Fifth Circuit, specifically focusing on the application of Boyle.

However, during the week of March 4, 2019, the government notified the court that the IRS had refunded the late-filing penalty at issue, effectively mooting the case.

This Open Question For Now.

 

As reflected in the Boyle case, it is still the IRS's position that Boyle controls e-filing and failure of the taxpayer to request and obtain confirmation of e-filing, is negligence on behalf of the taxpayer, which voids the reasonable basis argument. Really?

A court tackling this issue in today’s e-commerce environment may likely come up with different reasoning on how “reasonable cause” should apply when an original return is e-filed. The Electronic Tax Administration Advisory Committee found 79.9 percent of major return types were filed electronically in 2017.

Over the last few years, the Internal Revenue Service (IRS) has required e-filing for an ever-increasing number of returns. Currently, all “specified return preparers” must e-file. This definition includes anyone who accepts compensation to prepare returns and expects to file more than 10 returns per year.

Taxpayers who use “specified return preparers,” i.e., almost any paid return preparer, must rely on the preparers to e-file their returns. Even those taxpayers who use over-the-counter software to file their own returns rely on intermediaries to transmit the return to the IRS. Taxpayers may face risks even if these intermediaries operate properly. To process returns, the IRS relies on some of the oldest computer systems in the federal government and this risk/reliance was illustrated in the 2018 system crash on the last day of filing season.

The Current State Of The Law Has Not Kept Pace With Our Digital Economy.

 

 

The Ever-Increasing Reliance On E-Filing Presents Numerous Questions That Are Not Adequately Addressed

In Cases Like Boyle.

At the center of this quandary is whether a taxpayer can have reasonable cause where he relies upon a third party to perform a ministerial act, like e-filing an original tax return. A negative response will thwart the efficiencies gained by technology. A positive response will usher in a whole host of proof issues surrounding how to show that the taxpayer reasonably relied on the third-party agent.

Even the Taxpayer Advocate has addressed this issue in its 2018 Annual Report to Congress: 

"In several cases, taxpayers argued they had reasonable cause for failure to file their tax returns due to alleged malfunctions in their tax return electronic filing software. The courts uniformly rejected this defense.45 

In Spottiswood v. United States, married taxpayers attempted to file their joint income tax return electronically using TurboTax software.46 The IRS rejected taxpayers’ return because the social security number and last name of a dependent on the return did not match the IRS’s records.47 TurboTax informed the taxpayers of the electronic filing rejection on or about the same day that they filed the return. However, the taxpayers did not check the email account associated with their TurboTax account, nor did they use the "check e-file status" TurboTax screen to confirm the IRS had accepted their return until many months later.48 As a result, the court held that the taxpayers failed to establish reasonable cause for failing to file a return.49

Circumstances suggesting reasonable cause are typically outside the taxpayer’s control.50 In Haynes v. United States, taxpayers argued that the failure of the tax software to notify them when the IRS rejected their return was a circumstance beyond their control.51 The court rejected this argument, holding that "an alleged software failure does not rise to the level of the Supreme Court’s definition of a circumstance beyond Plaintiffs’ control—disability, infirmity, objective incapacity—in Boyle."52 

Furthermore, the court noted that taxpayers had the option of filing their tax return on paper, electronically, or through any number of tax return preparers.53 The court was careful in distinguishing cases in which reasonable cause may exist when taxpayers rely on erroneous advice of counsel on a question of law.54 

Accordingly, while it may have been reasonable for the taxpayers to retain an expert accountant to electronically file their return, their decision to do so does not rise to reasonable cause for the abatement of late-filing penalties. 

This case had generated much interest in the tax practitioner community.55 On appeal, the Fifth Circuit vacated the judgment and remanded the case back to the district court, holding that it was not yet necessary to consider whether an exception to the Boyle standard should be created for taxpayers who e-file.56”

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 45 See, e.g., Spottiswood v. U.S., 121 A.F.T.R.2d (RIA) 1595 (N.D. Cal. 2018), appeal docketed, No. 18-16103 (9th Cir. June 14, 2018); Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202 (W.D. Tex. 2017), vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).

46 Spottiswood v. U.S., 121 A.F.T.R.2d (RIA) 1595 (N.D. Cal. 2018), appeal docketed, No. 18-16103 (9th Cir. June 14, 2018).

47 Id.

48 Id.

49 Id. 

50 McMahan v. Comm’r, 114 F.3d 366, 369 (2d Cir. 1997) (citation omitted), aff’g T.C. Memo. 1995–547.

51 Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202 (W.D. Tex. 2017), vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).

52 Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202, 2017 U.S. Dist. LEXIS 106252, at *27-28 (W.D. Tex. 2017) (citing U.S. v. Boyle, 469 U.S. 241, 250 (1985)), vacated and remanded, No. 17-50816 (5th Cir. Jan, 29, 2019).

53 Haynes v. U.S., 119 A.F.T.R.2d (RIA) 2202 (W.D. Tex. 2017), vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).

54 Id. 55 See http://procedurallytaxing.com/delinquency-penalties-boyle-in-the-age-of-e-filing/ (last visited Sept. 4, 2018). The American College of Tax Counsel has filed an amicus brief in support of the taxpayers.

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Been Assessed a Late Filing Penalty For

An E-Filed Return?

 Contact the Tax Lawyers at 

Marini& Associates, P.A.  
 

 

for a FREE Tax HELP Contact Us at:

www.TaxAid.com or www.OVDPLaw.com 

or Toll Free at 888-8TaxAid (888) 882-9243  

 



 
 
Sources:
 
Taxpayer Advocate Service — 2018 Annual Report to Congress

JDSUPRA

56 Haynes v. U.S., vacated and remanded, No. 17-50816 (5th Cir. Jan. 29, 2019).

 

The Internal Revenue Service announced on May 16, 2019 a key advancement in how it identifies its biggest and most complex large corporations. The IRS's Large Business and International Division (LB&I) began a new application of data analytics for determining the population of its largest and most complex corporate taxpayers. This new Large Corporate Compliance (LCC) program replaces the Coordinated Industry Case (CIC) program and covers compliance oversight for LB&I’s largest corporate taxpayers. LCC is one of LB&I’s portfolio of compliance programs.

LCC employs automatic application of the large case pointing criteria to determine the LCC population. For example, pointing criteria include such items as gross assets and gross receipts.  In the past, this was done on a manual, localized basis. Automated pointing allows a more objective determination of the taxpayers that should be part of the population.

The LCC program further improves LB&I's ability to efficiently focus its resources on noncompliance.

LCC works in tandem with LB&I agents and examiners who apply their experience and expertise in undertaking compliance actions and determining compliance treatment streams of the biggest and most-complex corporate taxpayers. Each enhances the other.

The program includes continuous improvement using an agile model principle to continually monitor and improve based on feedback from stakeholders including field teams, practice networks, and data scientists.

  
Contact the Tax Lawyers at 

Marini& Associates, P.A. 

 

 

for a FREE Tax HELP Contact Us at:

www.TaxAid.com or www.OVDPLaw.com or

Toll Free at 888-8TaxAid (888) 882-9243

According to Law360, a deceased Tennessee man’s estate was liable for $1.3 million in taxes owed by his defunct bowling company since asset transfers to another company were fraudulent, the Sixth Circuit said in a Wednesday affirmation of a U.S. Tax Court decision.

Billy F. Hawk Jr.'s estate is liable for the taxes because Holiday Bowl Inc.’s 2003 sale of assets, bowling alleys, to MidCoast International Inc. was a sham transaction under Internal Revenue Code Section 6901(a) and the Tennessee Uniform Fraudulent Transfer Act, Circuit Judge Jeffrey Stuart Sutton said in the published opinion.

The taxes associated with the one-time bowling company were never paid, and it eventually dissolved in 2006, according to the opinion. The Internal Revenue Service examined MidCoast and uncovered not only the Holiday Bowl sale but at least 60 other similar transactions, according to the opinion.

MidCoast, Sequoia Capital LLC, which had originally given money to MidCoast to fund the purported purchase — and a law firm were investigated, Judge Sutton said. As a result, the government launched a civil collection against the Hawks, according to the opinion.

The Tax Court was correct to conclude that Sequoia’s loan to MidCoast was a fake transaction and that Holiday Bowl had merely distributed cash to the Hawks, who were liable for taxes as fraudulent transferees of Holiday Bowl, Judge Sutton said.

MidCoast had received loans from Sequoia, but those loans were issued and repaid on the same day as the MidCoast transaction, according to a November 2017 Tax Court opinion. The stock redemption and the MidCoast transaction failed to hold up under Tennessee’s adoption of the Tennessee Uniform Fraudulent Transfer Act, or TUFTA. Rather, they were part of the same event: a distribution of assets in complete liquidation, according to the order.

The dispute focused on certain transactions made in 2003 related to Holiday Bowl after Hawk died, when the estate sold its shares in the company, which was characterized as a stock sale, to MidCoast Investment Inc. for about $3.4 million, which immediately resold the stock to another third party. However, Holiday Bowl had no operating assets or employees, just cash and tax liabilities, according to court documents.

Nancy Hawk, widow of Billy F. Hawk and co-executor of the estate along with Regions Bank, had argued in August that TUFTA was incorrectly applied in the Tax Court decision. The court was wrong to deem that a loan used to purchase the Holiday Bowl shares was a sham, it incorrectly found that the company was insolvent, and there was no evidence that tax advisers who evaluated the transactions should have suspected tax avoidance, they said.

The U.S. urged the appeals court in November to affirm the Tax Court's decision finding the estate liable for the $1.3 million, saying that under both Section 6901(a) and TUFTA, the estate was transferees. Tennessee law allowed the government to reject Holiday Bowl's original description of a stock sale with MidCoast International Inc., and the Internal Revenue Service could recharacterize the stock sale under the substance-over-form doctrine, according to the U.S.

Have a US Estate Tax Problem?

Robert S. Blumenfeld  - 

On May 9, 2019, the House Ways & Means Committee held a hearing about the "tax gap" — the difference between the amount of taxes owed and those paid on time. The IRS needs more revenue officers and resources. 

“The most recent Internal Revenue Service estimate of the annual gross tax gap is about $460 billion and, after enforcement activities and late payments, the net amount is $400 billion a year,” said House Ways and Means Committee chairman Richard Neal, D-Mass., in his opening statement. “Despite this astounding number, the true tax gap is greater than what the IRS estimates. This is because the IRS estimate does not include taxes owed on income from illegal activities or taxes avoided on certain international activities. The tax gap simply represents estimates of different types of noncompliance with our individual, corporate, and other tax laws.”

He pointed out that there is noncompliance in the form of underreporting, which includes taxpayers who understate their income or overstate their deductions, exemptions, or credits. That accounts for nearly $390 billion of the gross tax gap. Noncompliance by taxpayers who file their tax returns but fail to meet the deadline to pay what they owe accounts for about $40 billion of the gross tax gap.Then noncompliance by taxpayers who are required to file a tax return, but don’t accounts for about $32 billion of the gross tax gap. Neal pointed out that the amount of the tax gap that the IRS can collect depends on its funding and resources.  

“Insufficient IRS funding creates incentives for some taxpayers to take aggressive tax positions,” he said.

 

 

“Well-advised taxpayers, including multinational companies and high-income taxpayers, have the incentives and the resources to do just that.”  
While high-income taxpayers have the most opportunity to engage in tax avoidance planning, the IRS isn’t focusing its audits on them. “Instead, in 2017, the IRS targeted low-income, Earned Income Tax Credit taxpayers,” said Neal. “Many question why the IRS is using its limited resources in this manner rather than deploying them on high-income taxpayers and corporations where the return is greater per hour of a revenue agent’s time.

Taxpayers are more compliant when they may be audited. 

 But the overall audit rate has plummeted below .005. 

 

• IRS examination personnel have decreased by nearly 5,000 employees or 38 percent over seven years, and
• IRS revenue officers have decreased by over 1,600 employees or 42 percent during the same period.

 

 

This All May Well Be an Academic Exercise,

 

As Any Bill Has Almost No Chance of Passing a

Republican-Controlled Senate, Let Alone a Republican President, Who Has Been under Audit Every Year.

 

J. Russell George, inspector general at TIGTA, presented a report on the tax gap and taxpayer noncompliance and pointed to some of TIGTA’s earlier reports on taxing the gig economy. In a report evaluating the gig economy’s impact on self-employment tax compliance, TIGTA reported that cases with billions of dollars in potential tax discrepancies involving taxpayers who earn income in the gig economy are not being worked by the IRS,” he said.

 

“Many cases were not selected to be worked by the IRS due to the large volume of discrepancies that were identified

and resource constraints.

In addition, a lack of an overall gig economy compliance strategy led IRS employees to remove thousands of cases from inventory without justification or with justifications

that were inaccurate.”

James R. McTigue, Jr., director of strategic issues at the Government Accountability Office, also presented a report by the GAO on how multiple strategies are needed to address taxpayer noncompliance. “GAO’s work has demonstrated that no single approach will fully and cost effectively address noncompliance since the problem has multiple causes and spans different types of taxes and taxpayers,” said the report. For example, expanding third-party information reporting could increase voluntary compliance and providing IRS with the authority to regulate paid tax return preparers could improve the accuracy of the tax returns they prepare.”

Need an Reliable Tax Planning?

 Contact the Tax Lawyers at 

Marini& Associates, P.A.  
 

 

 

for a FREE Tax HELP Contact Us at:

 

www.TaxAid.com or www.OVDPLaw.com 

or Toll Free at 888-8TaxAid (888) 882-9243

 

 

 

Sources

Rep Tom Suozzi

TaxProToday