Yearly Archives: 2019

Invoking the Fifth Amendment for an IRS Document Request

Under code section 7602, the IRS has the broad authority to summons books, papers, files, or any other data that may be relevant to an IRS investigation. While not a formal legal proceeding, it is possible to invoke the Fifth under these circumstances, but it’s not common, and doing so requires a thorough understanding of section 7602, the act of production doctrine, and the required records doctrine.
If a taxpayer receives a summons but believes that any part of it is incorrect, unwise, or otherwise a poor idea, he can refuse to comply with any part of the summons. At this point, it’s up to the IRS to bring a court order to attempt to secure the data not willingly provided. To do this, the IRS will have to prove to a court that a court order is necessary to conduct an investigation, that the investigation will be conducted properly, and that the information is not currently in the hands of the IRS.
However, attempting to use the Fifth Amendment for this reason gets a little murky according to case law, with several applicable principles to consider. First, there is no naturally assumed privilege for pre-existing, voluntarily created documents, like personal bookkeeping records, because these weren’t created on behest of the IRS. Second, the act of procuring requested documents may incriminate a summoned person by admitting that the documents exist, that they are in the taxpayer’s possession, and that they are presumably required by the summons, making the Fifth Amendment privilege largely available on a case-by-case basis. Third, an “act of production” immunity is not an option for required records, like foreign bank account records, under the required records doctrine as these records are required to be maintained by law and the government is given the right to inspect these documents as a condition of voluntary participation in one of the covered regulated activities. Fourth and finally, it’s not possible for the IRS to use its powers to force a taxpayer to waive his Fifth Amendment rights by requiring the preparation of documents that, under the right circumstances, may be covered by privilege.
Sound confusing? It is. But that’s the nature of using the Fifth Amendment as a defense.

Obligations of Tax Professionals: Weighing a Prompt Resolution with Protecting Taxpayer Privilege

The tax system is built on the voluntary compliance of taxpayers. To facilitate this, the Treasury Department maintains numerous rules and regulations that govern the practice of tax professionals, like tax attorneys and IRS Enrolled Agents. These individuals are meant to serve as pillars of the taxation system, not as a backdoor around the IRS’ stated intentions. In layman’s terms? Cooperation is expected, even in challenging circumstances.

However, the role of the Fifth Amendment does put many tax professionals lucky enough to stumble upon an applicable case between a rock and a hard place. While it’s in their best interest to help the taxpayer, they are also obligated to help the IRS uphold its responsibilities, which means both protecting privilege while simultaneously ensuring expedited proceedings. This essentially means that representatives are expected to fully understand the potential role of the Fifth Amendment and, more importantly, whether or not it is appropriate. After all, if every taxpayer pled the Fifth whenever the IRS came knocking, the cost of performing audits would skyrocket, putting even more burden on an already-stretched agency.

In spite of the IRS’ need for adherence to guidelines and prompt cases, the current guidance provided by the IRS does address how to navigate these conflicts of interest, and the priority is often with protecting the taxpayer. For example, Circular 230 indicates that tax professionals are obligated to promptly inform their clients of non-compliance, error, or omission, and must also explain the potential consequences of any mistakes made. Circular 230 then goes on to explain that all records must be submitted in a timely manner “unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.” In essence, practitioners must thoughtfully and carefully weigh their obligations to their clients and their obligations to the IRS while giving proper regard to each.

This does, however, become more challenging in what is known as an eggshell audit, or an audit in which the taxpayer and his representative are aware of erroneous entries in prior tax years, but the IRS auditor is not. In this case, a tax professional must somehow balance providing the IRS with the information it needs without misstating any facts or otherwise misleading the course of the audit while still safeguarding the taxpayer’s best interest. However, this can get into murky territory regarding Misprision of Felony in the United States Code, which effectively states that concealment of a felony by anyone who knows about a felony and fails to report it to the proper authority can result in a fine or three years in prison. However, this statute implies active concealment, which means that a tax representative doesn’t necessarily have to speak up when not asked, but should be honest if the issue arises.

1. Doubt as to liability. There must be a genuine dispute as to the existence of amount of the correct tax debt.
2. Doubt as to collectibility. Such doubt exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
3. To promote effective tax administration. An offer may be accepted on this ground if: (a) collection in full of the tax owed could be achieved, but (b) requiring payment in full would either create an economic hardship, or would be unfair and inequitable because of exceptional circumstances. (Reg. § 301.7122-1(b))

To request an OIC, the taxpayer must apply using Form 656, Offer in Compromise. The taxpayer also must submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses.

A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L, Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC).

The OIC application generally must be accompanied by a $186 application fee. However, the fee is waived for certain low income taxpayers or if the OIC is based on doubt as to liability. (Form 656-B, Notice 2006-68, 2006-31 IRB 105, Sec. 4.03)

1. You begin the running of the Statute of Limitations for assessment & collection,
2. You begin the running the two-year period for discharging this debt in bankruptcy and
3. You reduce your associative tax return penalties from 5% a month for late filing to .05% for late payment penalty. 
• The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
• If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

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The report, from the Government Accountability Office, found that data quality and management issues have limited the effectiveness of the IRS’s efforts to implement FATCA, which was part of the HIRE Act of 2010. The law required foreign financial institutions to send information about U.S. taxpayer assets or else face stiff penalties of up to 30 percent on their income from U.S. sources. The law proved to be controversial, and the Treasury Department needed to negotiate intergovernmental agreements with the tax authorities in dozens of other countries to get them to agree to turn over data under their own banking secrecy laws.

In most cases, the foreign banks turn over the information first to their own home country’s tax authority, which in turn transmits it to the IRS. The IRS also needed to develop portals where the information could be sent, as well as forms, instructions and other guidance and technology systems to implement FATCA.

However, even with all that work, the IRS has had difficulties matching the information reported by foreign financial institutions with U.S. taxpayers' tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by the foreign banks.

On top of that, the IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. individual taxpayers, partly because some IRS databases don’t store foreign asset data reported from paper filings.