Monthly Archives: July 2020

TIGTA found that Large Dollar Refunds Are Not Always Examined and Sent to the Joint Committee on Taxation. The Highlights of Reference Number:  2020-30-023 to the Commissioner of Internal Revenue provide that:

IMPACT ON TAXPAYERS

Pursuant to Internal Revenue Code (I.R.C.) Section (§) 6405, before the IRS can issue refunds of income, estate, and gift taxes, and certain excise taxes in excess of a statutorily prescribed amount ($2 million, or $5 million for C corporations), the IRS must provide a report to the JCT.  Taxpayers legally entitled to their refunds may be subject to audit and delays in receiving their refunds, while erroneous high dollar refund claims present a risk to tax compliance.

WHY TIGTA DID THE AUDIT

This audit was initiated to assess the effectiveness of the IRS’s efforts to examine returns with refunds in excess of $2 million ($5 million for C corporations) and report to the Joint Committee on Taxation (JCT) on such refunds.

WHAT TIGTA FOUND

TIGTA identified 1,664 tax modules that exceed the refund dollar criteria, but were not referred to or selected for examination because Treasury Regulation § 301.6402-4 and IRS procedures limit the tax returns that are subject to JCT review.  The IRS does not examine all of these returns even though they exceed the statutory dollar criteria of $2 million and $5 million.

Additionally, the IRS is not always in compliance with I.R.C. § 6405.  The existing procedures for identifying potential JCT cases and forwarding such cases to the Examination functions are not always being followed.  TIGTA identified 74 tax modules with amended and net operating loss carryback returns that were not properly referred to the Examination functions; therefore, they were not examined or sent to the JCT as legally required.

Even when a return is appropriately sent to the Examination functions as a potential JCT case, not all cases are sent to the JCT when required.  Some of the various situations TIGTA identified included:

·   11 instances in which the case was properly referred to the Examination functions, but the classifier accepted the return as filed; therefore, it was not examined or sent to the JCT.

·   28 tax modules meeting JCT review criteria that were not examined; therefore, they were not sent to the JCT for review even though they were properly referred to the Examination functions and properly selected for examination by the classifiers.

·   47 tax modules meeting JCT review criteria that were examined, but the revenue agent failed to refer the case to the IRS’s Joint Committee Review team at the conclusion of the examination; therefore, the case was not sent to the JCT for review.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS:  assess the compliance risk of the large-dollar original return refund claims that exceed I.R.C. § 6405 dollar criteria that are not required to be examined and are not subject to the JCT review process due to Treasury Regulation § 301.6402-4(a), relative to other tax returns, and allocate examination resources accordingly; take corrective actions to ensure that the refunds that were not sent to the JCT for review as required are subject to the JCT review process; and assign oversight responsibilities to a specific group or function for the overall JCT process to ensure that cases are sent to the JCT, when required, and procedures are being followed.

The IRS agreed to three of our four recommendations, and plans to take corrective actions such as coordinating with the JCT to determine the appropriate approach for the returns that were not sent to the JCT as legally required, and strengthening the controls over the process for identifying and submitting returns to the JCT.

 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

Read more at: Tax Times blog

The IRS in IR-2020-142 reminds taxpayers who took advantage of the People First Initiative tax relief and did not make previously owed tax payments between March 25 to July 15, that they need to restart their payments.

As the IRS continues to reopen its operations across the country, taxpayers who were in payment agreements and skipped any payments from March 25 and July 15 should start paying again to avoid penalties and possible default on their agreements.

“Through the People First Initiative, we have endeavored to provide unprecedented relief to help those who owed federal taxes and allow them extra time,”
said IRS Commissioner Chuck Rettig. 

“As we resume a phased-in approach to our normal operations, we are sympathetic to the many Americans still suffering COVID-related hardships and stand ready to continue offering help to those who need it.”

Here’s what taxpayers should do to resume their payment agreements to the IRS, including Installment Agreements, Offers in Compromise, and Private Debt Collection program payments:

Installment Agreements
Taxpayers who suspended their installment agreement payments between April 1 and July 15, 2020, will need to resume their payments by their first monthly payment due date after July 15. Taxpayers should be aware that the IRS didn’t default their agreement, but interest did accrue, and the balance remained.

Taxpayers who had their bank suspend direct debit payments should contact the bank immediately to ensure their first monthly payment due date occurring on or after July 15, 2020 is sent to avoid penalties.

If a taxpayer can’t meet their current installment agreement terms due to a COVID related hardship, they can revise the agreement.

Offer in Compromise
Pending Offers: If the IRS is currently reviewing a taxpayer's submitted offer but hasn’t accepted it yet, the taxpayer should resume their required payments starting July 15, 2020. The IRS will amend the taxpayer's offer to allow them to pay any skipped payments at the end of the offer period, if the offer is accepted.

Already Accepted Offers: If a taxpayer has an Offer in Compromise agreement, and the taxpayer was unable to make the payments on their accepted offer because of a COVID-19 hardship, the taxpayer should resume payments and make up the missed payments by July 15, 2020. If the taxpayer is unable to make up the missed payments, they can contact the number on the IRS notice to discuss their situation.

Private Debt Collection
The IRS did not forward new delinquent accounts to Private Collection Agencies (PCAs) from April 1 through July 15, 2020, and PCA interaction with taxpayers was limited to inbound telephone calls unless requested by a taxpayer in a voicemail or correspondence.

Taxpayers who had their PCA payments on hold should resume payments by July 15. The IRS encourages taxpayers to work with their assigned PCA to establish a new payment arrangement or restructure an existing one based on their current situation.

Taxpayers Who Owe But Can’t Pay
The IRS reminds taxpayers who are experiencing a hardship or who have questions about their payments to call the customer service number provided on their notice but be mindful that wait times could be long.

Phone Lines Remain Extremely Busy 

As The IRS Resumes Operations.

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

Read more at: Tax Times blog

According to the Tax Advisor, prior to the enactment of Sec. 7502, whether tax documents, including tax returns and claims for refund, were timely delivered to the IRS was determined under two common law rules: the physical-delivery rule and the mailbox rule. Under the common law physical-delivery rule, tax documents must be physically received on time by the IRS to be timely filed. This rule often led to documents' not being timely filed because the Post Office delayed in delivering the documents or did not deliver them at all.

To mitigate this problem, many courts began applying the more taxpayer-friendly common law mailbox rule. Under this rule, documents properly addressed and deposited in the U.S. mail by taxpayers are presumed to have been physically received by the IRS in the time such a mailing would ordinarily take to arrive. Proof of mailing can be established by testimonial or circumstantial evidence.

In 1954, Congress addressed the problems caused by the common law physical-delivery rule by enacting Sec. 7502. Under Sec. 7502, a tax document is timely filed if it is:

1. Deposited in the U.S. mail in a properly addressed envelope with adequate postage;
2. Postmarked on or before the prescribed filing date; and
3. Actually delivered by the U.S. mail.

After Sec. 7502's enactment, the courts generally took two positions regarding its effect on the common law mailbox rule. Some courts held that it superseded the common law mailbox rule and provided the exclusive exceptions to the common law physical-delivery rule. Other courts held that Sec. 7502 only provided a safe harbor to the physical-delivery rule and that under the common law mailbox rule, testimonial and circumstantial evidence could still be used to prove timely mailing.

To resolve the split among the courts, the IRS issued regulations (proposed in 2004, finalized in 2011) to make clear that the common law mailbox rule is no longer available. Under the regulations, a document must be postmarked by the U.S. Postal Service on or before the last date prescribed for filing, and the document must actually be delivered to the IRS (Regs. Secs. 301.7502-1).

Whether this 2011 regulation is valid was tested recently in Baldwin,921 F.3d 836 (9th Cir. 2019). The Baldwins filed a 2005 amended return requesting a refund of $167,000 from a net operating loss carryback from 2007. The due date for filing the claim for refund was Oct. 15, 2011, three years from the extended due date of their 2007 tax return. The Baldwins said they mailed the amended return in June 2011, but the IRS did not receive it by the Oct. 15, 2011, deadline. The IRS therefore denied their refund claim as untimely. The Baldwins filed suit in district court and sought to rely on the common law mailbox rule. Two of their employees testified that they deposited the amended return in the mail at the post office on June 21, 2011.

The district court credited the testimony of the employees and held, based on the common law mailbox rule, that the Baldwins' claim for refund had been timely filed in June (Baldwin, No. 2:15-CV-06004-RGK-AGR (C.D. Cal. 12/2/16)). The court concluded that Sec. 7502 unambiguously supplemented rather than supplanted the common law mailbox rule and, thus, Regs. Sec. 301.7502-1(e)(2) was invalid. The IRS appealed the decision to the Ninth Circuit.

The Ninth Circuit reversed the district court decision, holding that Regs. Sec. 301.7502-1 precluded the taxpayers from relying on the mailbox rule. In its decision, the appeals court applied the two-step analysis under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to determine if the regulation was valid. Under Chevron, a court first considers whether Congress has spoken to the precise question. If it has, a government agency may not adopt an interpretation at odds with the plain language of the statute. If the statute is silent or ambiguous, a court then asks whether the agency's interpretation is based on a permissible construction of the statute. If Congress has not spoken to the precise question and the agency's interpretation is permissible, the regulation is valid.

Here, the court found that Sec. 7502 is silent as to whether it replaces the common law mailbox rule and that the regulation's interpretation is based on a permissible construction of the statute. Therefore, under Chevron, the regulation is valid.

Have a Tax Problem?

 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

Read more at: Tax Times blog

A district court has concluded in US v. Bittner (DC TX 6/29/2020), that the penalty for a non-willful FBAR violation relates to each FBAR form not timely or properly filed rather than to each foreign financial account maintained but not timely or properly reported.

Under 31 USC § 5314(a), every U.S. person that has a financial interest in, or signature or other authority over, a financial account, or accounts, in a foreign country must report the account, or accounts, to IRS annually on a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year and one FBAR is used to report multiple accounts. 

The penalty for violating the FBAR requirement is set forth in 31 USC § 5321(a)(5) which provides that the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation, of 31 USC § 5314(a). The maximum amount of the penalty depends on whether the violation was non-willful or willful. The maximum penalty amount for a non-willful violation of the FBAR requirements is $10,000. (31 USC § 5321(a)(5)(B)(i))

The amount determined under 31 USC § 5321(a)(5)(C) is: 

    (i) in the case of a violation involving a transaction, the amount of the transaction, or 

    (ii) in the case of a violation involving a failure to report the existence of an account or any 

          identifying information required to be provided with respect to an account, the balance in 

          the account at the time of the violation. (31 USC § 5321(a)(5)(D)).

On June 6, 2019, the government filed a complaint against Taxpayer to collect $3 million in civil, non—willful FBAR penalties. The Taxpayer’s amended returns for the relevant periods only resulted in a total of $625 unpaid tax, leaving Taxpayer to question the appropriateness of the punishment sought. Taxpayer asserts in his Answer to the Complaint, filed July 30, 2019, that the “astronomical penalties of nearly $3 million against for not timely filing 5 FBAR forms is far in excess of any appropriate punishment for his non—willful conduct with respect to those statutory violations.”

In this case the taxpayer was born in Romania. He moved the U.S. in the early 1980’s and became a naturalized U.S. citizen in 1987. In 1990, Taxpayer returned to Romania and resided there until returning to the U.S. in 2011. During that time, Taxpayer was a successful businessman and investor, maintaining signature authority or control over multiple accounts.

Taxpayer asserts that while he lived in Romania, he had no knowledge of FBAR requirements. He emphasizes that after returning to the U.S. and learning about the requirements, he acted promptly to comply, and that any mistakes made were the result of his CPA’s gross negligence.

The government contends that from 2007 through 2011, Taxpayer failed to report more than 50 accounts. The government assessed $10,000 per account per violation in arriving at almost $3 million in penalties and accruals. On the other hand, Taxpayer argues that the statutory penalty applies per year.

The United States District Court for the Central District of California, in United States v. Boyd, held that the IRS correctly assessed a taxpayer, who non—willfully failed to timely report her 14 accounts in the U.K., on a per account basis. In other words, each account not listed on a timely filed FBAR was a non—willful violation; thus, more than one FBAR violation per year may be assessed, according to the court.

The Internal Revenue Manual (IRM) language also arguably supports a “per year” approach, providing that the FBAR “must be filed for each calendar year that the person has a financial interest in, or signature authority over, foreign financial account(s) whose aggregate balance exceeds the $10,000 threshold at any time during the year.” and, per the IRM, most examiners will impose one penalty per year for non—willful violations.

The district court concluded that the penalty for a non-willful FBAR violation relates to each FBAR form not timely or properly filed rather than to each foreign financial account maintained but not timely or properly reported. Thus, the penalty for Mr. Bittner was $10,000.

The district court looked to the language of the willful penalty and found that 31 USC § 5321(a)(5)(D) mentions "account" three times. The court said, "Congress clearly knew how to make FBAR penalties account specific."

The court said since "account" is not mentioned in 31 USC § 5321(a)(5)(B)(i), the non-willful penalty only applies to the violation of the FBAR rules. The FBAR rules only talk about filing a return. Thus, the non-willful penalty only applies to the return, not to the number of accounts not mentioned on the return.

The district court recognized that Boyd came to an opposite conclusion. But the court found that the Boyd court's analysis fails to provide adequate guidance as to how it reached the conclusion it did. The district court also said that Boyd is in a different district in a different circuit.

Have an FBAR Penalty Problem?

Read more at: Tax Times blog