Monthly Archives: August 2023

According to the IRS, a Colorado man was sentenced today to 15 months in prison for evading the payment of more than $700,000 in employment taxes he owed to the IRS.

According to court documents and statements made in court, Frank Stevens of Bow Mar, Colorado, co-owned restaurants and an oil production business, which had employees from whose paychecks he withheld income and Social Security and Medicare taxes. 

Starting in approximately 2002 and continuing for many years, Stevens did not pay over the withheld payroll taxes to the IRS or file the required quarterly employment tax returns for his businesses. 

After failing to collect from the businesses, the IRS assessed the tax against Stevens personally. To prevent the IRS from collecting through bank levies the taxes he owed, Stevens kept the balances of his personal and business bank accounts low, often leaving them with only $0.01. 

Stevens transferred, or directed employees to transfer, just enough funds to cover expenses and then moved any remaining money to a bank account not subject to IRS levy. In total, Stevens caused a tax loss of approximately $737,128.

In addition to the term of imprisonment, U.S. District Judge Daniel D. Domenico ordered Stevens to serve three (3) years of supervised release and to pay a $10,000 fine and $1,096,138.14 in restitution to the United States.

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According to Procedurally Taxing, in United States v. Paulson, 68 F.4th 528 (9th Cir. 2023) the Ninth Circuit reverses the district court and holds the beneficiaries and trustees personally liable for unpaid estate taxes.  

The Paulson estate had about $200 million in assets.  So, it’s well above the threshold for being a taxable estate, and this case involves unpaid estate taxes. 

Prior to this collection suit, the estate had petitioned the Tax Court, which determined an increased deficiency of $6,669,477 in estate taxes on top of the estate tax liability of $4,459,051 reported on the estate tax return.  Mr. Paulson passed away in July 2000.  The Tax Court entered the stipulated decision in December 2005. The estate elected to pay the additional amount through installments as well.

If the estate taxes are unpaid, trustees, transferees, or beneficiaries become liable for the unpaid estate taxes through IRC §6324(a)(2).  Here, the estate failed to keep up with the installment payments causing the IRS to terminate the §6166 election and issue a notice of final determination under 26 U.S.C. §7479.  This triggered the immediate need for the estate to pay the entire liability.  As you might expect, with an estate of this size, the beneficiaries did not all get along with each other or with the trustee of the living trust. 

By the time the IRS filed suit in 2015 to recover the unpaid estate taxes, the liability had exceeded $10 million.  The beneficiaries, trustees, and former trustees pointed at each other as the person(s) responsible for failing to pay the estate taxes, while each disclaimed their own responsibility.

The district court concluded that James Paulson, Vikki Paulson, and Crystal Christensen were not liable for the unpaid estate taxes as transferees or trustees because they were not in possession of estate property at the time of Allen Paulson’s death.

The timing argument is critical in this case, and it relates to the language of the applicable statute.  The circuit court states:

The statutory provision at issue here, §6324(a)(2), as stated in its title, imposes personal liability on “transferees and others” who receive or have property from an estate.  The statute provides that:

If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employees’ trust which meets the requirements of section 401(a)), surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under sections 2034 to 2042, inclusive, to the extent of the value, at the time of decedent’s death, of such property, shall be personally liable for such tax.

The question before us is whether the phrase “on the date of the decedent’s death” modifies only the immediately preceding verb “has,” or if it also modifies the more remote verb, “receives.”

The IRS argued that the language imposes personal liability on individuals who have estate property at the time of death but also on those who receive estate property anytime thereafter, covering successor trustees and beneficiaries of the living trust.  The circuit court agrees with the IRS reading of the statute.

 

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On July 21, 2023 the Treasury Inspector General For Tax Administration (TIGTA) released its report of the IRS Independent Office of Appeals Collection Due Process Program which found that the IRS Independent Office of Appeals (Appeals) properly informed taxpayers that Collection Due Process and Equivalent Hearings were conducted by an impartial hearing officer. 

Appeals hearing officers verified applicable law or administrative procedures were met; allowed taxpayers to raise issues at the hearing related to the unpaid tax; and made a determination on the proposed levy, the filing of the Notice of Federal Tax Lien, or both after considering the collection action balances efficient tax collection with the taxpayer’s concern that the collection action be no more intrusive than necessary. 

However, TIGTA reviewed a statistically valid stratified sample of 106 cases and identified that Appeals did not always classify taxpayer requests properly or provide only one hearing with respect to the taxable period related to the unpaid tax. 

In addition, similar to prior audits, TIGTA identified incorrect Collection Statute Expiration Date (CSED) posting errors in ** (** percent) of the 106 sampled taxpayer cases in which the IRS either incorrectly extended the CSED, allowing the IRS additional time to collect the delinquent taxes; or incorrectly shortened the CSED, resulting in the IRS having less time to collect the delinquent taxes.

 Based on the sample results, TIGTA estimates that ** and 1,790 taxpayer accounts had their CSEDs incorrectly extended and shortened, respectively, during Fiscal Year 2022. 

Because prior year’s review included a still open recommendation to reinforce the procedures for Appeals personnel to ensure that the correct CSEDs are posted to taxpayer accounts, TIGTA is not making any further recommendations related to this issue in this year’s report. 

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According to Law360, an IRS supervisor would have to sign off on penalties before they're included in pre-assessment notices subject to U.S. Tax Court review under rules the agency proposed on April 10, 2023, which intend to resolve conflicting court interpretations of an oft-litigated piece of the tax code.

The proposed rules from the Internal Revenue Service and the U.S. Department of the Treasury look to clear up confusion surrounding the application of Internal Revenue Code Section 6751(b), which requires an IRS supervisor to provide approval in writing of certain tax penalties.

For penalties reviewable by the Tax Court and included in pre-assessment notices to taxpayers, such as notices of deficiency, a supervisor would need to provide sign-off before the notice is actually issued to the taxpayer under the proposed regulations. Penalties the IRS proposes for the first time in court would need to be approved in writing by a supervisor before the agency first asks that the court consider the penalties, according to the proposal.

For Penalties That Don't Get Reviewed By
The Tax Court Before They're Assessed, An
IRS Supervisor Would Need To Sign Off
On Them Only Before Assessment,
The Proposed Rules Said.

Section 6751(b) has been subject to many court challenges, and the Tax Court specifically "has imposed increasingly earlier deadlines" by which a supervisor must sign off on penalties, "formulating tests that are difficult for IRS employees to apply," the proposed rules said.

"The proposed regulations are intended to clarify the application of Section 6751(b) in a manner that is consistent with the statute and its legislative history, has nationwide uniformity, is administrable for the IRS and is easily understood by taxpayers," the IRS and Treasury said.

The proposed rules sketched out the progressively tighter deadlines for supervisory approval established by the courts. The Tax Court in 2016 initially concluded that there was no timing requirement for supervisory approval, saying in Graev v. Commissioner that sign-off must be obtained any time before penalties are assessed.

But the Second Circuit departed from that take on Section 6751(b), saying in Chai v. Commissioner that supervisory approval has to be obtained while the supervisor still has authority over the penalty. Implicit in "supervisor approval" is that a supervisor has discretion to approve or reject the penalty, the rules said, and that discretion goes away once a notice of deficiency or similar pre-assessment document is issued.

The Tax Court then adopted that holding and began to roll back the deadline for supervisor approval, the proposed rules said. By the time the Eleventh Circuit reversed the Tax Court in Carter v. Commissioner, the Tax Court had decided that supervisory approval has to be obtained before a penalty is first communicated to a taxpayer.

Several appeals courts have since rejected this first-communication rule. But two of those courts, the Ninth Circuit and the Eleventh Circuit, created different standards for satisfying the supervisory approval requirement, leading to confusion, the IRS and Treasury said.

"The difficulty in applying or anticipating how courts will construe these rules has resulted in otherwise appropriate penalties on taxpayers not being sustained and has undermined the efficacy of these penalties as a tool to enhance voluntary compliance by taxpayers," the proposed rules said.

"In addition, the evolving standards regarding interpretations of Section 6751(b) have served to increase litigation, which consumes significant government resources," they added.

It's appropriate to require supervisory approval of notices issued pre-assessment and reviewable by the Tax Court before they are actually issued, the rules said. That's effectively the rule established by the Second Circuit in the Chai case, and it lets a supervisor give their sign-off while they still have the authority to approve or reject a penalty, the rules said.

There's not an earlier deadline mentioned in either the statute or the legislative history, the proposed rules added. Likewise, it makes sense to require a supervisor's sign-off before penalties are raised for the first time in the Tax Court, the proposed rules said, given that "once a penalty is raised, the Tax Court decision will control whether it is assessed."

For penalties that don't get reviewed by the Tax Court, it's reasonable to require a supervisor's sign-off at any point before the penalties are assessed. Since there's no Tax Court review for those penalties, the supervisor's discretion over them can't be made pointless, the proposed rules said.

"Consistent with the language of Section 6751(b), supervisory approval can be made at any time before assessment without causing any tension in the statutory scheme for assessing penalties," the IRS and Treasury said.

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