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Category Archives: criminal tax law

The Common Law Mailbox Rule Now Superseded By Regulations

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 Some courts held that it superseded the common law mailbox rule and provided the exclusive exceptions to the common law physical-delivery rule.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.
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    DC Holds That Non-Willful FBAR Violation Calculations Is Per Year NOT Per Account

    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.

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    IRS Sending Notices With Expired Dates for Action!

    On June 22, 2020 National Taxpayer Advocate Erin Collins issued a blog post advising readers to keep an eye out for notices with expired action dates. As the country continues to grapple with the COVID-19 emergency, IRS campuses are reopening and employees have begun processing the work backlog, including notices.  

    During the shutdown, the IRS generated more than 20 million notices; however, these notices were not mailed.  As a result, the notices bear dates that now have passed, some by several months, and some of the notices require taxpayers to respond by deadlines that also have passed.  There is a silver lining, however. The IRS is providing additional time to respond before interest or penalties apply.  

    To explain the extended response deadlines, the IRS is including in its mailings “inserts” such as Notice 1052-A, entitled “Important! You have More Time to make Your Payment.”  But even with these inserts, we anticipate confusion for taxpayers.  The challenge will be to review the entire package and reference the insert to determine the revised due date before stressing out.

    There are several dozen kinds of IRS notices ready to be mailed in the next month or two.  As the mailing and response dates have passed, the IRS is establishing new response dates.  

    For Business Reasons, The IRS Is Not Revising
    The Generated Notices.

     Rather, It Is Enclosing An “Insert” In Its Mailings,
    Which Consists Of An Additional Page At The End of
    The Notice That Provides Updated Due-Date Information.

    For that reason, taxpayers who receive these notices may be confused and distressed, believing they missed response deadlines.  Thus, it is critical that taxpayers and representatives read through all pages included in IRS notices and pay special attention to the due dates on the insert.  Here’s what taxpayers can expect:

    Initial Balance Due Notices (sometimes called a Notice and Demand)

    The IRS has begun mailing the backlog of 1.5 million notices informing taxpayers that their tax hasbeen assessed and they have a balance due.  The law requires the IRS to send these notices within 60 days of making an assessment.  Taxpayers should look for the insert included at the end, Notice 1052-A, entitled “Important! You have More Time to make Your Payment.”  It specifies that:

    • For returns due on or after April 1, 2020, and before July 15, 2020, taxpayers have until July 15, 2020, to make a payment before interest or penalties apply.
    • For income tax returns due before April 1, 2020, or employment or excise returns due on or after April 1, 2020, taxpayers have until July 10, 2020, to make a payment before interest or penalties apply.

    Notice 1052-A provides a link to the IRS.gov webpage on coronavirus relief, which provides further details about the relief for filing and payment deadlines.

    Math Error Notices Increasing the Amount of Tax

    A subset of the notice and demand backlog is math error notices, which include critical deadlines.  When the IRS proposes an increase in tax for a simple mathematical or clerical error, the law provides the taxpayer with 60 days to request a reversal of the math error adjustment.  If the taxpayer does not timely request a reversal, the tax is assessed and the taxpayer loses the opportunity to appeal the liability in U.S. Tax Court, which is the taxpayer’s only opportunity to challenge the liability in court prior to paying it.  TAS worked with the IRS to create a special insert for these notices to ensure taxpayers know what they need to do to protect this fundamental taxpayer right. 

    • The backlog of math error notices will include Notice 1052-B, Important! You Have More Time to Make Your Payment, which provides taxpayers with 60 days after the notice is sent to contact the IRS to request a reversal.

    Collection Due Process and Other Backlog Notices

    For other notices in the backlog that provide a deadline for action, TAS is working with the IRS to develop insert language that will clarify the new deadlines.  For Collection Due Process (CDP) notices, TAS has recommended the IRS provide a revised deadline to request a CDP hearing that is 30 days after the IRS mails out its backlog CDP notices – and include an insert to that effect.  This approach will help ensure that the taxpayer’s right to request an appeal in an independent forum is not compromised during the coronavirus emergency.

    Even with these efforts, there will likely be taxpayers who contact the IRS because they are confused about when they must respond.  In addition to reading the insert, taxpayers and practitioners should check the IRS’s website and look for updates via alternative channels, such as social media and other outreach.  Compounding the confusion surrounding notice dates, IRS transcripts for taxpayers’ accounts will also reflect incorrect dates for some of the notices.  TAS is continuing to work with the IRS to provide guidance to its employees about how to help taxpayers understand their notices and account transcripts. 

    Look for and Read the Insert for Applicable Due Dates!

    Received a Disparaging IRS Notice?

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    What Are My Chances of Being Audited by the IRS ?

    As IRS budgets and audit staff continue to diminish, audit numbers are at an all-time low. But when you file your clients’ returns, the most common question persists: “How likely am I to be audited?”

    Taxpayers whose returns stray far away from the norm or have “large, unusual or questionable items” can always be singled out for audit. But overall, as the statistics bear out, the IRS likes to audit taxpayers with certain characteristics.

    To start, individuals get more audits than business and specialty taxpayers. In 2017, the IRS reported a 1 in 184 (0.542 percent) chance of being audited for all taxpayers. For taxpayers filing individual returns, the likelihood of audit is 1 in 161 (0.623 percent). Corporations (1120, 1120-S) and partnerships are audited less than individuals – with an audit rate of 1 in 224 (0.445 percent). In 2017, the IRS audited only 1 in every 568 (0.176 percent) employment tax returns (Forms 940/941).

    Individual return audit rates Out of the 150 million taxpayers who filed in 2017, here are the IRS statistics on who experienced an audit:

    Form 1040 taxpayer types, in descending likelihood of audit

    Returns audited

    International taxpayers

    1 in 19

    Taxpayers with gross income before deductions of over $1 million

    1 in 23

    Sole proprietors with gross income before deductions between $100,000 and $200,000

    1 in 48

    Sole proprietors with gross income before deductions between $200,000 and $1 million

    1 in 64

    Taxpayers with self-employment income under $25,000 who claim the EITC

    1 in 72


    1 in 161


    1 in 228

    Wage earners who make under $200,000 and don’t claim the EITC (65% of taxpayers fit this category)

    1 in 364

    The IRS is focusing its audit resources on areas where it knows taxpayers are traditionally non compliant: small businesses, international taxpayers, high-wealth taxpayers, and possible Earned Income Tax Credit fraud schemes. Traditional wage earners who have traceable income reported on Forms W-2 face much less scrutiny.

    Business and specialty tax return audit rates Out of the millions of returns filed by businesses, employers, and specialty taxpayers (estate, gift, trust returns), here are the IRS statistics on who experienced an IRS audit:

    Business/specialty taxpayer types, in descending likelihood of audit

    Returns audited

    Large corporations (Form 1120, assets greater than $5 billion)

    1 in 3

    Estate tax returns

    1 in 12

    Large corporations (Form 1120, assets between $10 million and $5 billion)

    1 in 23

    Excise tax returns

    1 in 72

    Gift tax returns

    1 in 130

    Small corporations (Forms 1120, not 1120-S)

    1 in 146


    1 in 224

    Partnership returns (Form 1065)

    1 in 260

    Estate and trust income tax returns (Forms 1041)

    1 in 971

    Employment tax returns (Forms 940 and 941)

    1 in 568

    S corporation returns (Forms 1120-S)

    1 in 358

    The IRS questions more returns through automated matching notices Audits are not the only way the IRS can question the accuracy of a tax return. Over the past 20 years, the IRS has ramped up more automated return checks in the form of matching programs. For example, in the IRS CP2000 program – the automated underreporter program – the IRS matches income between tax returns and IRS information to look for discrepancies. If there’s a mismatch, the IRS automatically sends out a notice asking for explanation. This program has increased 143 percent since 2000 – and it outnumbered audits 3.1 to 1 in 2017.

    Clearly, smaller IRS budgets and personnel over the past seven years have even lowered the number of CP2000 matching notices. But automated notices have become the norm. And although CP2000 notices are not technically IRS audits, they allow the IRS to increase its ability to challenge returns far beyond what it can do through people-intensive audits. Matching notices also feel a lot like an audit for taxpayers. If you add the CP2000 matching program to the IRS “return challenge” rate for individuals, the chances of the IRS challenging an individual taxpayer’s return come out to 1 in 35 instead of 1 in 161.

    The cost of an audit can be high Audits are likely to be costly. IRS data shows that over 90 percent of individual audits result in a tax change. The average additional tax owed is $6,014 for a mail audit and $21,918 for a more intrusive IRS field audit. CP2000s can also be costly. The IRS collected $6.7 billion in additional tax on the 3,295,000 matching notices it sent in 2017 – an average of $2,033 per notice issued.

    On top of the additional tax for audits and under reporter notices, there are accuracy penalties, which can add 20 percent to the tax bill. Since 2005, the IRS has increased accuracy penalty assessments by 854 percent -- with more than 557,000 taxpayers getting an additional 20 percent penalty on their audit or CP2000 notice.

    Do a proactive income review For some taxpayers, like international taxpayers and higher-wealth taxpayers, avoiding an IRS audit can be more difficult because the IRS believes that their returns are more likely to have errors and omissions.

    For most taxpayers, avoiding IRS scrutiny means reporting all wage and income documents (Forms W-2, 1099, etc.) to the IRS. Tax pros can’t get IRS information statements from the IRS before the end of filing season, so they need to rely on their client’s ability to provide them all the information.

    Tax pros can do their best tax season due diligence by looking at last year’s return and IRS wage and income transcripts for sources of income. They can also do a post-filing review by obtaining their client’s current-year wage and income transcripts that are available during the summer, before the IRS issues the first CP2000 notices later in November. 

    This post-filing review is still proactive before the IRS issues any notices. If tax pros find unreported income, they can file an amended return to avoid any potential accuracy penalty that could be associated with a notice or audit. Clients who don’t avoid an audit or CP2000 notice will look to tax professionals for help. 

    This is when tax professionals, especially experienced Tax Attorneys, can show their ultimate value to clients, by helping Fearlessly representing them before the IRS and penalty abatement request.

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



    Read more at: Tax Times blog