Category Archives: criminal tax law

According to Law360, The Internal Revenue Service has seized property from individuals suffering economic hardships, violating a federal tax law requiring the agency to release levies causing financial difficulties, the Treasury Inspector General for Tax Administration said in a recent report.

The IRS agreed to develop new training to stress that agents tasked with property seizures must confirm that taxpayers' levies are valid. 

TIGTA reviewed 60% of the seizures that the IRS conducted between July 2018 and June 2019, and found examples where the agency failed to release levies against taxpayers who were dealing with economic hardships and seized assets including personal residences. 

Under Internal Revenue Code Section 6343, The IRS Is Required To Release Levies Against Those Who May Be
Suffering Economic Hardships.

In the report, the IRS agreed with TIGTA recommendations that the agency develop new training to stress that agents tasked with conducting property seizures properly confirm that those taxpayers' levies are valid. The IRS also agreed to stress to its agents that any proceeds from the sale of seized assets must be immediately applied to that taxpayer's account to satisfy their deficiencies, and pledged to better inform IRS employees of notice requirements associated with property seizures.

The IRS disagreed with two of TIGTA's recommendations to issue additional guidance to prevent seizures on taxpayers suffering economic hardships and another to require IRS agents to document discussions they have with interagency officials about whether a taxpayer is protected from a property seizure. The IRS told TIGTA that those protocols are already included in the Internal Revenue Manual and preseizure checklist, according to the report.

TIGTA said that the IRS' failure to change its rules could lead to additional taxpayers losing their homes. 

If They Hold Equity In Assets Such As A Personal Residence, According To The TIGTA Report.

In a number of seizures, the IRS didn't properly follow its protocol, failing to perform required research on those taxpayers who have levies against them or give those taxpayers sufficient notice, according to the report. A majority of seizures focused on taxpayers' "other real property," according to the TIGTA report, but several seizures also involved vehicles and personal residences.

TIGTA Did Find That The IRS Followed Its Protocols and
Didn't Seize Property When Taxpayers Had Filed
A Timely Request For An 
Appeals Hearing For Collection Due Process.

The IRS also sufficiently adhered to the guidelines it had set in scaling back collection and enforcement actions during the novel coronavirus pandemic between March and July, according to the report.

During the time in which the IRS suspended some of its enforcement and collection activities, the agency conducted three seizures, but TIGTA found they were proper in order to "protect the government's interest in collection of significant delinquent amounts due," according to the report.

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According to Offshore Bankers Oleg Tinkov is a self-made Russian billionaire with a penchant for private jets and luxury homes around the globe that bear his name, just like the online bank he founded.

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A California District Court in Preimesberger (08/05/2020) 126 AFTR 2d ¶2020-5143 has found that a nursing home officer’s failure to pay withholding taxes was not willful as a matter of law. The officer paid other creditors before the IRS while trying to comply with mandatory federal and state regulations that required him, despite a severe cash flow problem, to keep the nursing homes operating at the existing standard of care. 

James Preimesberger was employed by Meridian Health Services Holdings, Inc. ("Meridian") to operate five skilled nursing home facilities in California ("the Facilities"). 

From 2010 through 2015, the Facilities accrued substantial Medicare and Medi-Cal receivables due from the United States. Eventually the cash flow problem became so acute that the Facilities could not meet all their operational expenses.

Preimesberger arranged for Meridian to bridge the cash flowHim him him gap by drawing on a line of credit from a bank, Capital Finance, Inc. (CFI). However, CFI only authorized and provided funds for the payment of net wages and other expenses necessary to maintain the Facilities’ standard of care, so the Facilities could not use the funds to pay their withholding tax obligations. 

According to Preimesberger, the Facilities could not simply cease operations to resolve its cash flow problems. Under various federal and state regulations, the Facilities had to remain open and maintain the existing standard of care for all residents, despite its cash flow problems, until it complied with regulatory closing procedures and could officially close. Violations of the regulations carried civil and criminal penalties.

In 2019, the IRS assessed trust fund recovery penalties against Preimesberger for the second, third and fourth quarters of 2014 and the first and second quarters of 2015.

The district court found that Preimesberger’s failure to pay the Facilities’ withholding taxes was not willful as a matter of law.

According to the court, the available evidence showed that the Facilities could not just cease operations because federal and state regulations (“nursing home regulations”) prevented nursing homes and skilled nursing facilities from simply closing their doors. Instead, the nursing home regulations required nursing homes and skilled nursing facilities 

1. to follow a specific closing process and 
2. to maintain the existing standard of care until closure.

Failure to comply with the nursing home regulations could have resulted in civil and criminal penalties.

Based on this evidence, the court determined Preimesberger had to keep the Facilities open and maintain the standard of care until he could comply with the regulatory process for closing them.  

Since there was no evidence that Preimesberger had any funding options other than CFI’s line of credit, the court determined that the only way that Preimesberger could meet his obligations under the nursing home regulations was to comply with the restrictions CFI placed on the funds he borrowed.

The IRS did not allege that Preimesberger had access to any funds, other than the CFI loan, that he could use to pay the withholding taxes. 

In addition to the restrictions imposed on the funds by CFI, the court found that the nursing home regulations appeared to have required that CFI’s loan be used to maintain the standard of care, which arguably made the funds “encumbered” under Nakano. The court determined that, under these circumstances, Preimesberger’s nonpayment of the withholding taxes could be considered involuntary and, therefore, not willful.  

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The IRS rejects a lot of e-filed returns for reasons that seemingly have nothing to do with whether the taxpayer filed a valid return. (see these Procedurally Taxing posts) This disparity between the way it treats e-filed returns and the way it treats mailed returns caught up with them in Fowler v. Commissioner, 155 T.C. No. 7 (2020) a fully reviewed opinion with no concurrences or dissents. 

In this deficiency case, the taxpayer's self-reported liabilities, for year for which he e-filed return on extended due date that was rejected for failure to provide valid IP PIN and subsequently refiled return with IP PIN which IRS accepted.

The Tax Court determined on summary judgment that taxpayer's 1st submission triggered running of IRC Sec. 6501(a)'s 3-year Statute of limitations for assessment, so deficiency notice that IRS sent outside that period was untimely. Notwithstanding that the IP PINWas omitted, the taxpayer's 1st submission was “required return” and “properly filed.” 

The court held that the 1st submission met the Beard test insofar as it purported to be return, appeared to be honest and reasonable attempt to comply with tax laws as it included his income, deductions, exemptions and credits along with supporting documentation, and was executed under penalties of perjury. 

 The U.S. Tax Court’s opinion in Beard v. Commissioner enumerated several factors to determine the presumptive validity of a taxpayer submission as a tax return. See 82 T.C. 766, 777 (1984), aff’d per curium, 793 F.2d 139 (6th Cir. 1986) (commonly referred to as the “Beard test”). The  Beard test provides that when a taxpayer mails a paper income tax return to the IRS, the return is treated as valid as long as: 

1. the information on the return is sufficient for the IRS to calculate the tax liability; 
2. the filed document purports to be a tax return; 
3. the return makes an honest and reasonable attempt to comply with the tax laws; and 
4. the taxpayer executes the return under penalties of perjury

The IRS's argument that IP PIN was part of signature requirement was unsupported and otherwise failed where internal IRS guidance stated that element other than e-signature could be needed to authenticate electronic returns; where electronic return originator was instructed to verify taxpayer's identity; and where 1st submission included PPIN, which Form 1040 instructions identified as e-signature. 

Also, taxpayer established delivery of his 1st submission to IRS with accountant's affidavit, accounting firm's transmission log, and IRS's acknowledgement of his submission/that taxpayer's e-filing attempt was unsuccessful due to above omission.

Possibly the Fowler case will persuade the IRS to change its practices of rejecting E-filed returns with issues having nothing to do with whether the taxpayer actually filed a return. While this opinion seems correct, we will see whether given the administrative importance of the issue, the IRS will appeal.

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