2014 2014 IR IRS & CT CT DR DRS Upda Update Green & Sklarz - - PDF document

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2014 2014 IR IRS & CT CT DR DRS Upda Update

Green & Sklarz LLC www.gs‐lawfirm.com (203) 285‐8545 New Haven ~ Stamford

About Us

Eric L. Green, Esq Eric is the Chair of the Connecticut Bar Associations Tax Section, and is a frequent lecturer on tax topics, including estate planning, and handling tax audits and tax controversies. Eric is the creator, author and lecturer for CCH’s Certificate Program in IRS Representation, which trains other professionals to handle IRS matters on behalf of clients. Eric is an advisor and columnist for CCH’s Journal

• f Tax Practice & Procedure.

Jeffrey M. Sklarz, Esq Jeff’s practice is focused on representing businesses and individuals with complex financial challenges and litigation needs including: bankruptcy/bankruptcy litigation, creditor/debtor litigation, tax litigation, pension and employee benefit litigation and commercial litigation. He regularly tries cases and appeals before Connecticut’s state and federal courts.

About Us

Arnold Kapiloff, Esq.

Attorney Kapiloff concentrates his practice in estates and trusts and matters of federal, state, and local taxation, including planning and the handling of tax controversies before judicial and administrative tribunals. He has published articles

• n taxation and lectured frequently on tax matters before bar association groups

and other professional continuing education programs. He is a Fellow of the American College of Tax Counsel. Prior to forming this own law practice he was Counsel at the Department of Justice Tax Division, and then counsel to Kostelanetz & Fink, LLP where he was chair of that firm’s Estate Planning and Wealth Management Group.

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IRS Representation Certificate Program Agenda

• IRS Collection Update
• IRS Criminal Enforcement Update
• Bankruptcy & Discharging Taxes
• Penalty Abatement
• CT DRS Update

IRS Collection Update

• 11.8 million taxpayer accounts in collection inventory as of 12/31/13
• Finally getting hiring authority – should see 300 new REs and ROs this

year

• Changes to collection have made it easier to resolve tax debts

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Collection Update

• 2012 Fresh Start initiative has made it easier to resolve tax debts
• Offer acceptance rate is up to 42% (74,000 filed, 31,000 accepted)
• Streamlined installment agreements easier than ever
• New $186 Offer application fee – get it right
• So why the increasing collection inventory?

Collection Update

• US v. Clark – Summons Enforcement
• Summons can only get what exists
• If missed meeting, 2nd letter issued by IRS counsel
• If that missed, US Attorney will seek enforcement by court order

Criminal Tax Update

• IRS Criminal Investigation increase of 25.7% number of convictions in

2013 over 2012

• Identity theft remains a top priority (66% increase in new

investigations opened in 2013)

• Return Preparer Fraud
• Refund Fraud
• Offshore Disclosure investigations

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Criminal Tax Update

True or False? Since its inception in 1913, the government (CI and DOJ) has never had a less than 90% conviction rate in tax cases that go to trial?

Answer

TRUE! Why?

Criminal Tax Update

• Wegelin & Co. Indictment
• Ty Warner & Beenie Babies
• Hydro Expo – the 8300 will kill ya
• Payroll Companies – don’t get Carter!
• Payroll Tax debts – once, twice, and you’re done
• Zwerner ‐ the cost of “willful misconduct”

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Ci Civil vil & Crim Crimin inal al Pe Penalties – Recen ecent Case Case

USA v. Zwerner, 1:13‐cv‐22082‐CMA (S.D. Fla.)

• Carl Zwerner had offshore bank accounts since the 1960s
• He wanted to come into tax compliance in 2008 because of the impending

turnover of Swiss bank account information

• At the time there was no OVDI program – so he made a so‐called “quiet

disclosure” for 2007

• In March 2009 he filed delinquent FBARs for 2004, 2005 and 2006
• The Government did not prosecute
• BUT – assessed 50% FBAR penalties for each delinquent year

Ci Civil vil & Crim Crimin inal al Pe Penalties – Recen ecent Case Case (Cont.)

• The penalties amounts to approximately 150% of the amount of

money held in the accounts

• On June 3, 2014, following a jury trial – the FBAR penalty was upheld
• Bad Facts?
• Filed returns that said he did not have foreign accounts
• Filed returns that said he did not have foreign income
• Used shell companies
• Signed a letter admitting to “willful misconduct”

Ci Civil vil & Crim Crimin inal al Pe Penalties – Recen ecent Case Case (Cont.)

"As this jury verdict shows, the cost of not coming forward and fully disclosing a secret offshore bank account to the IRS can be quite high. Those who still think they can hide their assets offshore need to rethink their strategy.“ ‐ Kathryn Keneally, Asst. Atty. Gen. Tax Division

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Discharging Taxes in Bankruptcy

Discharging Taxes in Bankruptcy

• Can be used to resolve outstanding tax issues
• Some income taxes may be dischargeable
• Stop collection activity
• Force an installment agreement
• Discharge non‐priority debt

Discharging Tax Debt

• Income tax
• Must be 3 years old
• If a return is filed late, must be filed at least 2 years prior to the

Petition Date

• Additional assessments 240 days old
• No SFR (?)
• Tax Liens

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Discharging Tax Debt: 3 Year Rule

The critical date for the three year look back period to commence is when the return was last due, including extensions, not when the return was filed which is immaterial. United States v. McDermott (In re McDermott), 286 B.R. 913 (M.D. Fla. 2002).

Discharging Tax Debt: 3 Year Rule (cont)

Don’t be this guy:

• In re C.R. Leslie, 2014‐1 USTC ¶50,297 (Bankr. C.D. Iowa May 29, 2014)

– no discharge of taxes because TP forget he filed an extension of time to file tax return

Discharging Tax Debt: 2 Year Rule

TP Must Self‐File a Return

• "[I]n order for a document to be considered a 'return,' under either

the bankruptcy or the tax laws, it must (1) purport to be a return; (2) be executed under penalty of perjury; (3) contain sufficient data to allow calculation of tax; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax laws." Moroney v. United States (In re Moroney), 352 F.3d 202 (4th Cir. 2003); Beard v. Commissioner, 82 T.C. 766 (1984) aff'd, 793 F.2d 139 (6th Cir. 1986)

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Discharging Tax Debt: 2 Year Rule (Cont.)

Return Cannot be an SFR

• Generally an SFR (6020(b) return) is not considered a return for purposes of the 2

year rule.

• But see, In re: Rhodes, Case No. 11‐402890‐PWB, AP No. 11‐4074, Doc. #28

(Bankr. N.D. Ga. May 6, 2013) (denying summary judgment where IRS issued SFR but debtor, thereafter, filed a return that was accepted by IRS).

• If the debtor signs the SFR, that may constitute a “return”. 26 USC 6020(a)

Discharging Tax Debt: 2 Year Rule (Cont.)

Self‐Filed Return Must be Pre‐Assessment (maybe?)

• In re Martin, 508 B.R. 717 (Bankr. E.D. Cal. 2014) – TP self‐filed a return post‐
• assessment. Court held there is nothing in the Bankruptcy Code that prohibits

discharge.

• First case to follow 8th Circuit holding in In re Colsen, 446 F.3d 836, 840 (8th Cir.

2006)

• All other circuits have followed In re Hindenlang, 164 F.3d 1029, 1034 (6th Cir.

1999) (no discharge for returns that reduce tax liability post‐assessment)

Discharging Tax Debt:2 Year Rule

Does the 2‐Year Rule Even Exist?

• For federal taxes Yes ‐ CCN CC‐2010‐016 (Sept. 8, 2010) (“A Form 1040 is not disqualified as a “return” under

section 523(a) solely because it was filed late. Regardless of whether a Form 1040 filed after assessment is a “return” for tax purposes, the portion of a tax that was assessed before the Form 1040 was filed is nondischargeable under section 523(a)(1)(B)(i).”)

• For state taxes – Maybe No ‐ Miss. State Tax Comm. v. McCoy, 666 F.3d 924 (5th Cir. 2012) (“Because returns

submitted under [29 U.S.C.] § 6020(b) are, by definition, late and specifically excluded from the definition of returns, McCoy contends that MSTC's interpretation that late filings are not returns under § 523(a)(*) would render this final portion of § 523(a)(*) superfluous.”), cert. denied, 133 S. Ct. 192, 184 L. Ed. 2d 38. But see, In re Wogoman, 475 B.R. 239 (10th Cir. BAP 2012).

• There is a disagreement within the District of Massachusetts over whether to follow McCoy or not.

Compare Perkins v. Massachusetts Dep't of Revenue, 507 B.R. 45, 54 (D. Mass. 2014) (follow McCoy) with, Gonzalez v. Massachusetts Dep’t of Revenue, 506 B.R. 317 (1st Cir. BAP 2014)

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Discharging Tax Debt:2 Year Rule

What is good tax policy?

Discharging Tax Debt: 240 Day Rule

• The tax in question must have been assessed more than 240 days prior to the

bankruptcy (plus any period of time during which an offer in compromise was pending, plus 30 days).

• An amended return is a new assessment.
• Installment agreements do not toll this period.
• Offers in compromise made prior to the assessment do not toll the 240 day period.

See United States v. Aberl (In re Aberl), 78 F.3d 241 (6th Cir. 1996); In re Colish, 239 B.R. 670 (Bankr. E.D.N.Y. 1999).

• Each assessment must be reviewed separately for this determination.

Discharging Tax Debt: 240 Day Rule (Cont.)

Audit Risk. If taxes can still be assessed via audit, then, they will be priority/nondischargeable. Example: Pending Tax Court case. Example: In 2005, debtor filed an open‐ended Form 872‐A (Consent To Extend Time For Assessment) for the tax year 2002. If, for some reason, the IRS forgets the debtor/taxpayer and the debtor files for bankruptcy in 2014, the tax year 2002 remains

• pen, and any subsequently assessed 2002 tax is a priority/nondischargeable tax.

Not an example: Tax on nonfiled returns. Tax on such returns is given a more adverse treatment.

[examples courtesy of Kenneth Weil]

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Tax Liens and Bankruptcy

It is often said that bankruptcy cannot disturb liens and that security interests pass through bankruptcy. This is particularly important in the contest of a Federal Tax Lien (“FTL”) since the FTL will pass through bankruptcy and attach to the debtor’s future interests. Thus, while the underlying tax debt may be sufficiently old to be discharged in bankruptcy, if the FTL remains and the debtor owns or later acquires lienable property (i.e. their home) the IRS will still be able to execute on its tax lien. See, IRS v. Orr (In re Orr), 180 F.3d 656 (5th Cir 1999).

Tax Liens and Bankruptcy: Lien Stripping

• Certain liens can be “stripped down” or “stripped off”. 11 USC 506(a).
• FTLs are not considered “judicial liens” under § 522(f). Because the

IRS is not subject to state law exemption, FTLs cannot typically be removed even if there is no non‐exempt equity in property. Thus, even if real estate would be fully exempt to standard judgment creditors, the FTL remains.

Tax Liens and Bankruptcy: Lien Stripping

• Pursuant to 11 USC § 506(a) a lien can typically be reduced (stripped down) to the

value of the collateral securing the lien. If the property has insufficient value to support the lien it may be (stripped off) removed.

• In Dewsnup v. Timm, 502 U.S. 410 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992), the

Supreme Court held that a Chapter 7 debtor could not strip down a partially secured lien. The basis of the holding was that liens are supposed to emerge from bankruptcy unaffected, except as specifically set forth in the Bankruptcy Codes, such as under § 522(f).

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Tax Liens and Bankruptcy: Lien Stripping

• In re McNeal, 477 Fed. Appx 562 (11th Cir. 2012) held that a chapter 7 debtor could strip off a

wholly unsecured lien. In such a case, a FTL filed against an underwater property, could be avoided.

• Wachovia Mortgage v. Smoot, 478 B.R. 555, 569‐70 (E.D.N.Y. 2012) (acknowledging that the

Bankruptcy Code seems to allow for strip offs and “[t]his Court agrees that “the minority cases

• pining that sections 506(a) and (d) must be read together, and concluding that in a Chapter 7

case, junior liens with no value underlying the claim may be avoided under § 506(d), are premised on sound principles of statutory interpretation, and would be controlling here if we were writing on a clean slate,” but “the Court is not operating in the absence of binding

• precedent. “Ultimately, the differing treatment of wholly unsecured mortgages on debtors'

principal residences may need to be resolved by the circuits or possibly the Supreme Court.”)

Tax Liens and Bankruptcy: Lien Stripping

• McNeal, however, remains a controversial decision.
• In re Saric, 2013 WL 6536752 (Bankr. N.D.N.Y. Dec. 12, 2013) (“This Court agrees with the

majority view that a chapter 7 debtor may not strip off a valid consensual mortgage lien solely under §§ 506(a) and (d)”)

• In re Williams, 488 B.R. 492, 499 (Bankr. M.D. Ga. 2013) (applying McNeal, a tax lien that

attaches to any property of the debtor cannot be stripped: “Therefore the IRS's single claim is an ‘allowed secured claim’ under § 506(d). As a result, Dewsnup rather than McNeal applies to these facts, and no portion of the IRS lien can be avoided.”) In Williams, the court held that because a tax lien attached to personal property it could not be stripped off real property.

Tax Liens and Bankruptcy: Lien Stripping

• Chapters 11 and 13 provide more flexibility for lien stripping.
• C.I.R. v. Johnson, 415 B.R. 159, 170 (W.D. Pa. 2009) (allowing

lien stripping in a Chapter 11 post‐Dewsnup)

• In re Brinson, 485 B.R. 890 (Bankr. N.D. Ill. 2013) (allowing

lien stripping in a Chapter 13 post‐Dewsnup)

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Discharging Tax Debt: Miscellaneous Issues

• The employER portion of withholding taxes are not trust fund taxes
• U.S. v. Sperry, 2013 WL 1768664 (S.D. Ind. Apr. 24, 2013): Sperry is not a bankruptcy

case, but addresses a common issue that arises as an adjunct to a business failure or

• downturn. In Sperry the Court held that under 31 U.S.C. § 3713 (rendering certain claims
• f the U.S. Government “first” priority claims) the government could recover non‐trust

fund amounts to the extent the debtor’s principal remitted debtor funds to himself or

• ther unsecured creditors of the debtor.
• Has not been cited
• Has not been used again (yet)

Discharging Tax Debt: Repayment

• Chapter 13 – 60 months
• Chapter 11 – 60 months, although the IRS can agree to longer
• Reduces the non‐priority/non‐secured debt to the ability to pay

Penalty Abatement

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Penalty Policy Considerations

• Encourage voluntary compliance
• Conserve IRS resources
• Provide clear guidance to taxpayers and practitioners
• Ensure consistent and fair treatment of the issues
• Ensure noncompliant behavior is penalized
• Educational Opportunity

Strategies for Exam

• Build credibility with the examiner through cooperation, timeliness

and transparency

• Assume penalties will be imposed and build defense throughout the

exam

• Seek to discuss the examiner’s position and negotiate before it goes

to 30‐day letter

Strategies for Appeals

• Appeals will not simply concede
• Use it as a bargaining chip
• Look at timing, taxpayer history, specific circumstances. Make sure

the story fits!

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Reasonable Cause

• Does T/P explanation relate to the penalty?
• Do dates and times coincide?
• Could the non‐compliance have been anticipated/prevented?
• Was it an honest mistake?
• Has T/P presented sufficient detail to determine if ordinary business

care/prudence was used?

Reasonable Cause

• Is the T/P a financial professional?
• What is the T/P’s history with compliance?
• Has the T/P had this issue before?
• Have there been prior abatements?

Reasonable Cause: Collection

• Use Form 843
• Request abatement
• Document your case
• Appeal!

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CT DRS Update

CT Dept. of Revenue Services In light of our budget crisis, the DRS is getting more aggressive. They recently updated their logo to reflect this change: DRS Releases New Logo

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Statute of Limitations

• Exam ‐ 3 years
• However, if DRS notices significant underreporting, they will expand

the exam to all years the current owner has had the business

• Collection – None! Compare to the IRS 10‐year Statute

What Triggers the Exam?

• Third party purchase information
• Examination of other taxpayers
• Type of business (liquor stores, bars, smoke shops, mini mart/variety

stores)

• Variance between federal gross receipts and sales tax returns

DRS Workpapers

• Look at the mark‐up percentage
• Look at the glass size (bars)
• Check the bar tenders manual (bars)
• Pull Third party purchase information

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Issues

• Date of purchase v. sales price for mark‐up percentages
• Cash Register receipts (Go Ask Alexandre)
• SMLLC sales tax cases becoming income tax cases
• SIS Referral

Appeals

• Billing Notice triggers the 60 day appeal period, 10

days for jeopardy assessment

• Taxpayers may use APL‐002 to file their protest
• May file an Offer to resolve the case while in Appeals
• 30 Day letter to Tax Session in Superior Court

Bring a Ham to the Meeting

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They like photos Question: What happens if you don’t pay your Connecticut taxes? Answer:

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Criminal Prosecutions

• Referring more cases to criminal than ever before (SIS)
• New Arrest Summary on the DRS Homepage
• SIS are all former police officers, not tax professionals
• Strategy is to try and kill the case as early as possible

Questions