Court Sentences Kroupa; NTA On Appeals’ Changes; Tax Reform Still Percolating

Kroupa Sentenced

Earlier this week Keith discussed the differing views that former Tax Court Judge Kroupa and the government had on sentencing. Yesterday the court, agreeing with the government, sentenced former Judge Kroupa to 34 months. Her ex-husband received 20 months. The Minnesota Lawyer recounts the tale; for those interested our prior posts link to the underlying documents in the case.

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NTA Blogs on Appeals’ Changes

I am a keen reader of what the National Taxpayer Advocate writes; her take on tax administration often offers both an insider and outsider perspective. Her recent blog post on Appeals’ changes in bringing in Compliance and Counsel to Appeals conferences does just that; she appreciates what motivated Appeals to make the changes, and then discusses and reflects on why practitioners, such as the ABA Tax Section, have raised concerns. I recommend a full read of this post but this snapshot shows some of the issues she has with the new procedures:

The new approaches being put into place by Appeals make it appear as though Appeals no longer trusts its own Hearing Officers and that these Hearing Officers require the guidance and oversight of Counsel and Compliance to reach the correct determinations. As a former practitioner, I would think long and hard before bringing a case to Appeals under these new rules.

Tax Reform on the Horizon (and Some Thoughts on Tax Administration)

There is lots of talk this week on the Senate’s proposed health care legislation. On a separate legislative track is deeper tax reform for business and individual taxpayers. On Procedurally Taxing we steer clear from most of the big macro policy issues underlying the tax reform policy choices. We have, however, noted that many reform proposals do implicate key issues of tax administration. For example, last year Keith discussed the House Blueprint for tax reform and its proposal to add a new small claims court to hear tax cases.

The other day Speaker Ryan offered his tax reform pitch and assurance that reform will happen in 2017 as part of a talk he gave to the National Association of Manufacturers. Now, I have scratched my head thinking about border adjustability and contemplated the possible ways that service providers may try to shift income into pass through entities in light of some of the specific proposals that many are kicking around. But my ears perked up when I heard the Speaker justify, at least in part, individual tax reform on the difficulties Americans face when they file their tax returns:

Look at what happens during tax season. I could describe the complexity of the code all day, but what really defines our tax code is that sense of dread that you feel. You know that feeling?

You have to navigate long, complicated forms to file your returns. You need to wade through a seemingly endless amount of deductions and credits, each with its own rules and eligibility requirements.

And then, after you tally up those deductions, you are placed in up to seven different federal tax brackets based on your income level.

And at the end you hope—I mean really hope—that you do not owe a bunch this year. You hope, because you do not really know ahead of time. How could you? This whole system is too confusing, and just too darn expensive.

The solution, according to Ryan is to “start over.”

First, we will eliminate harmful, burdensome taxes including the death tax and Alternative Minimum Tax.

Next, we will clear out special interest carve outs and excessive deductions, and focus on keeping those that make the most sense: home ownership, charitable giving, and retirement savings.

We will consolidate the existing seven brackets into three, double the standard deduction, and simplify things to the point that you can do your taxes on a form the size of a postcard. Wouldn’t that be nice?

And finally—and most importantly—we will use the savings from eliminating these loopholes to lower tax rates.

Let me say that again: We are going to cut taxes

I am intrigued by the Speaker’s reference to the way that Americans meet their annual tax return obligations. A brief article  from Bloomberg earlier this year estimates that only 5 million out of the 165 million or so individual returns are done manually.The overwhelming majority of Americans today do not wade through IRS forms. Instead, they answer user friendly prompts generated by increasingly freely provided software; those that do not use a DIY product either pay a preparer or use free preparers at VITA or TCE sites.

The Speaker is thinking about taxpayer burden using a 20th century model; fewer and fewer taxpayers actually work with an actual IRS form. The bigger point the Speaker makes though I think is that despite the decreasing mental burden on Americans in actually filing their tax returns, many Americans are clueless going into filing season when it comes to understanding their individual and family tax situation. Many Americans, especially lower and moderate income Americans, do not grasp the hodgepodge of credits and deductions that Congress has put in the Code for one reason or another.

If thinking about tax administration when it comes time to pass reform, Congress should simplify our tax system so the average American can understand what their return reflects and how their actions may in fact align with tax law. When thinking about tax reform, Congress should strongly consider paring back the myriad credits and deductions that leave most Americans befuddled. In addition, while Congress may choose (and have good reason) to use the IRS to administer social policy provisions, including some credits, actually aligning the substantive provisions with the reality of Americans’ lives would contribute to a tax system that the IRS could administer and the public could understand.

Follow Up on Recent Posts

On March 28, I wrote a post about an innocent spouse/injured spouse case, Palomares v. Commissioner, pending before the 9th Circuit.  The case has been argued and the oral argument is available here for those who have an interest in this issue.

On May 23, I wrote a post about a fully stipulated collection due process case, Low v. Commissioner, in which the Court remanded the case because the stipulation was incomplete.  Counsel for the petitioner commented on the case and has provided access to certain documents in that case for those with further interest.  The first stipulation of facts, the briefs, and the briefs in a related case are available through these links.

On May 18, Les wrote a post about the statute of limitations where the taxpayer failed to file the correct form with the IRS, May v. United States.  We received a lengthy and thoughtful comment about the matter from occasional guest blogger Stu Bassin.  For those interested in this case, we recommend reading his comment.

We bring this up occasionally but the people providing comments on the blog post bring up many relevant insights about the matters on which we post.  If you are not regularly reading the comments or at least looking for comments on posts of interest to you, you are missing some important information.  Thank you again to those of you who take the time to comment for your thoughtful insights on the posts.  Please remember if you make a comment that we do request that you identify yourself because we find that self- identification keeps the comments more civil in tone.  We hope that you find the blog provides civil discourse about tax procedure issues and that the comments continue that civil discourse about important tax procedure issues.

In addition to soliciting your comments, we also welcome guest bloggers.  If there is a tax procedure issue about which you would like to write a blog post for our site, please contact one of us with your idea or your post.

Legal Practice and Mental Health

We try hard to stay in our lane on Procedurally Taxing. If you come to us for tax procedure and tax administration, and want to keep it that way, feel free to pass on today’s article.  Because we deal with proper representation and because good mental health of the representative is an important aspect of proper representation, you may find today’s short post of some benefit.

May is mental health month, according to Mental Health America, a leading nonprofit that spreads the word on mental health issues. As someone who has over the years benefitted from confronting mental health issues with the care of professionals, and who lost a dear friend to suicide, I believe that tax professionals and the organizations where they work should have at their disposal resources to help through inevitable tough times that are part of life.

There are many places that can provide help and information, and lawyers and tax professionals are generally pretty good about finding information (hey, you found us)! For many who might need help, however, a big issue still is the stigma associated with seeking help from a mental health professional.

Perhaps that is changing.

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An article last week in the WSJ Law Firms Finally Say it’s OK to See a Therapist [$]discussed how some law firms have begun to address more directly the challenges of life in big law, with proactive efforts to bring care to lawyers who may need some help.

My tax professor at Stanford, Joe Bankman, who is also a clinical psychologist in addition to being a rock star tax professor, along with Sarah Weinstein, have started the Wellness Project. As the home page of the project describes, “there has been an explosion of interest in wellness at law schools, and in the greater legal community. The purpose of this website is to make it easier for those working in this area to share ideas, teaching materials, articles and announcements.”

There are some terrific resources at the Wellness Project site. I listened to their most recent podcast, a conversation with Brooklyn Law School Professor Heidi Brown, who discussed her book The Introverted Lawyer. The discussion is terrific, and includes some heartfelt stories about anxiety and how students and lawyers can develop coping strategies to deal with anxiety. As a fellow introvert who finds joy and calm in reading, reflecting and writing, I identified with Professor Brown’s day-to-day approach in finding professional satisfaction despite anxieties.

Just knowing that there are others who sometimes struggle can make a difference. People do not need to suffer in silence, or feel that mental health issues make them weak or lesser professionals.

Back to tax procedure. I promise.

Who Needs Netflix? Tax Videos on Demand

Today is graduation at Villanova Law School. It is a beautiful day and it will be nice to see families and students beaming. One of the highlights for me last academic year was participating in the Second Annual International Taxpayer Rights Conference in Vienna. The conference had a diverse group of speakers, with tax administrators, practitioners and academics from all over the world.

The conference organizers have posted videos of all of the panels and I link them below. An agenda with a little more description and information about the panelists is here.

Links to Video of Panels

NTA Testimony Today on Tax Reform

For more viewing pleasure, the National Taxpayer Advocate will be testifying today about tax reform before the Oversight Subcommittee of the Ways and Means Committee. The hearing is scheduled for 9 AM and the committee live streams and archives the event, which can be found here. More information on the hearing is here

 

Oral Argument This Week on State Qui Tam Action Involving Citigroup

Readers may recall from fall of 2015 a post by Professor Eric Rasmusen discussing a New York State False Claim complaint he filed in connection with allegations that the government’s purchase of Citigroup stock should have triggered Section 382 to apply to limit the bank’s net operating losses. The matter has been removed to New York State court and is scheduled for oral argument this Wednesday. Professor Rasmusen has posted lots of useful information (including briefs) about the case here.

The main issues before the court are the following:

1. Does Citigroup owe the taxes?
2. Should Citigroup know it owes the taxes? (scienter)
3. Is the qui tam suit based on information “publicly disclosed in the news media and government reports”?
We will keep you posted.

ABA Tax Section Preview: Panels of Interest, Appeals Comments and Olson Wins Distinguished Service Award

Keith and I are off to the ABA Tax Section meeting in DC this week. We will report back on some of the highlights; both Keith and I are speaking. Keith is on a panel today discussing issues small businesses confront when things do not go well, including trust fund recovery and bankruptcy issues.

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I am moderating a panel tomorrow that will feature two former PT guest posters, David Vendler and Caleb Smith. David and Caleb will be focusing on information reporting issues; David will be looking at interest reporting arising from transactions relating to homeownership (e.g., loan modifications, short sales). As David has discussed here before, the issue is timely: it is part of the recent IRS guidance priority and David is lead attorney in a class action suit that alleges banks are systematically underreporting interest to millions of consumers. Caleb will be looking at systemic approaches to information reporting, looking at student loan discharge as a case study, a topic he has also discussed in PT here.

On Saturday I will be on a panel moderated by former guest poster, current Tax Court clerk (and Villanova Law alum) Lany Villalobos with the National Taxpayer Advocate Nina Olson, EITC expert Steve Holt, and Congressional Research Service staffer Margot Crandall-Hollick; the panel will focus on tax benefits for working families, with an eye toward future reform proposals.  I will look at two recent cases as a platform to show how the current EITC often entraps individuals, contributing to the high improper payment rate. This is a topic of a brief essay I am finishing and hope to discuss in more detail in PT once it is done.

In addition to hosting meetings, the Tax Section submits many comments. Earlier this week, the Section submitted a set of comments looking at recent Appeals changes and suggesting improvements. Those comments are quite good and are linked here.

Finally, the ABA Tax Section is recognizing National Taxpayer Advocate Nina Olson this weekend with its Distinguished Service Award in honor of her service to the ABA Tax Section, the government and the tax system generally. Former ABA Tax Section Chair Michael Hirschfeld wrote a brief article discussing some of Nina’s career highlights. In it he shares a terrific story involving Keith and Nina meeting years ago to discuss Nina’s prescient idea to have tax clinics help the unrepresented in tax disputes.

Ways and Means Committee Hearing on 2017 Tax Season Highlights Progress and Challenges

Last week the Oversight Subcommittee of the House Ways and Means Committee held its annual hearing to examine the IRS’s filing season performance. The testimony included opening statements from Chair Vern Buchanan and ranking minority member John Lewis, as well as testimony from IRS, TIGTA and GAO.

For those interested in the testimony itself, this link will take you to Committee’s landing page, with video and the written testimony. Here are some highlights.

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Chair Buchanan emphasized the IRS’s efforts to combat fraud, looking to specific programs that in his mind are characterized by high error rates; not surprisingly, the EITC was the poster child (“we are taking about big money here”) though the Chair did note that it was not clear how much of the error was due to fraud and how much due to mistakes.

Representative Lewis, after commenting on the upward trajectory in customer service this filing season, used most of his introductory remarks to criticize private debt collection, noting that he has introduced legislation to overturn its adoption.

The testimony of the IRS executive, Kristen Wielobob, emphasized that this filing season has been generally successful, pointing to reduced telephone wait times and implementation of PATH changes (like accelerating the receipt of W-2’s and delaying EITC and CTC-fueled refunds until February 15 to theoretically allow a match before release of those credit-based refunds).

The GAO testimony, while also noting many of the IRS successes such as reduced telephone wait time, looked to the challenges, including the somewhat surprising statement that even with the PATH acceleration of W-2 filing deadlines, IRS did not verify the wage information on about 2/3 of the EITC returns it received. That was due in part to limits IRS had in processing information it received from third parties (including the challenges of digesting paper rather than electronic W-2s). GAO did note however that the PATH changes led to an early identification of about $863 million in additional refunds as being possibly fraudulent.

The TIGTA testimony indicates that it is studying and will report soon on IRS compliance with the PATH requirements. It also highlights the IRS shift away from in-person service to alternative ways to communicate with taxpayers, (or in its parlance “technology-based assistance services”). The TIGTA testimony also highlights the ongoing identity theft challenges IRS has faced, the IRS efforts to assist identity theft victims and the challenges associated with private debt collection. On the latter point, most worrisome to me is the TIGTA warning that in an initial audit it felt that IRS seems to be setting itself up for major problems in administering the PDC program. According to TIGTA,

[w]e have identified numerous concerns during our audit, including the IRS’s lack of commitment to assist taxpayers concerned that the PCAs [private collection agencies] are part of an impersonation scam as well as our concerns related to the IRS’s process for receiving taxpayer complaints about PCAs.

Parting Thoughts

I am far removed from DC and do not have a good feel about the prospects for tax reform this year. The current administration’s proposals will, at least in the short-term, cost a great deal of revenue. While there is always a drumbeat to reduce the tax gap, those beats get louder when a legislature looks hard to find revenue offsets.

The opening statements of the Chair and ranking minority member of the Oversight Subcommittee to a large extent focused on tax gap issues. I suspect that there will be an increasing focus on ways to reduce the tax gap. While much of the individual tax gap is associated with small business income underreporting, small business taxpayers have powerful voices.  That suggests an increased focus on reducing errors associated with refundable credits, which, relatively speaking, account for little of the overall tax gap but credit claimants typically do not have the same clout with representatives. I would not be surprised if Congress expands the PATH model of delaying credit-based refunds to allow IRS more time to verify eligibility. In addition, TIGTA (as it has in years past) discussed the supposed benefits of allowing IRS to use math error authorities to disallow refundable credits in additional circumstances. I have previously raised concerns with expanding IRS math error powers  (which essentially deprives claimants of the usual pre-assessment notice and hearing rights), but I suspect that there may be increased interest in that approach.

 

 

Arrests Made in IRS Scam Call Center Probe; Dark Web a Home for Stolen Tax Information

In New York Times Article on Call Center Tax Scams Highlights How Criminals Prey on Our Citizens Fear of IRS I discussed how a New York Times reporter uncovered some of the methods and motives of the overseas IRS imposters who preyed on American fear of IRS. The other day the Wall Street Journal reported that Indian police have arrested the apparent ringleader of the scammers in Indian Police Arrest Man Allegedly Behind Tax Scam Call-Center Network. The same day as the WSJ article Accounting Today had a story about how Americans’ tax information is out there on the dark web, for sale and available for scammers seeking to file fake returns and access refunds.

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First, I will briefly discuss the call center scams. Most are familiar with them; as the WSJ reported, the scammers “received phone numbers and other details about U.S. taxpayers from a contact in the U.S. Call-center workers would make hundreds of calls, telling whoever answered they owed back taxes and risked financial ruin, humiliation and arrest if they didn’t pay immediately.”

The WSJ article discusses how the call center scammers were taking in about $150,000/ day. Indian authorities arrested the ringleader and seized his Audi R8 as evidence.

A DOJ indictment from last fall named the ringleader as one of the co-conspirators. The indictment discusses the IRS scam as well as a few other confidence scams that prey on the vulnerable and unsophisticated, including one where callers impersonating ICE agents threaten deportation unless the victim paid a fee.

These schemes suggest that the callers know something about how some Americans fear IRS and government in general. As I discussed last week in a brief post on a TIGTA review of IRS CI conduct in investigating structuring violations the IRS does not help itself when it fails to respect taxpayer rights when it investigates structuring violations. As the TIGTA report described, “when property owners were interviewed after the seizure, agents did not always identify themselves properly, did not explain the purpose of the interviews, did not advise property owners of any rights they might have, and told property owners they had committed a crime at the conclusion of the interviews.” This kind of behavior (and the publicity surrounding it) plants the seeds of fear.

Added to the mix of likely confusion and fear is the onset of private debt collection, an issue Keith has discussed and one that is likely to contribute to new opportunities for scamming Americans. The upshot is I suspect that while perhaps the Indian authorities have put one bad guy away, there are many more right behind him, and many future victims who are a mere phone call (or text) away.

On to the dark web. Wikipedia defines the dark web as “content that exists on darknets, overlay networks which use the public Internet but require specific software, configurations or authorization to access.” Last week Accounting Today in Tax refunds are selling cheap on the Dark Web discusses how there is a fully active market for sales of individuals’ W-2s. There is a sobering link to an IBM study outlining a 6,000 per cent increase in IRS scam emails over the past year, and how cybercriminals are selling W-2 information for $30, with an additional $20 charge for last year’s AGI, a necessary bit of information to allow a scammer to efile a return.

The Accounting Today story is terrific and I recommend a read; it has useful screenshots showing ads on the Dark Web and includes some new vocabulary that the fraudsters use to discuss the crimes. The piece ends with a reminder of how the fraudsters depend on people opening and responding to phishing emails and that “[n]o matter how enticing—or scary—the supposed offer or threat is in the supposed IRS letter, which will try to entice you into clicking on a link, or opening a file, resist, and forward the phishing attempt to the IRS at phishing@irs.gov.”

Good advice.