ABA Tax Section Fall Meeting in Austin

Stephen and I are attending the fall ABA Tax Section meeting in Austin. There are panels about important procedural and administrative issues, including the new partnership audit regime (timely as my colleague Marilyn Ames and I are finishing up a chapter on that for the Saltzman/Book treatise), the many changes in Appeals Office procedures, how to navigate cases before the Office of Professional Responsibility, best practices in reading and drafting the various types of tax guidance, and the possible changes arising due to the tax aspects of healthcare reform.

This morning Stephen will be on a panel I am moderating  discussing Section 7434 and the private cause of action that it allows for fraudulently issued information returns. Joining him on the panel is Mandi Matlock, who splits her time between Mondrick & Associates and Texas Rio Grande Legal Aid (and who contributes to the Effectively Representing book and has also blogged for us). There are many interesting issues relating to Section 7434, including whether the statute supports a claim for improperly issued information returns arising in employee misclassification cases, whether a person who did not have a legal obligation to file the information return is potentially liable and how the courts have approached damages in the handful of cases that plaintiffs have won.

 

Review of the Combined Annual Wage Reporting Program

In a recent report, the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS was not using the Combined Annual Wage Reporting (CAWR) Program to the best advantage.  I will talk about the report in some detail but I took from the report that the investigation into CAWR provides a good example of what happens when you grossly underfund the IRS.  Undoubtedly, finding other examples of this would prove easy.  The CAWR program provides a valuable and relatively easy way to reconcile wage reporting and find discrepancies.  If the IRS cannot do anything with the findings, the situation needs correction.

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Employers must report wage and withholding information to both the Social Security Administration and the IRS.  The reported information should reconcile; however, the IRS and SSA learned long ago that it did not and established a program to look into the cases in which it did not.  SSA wants to ensure that employees receive proper credit for working and for covered earnings since the earnings have a direct impact on Social Security benefits based off each person’s highest 35 years of earnings.  Employer mistakes could rob a worker of benefits or keep a worker from receiving the correct amount of benefits if the data reported to SSA does not properly report the worker’s earnings.  Similarly, the IRS wants to make sure that employers report the proper amount of taxes and tax withholding.  The program matches the information reported to the IRS on Forms 1099-R and W-2G (Certain Gambling Winnings) with the Forms W-3, W-2, W-3c (Transmittal of Corrected Wage and Tax Statements), and W-2c (Transmittal of Corrected Wage and Tax Statements) transmitted to SSA.

The CAWR program looks for discrepancies in the reporting information that exceed certain limits – the idea is that the IRS would take action to correct the situation which could result in substantial assessments against the employer whose data does not match.  The program also identifies employers who fail to file employment tax returns with the IRS.  That failure, of course, could result in substantial liabilities and should cause swift action by revenue officers assigned to those accounts.

Looking at the 2013 data (and keeping in mind that CAWRs generally runs a couple of years behind), TIGTA found that the IRS only worked 17% of the discrepancy cases identified.  It estimated that the potential amount of tax underreported was $7 billion and that it would take about 55 IRS employees to work these cases.  It estimated that these 55 employees would cost the government about $2.7 million (with an M not a B).  How many of us would like the opportunity to invest $2.7 million to obtain a return of $7 billion.  I seriously doubt the IRS could collect all of the $7 billion even if it could assess that amount and I also doubt if the 55 employee number considers all of the downstream work that might need to occur in collection and other parts of the IRS to fully recover this amount, but it still seems like an eye popping return on investment opportunity.  While the IRS response gave other reasons for not addressing some of the cases or not prioritizing them as TIGTA might, the IRS pointed to limited resources as a major reason for not going after cases it identified as having discrepancies.

Interestingly, on the SSA side a lawsuit settled in 1990  causes the government to work all of the SSA cases and the IRS can only spend whatever limited resources it has left in working the IRS discrepancy cases.  I suppose that should make those of us hoping for social security benefits feel good, but it also leaves me wonder if someone should bring a lawsuit on behalf of taxpayers to get the same deal for the tax cases.  Here is an example of the government spending the resources necessary to ensure that the benefits side makes out but not spending the resources to ensure that the money is captured that will enable it to pay out the benefits without printing more money.

The report contains detailed statistics for anyone wanting to delve deeper into this topic and one chart shows the types of cases identified.  As with many TIGTA reports, it provides an interesting glimpse into the inner workings of the IRS.  In this case, a discouraging one as well.

 

Summer Reading: Tax Compliance And Small Business Taxpayers

The Wall Street Journal ran an interesting article last week, Number of Americans Caught Underpaying Some Taxes Surges 40% [$]. The main point in the story is that with the increase in the gig economy many more Americans are left on their own to pay estimated taxes. Many are not complying. The WSJ reported that from 2010 to 2015 there was an increase of about 40% in the number of people penalized for underpaying estimated taxes.

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It is easy to understand why. Without the benefit of withholding that comes with traditional paychecks and in many cases also without information reporting that can remind people that Uncle Sam is looking, there are many challenges to staying on the right side of the tax law.

A report last year from the American University Kogod Tax Policy Center called Shortchanged: Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy gives the issue a deep dive.

The Kogod Report is terrific. It is well researched. It provides background on the rapid growth of this segment of the economy, with companies like Uber, Airbnb, Etsy and many others pushing Americans into the uneasy tax perch of small business owners. One of the main points in the study is that the tax code is a 20th century code poorly matched with the 21st century economy. Add to the mix a 20th century mode of tax administration and many Americans are ill-equipped to keep records and understand how the law applies to their situation. This all leads to a major tax administration headache.

What I found most interesting in the report is the survey it conducted of about 50 small business owners. While the survey is not meant to be a statistically reliable sample (and in fact may reflect a greater sophistication as all responders were in the National Association of Self Employed) it did provides some insight into many challenges this group faces:

At best, these small business owners are shortchanged when filing their taxes; at worst, they fail to file altogether. Approximately one- third of our on-demand platform operator survey respondents didn’t know whether they were required to pay quarterly-estimated payments and almost half were unaware of any available deductions, expenses or credits they could claim to offset their tax liability. These taxpayers face potential audit and penalty exposure for failure to comply with filing rules that are triggered by relatively low amounts of earned income. Compounding this problem is inconsistent reporting rule adoption that results in widespread confusion among taxpayers

I tip my cap to one of the headings in the report (They Got 1099 Problems and Withholding Ain’t One). The Report and the WSJ article tell of one of the main shortfalls in the US tax reporting system for platform players. Essentially reporting is only required if payments are made via credit card or debit card, and the aggregate number of transactions to one service provider exceeds 200 and the payments exceed $20,000. Absent exceeding both requirements then companies that process credit card payments on behalf of individuals in the gig economy are not required to issue a 1099. Of course, the absence of a 1099 does not mean that the service provider does not have to report income but the absence of reporting leads to either mistakes or intentional non reporting.

Some of the platform players in the economy, like Uber, issue a 1099 even if the service provider does not meet both the 200/20K tests (an earlier WSJ article talks about this; see The Blind Spot in a Sharing Economy: Tax Collection $).

As the report discusses, employment and income tax liabilities, with penalties, can snowball. Not surprisingly, the National Taxpayer Advocate has been on this issue; for example, her testimony last year before the House Committee on Small Business touches on these issues, and lots more, including employee classification issues. She also adds a number of proposals to increase compliance, including changing estimated tax and backup withholding rules for taxpayers with poor compliance history and an increase in IRS education efforts to get people on the right path.

Tax administrators, scholars and legislators have taken note. IRS has put up the Sharing Economy Tax Center on its web page, and there are legislative proposals to change the 200/20,000 rule to trigger mandatory reporting at lower thresholds. UC Hastings Law Professor Professor Manoj Viswanathan has a new article called Tax Compliance in a Decentralizing Economy that addresses some of these issues (I have not yet read though am looking forward to it). Our blogging colleague BC Law Prof Diane Ring at Surly Subgroup also discusses the sharing economy in a post today highlighting worker classification issues. With her BC colleague Shu-Yi Oei Diane co-authored Can Sharing Be Taxed, an article that was in Wash U Law Review last year that also looked at the sharing economy, including reviewing some of the compliance problems implicated in today’s post.

As the Kogod Center reports, it is likely that this part of the economy will grow rapidly in the next few years so one can expect a great deal more attention on the issue.

 

 

Villanova Law School Seeks Faculty Member to Direct Tax Clinic

Keith’s departure for Harvard this year means that Villanova Charles Widger School of Law is looking to hire a full time faculty member to run our tax clinic. The posting for the position is here.

It is a great opportunity. Villanova has an excellent Clinical Program and an innovative Graduate Tax Program. Prior to Keith, I directed the Tax Clinic, and Stephen also cut his teeth there as a student many moons ago. The Law School provides significant support to faculty members and expects that the new Tax Clinic Director will continue the Clinic’s place as a national leader in the tax clinic community.

Storm at SEC Over Appointments Clause Violations Concerning Its ALJs and Possible Implications as to Circular 230 ALJs , Part V

Frequent guest poster Carl Smith updates us on important developments concerning SEC ALJs and reminds readers of possible implications for tax procedure. Les

Since September 2015, I have been following and posting about litigation concerning whether SEC ALJs need to be appointed in accordance with the Constitution’s Appointments Clause.  They currently are not appointed.  The SEC doesn’t think its ALJs need to be appointed because arguably its ALJs do not exercise final authority, since the SEC can review their rulings mostly de novo.

In my last post, I noted that the Tenth Circuit has held that these ALJs need to be appointed; Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016); while the D.C. Circuit has held that these ALJs need not be appointed. Raymond J. Lucia Cos., Inc. v. SEC, 832 F.3d 277 (D.C. Cir. 2016).  I pointed out that, to see if it could resolve the Circuit split short of Supreme Court review, the D.C. Circuit agreed to rehear Lucia en banc.  That hearing took place on May 24, 2017.  But, the Circuit split evenly, so on June 26, 2017, it issued an order announcing that it split.  There is no opinion as a result.  This is to report that on July 21, 2017, Lucia filed a petition for cert. I fully expect the Supreme Court to grant that petition.

For more background on these SEC cases and why this may have an impact on ALJs that the Treasury uses to try Circular 230 violations (who also may not be properly appointed), see my prior posts here, here, here, and here.

This all boils down to a fight over the meaning of a part of Freytag v. Commissioner, 501 U.S. 868 (1991).  In Freytag,  the Supreme Court held that the Appointments Clause did not prohibit the Tax Court’s Chief Judge from appointing Special Trial Judges (STJs) because the Tax Court was one of the “Courts of Law” mentioned in the Clause and because the Chief Judge could act for the Tax Court.  Before reaching these rulings, the Supreme Court first had to decide whether the STJs are “Officers” of the United States who need to be appointed under the Clause or are mere government workers, who don’t need to be appointed.  This question turned on the vague standard the Supreme Court has used in recent years to identify Officers – i.e., individuals who “exercise significant authority on behalf of the United States”.

In Freytag, the Supreme Court held that because of the judge-like duties of the STJs, they are Officers needing appointment under the Clause.  In going through a recitation of STJ duties and powers, the Court, at the end, noted that in some cases (under what is now section 7443A(b)(1)-(5)) STJs can make rulings that are final and not reviewable by regular Tax Court judges.  See section 7443A(c).  In deciding whether SEC ALJs are Officers, the D.C. Circuit and Tenth Circuit have split over whether the mention of these final decision instances for Tax Court STJs constituted a holding by the Supreme Court that, in the absence of final authority, no individual can be an Officer.  The Supreme Court in Lucia (if it grants cert.) will have to resolve this split over what it meant by the finality observation in Freytag.

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.