McDonald’s Franchisee Loses Its Payroll Taxes to an Embezzler and Then Loses It Penalty Argument with the IRS

The case of Kimdun, Inc. v. United States provides yet another example of the havoc wrecked by payroll provider companies. Over the last 15 years, a fair number of payroll providers have run off with the money leaving their clients in hot water with the IRS. The IRS standard approach to these cases involved telling the cheated taxpayers that they owed their taxes, penalties, and interest. The cheated taxpayer received little compassion from the IRS as they tried to sort through the financial wreckage caused by the payroll provider.   The traditional IRS view on this issue sees the payroll provider as an agent of the taxpayer and any problems created by the payroll provider as problems the taxpayer must fix.   That approach has a sound legal basis but does not always make good policy because some of the payroll provider cases invoke a lot of sympathy.

I thought the IRS position concerning payroll providers had softened. Several pronunciations seemed to suggest a kinder, gentler approach by the IRS on these cases. I quote from the relatively new IRM on ETA offers at the end of the post and cite there to other relevant IRM provisions that a taxpayer facing this problem should explore.

Kimdun definitely did not meet the kinder side of the IRS. This case does not involve Kimdun’s liability for the stolen taxes themselves but rather picks up at the penalty phase. This case involves delinquency penalties for failure to pay and failure to deposit. Kimdun loses the argument in a preemptory fashion. The five McDonalds franchise locations will need to flip a lot of burgers to pay off the penalty for hiring a company that cheated on it and caused it not to pay its taxes on time.

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Kimdun paid the taxes and penalties assessed by the IRS in addition to making payments of the taxes to its payroll provider who ran off with the payments. This case involves a refund suit for return of the money paid for the penalties. Kimdun and the affiliated corporations that made up the franchise group owned by Kim Dobbins have operated in the Los Angeles area for about 30 years. The opinion states that for that entire time or almost that entire time, the companies hired Copac Payroll Service and its clearinghouse bank, Cachet Banz, Inc. to process its payroll, make the necessary deposits, fill out the payroll returns, etc. The payroll company and the bank would electronically sweep the money to pay the payroll and the taxing authorities from the bank accounts of the franchisees. The companies could see (I assume they were looking) that the money was coming out of their bank accounts. They knew their employees received payment because the employees would have quickly sounded an alarm if they had not received payment, and the company assumed that the payroll provider sent the appropriate amounts to the state and federal taxing authorities. Unfortunately the companies apparently did not check up on the timely filing and payment of the taxes.

Some question exists whether the companies had notice of failures before the firing of the payroll company, but eventually the failure became clear. and they fired the payroll provider, The companies also learned that the payroll provider was the subject of a federal grand jury investigation, and the companies received bills from the IRS and California for the unpaid taxes.

Kimdun and the affiliated companies apparently paid over the taxes without a fuss. Having worked on payroll provider cases when I worked in Chief Counsel’s office, I can say that not every taxpayer who gets cheated like this can stroke a check and do that. Many taxpayers who find themselves in this situation face quite a struggle to come up with the taxes for a second time. The ability of Kimdun to pay the IRS the taxes and the penalties attests to the strength of the business and demonstrates that the business stepped up when it learned of the problem and did not shirk from the problem. Hopefully, it also received a theft loss deduction to soften the blow somewhat.

Nonetheless, the IRS stuck to its guns on the penalty. Kimdun argued that the failure to pay the taxes on time and to make the required deposits resulted from reasonable cause and not willful neglect. The court cited United States v. Boyle, 469 U.S. 241 (1985). When a court in this situation cites to Boyle, it is generally a bad sign for the taxpayer and that held true in this case. In Boyle, the Supreme Court set a high bar for taxpayer seeking penalty relief based on the failure of someone on whom the taxpayer relied. The district court here characterized the Supreme Court’s view of the misplaced reliance as providing little relief from penalty where the task involved something the taxpayer could check without expertise such as the timely filing of a return or the timely payment of a debt contrasted with reliance where the expertise of the person on whom the taxpayer relied would reasonably occur such as the taking of a legal position on a return.

The district court here cited to an earlier 9th Circuit case, Conklin Bros. v. United States, 986 F.2d 315 (9th Cir. 1993), involving embezzlement by an in-house bookkeeper rather than a payroll provider. In Conklin, the 9th Circuit, the circuit to which the appeal in this case would lie and the circuit providing controlling precedent to this district court, held that Congress had “charged Conklin with an unambiguous duty to file, pay, and deposit employment taxes and Conklin cannot avoid responsibility by simply relying on its agent to comply with the statutes.”   The district court here applied the same logic in holding Kimdun and its affiliates liable for the delinquency penalties.

This is a tough outcome. If you represent a company whose payroll provider steals its money, look hard at the IRS pronunciations on the relief it may provide to taxpayers in this circumstance. Even if the IRS can win in court decisions that sustain the application of the delinquency, it may not always press for such penalties. It appears there was a little evidence that Kimdun might have had some information to support firing the payroll provider earlier. The case also did not contain information about the IRS failing to follow its own procedures and sometimes you will find that in these cases. Before giving up, seek penalty relief (and in the right circumstances, relief from some of the taxes themselves) but be aware of the precedent and the uphill battle your client will face, because the payroll provider was their agent and ultimately the IRS can place the burden of the loss on the taxpayer.

While Effective Tax Administration offers can prove very hard to obtain, I.R.M. 5.8.11.2.2.1.4 (08-05-2015) entitled “Public Policy or Equity Compelling Factors” has some language that appears to give hope to taxpayers cheated by a payroll provider. The section states:

Compromise may promote ETA and allow for relief if the taxpayer demonstrates that the criminal or fraudulent act of a third party is directly responsible for the tax liability.

In any case involving a fraudulent act of a third party, the taxpayer should be able to provide supporting documentation that the act occurred and was the direct cause of the delinquency. The taxpayer should also be able to show that the nature of the crime was such that despite prudent and responsible business actions the taxpayer was misled to believe the tax obligations were properly addressed. There should be evidence that the funds required for the payment of the taxes were segregated or otherwise identified and were available to pay the taxes in a timely manner. Compromise would promote ETA in such situations only where the failure to comply is directly attributable to intervention by a third party and where the taxpayer has made reasonable efforts to comply and taken reasonable precautions to prevent the criminal or fraudulent acts at issue. If appropriate, the taxpayer’s efforts to mitigate the damages by pursuing collection from the third party should also be considered. Compromise for this reason would only promote ETA where there is a very close nexus between the actions at issue and the failure to comply.

In situations where the actions of a payroll service provider (PSP) contributed to the delinquency, once the offer specialist (OS) has determined sufficient supporting information or documents are available to verify the PSP was the cause of the delinquency and the taxpayer acted in a reasonable manner, the OS may proceed with minimal additional documentation, refer to IRM 5.8.11.5.

Factors which demonstrate the taxpayer was acting reasonably may include, but are not limited to:

– the manner and frequency of monitoring federal tax deposits via EFTPS or other means,

– verifying references prior to entering into the arrangement with the PSP, determining if the PSP was bonded or licensed as required by state laws and regulations and if any corporate filings and licenses required by the state were up to date;

– the fact immediate steps to remedy the problem after learning of the PSP’s misconduct were taken and – whether mitigating factors were involved that may have hampered the ability to identify and correct the problem, e.g. serious illness, natural disaster, etc., as well as a determination as to whether consideration of the taxpayer’s offer under ETA Hardship is a more appropriate resolution

Other IRM provisions worth looking at include IRM 5.1.24.4  (08-15-2012) Types of Third-Party Payer Arrangements; IRM 5.1.24.4.2  (08-15-2012) Payroll Service Provider; IRM 5.1.24.5  (08-15-2012) Collection Actions in Cases Involving Third-Party Payers; IRM 5.1.24.5.1  (11-06-2015)Assignment of Third-Party Payer Client Cases; IRM 5.1.24.5.3  (08-15-2012) Use of Electronic Federal Tax Payment System (EFTPS) for Payment Verification; and 5.1.24.5.8  (08-15-2012)Trust Fund Recovery Penalty (TFRP) Investigations.

Victims of payroll tax providers should take a hard look at the ETA offer provisions because they do provide a way out of the problem caused by paying over the taxes twice. Of course, the IRS does not want to serve as a taxpayer’s insurer; however, this relatively new section of the IRM suggests that in the right circumstances, the IRS will take the hit for the taxpayer because that provides the most effective manner to administer the tax laws.

Interest Abatement Based on “Unfair” Assessment

Frequent guest blogger Carl Smith writes about an interest abatement case recently argued before the 7th Circuit. The fact that it arises in a Collection Due Process case, that the taxpayer fully paid the liability yet continued with the interest abatement argument, that the Tax Court has found it has no jurisdiction to order a refund in a Collection Due Process case and that the taxpayer passed away before the 7th Circuit argument create an interesting backdrop for a potentially broad reaching interest abatement determination. Keith

This is an update to a case on which Stephen posted when the Tax Court rendered its opinion last July. Oral argument was heard in the Seventh Circuit in an appeal in the case on May 27, 2016.

King is an employment tax Collection Due Process (CDP) case based on a notice of federal tax lien (NFTL).  The only issue left in the case on appeal is interest abatement under IRC § 6404(a).  That’s not a typo for § 6404(e).  § 6404(e) allows abatement of interest with respect to taxes that are deficiencies (income, estate, and gift), not employment taxes, where there have been unreasonable IRS errors or delays.  By contrast, § 6404(a) provides: “The Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which–(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed.” While § 6404(a) abatement clearly authorizes abating tax, the IRS agrees that “any liability in respect” of the tax includes interest.

In H & H Trim & Upholstery Co. v. Commissioner, T.C. Memo. 2003-9, the Tax Court held that interest on a tax liability could be abated under § 6404(a) when the amount seemed “unfair”, since anything that was unfair was “excessive in amount”.  In King, the Tax Court granted interest abatement under section § 6404(a) for a period of less than two months — involving, by my estimate, just over $200 of interest abated.  The government was so hopping mad about losing King (and the existence of H & H Trim), that it appealed King to the Seventh Circuit, arguing that § 6404(a) abatement could never apply to interest that was correctly calculated.  The government clearly doesn’t care about the $200 in this case, but wants to get a ruling from some appellate court that taxpayers can’t use § 6404(a) as an end run around the limitations in § 6404(e).  No other appeals court has ever considered interest abatement under § 6404(a).

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The taxpayer was an elderly solo practitioner lawyer who had one or more employees over a number of quarters that the IRS audited.  After the audit was completed and certain proposed adjustment amounts were reduced, the taxpayer agreed to the assessment of employment tax audit changes by signing a Form 2504 showing about $50K in tax and penalties for all the quarters combined.  Shortly before sending in the signed Form 2504, he sent two letters to the Revenue Agent saying he would like to pay in installment over 60 months, but not specifying the amount he proposed to pay each month.  The IRS assessed the employment taxes and penalties and led him to believe that he was going to be put on an installment agreement, but he never was.  After being referred to the Taxpayer Advocate Service (TAS) about a months after the date of assessment, TAS told him that the reason he was not put on an installment agreement was both because he had not stated the amount of monthly payment he wanted to make and he had to submit financial information.  When he did eventually submit financial information, the IRS concluded that he had enough assets to pay in full, if he would just sell off some illiquid assets.  So, the IRS did not give him an installment agreement.

The IRS filed an NFTL, and the taxpayer requested a CDP hearing in which he sought an installment agreement and sought abatement of the interest and penalties.  When the IRS denied him any relief in the notice of determination, he appealed to the Tax Court.  Early on during the case, though, he managed to get a reverse mortgage, and he paid off the tax, penalty, and interest assessments in full.  But, he did not concede that the CDP case was moot.  He still sought penalty abatement under § 6404(f) and interest abatement under §§ 6404(a) or (e).

In King v. Commissioner, T.C. Memo. 2015-36, the Tax Court first noted that it had no overpayment jurisdiction in CDP, citing Greene-Thapedi v. Commissioner, 126 T.C. 1, 12 (2006).  So, the CDP portion of the case in which the taxpayer had, in his petition, complained about not getting an installment agreement was now moot.

Next, the court noted that under its jurisdiction at § 6404(h), it can only resolve disputes about interest, not penalties.  Thus, it had no power to review the IRS’ failure to abate penalties under § 6404(f).

Third, the court noted that interest abatement under § 6404(e) couldn’t apply in King’s case because that subsection does not apply to employment taxes, only such taxes that can give rise to a “deficiency” — i.e., income, estate, gift, and certain excise taxes.

However, the court considered the notice of determination in the case as one denying interest abatement under § 6404(a) — over which the court had jurisdiction — even though at this point, the taxpayer, if successful, would be getting a refund.

King sought interest abatement for three different periods, citing H & H Trim for the proposition that interest should be abated if it was “unfair” under the circumstances.  The IRS argued that H & H Trim was incorrect and that interest abatement under § 6404(a) should only be done if there was some procedural defect in its assessment, the assessment was late under the statute of limitations, or the numerical calculation of the interest was excessive.

The Tax Court stuck by its H & H Trim ruling and gave interest abatement for one of the three periods.  In the period in which King was successful, the Tax Court held that it was “unfair” for interest to accrue from the date of assessment of the liabilities to the date the TAS employee explained to the taxpayer that the taxpayer needed to supply financial information.  The court thought that the IRS employee who originally told the taxpayer that he was going to get an installment agreement should have communicated the problems with the original proposal on or before the date of the assessment.

Even though the amount of interest abated here was only about $200 by my estimate, the DOJ filed an appeal with the Seventh Circuit, wanting to nip in the bud other taxpayers arguing for interest abatement under § 6404(a) simply because the amount assessed was “unfair”.  No Circuit court has ever ruled on this issue.  H & H Trim had not been appealed.  Nor had the IRS appealed another Tax Court opinion that followed H & H Trim, Law Offices of Michael B.L. Hepps v. Commissioner, T.C. Memo. 2005-138.

In the Seventh Circuit, before any briefing was done, the taxpayer died.  His wife, who was not a party to the case, was invited to take over in the case for him, but she did not respond to a letter from the Seventh Circuit.  So, only the DOJ filed a brief.  On May 27, 2016, a one-sided oral argument was held before a three-judge panel that included Judge Posner.  The audio of the oral argument is freely available on the Seventh Circuit’s website, Docket No. 15-2439.

Judge Posner was the only judge who asked questions. His main concern was to give meaning to the words “excessive in amount” in § 6404(a)(1) that was independent of “is erroneously or illegally assessed” in § 6404(a)(3). The DOJ attorney argued that “erroneously or illegally assessed” might mean that internal steps to authorize assessment had not been completed – i.e., procedural defects other than the statute of limitations – while “excessive in amount” might mean, in the case of interest, that the wrong rate or time period had been used in the calculation, leading to an excessive amount of interest having been assessed. Thus, there was no need to interpret “excessive in amount” as “unfair”.

Judge Posner also got into a colloquy with the DOJ attorney about the interplay between §§ 6404(a) and (e).  Although this was not a case where § 6404(e) interest abatement could have applied (since subsection (e) doesn’t apply to employment taxes), the attorney warned that if subsection (a) (which could apply to any tax) applied to “unfair” assessments of interest, then a person who, say, was seeking interest abatement under subsection (e) for interest on income taxes could use (a) abatement as an end run around the limitations of (e) that (1) prevent abatement where a taxpayer contributed to the delay and (2) limit interest abatement to cases of unreasonable errors or delays in IRS employees performing ministerial or managerial acts.

It sounded like the DOJ attorney cleared up all of Judge Posner’s questions, but I am not positive that the IRS will win this case.

 

Summary Opinions through 12/18/15

Sorry for the technical difficulties over the last few days.   We are glad to be back up and running, and hopefully won’t have any other hosting issues in the near future.

December had a lot of really interesting tax procedure items, many of which we covered during the month, including the PATH bill.  Below is the first part of a two part Summary Opinions for December.  Included below are a recent case dealing with Section 6751(b)(1) written approval of penalties, a PLR dealing with increasing carryforward credits from closed years , an update on estate tax closing letters, reasonable cause with foundation taxes, an update on the required record doctrine, and various other interesting tax items.

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  • In December, PLR 201548006 was issued regarding whether an understated business credit for a closed year could be carried forward with the correct increased amounts for an open year.  The taxpayer was a partner in a partnership and shareholder in an s-corp.  The conclusion was that the corrected credit could be carried forward based on Mennuto v. Comm’r, 56 TC 910, which had allowed the Service to recalculate credits for a closed year to ascertain the correct tax in the open year.
  • IRS has issued web guidance regarding closing letters for estate tax returns, which can be found here.  This follows the IRS indicating that closing letters will only be issued upon taxpayer request (and then every taxpayer requesting a closing letter).  My understanding from other practitioners is that the transcript request in this situation has not worked well.  And, some states will not accept this as proof the Service is done with its audit.  Many also feel it is not sufficient to direct an executor to make distributions.  Seems as those most are planning on just requesting the letters.
  • Models and moms behaving badly (allegedly).  Bar Refaeli and her mother have been arrested for tax fraud in Israel.  The Israeli taxing authority claims that Bar told her accountant that she resided outside of Israel, while she was living in homes within the country under the names of relatives.  Not model behavior.
  • The best JT (sorry Mr. Timberlake and Jason T.), Jack Townsend, has a post on his Federal Tax Procedure Blog on the recent Brinkley v. Comm’r case out of the Fifth Circuit, which discusses the shift of the burden of proof under Section 7491.
  • PMTA 2015-019 was released providing the government’s position on two identity theft situations relating to validity of returns, and then sharing the return information to the victims.  The issues were:

1. Whether the Service can treat a filed Business Masterfile return as a nullity when the return is filed using a stolen EIN without the knowledge of the EIN’s owner.

2. Whether the Service can treat a filed BMF return as a nullity when the EIN used on the return was obtained by identifying the party with a stolen name and SSN…

4. Whether the Service may disclose information about a potentially fraudulent business or filing to the business that purportedly made the filing or to the individual who signed the return or is identified as the “responsible party” when the Service suspects the “responsible party” or business has no knowledge of the filing.

And the conclusions were:

1. The Service may treat a filed BMF return as a nullity when a return is filed using a stolen EIN without the permission or knowledge of the EIN’s owner because the return is not a valid return.

2. The Service may treat a filed BMF return as a nullity when the EJN used on the return was obtained by using a stolen name for Social Security Number for the business’s responsible person. The return is not a valid return.

  • Back in 2014, SCOTUS decided Clark v. Rameker, which held that inherited IRAs were not retirement accounts under the bankruptcy code, and therefore not exempt from creditors.  In Clark, the petitioners made the claim for exemption under Section 522(b)(3)(C) of the Bankruptcy Code for the inherited retirement account, and not the state statute (WI, where petitioner resided, allowed the debtor to select either the federal exemptions or the state exemptions).  End of story for those using federal exemptions, but some states allow selection like WI between state or federal exemptions, while others have completely opted out of the federal exemptions, such as Montana.  A recent Montana case somewhat follows Clark, but based on the different Montana statute.  In In Re: Golz, the Bankruptcy Court determined that a chapter 7 debtor’s inherited IRA was not exempt from creditors.  The Montana law states:

individual retirement accounts, as defined in 26 U.S.C. 408(a), to the extent of deductible contributions made before the suit resulting in judgment was filed and the earnings on those contributions, and Roth individual retirement accounts, as defined in 26 U.S.C. 408A, to the extent of qualified contributions made before the suit resulting in judgment was filed and the earnings on those contributions.

The BR Court, relying on a November decision of the MT Supreme Court, held that an inherited IRA did not qualify based on the definition under the referenced Code section of retirement account.  I believe opt-out states cannot restrict exemption of retirement accounts beyond what is found under Section 522, but it might be possible to expand the exemption (speculation on my part).   Here, the MT statute did not broaden the definition to include inherited IRAs.

  • In August, we covered US v. Chabot, where the 3rd Circuit agreed with all other circuits in holding the required records doctrine compels bank records to be provided over Fifth Amendment challenges.  SCOTUS has declined to review the Circuit Court decision.
  • PLR 201547007 is uncool (technical legal term).   The PLR includes a TAM, which concludes reasonable cause holdings for abatement of penalties are not precedent (and perhaps not persuasive) for abating the taxable expenditure tax on private foundations under Section 4945(a)(1).  The foundation in question had assistance from lawyers and accountants in all filing and administrative requirements, and those professionals knew all relevant facts and circumstances.  The foundation apparently failed to enter into a required written agreement with a donee, and may not have “exercised expenditures responsibly” with respect to the donee.  This caused a 5% tax to be imposed, which was paid, and a request for abatement due to reasonable cause was filed.  Arguments pointing to abatement of penalties (such as Section 6651 and 6656) for reasonable cause were made.  The Service did not find this persuasive, and makes a statutory argument against allowing reasonable cause which I did not find compelling.  The TAM indicates that the penalty sections state the penalty is imposed “unless it is shown that such failure is due to reasonable cause and not due to willful neglect.”  That language is also found regarding Section 4945(a)(2), but not (1), the first tier tax on the foundation.  That same language is found, however, under Section 4962(a), which allows for abatement if the event was due to reasonable cause and not to willful neglect, and such event was corrected within a reasonable period.  Service felt that Congress did not intend abatement to apply to (a)(1), or intended a different standard to apply, because reasonable cause language was included only in (a)(2).  I would note, however, that Section 4962 applies broadly to all first tier taxes, but does specify certain taxes that it does not apply to.  Congress clearly selected certain taxes for the section not to apply, and very easily could have included (a)(1) had it intended to do so.

I’m probably devoting too much time to this PLR/TAM, but it piqued my interest. The Service also stated that the trust cannot rely on the lack of advice to perform certain acts as advice that such acts are not necessary.  I am not sure how the taxpayer would know he or she was not receiving advice if it asked the professionals to ensure all distributions were proper and all filings handled.  I can hear the responses (perhaps from Keith) that this is a difficult question, and perhaps the lawyer or accountant should be responsible.  I understand, but have a hard time getting behind the notion that a taxpayer must sue someone over missed paperwork when the system is so convoluted.  Whew, I was blowing so hard, I almost fell off my soapbox.

  • This is more B.S. than the tax shelters Jack T. is always writing about.  TaxGirl has created her list of 100 top tax twitter accounts you must follow, which can be found here. Lots of great accounts that we follow from writers we love, but PT was not listed (hence the B.S.).  It stings twice as much, as we all live within 20 miles of TaxGirl, and we sometimes contribute to Forbes, where she is now a full time writer/editor.  Thankfully, Prof. Andy Gerwal appears to be starting a twitter war against TaxGirl (or against CPAs because Kelly included so many CPAs and so few tax professors).  We have to throw our considerable backing and resources behind Andy, in what we assume will be a brutal, rude, explicit, scorched earth march to twitter supremacy.  We are excited about our first twitter feud, even if @TaxGirl doesn’t realize we are in one.
  • This doesn’t directly relate to tax procedure or policy, but it could be viewed as impacting it, and we reserved the right to write about whatever we want.  Here is a blog post on the NYT Upshot blog on how we perceive the economy, how we delude ourselves to reinforce our political allegiances (sort of like confirmation bias), and how money can change that all.

Informal IRS Advice Grab Bag: Abatements and Powers of Attorney

In this brief post I discuss informal advice relating to abatement requests and powers of attorney, and also flag the IRS’s release earlier this month of a new Form 2848 that reflects developments in light of Loving.

ABATEMENT REQUESTS

A recent IRS email advice discusses requests for abatement, a procedure that I found confusing when I first began working in a tax clinic many years ago. The confusion is because Section 6404(b)  states no claim for abatement shall be filed by a taxpayer for any income, estate, or gift tax assessment.  Despite that statutory limitation, the Internal Revenue Manual states that taxpayers can submit a request for an abatement for income, estate and gift tax assessments, and that the Service will consider those requests. To that end, see for example IRM 25.6.1.10.1(2) Requests for Abatement. One can use an amended return for these purposes.

What happens if the statute of limitations on assessment for the year has closed? There is no sol when it comes to abatement requests, (contrasted with the refund sol). In the email advice, the IRS states, however, that sol on assessment is not irrelevant, as the IRS is supposed to take “special care” on those abatement requests because if the IRS abates an assessment (or part thereof) and the sol on assessment has expired, then the IRS is out of luck because the tax cannot be reassessed.

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POA-CAN A REP HOLD ON TO A SIGNED POA?

A recent IRS memo considered another issue worthy of note, namely whether a representative can submit electronically a POA Form 2848 without a client’s signature. We recently discussed POAs in a post Who Can/Must Sign the POA Form by Keith regarding the ability of one rep to sign on behalf of another, where IRS said the reps must sign individually. Similarly, in this PMTA, the IRS said it must receive the POA that is signed by both the client and the rep in order for it to be effective. The rep had stated that it had the client’s signature on file, but wanted to submit the POA electronically and keep the signed POA in its records and submit to IRS upon request.  IRS’s Procedural Rule 601.504(c)(4) allows for IRS to receive a copy or a fax of the signed POA, but as per the PMTA the IRS will not allow the unsigned 2848, stating that such a procedure could facilitate identity theft and lead to unauthorized disclosures.

IRS RELEASES NEW POA

Earlier this month, IRS released a new version of the Power of Attorney, as well as instructions that highlight the differences between the new 2848 and the prior version. The main difference relates to the limited representation rights for unenrolled preparers and other post-Loving developments such as removing the designation “registered tax return preparer.”

Here is a bit more on the limited representation rights, as this I believe is a major change and reflects the IRS approach of offering a big carrot to those preparers who opt in to the voluntary testing and education program (IRS description of the Annual Filing Season Program is here). Prior to this filing season, all unenrolled preparers had limited representation rights before the IRS relating to an examination of the taxable period covered by the tax return they prepared and signed. As I discussed earlier this year in Some More Updates on IRS Annual Filing Season Program, effective for returns filed as of January 1, 2016, in order for an unenrolled preparer to have those limited representation rights, the PTIN-wielding unenrolled return preparer must also have (1) a valid Annual Filing Season Program Record of Completion for the calendar year in which the tax return or claim for refund was prepared and signed; and (2) a valid Annual Filing Season Program Record of Completion for the year or years in which the representation occurs. Absent the record of completions, the preparer wishing to get information (but not actually represent in an exam) will have to use a Form 8821 which will allow inspection and retrieval of information only.

I am not familiar with data on how often unenrolled preparers in the past had used these rights, but I suspect the ability to communicate and represent in the examination process would be a powerful benefit that an informed consumer would want in a preparer.

Summary Opinions for November

1973_GMC_MotorhomeHere is a summary of some of the other tax procedure items we didn’t otherwise cover in November.  This is heavy on tax procedure intersecting with doctors (including one using his RV to assist his practice).  Also, important updates on the AICPA case, US v. Rozbruch, and the DOJ focusing on employment withholding issues.

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I’ve got a bunch of Jack Townsend love to start SumOp.  He covered a bunch of great tax procedure items last month.  No reason for me to do an inferior write up, when I can just link him.  First is his coverage of the Dr. Bradner conviction for wire fraud and tax evasion found on Jack’s Federal Tax Crime’s blog.  Why is this case interesting?  Because it seems like this Doc turned his divorce into some serious tax crimes, hiding millions offshore.  He then tried to bring the money back to the US, but someone in the offshore jurisdiction had flipped on him, and Homeland Security seized the funds ($4.6MM – I should have become a plastic surgeon!).  His ex is probably ecstatic that the Feds were able to track down some marital assets.   I am sure that will help keep her in the standard of living she has become accustom to.

  • I know I’ve said this before, but you should really follow Jack Townsend’s blogs.  From his Federal Tax Procedure Blog, a write up of the Second Circuit affirming the district court in United States v. Rozbruch.  Frank Agostino previously wrote up the district court case for us with his associates Brian Burton and Lawrence Sannicandro.  That post, entitled, Procedural Challenges to Penalties: Section 6751(b)(1)’s Signed Supervisory Approval Requirement can be found here.  Those gents are pretty knowledgeable about this topic, as they are the lawyers for the taxpayer. As Jack explains, the Second Circuit introduces a new phrase, “functional satisfaction” (sort of like substantial compliance) as a way to find for the IRS in a case considering the application of Section 6751(b) to the trust fund recovery penalty.
  • The Tax Court in Trumbly v. Comm’r  has held that sanctions could not be imposed against the Service under Section 6673(a)(2) where the settlement officer incorrectly declared the administrative record consisted of 88 exhibits that were supposed to be attached to the declaration but were not actually attached.  The Chief Counsel lawyer failed to realize the issue, and forwarded other documents, claiming it was the record.  The Court held that the Chief Counsel lawyer failed to review the documents closely, and did not intentionally forward incorrect documents.  The Court did not believe the actions raised to the level of bad faith (majority position), recklessness or another lesser degree of culpability (minority position).  Not a bad result from failing to review your file!
  • This isn’t that procedure related, but I found the case interesting, and I’ve renamed the Tax Court case Cartwright v. Comm’r as “Breaking Bones”.  Dr. Cartwright, a surgeon, used a mobile home as his “mobile office” parked in the hospital parking lot.  He didn’t treat people in his mobile home (which is good, because that could seem somewhat creepy), but he did paperwork and research while in the RV.  Cartwright attempted to deduct expenses related to the RV, including depreciation.  The Court found that the deductions were allowable, but only up to the percentages calculated by the Service for business use verse personal use.  I’m definitely buying an Airstream and taking Procedurally Taxing on the road (after we find a way to monetize this).
  • The IRS thinks you should pick your tax return preparer carefully (because it and Congress have created a monstrosity of Code and Regs, and it is pretty easy for preparers to steal from you).
  • Les wrote about AICPA defending CPA turf in September.  In the post, he discussed the actions the AICPA has been taking, including the oral argument in its case challenging the voluntary education and testing regime.  As Les stated:

The issue on appeal revolves whether the AICPA has standing to challenge the plan in court rather than the merits of the suit. The panel and AICPA’s focus was on so-called competitive standing, which essentially gives a hook for litigants to challenge an action in court if the litigant can show an imminent or actual increase in competition as a result of the regulation.

On October 30th, the Court of Appeals for the District of Columbia reversed the lower court, and held that the AICPA had standing to challenge the IRS’s Annual Filing Season Program, where the IRS created a voluntary program to somewhat regulate unenrolled return preparers.  The Court found the AICPA had “competitive standing”, which Les highlighted in his post as the argument the Court seemed to latch on to.   For more info on this topic, those of you with Tax Notes subscriptions can look to the November 2nd article, “AICPA Has Standing to Challenge IRS Return Preparer Program”.  Les was quoted in the post, discussing the underlying reasons for the challenge.

  • Service issued CCA 201545017 which deals with a fairly technical timely (e)mailing is timely (e)filing issue with an amended return for a corporation that was rejected from electronic filing and the corporation subsequently paper filed.  The corporation was required to efile the amended return pursuant to Treas. Reg. 301.6011-5(d)(4). Notice 2010-13 outlines the procedure for what should occur if a return is rejected for efiling to ensure timely mailing/timely filing, and requires contacting the Service, obtaining assistance, and then eventually obtaining a waiver from efiling.  There is a ten day window for this to occur.  The corporation may have skipped some of the required steps and just paper filed.  The Service found this was timely filing, and skipping the steps in the notice was not fatal.  The Service did note, however, that efiling for the year in question was no longer available, so the intermediate steps were futile.  A paper return would have been required.  It isn’t clear if the Service would have come to the same conclusion if efiling was possible.
  • Sticking with CCAs, in November the IRS also released CCA 201545016 dealing with when the IRS could reassess abated assessment on a valid return where the taxpayer later pled guilty to filing false claims.   The CCA is long, and has a fairly in depth tax pattern discussed, covering whether various returns were valid (some were not because the jurat was crossed out), and whether income was excessive when potentially overstated, and therefore abatable.  For the valid returns, where income was overstated, the Service could abate under Section 6404, but the CCA warned that the Service could not reassess unless the limitations period was still open, so abatement should be carefully considered.