2014 IRS & CT DRS Update

Transcription

1 2014 IRS & CT DRS Update Green & Sklarz LLC lawfirm.com (203) 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 of 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 on 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. 1

2 IRS Representation Certificate Program IRS Collection Update IRS Criminal Enforcement Update Bankruptcy & Discharging Taxes Penalty Abatement CT DRS Update Agenda 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 2

3 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, 2 nd 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 3

4 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 4

5 Civil & Criminal Penalties Recent Case USA v. Zwerner, 1:13 cv 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 Civil & Criminal Penalties Recent 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 Civil & Criminal Penalties Recent 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 5

6 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 6

7 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, 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 (4 th Cir. 2003); Beard v. Commissioner, 82 T.C. 766 (1984) aff'd, 793 F.2d 139 (6th Cir. 1986) 7

8 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 PWB, AP No , 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 postassessment. Court held there is nothing in the Bankruptcy Code that prohibits discharge. First case to follow 8 th 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 (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) 8

9 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 If, for some reason, the IRS forgets the debtor/taxpayer and the debtor files for bankruptcy in 2014, the tax year 2002 remains open, 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] 9

10 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 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). 10

11 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, (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 opining 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 (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) 11

12 Discharging Tax Debt: Miscellaneous Issues The employer portion of withholding taxes are not trust fund taxes U.S. v. Sperry, 2013 WL (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 (rendering certain claims of 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 other unsecured creditors of the debtor. Has not been cited Has not been used again (yet) Discharging Tax Debt: Repayment Chapter months Chapter months, although the IRS can agree to longer Reduces the non priority/non secured debt to the ability to pay Penalty Abatement 12

13 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! 13

14 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? Use Form 843 Request abatement Document your case Appeal! Reasonable Cause: Collection 14

15 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 15

16 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 16

17 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 17

18 They like photos Question: What happens if you don t pay your Connecticut taxes? Answer: 18

19 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 19