Tax Procedure and Tax Fraud in a Nutshell
Author:
Watson, Camilla E.
Edition:
5th
Copyright Date:
2016
32 chapters
have results for Tax Procedure and Tax Fraud in a Nutshell
Chapter 10. Civil Penalties and Interest 84 results (showing 5 best matches)
- Perhaps the most difficult issue in tax fraud litigation is the line between tax avoidance (which is legal) and tax evasion (which is illegal and will subject the taxpayer to possible civil and criminal penalties). Judges and scholars from Justice Holmes, in a famous 1916 case, to the present day have attempted to minimize the analytical problems involved by simply declaring the rule to be obvious: tax avoidance is the attempt to avoid taxes in a legal manner, while tax evasion (or fraud) is the attempt to evade taxes in an illegal fashion. In practice, though, the distinction is not easily drawn.
- “Fraud” for purposes of the civil penalty under § 6663(b) is synonymous with tax evasion, the “willful attempt in any manner to evade or defeat any tax,” under the criminal fraud provision, § 7201. In fact, prior to 1954 the civil fraud penalty was phrased in terms of “intent to evade tax,” rather than the current “fraud.” Moreover, the voluminous cases interpreting the term “willfully” under the tax criminal sections are instructive and applicable also in the definition of civil fraud. Both civil fraud and criminal evasion depend on the taxpayer’s state of mind. To be liable for either the civil or criminal fraud penalty, the taxpayer must intend to evade a tax known to be due.
- The major difference between civil and criminal fraud is the degree of proof required to establish fraud on the part of the taxpayer. Criminal fraud requires sufficient evidence to prove guilt beyond a reasonable doubt. Civil fraud requires clear and convincing evidence of tax evasion. Due to the lower standard of proof in civil cases, the civil fraud penalty may be imposed upon a taxpayer who was not convicted of criminal tax evasion. If the taxpayer is convicted of criminal tax evasion under IRC section 7201, the civil fraud penalty should be asserted for the same tax year. Criminal conviction does not mean the civil penalty will be automatically sustained. [IRM § 20.1.5.14.4]
- Can a taxpayer thwart the Commissioner’s imposition of the fraud penalty by filing a Tax Court petition challenging the asserted deficiency and the fraud penalty, and then simply failing to appear at trial? The Tax Court, in a reviewed decision with five dissents, held that in such a case, if the Government’s specific allegations of fact, taken to be true by the taxpayer’s default, are sufficient to establish fraud, then the fraud penalty will be sustained.
- Unlike § 6662, which defines the terms “negligence” and “disregard,” § 6663 does not define the term “fraud.” Courts have long recognized that the essence of fraud is the taxpayer’s state of mind. Precisely what state of mind the Government must prove has been variously described, but most definitions require a motivation or intent to evade a known tax. According to the Tax Court, fraud is the intent “to evade taxes known to be due and owing by conduct intended to conceal, mislead, or otherwise [to] prevent the collection of taxes, [where] there is an underpayment of tax.”
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Preface 3 results
- Federal tax practice and procedure is a burgeoning and ever more important area of the tax law. Many tax cases are won or lost on procedural grounds alone, and an increasing number of law schools are incorporating tax procedure courses into their curricula. This book is intended as a supplement to the various casebooks and treatises on federal tax practice and procedure, especially Federal Tax Practice and Procedure by Watson and Billman. This book summarizes the legal rules and provides a broad overview of the federal tax practice and procedure area in both the civil and the criminal contexts. It also delves into the policy behind the law and notes conflicts among the circuits and ambiguities in the law. However, this book is not intended to provide an exhaustive analysis of the law or its historical development.
- Federal tax practice and procedure is divided into two general categories: civil and criminal. The majority of the book (the first fifteen chapters) is devoted to the civil aspect of tax practice. The general organization of this Fifth Edition follows that of the Fourth Edition. In the interim between the two editions, however, there have been numerous important changes in this area and several important U.S. Supreme Court cases.
- The last four chapters of this book are devoted to the criminal aspect of a tax practice. These chapters cover the investigation of tax crimes, the substantive offenses (under Titles 11, 18 and 26 of the U.S.C.), likely defenses, and important procedural aspects of criminal tax practice, focusing on Fourth, Fifth and Sixth Amendment rights.
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Chapter 18. Federal Tax Crimes 105 results (showing 5 best matches)
- The significance of importing the mail and wire fraud statutes into the tax fraud arena is that conviction of either will support civil and criminal penalties under RICO, the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. RICO prosecutions are statutorily authorized for violation of some federal criminal laws. Tax crimes are not included in the list of permissible predicate crimes, but mail fraud and wire fraud are appropriate predicates. If the same conduct supports both a tax charge (under any of the tax crimes) and a mail fraud charge (because the defendant mailed her tax return as part of a scheme to defraud), then the same indictment charging those two offenses also may include a RICO charge. See
- Can the mailing of a fraudulent income tax return violate the mail fraud statute? Yes, so long as there is a scheme to defraud. Courts have upheld convictions of mail fraud in cases in which the defendant filed false income tax returns under fictitious names to obtain refunds. 575 F.2d 32 (2d Cir.1978). A defendant can be convicted of both mail fraud and tax fraud. 817 F.2d 1409 (9th Cir.1987). Because the Government need not prove “willfulness” in a mail fraud prosecution, it may elect to proceed under the mail fraud statute, rather than under a criminal tax provision.
- The Justice Department requires authorization of the Tax Division before charging mail fraud, either independently or as a predicate for a RICO charge, when the mailing charged is either the filing of a false tax return or other tax form or the mailing is to promote a tax fraud scheme such as a tax shelter. According to the amendment, “authorization [to bring a mail fraud charge in such situations] will be granted only in exceptional circumstances.” The amendment explains the policy as follows: “It is the position of the Tax Division that Congress intended that tax crimes be charged as tax crimes and that the specific criminal law provisions of the Internal Revenue Code should form the focus of prosecutions when essentially tax law violation motives are involved, even though other crimes may technically have been committed.” United States Attorneys’ Manual, § 6–4.210.
- The tax evasion statute, § 7201, is the “capstone of a system of sanctions which singly or in combination were calculated to induce prompt and forthright fulfillment of every duty under the income tax law and to provide a penalty suitable to every degree of delinquency.” 317 U.S. 492 (1943). The evasion statute (also called criminal fraud) provides the harshest punishment, and requires the greatest quantum of proof by the Government, than any other tax crime.
- , makes clear, the term willfulness means the same thing in tax felonies as it does in tax misdemeanors. There is no lesser standard of intent for misdemeanor willful failure to file than for felony attempted tax evasion: both require a voluntary, intentional violation of a known legal duty. Carelessness or mistake is insufficient in both the felony and the misdemeanor contexts.
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Chapter 11. The Collection Process 65 results (showing 5 best matches)
- If the taxpayer loses a civil or criminal fraud case, she may make the acquaintance of the Area Collection Division. In civil fraud cases, there is no time limit for assessing the tax (IRC § 6501(c)) or the penalty. Moreover, a taxpayer who has been convicted of tax evasion is certain to face assessment of tax and civil penalties at a time when she may be least able to pay.
- After the lien arises, the IRS will file a Notice of Federal Tax Lien to give the public notice of the lien. Filing a notice of a tax lien can have a devastating impact on the taxpayer because, among other things, it potentially can ruin her credit rating. Many taxpayers must borrow funds to pay their tax debts, and filing a notice of the lien may hamper the taxpayer’s ability to obtain the necessary funds. Congressional hearings in 1997 and 1998 focused in part on tax liens filed erroneously, and the problems caused by such errors. Congress addressed these concerns in its 1998 enactment of the Taxpayer Bill of Rights Act (TBRA 3), which contains provisions providing “due process” in the collection process. Under this Act, the IRS must follow formal procedures giving the taxpayer notice and hearing rights in connection with the filing of a Notice of a Federal Tax Lien or an intent to levy on such a lien. See §§ 11.3.B and ...of the administrative levy and collection due...
- The priority of a federal tax lien is governed by §§ 6321–6323 of the tax Code, as well as by provisions in the Bankruptcy Code. The general rule is “first-in-time-is-first-in-right,” so a non-tax lien that is perfected prior to a federal tax lien will have priority over the tax lien. The federal tax lien arises automatically and attaches to the taxpayer’s property without having to be filed. But the priority of the lien depends upon whether and when the IRS has filed a notice of its lien. If the notice has not been filed, the tax lien is invalid against judgment creditors, purchasers from the taxpayer, and holders of mechanics liens or security interests. IRC § 6323(a). If the notice has been filed, the tax lien takes priority over subsequently perfected security interests or liens under the general rule. But there are some exceptions to the general rule. First, if the earlier filed non-tax lien is “inchoate,” the later federal tax lien takes priority over the non-tax lien. A lien...
- Notices under both sections must state the amount of the unpaid tax and inform the taxpayer of the right to request a hearing within 30 days. Lien notices also must describe the administrative appeals process and the procedures relating to the release of liens. Levy notices must describe the IRS’s proposed actions and the taxpayer’s rights. If the taxpayer requests a hearing, the hearing will be conducted by an Appeals officer not previously involved with the taxpayer’s case. Timely request for a hearing postpones any collection activities, criminal tax prosecutions, and refund suits until the Appeals officer issues a determination. At the hearing the taxpayer may raise “any relevant issue relating to the unpaid tax or the proposed levy,” including such matters as request for innocent spouse relief or for an offer in compromise or installment agreement. IRC § 6330(c). The IRS recently has revised its procedures to allow consideration of economic hardship. The Appeals officer’s...
- If the decision of the Appeals officer is adverse to the taxpayer, the taxpayer may seek judicial review by filing a Tax Court petition (or in a district court, if the Tax Court lacks jurisdiction over the underlying tax liability) within 30 days of the Appeals officer’s decision. Collection activities, criminal tax prosecutions, and refund suits continue to be suspended if the taxpayer files a timely request for judicial review.
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Glossary 79 results (showing 5 best matches)
- Small tax case procedures
- Fraud is defined by the Tax Court as “the intentional commission of an act or acts for the specific purpose of evading a tax believed to be owing. Fraud implies bad faith, intentional wrongdoing and a sinister motive. It is never imputed or presumed.” The essence of fraud is the taxpayer’s state of mind indicating a motive or intent to evade a known tax. The IRS may recommend criminal prosecution for fraud under the tax evasion statute, section 7201, or it may seek to impose a civil penalty under section 6663 (former section 6653(b)). See §§ 10.3 and 18.1.A.
- provide relief for an innocent spouse from tax liabilities, interest and penalties under certain conditions, including relief from liability for civil tax fraud when the fraud is attributable only to the culpable spouse. See § 13.1.
- Tax Court (or United States Tax Court)
- refers to the court the taxpayer chooses in which to litigate a tax dispute. The taxpayer in a civil tax controversy can select among three different courts, each with different procedures, precedents, and levels of expertise. The three available forums are the United States Tax Court, the United States District Court and the United States Claims Court (Court of Federal Claims). See Chapter 14.
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Chapter 14. Choice of Forum in Civil Tax Litigation 74 results (showing 5 best matches)
- There are procedures available to reduce the impact of interest rates on the choice of forum. Importantly, a taxpayer who wishes to try her case in the Tax Court but who also wants to avoid the cumulation of high interest on any potential tax finally determined to be owing may pay the tax after or even before (see Rev.Proc. 2005–18, 2005–13 I.R.B. 798 for procedures for making a § 6603 deposit; see also discussion, § 10.8) filing the Tax Court petition. Thus, the taxpayer has the choice in Tax Court litigation to pay the tax in advance or not. If the taxpayer pays the tax, plus interest to date and any penalties, but ultimately prevails, the Government must pay interest to the taxpayer on amounts found to have been overpaid. In addition to full payment of the tax, interest and penalties, the taxpayer may elect to make a § 6603 deposit against a potential underpayment of tax and proceed with the Tax Court litigation. Making such a deposit stops the running of interest against the...
- Unlike the other available courts, the Tax Court permits non-lawyers to represent taxpayers in cases before it. Under Tax Court Rule 24(b), a taxpayer may represent herself in a Tax Court proceeding, and Rule 200 permits accountants and others, upon passing an examination, to practice before the Tax Court. For obvious reasons, however, including most non-lawyers’ lack of familiarity with litigation procedures and tactics, the taxpayer usually should be represented by an attorney. Note, however, that the Tax Court has held that it does not have the power to appoint counsel for indigent taxpayers.
- Special trial judges, appointed by the Chief Judge of the Tax Court under Tax Court Rules 3(d) and 180–83, hear small tax cases (also called “S cases”). Under § 7463(b), decisions of the trial judge in small tax cases are final and nonappealable, and are not treated as precedent for any other case. A taxpayer electing small tax case procedures, therefore, gains the advantage of informality and expediency, but forfeits both the opportunity to have her case tried by a regular Tax Court judge and her right to appeal an adverse decision.
- Trial by jury is not available in the Tax Court. As a result, the Federal Rules of Evidence, which apply in Tax Court proceedings, are enforced much less stringently than in the U.S. district court. The Tax Court has its own rules of practice and procedure, which differ from the Federal Rules of Civil Procedure (FRCP). Tax Court rules require the parties to cooperate generally to resolve factual disputes. For example, pretrial discovery is more limited by the Tax Court Rules than by the FRCP, and the Tax Court Rules require that the parties first engage in informal communication for purposes of discovery before utilizing formal discovery procedures. T.C. Rule 70(a)(1).
- The filing fee for both regular Tax Court petitions and those filed in small tax cases is $60. Small case procedure is not automatic; the taxpayer must request it and the Tax Court must approve it. IRC § 7463(a).
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Chapter 7. The Assessment Procedure and Statutes of Limitations 43 results (showing 5 best matches)
- Another exception to the general three-year statute of limitations is contained in § 6501(c)(1), which permits assessment and collection of tax “at any time” if the taxpayer files “a false or fraudulent return with the intent to evade tax.” A similar exception is contained in § 6501(c)(2), which provides for an unlimited time for assessment in “case of a willful attempt to defeat or evade tax.” The Government has the burden of proving fraud, but if the taxpayer has been convicted of criminal fraud (attempted tax evasion under § 7201, discussed in Chapter 18), then the taxpayer will be collaterally estopped to challenge an assessment made after the 3-year statute of limitations has expired. See § 15.2, , for a discussion of collateral estoppel in tax cases.
- There are two general ways in which an assessment normally occurs. One is through the summary assessment process in which tax liability that is shown on a return is recorded in a summary record, even though the tax itself may not have been paid. This amount is said to be “self-assessed.” The other is through the deficiency procedure, which normally occurs only at the end of the deficiency assessment period.
- The IRS can bypass the normal assessment rules when immediate collection action is necessary. Particularly in situations involving illegal source income, the IRS must be able to seize assets quickly when a delay is likely to allow the person in question to flee the country or conceal assets. The Code authorizes the IRS to assess and collect a tax immediately without going through the normal deficiency procedure, if it appears that collection of the tax would be jeopardized by delay. There are two separate statutory authorizations for extraordinary assessments: § 6851 permits the Service to terminate a taxpayer’s taxable year and immediately assess the tax due (known as a “termination assessment”); § 6861 permits immediate assessment of a tax already due (known as a “jeopardy assessment”).
- When is it too late for the Service to notify a taxpayer that she owes an additional tax? The answer to this question generally depends on whether and when a return was filed (or deemed filed), the types of errors or omissions in the return, and the taxpayer’s intent in filing the return (that is, whether the taxpayer willfully intended to evade tax).
- As in any area of the law, familiarity with the statutes of limitation is essential to proper handling of a tax controversy. The rules governing the time in which tax assessments may be made or claims for refund of overpayments must be filed are complex, technical and often confusing. This section discusses the general three-year statute of limitations on assessment of tax deficiencies and the exceptions to this general rule, as well as the rules relating to extension of the statutory time limits and mitigation of the statute of limitations.
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Chapter 19. Defenses to Criminal Charges 29 results (showing 5 best matches)
- A fascinating case illustrating the difficult issues involved in this defense is 607 F.2d 92 (5th Cir.1979). The defendant in was convicted of tax evasion for failing to report income received from the sale of her rare blood plasma. Although the medical procedures involved in extracting the plasma were “accompanied by pain and discomfort and carry the risks of hepatitis and blood clotting,” the defendant had undergone the painful procedures up to six times per month during the years in question and had allegedly received more than $70,000 per year for her plasma. The company that bought her plasma also paid her a weekly salary of $200, withheld taxes on it, and furnished her a W-2 form reflecting the taxes withheld. She duly reported the salary as income each year and paid taxes on it. The payments for the plasma itself, however, were not treated as wages. Thus, the company did not withhold taxes on these payments, and Garber did not pay tax on them.
- Tax protestors present a difficult problem in this context. One who fails to file or who files a false return is not protected from conviction merely because she disagrees with the tax laws or believes they are unconstitutional or bad public policy. Failure to comply with the law based on a disagreement with it does not negate willfulness. Typical arguments raised by tax protestors are that the income tax is unconstitutional and that wages are not taxable income. Given the litany of cases in which the constitutionality of the income tax system has been upheld, and the notion that wages are not taxable income flatly rejected, some courts imposed a reasonableness test on the good faith mistake of law defense, requiring the jury to reject the defense unless the defendant’s belief was reasonable.
- Criminal tax defendants frequently argue that they did not act willfully because they were financially unable to pay the tax. In 2008, defendant Jack Easterday argued that “willfulness” required the government to prove financial ability to pay. He had been convicted of failure to pay employee withholding taxes in violation of § 7202 and he argued that his failure to pay was not willful because he had spent the money on other business expenses and therefore lacked the funds to remit the payroll taxes. The Ninth Circuit held that the lower court was not in error when it refused to give Easterday’s requested jury instruction on financial inability to pay and that “willfulness does not require the government to prove that a defendant had the ability to meet his tax obligations.” .... 2009). One commentator has argued, however, that the defense retains (or should retain) some vitality in cases where the “financial distress occurs because of reasons beyond the control of the defendant,...and
- Grave penalties rest in this case on an unsubstantiated theory of tax law * * *. Whatever eventual success this proposition may enjoy as an interpretation of tax law—a destiny we do not influence here—present authority in support of the theory is far too tenuous and competing interpretations of the applicable law far too reasonable to justify these convictions.
- Not surprisingly, the personal and professional characteristics of a defendant may influence juries’ findings of willfulness. For example, an experienced tax lawyer or accountant who claims a good faith misunderstanding of the tax law, particularly if the question at issue is not novel or unsettled, stands less chance of being believed than someone who is generally unfamiliar with the complexities of the tax law. Similarly, an experienced businessman or college graduate who claims not to have known that tax returns must be filed will most likely not be believed by the jury. Simply being a lawyer or other professional does not necessarily ensure conviction, however. In a now-famous case, the Fifth Circuit took judicial notice “that most lawyers have only scant knowledge of the tax laws.”
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Chapter 16. Criminal Investigations 49 results (showing 5 best matches)
- Tax avoidance is perfectly legal; tax evasion (or tax fraud) is not. The difference between legal avoidance and illegal evasion is often unclear, however, and numerous sections of the Code ignore the distinction by referring to transactions motivated by a desire to “evade or avoid” taxes. See, §§ 269A, 6662(d)(2)(C)(ii). Cynics would say that only in hindsight can the real distinction be drawn: that is, a position ultimately upheld as legal is avoidance, while a scheme held to be illegal is evasion. In truth, however, there are identifiable (and therefore predictable) differences between avoidance and evasion, all of which hinge on the taxpayer’s state of mind. A taxpayer who takes a position that she honestly believes to be legal has not engaged in tax fraud or evasion, even if that position is ultimately found to be prohibited under the Code. On the other hand, a taxpayer who takes a position on her return that she knows or believes to be contrary to the law has gone beyond mere...
- The IRS and the Tax Division of the Justice Department instituted an expedited plea procedure in 1986. If certain criteria are met, the case will be referred simultaneously by the CID and the Chief Counsel’s Office to the Tax Division for plea negotiations with the taxpayer’s attorney. The benefit to the taxpayer of this expedited procedure is the avoidance of a lengthy CID investigation and a possibility of a lesser sentence or fine than she might receive at trial. To qualify for this “quicky plea” procedure, the plea agreement must:
- Thus far, discussion has focused almost exclusively on civil liabilities under the Code. This chapter and those that follow focus on criminal investigations and prosecutions for tax offenses, but in reality, the distinction between civil fraud and criminal tax evasion may be murky.
- The factors considered significant by the Tax Division do not always coincide with the factors considered significant by the CID and the Chief Counsel. For example, the Justice Department generally will not decline prosecution on the basis of the taxpayer’s poor health. Tax Division attorneys are directed to recommend prosecution if the attorney “believes the person’s conduct constitutes a Federal offense and that the admissible evidence is sufficient to obtain and sustain a conviction.” U.S. Attorneys’ Manual § 9–27.220. The Government’s success rate in prosecuting tax crimes is very high and the Government has increased its efforts “to identify, investigate and punish tax cheats.” IR 2004–48, April 6, 2004. Recently, the Justice Department has increased its enforcement efforts in the areas of employment tax fraud and abuse, and identity theft.
- The Tax Relief and Health Care Act of 2006 modified and enhanced the award program under new § 7623(b). First, it created a Whistleblower Office within the IRS to handle informant claims that (1) relate to a tax noncompliance matter in which tax, penalties, interest and other additions to tax exceed $2 million or (2) relate to any taxpayer, except that individual taxpayers are eligible only if their gross income exceeds $200,000 for at least one of the tax years in question. Second, the payment of an award is determined by the Whistleblower Office and if the informant provides information that leads to any judicial or administrative action, the individual will receive an award based on the amounts collected. Thus, the award is less dependent upon the discretion of the IRS after the 2006 amendments. Third, the amount of the award was raised to a minimum of 15 percent and a maximum of 30 percent of the amount of tax, penalties, interest and fines paid to the Government as a result of...
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Chapter 5. Federal Tax Returns and Compliance 20 results (showing 5 best matches)
- Payments of income tax are due quarterly and are paid either through employer withholding on wages of employees, or through estimated tax payments on amounts that are not subject to withholding. The obligation to pay the tax liability is separate and distinct from the obligation to file a return. Thus, an automatic extension of time to file the return does not confer an automatic extension of time to pay. Instead, the tax must be estimated and any remaining liability must be paid at the time the Form 4868 is filed, unless the taxpayer has obtained a separate extension of time to pay. Such an extension may be granted for up to six months in the case of an income tax return, but the taxpayer must make a showing of undue hardship. Such a showing is twofold: (1) the taxpayer must establish that the deficiency is not due to fault of the taxpayer (i.e., negligence, intentional disregard of rules and regulations, or fraud) (IRC § 6161(b)(3)) and (2) the hardship must amount to more than “...
- In the early years of electronic filing, taxpayers devised numerous schemes to obtain refunds to which they were not entitled. Much, if not most, of this fraud involved improper claims of entitlement to the earned income tax credit (IRC § 32), and much of it involved the use of fictitious or purchased social security numbers. In 1995, the Service took several steps to address the problem: it began delaying processing of returns claiming the earned income tax credit to allow sufficient time to verify the claim; it began checking social security numbers to verify that the numbers matched the names in IRS databases; and it sent paper (rather than electronic) refunds to all taxpayers who were filing returns for the first time, because about 30 percent of all detected fraud involved persons for whom the Service had no record of previous filing. But the fraud continued and in 2007, Jackson Hewitt, the nation’s number two tax return preparer, was accused of perpetrating massive tax fraud...in
- An individual taxpayer may obtain an automatic six-month extension of time to file a federal income tax return by filing a Form 4868 (Request For Automatic Extension of Time to File U.S. Individual Income Tax Return). The request must be filed on or by the original due date of the return. Since an automatic extension of time to file does not extend the time to pay the tax, the taxpayer must estimate the amount of any remaining tax and must remit that amount with the Form 4868 in order to avoid penalties and interest. Special rules apply if the taxpayer is out of the country or is in a combat zone.
- All taxpayers must prepare (or have a professional prepare) and file federal income tax returns on which they must disclose and reconcile their annual financial transactions, determine their tax liability, and pay amounts due by certain dates. For the fiscal year 2014, there were around 240 million federal returns filed, of which over 185.5 million were income tax returns. In order to properly administer the internal revenue laws, the IRS must ensure that these returns adhere to a uniform standard.
- Forms or documents that are incomplete when filed by taxpayers with the IRS may not qualify as “returns” for purposes of the return filing requirement, penalties, and the statute of limitations. Generally, the law requires that the return be filed on the proper form, signed under penalties of perjury, and contain enough information to enable the Service to calculate the tax. See IRC § 6011(a). In addition, the taxpayer must make an honest and reasonable attempt to comply with the requirements of the tax laws. 82 T.C. 766 (1984). For a discussion of the types of errors that can cause a form not to qualify as a return, see § 7.2.C,
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Chapter 15. Additional Civil Litigation Considerations 56 results (showing 5 best matches)
- Abolition of the mutuality of parties rule might prove to be a significant weapon for the Government in tax cases, as illustrated by the Tax Court’s decision in 91 T.C. 273 (1988) (reviewed). The taxpayer in had been an unsuccessful defendant in a suit by his former employer, Hughes Tool Co., in an action for an accounting in which it was found that Meier had diverted his employer’s funds for his own use and benefit. 489 F.Supp. 333 (D.Utah 1977). The Commissioner sought to use this judgment, even though the IRS had not been a party in that suit, to collaterally estop Meier from contesting that he had diverted his employer’s income to his personal use and had fraudulently failed to report the diverted funds as income. Applying the standard, the Tax Court, in a reviewed decision with no dissent, held that Meier had “used all the legal and procedural means available to him to defend the accounting action.” at 289. Thus, he had a full and fair opportunity to litigate the diversion...
- The Government may attempt to offset the taxpayer’s alleged overpayment of taxes with alleged underpayments not raised in the refund complaint. In other words, once the refund complaint is filed, the Service is free to examine the returns in question, as well as those of other years, in an attempt to reduce the taxpayer’s recovery. If the Government attempts to setoff a taxpayer’s alleged overpayment of taxes with alleged underpayments in tax years not barred by the statute of limitations, then the burden of proving the new issues depends on the tax involved in the new proposed adjustment and whether it relates to the same tax year that is at issue in the refund suit. If the proposed offsetting adjustment relates to the same type of tax (e.g., income tax or estate tax) in the same year, or a related type of tax that will affect the tax in issue and is in the same taxable year, then the taxpayer will have the burden of proof, even though the issue was raised by the Government. On the...
- For many years, the Government succeeded in collaterally estopping a taxpayer from denying that a tax underpayment was due to fraud when the taxpayer had been convicted of willfully failing to file a return under § 7203 or filing a return containing a false statement under § 7206(1). Recognizing that the elements of civil fraud under § 6653(b) are not identical to the issues involved in § 7203 or § 7206(1) prosecutions, the courts have held that such convictions do not collaterally estop taxpayers from contesting the civil fraud penalty. 86 T.C. 1253 (1986) (conviction under § 7203 does not bar taxpayer from contesting civil fraud penalty); 84 T.C. 636 (1985) (reviewed) (§ 7206(1) conviction does not collaterally estop challenge to civil fraud penalty). Where the elements of the offense are identical, however, the taxpayer is estopped to challenge the civil penalty. Thus, conviction of a willful attempt to defeat or evade a tax under § 7201, will collaterally estop denial of the
- Although an in-depth examination of the principles of res judicata and collateral estoppel is beyond the scope of this discussion, the effect of the doctrines in tax cases cannot be overlooked. The purpose of both doctrines is to provide finality for judicial decisions and to bar repetitious suits. The doctrine of res judicata, also known as “claim preclusion,” bars relitigation of a claim after a final judgment on the merits has been issued in a suit involving the same parties or their privies. For tax cases, the Commissioner, the United States, and the district director (or division director) are considered identical parties. IRC § 7422(c). Importantly, in tax cases, each taxable year generates a new and separate tax liability and cause of action. Res judicata thus bars a taxpayer from bringing suit with respect to tax liability for a year that was the subject of a prior suit. For example, if the taxpayer litigates an income tax deficiency for 1990 in the Tax Court, she cannot...
- Prior to the enactment in 1980 of the Equal Access to Justice Act (“EAJA”), there was almost no opportunity for a taxpayer to recover litigation costs and attorneys’ fees incurred in a tax dispute. The EAJA provided for recovery of costs in civil tax litigation, but it did not cover suits filed in the Tax Court.
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Chapter 13. Third Party Liability 57 results (showing 5 best matches)
- Since 1948, married couples have been permitted to combine their income and deductions and pay their taxes under different and lower rates. In exchange for the right to file a “joint” return, married couples are jointly and severally liable for the accuracy and payment of amounts shown on the return. In a society in which divorce is common and tax laws are increasingly complex, it is not surprising that “innocent” spouses seek relief from the harsh rule of joint and several liability. The innocent spouse relief rules first became part of the Code in 1971 under former § 6013(e) and § 6653(b)(3), and were subsequently amended in1984 and again in 1998. Section 6013(e) provided relief for an innocent spouse from tax liabilities, interest and penalties under certain conditions. Section 6663(c) relieved a spouse from liability for the civil fraud penalty when the fraud was
- Courts have adopted the term “responsible person” as shorthand for the statutory description of persons liable under § 6672: any “person required to collect, truthfully account for and pay over any tax imposed.” The Supreme Court interpreted this statutory language to mean that a person responsible for collecting the taxes can be liable for the penalty, even if he lacks authority to pay over the taxes when they are due. , 436 U.S. 238 (1978). Thus, a person who is responsible for collecting and accounting for taxes, and who actually does so, can be liable for the 100-percent penalty if he terminates employment before the taxes are to be paid and the employer fails to pay them when they are due. The issue in was whether a person who acquired control of a business that was delinquent in its payroll taxes could be held liable for the delinquent taxes. In other words, can a responsible person be held liable for tax liability incurred before he became a responsible person? The Supreme...
- A separate source of lender liability is § 3505, which makes a lender liable for a debtor’s unpaid trust fund taxes in two different situations. The first, covered by § 3505(a), makes the lender liable for a penalty equal to 100-percent of the unpaid payroll taxes if the lender pays the debtor’s wages directly and fails to remit the trust fund taxes to the Government. This degree of control would also justify the § 6672 penalty, but Congress, in enacting § 3505 in 1966, sought to provide bright-line standards for certain conduct of lenders. Thus, where a lender or its agent pays the debtor’s employees’ wages and fails to collect and pay over the trust fund taxes, the lender will be subject to a 100-percent penalty under § 3505(a) without regard to the § 6672 factors of willfulness and “responsibility.” The second situation covered by § 3505 has generated significant litigation because it imposes liability under circumstances that § 6672 would not reach. Section 3505(b) imposes a...
- Employment taxes consist of two portions: (1) the employer’s portion, which consists of the employer’s share of both FICA (Social Security) taxes plus FUTA (federal unemployment) taxes and (2) the employee’s portion, which the employer is required to withhold and remit quarterly to the Government. The latter portion consists of income taxes and the employees’ share of FICA and RRA (Railroad Retirement Act) taxes. It is only the second portion that constitutes trust fund taxes. The employer is directly liable for the first portion and thus does not hold those taxes in trust.
- ) that the time period in which a refund claim must be filed is the later of: (1) three years from the date the return was filed and the taxes paid, if paid at that time; or (2) two years from the date the taxes were paid, if paid later. Although most taxes must be paid in full before a refund suit can be maintained, the 100-percent penalty under § 6672 is a “divisible” liability that avoids the harshness of the full payment rule. (See further discussion, § 14.3.A, ). Under § 6672, an alleged responsible person need only pay the payroll tax for one employee for one quarter, not the entire deficiency to qualify to litigate a refund claim. Thus, a person against whom a § 6672 penalty has been assessed can gain access to a jury trial in a United States district court (or can invoke the jurisdiction of the Court of Federal Claims, a separate refund tribunal in which a jury trial is not available) without paying the entire assessed amount. In order to bring such a suit, the person first...a
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Chapter 17. IRS Investigatory Powers and Techniques 89 results (showing 5 best matches)
- To equip the IRS to carry out its mission of enforcing the tax laws, Congress has given it enormous investigatory powers, chief of which is the summons power contained in § 7602 and discussed at length in this chapter. Two other investigatory techniques that are used extensively are undercover operations and grand jury investigations. For obvious reasons, there is little public information concerning the types and scope of IRS undercover investigations. The IRM, however, describes the basic procedures governing undercover operations. IRM 9.4.8. Moreover, case law reveals that IRS agents have posed as clients of return preparers and tax shelter promoters who are suspected of fraud, as well as prospective buyers of businesses. These guises are probably only a fraction of the “covers” actually utilized. Grand jury investigations, and the reasons why they are increasingly utilized in tax cases, are discussed in § 17.2, . Search warrants and the privileges and protections of persons...
- The Fifth Amendment’s self-incrimination and double jeopardy clauses apply only to criminal cases. Thus, a conviction of a tax offense does not insulate the defendant from the imposition of a civil penalty. See, Cir.1999) (defendant convicted of tax fraud was also subject to civil fraud penalty). Although the United States Supreme Court held in 490 U.S. 435 (1989) that under certain rare circumstances, a civil penalty may be considered punitive under the Double Jeopardy Clause, it subsequently changed its view in 118 S.Ct. 488 (1997) and stated that the test of was “unworkable”. The Court noted that for a civil penalty to be considered punitive under the Double Jeopardy Clause, there must be “the clearest proof” that the sanction was intended to be criminal in nature.
- Widespread use of alleged “churches” as tax shelter devices prompted Congress to enact special legislation governing the sensitive problem of IRS summons authority for church records. Section 7611 provides special rules for any “church tax inquiry” (an investigation to determine whether the alleged church in fact qualifies for tax-exempt status) and for audits of churches. In general, § 7611 requires approval of a high-level Treasury official for any “church tax inquiry” and the IRS must furnish prior written notice to the church before any inquiry or audit explaining in detail the nature and purpose of the inquiry and the church’s rights.
- The Fifth Amendment prohibits prosecution of a felony charge without an indictment, unless the indictment is waived. Thus, a federal grand jury will be involved at some point in almost every criminal tax investigation. The grand jury can become involved either after the Justice Department has reviewed the case and concluded that prosecution is warranted without further investigation, or the Justice Department can turn the case over to the grand jury for further investigation. According to the IRM, grand jury investigations are normally requested (1) in the interest of efficiency, when it is apparent that “the administrative process cannot develop the relevant facts within a reasonable period of time” and (2) when “an investigation has proceeded as far as the administrative process allows, but prosecution potential would be strengthened by the grand jury process.” IRM 9.5.2.2. In addition, investigations of non-tax crimes can be expanded to include tax investigations if evidence of a
- Even though the party summoned may be a “third-party recordkeeper” under one of the above categories, this does not ensure that the taxpayer under investigation will be entitled to notice of the summons and an opportunity to contest it. These rights depend on the type of information sought in the summons. For example, if unpaid taxes have been assessed against taxpayer A, a summons issued to A’s bank to determine the amount held in A’s account does not require notice of the summons to be given to A because the tax against A has been assessed. See Reg. § 301.7609–2(b).
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Chapter 1. Overview of the Federal Tax System 21 results (showing 5 best matches)
- Given the huge numbers of returns and the importance of the federal income tax to our society, fair and efficient administration of the federal tax laws is essential. Our federal tax system is built upon the idea of “voluntary compliance”: that is, each person is expected to account annually for all income and deductions during that taxable year and to pay the proper amount of tax. The Government must maintain confidence in the voluntary compliance system by ensuring that taxes are viewed as fair and that those who fail to comply with the tax laws are penalized. During the late 1970’s and early 1980’s, this system eroded due to widespread perceptions that wealthy individuals could avoid paying taxes by using “tax shelters,” that most people “cheated” on their federal income taxes, and that the IRS was so overburdened that those who cheated were not likely to be caught. Both the IRS and Congress placed part of the blame for these perceptions on the civil tax penalty system, which...
- Taxes are the principal source of revenue for the federal Government, accounting for about 93 percent of all budget receipts. Revenue projections for fiscal year 2015 estimate that federal tax receipts will total about $3.2 trillion, about half of which (nearly 47 percent) represents income taxes paid by individuals and about 34 percent represents payroll tax receipts. In contrast, corporate income taxes for the same period will amount to only $348 billion, representing about 11 percent of the total federal tax revenues. But despite a temporary decline during the Great Recession of 2008 and 2009, corporate profits set new records in fiscal years 2012 and 2013. However, the trend of lower effective corporate tax rates has reduced the importance of corporate taxes as a source of revenue in the federal budget.
- In 1997, Congress held hearings to scrutinize alleged abusive practices and inefficient procedures of the IRS. While doubts were raised subsequently about the veracity of some of the testimony from these hearings, the die had been cast as far as Congress was concerned. The result was the IRS Restructuring and Reform Act of 1998 (RRA), signed into law on July 22, 1998 by President William Jefferson Clinton. This Act significantly altered the organization and operation of the IRS in an effort to make the tax administration process fairer and more efficient. Under the RRA, the IRS was required to review and restate its mission to place greater emphasis on serving the public and meeting taxpayers’ needs. In addition, the entire organization of the agency was changed from a geographically based structure to a more functionally based organization, similar to that of many private sector businesses. The former three-tiered organizational structure (national, regional and district offices)...
- The Tax Division of the Justice Department plays a significant role in the administration of the federal tax laws. Lawyers from the Tax Division represent the Government in refund suits (civil actions in United States district courts and the Court of Federal Claims, discussed in Chapter 14) and in civil suits challenging the validity of Treasury regulations and IRS rulings. In addition, Tax Division lawyers in the Criminal Section supervise the prosecution of criminal tax cases. Typically, the role of the Criminal Section is limited to reviewing criminal cases developed by the IRS and forwarding them for prosecution to U.S. Attorneys. In particularly complex or otherwise significant cases, lawyers from the Criminal Section will try the cases or offer substantial assistance to the U.S. Attorneys trying the cases.
- The operating divisions are supported by several functional units that focus on specific areas and issues. The Chief Counsel represents the Commissioner in the Tax Court, drafts regulations, and provides legal advice and guidance to the operating divisions. The Chief Counsel now reports directly to the Commissioner instead of to the Treasury Secretary. The Criminal Investigation (CI) Division coordinates with the Chief Counsel’s office to investigate potential criminal violations of the tax laws and related financial crimes. The Appeals Office has authority to resolve tax controversies without litigation. The RRA requires that the Appeals Office be assured its independence, so the Act includes a specific prohibition of communications between Appeal officers and other IRS employees to the extent such communications appear to compromise the independence of the Appeals officers. The Communications and Liaison Division coordinates communications between the IRS and taxpayers and...
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Chapter 3. The Hazards and Standards of Tax Practice 97 results (showing 5 best matches)
- Because reliance on the advice of a lawyer after full disclosure provides a defense to criminal sanctions, as well as the negligence and civil fraud penalties, and because some lawyers interpreted the reasonable basis standard to permit favorable opinions on very dubious positions, the standard deteriorated in the 1970’s. Taxpayers sought favorable opinions to insure against penalties, and lawyers stretched the standard to accommodate clients’ tax-minimizing goals, particularly in the area of tax shelter offerings. As one judge observed in acquitting a taxpayer of criminal charges:
- Section 6673(b)(1) authorizes courts other than the Tax Court to impose penalties of up to $10,000 against taxpayers who bring frivolous or groundless tax suits. Under § 6673(b)(2), any penalties, costs or damages assessed by any court under § 6673(b)(1) may be assessed by the IRS and collected in the same manner as a tax. The purpose of this provision is to permit sanctions imposed by all courts in connection with federal tax proceedings to be assessed and collected in the same manner as penalties imposed by the Tax Court. In addition, § 6673(b)(3) provides that federal appellate courts (the U.S. Courts of Appeal and the U.S. Supreme Court) may impose monetary sanctions, penalties or court costs in favor of the Government for frivolous appeals of Tax Court decisions and tax decisions of other federal tribunals. Such awards may be assessed and collected in the same manner as a tax. Moreover, such orders may be registered with a U.S. district court and enforced as other district...
- In an effort to “restore and promote public confidence in the tax system and in those who provide tax advice and other services,” Circular 230 was amended in late 2004 to set aspirational (as opposed to mandatory) “best practices” for tax advisors. These practices were derived from the ABA Model Rules of Professional Conduct. Failure to follow the practices will not result in a sanction unless the failure violates other provisions of Circular 230. The practices are found at § 10.33 of Circular 230, which provides that all tax advisors must (1) communicate clearly with their clients regarding the terms of the engagement and the form and scope of the advice or assistance to be rendered, (2) establish the relevant facts, including evaluating the reasonableness of any assumptions or representations, (3) relate the applicable law, including potentially applicable judicial opinions, to the relevant facts, (4) arrive at a conclusion supported by the law and the facts, (5) advise the client...
- The majority of taxpayers use a return preparer to prepare and file their tax returns. An income tax return preparer is any person who, for compensation, prepares any tax return or claim for refund. IRC § 7701(a)(36). This includes any person who prepares a substantial portion of a return or who furnishes a taxpayer with sufficient information and advice so that the completion of a return is largely a mechanical or clerical matter. Reg. § 301.7701–15(b) and (c). While some preparers, such as attorneys, CPAs, and enrolled agents are subject to strict federal and state licensing requirements, ethical obligations, and continuing professional education, preparers who do not fall into these categories are not required to meet minimum competency standards. In fact, the regulations provide that a “person may be an income tax return preparer without regard to educational qualifications and professional status requirements.” Reg. § 301.7705–15(d). Since the ...vary widely, and this... ...tax...
- Tax practitioners complained bitterly about the 2007 amendment because the “more likely than not” standard (interpreted as a greater than 50 percent chance of being sustained on the merits if challenged) was a more stringent standard than the “substantial authority” standard to which taxpayers were subject in order to avoid an accuracy related penalty. Thus, there was a discrepancy between the standard for tax advisors and the standard for taxpayers. This disparity was eliminated in 2008 under the Emergency Economic Stabilization Act, which brought the standard for tax advisors in line with the standard for taxpayers. After the 2008 Act, the current standards for tax advisors are the “reasonable basis” standard for disclosed positions and the “substantial authority” standard for undisclosed positions. The “more likely than not” standard applies to tax shelters and reportable transactions for returns prepared for tax years ending after October 3, 2008. So after 2008, the penalty will...
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Chapter 6. Further Compliance: Audits and Administrative Appeals 49 results (showing 5 best matches)
- The effect of executing a Form 870 (or Form 890 for estate or gift tax disputes) is to waive the statutory notice of deficiency (the “90-day letter”), see § 7.1.A, , and to consent to an immediate assessment and collection of the tax. IRC § 6213(d). A taxpayer who signs a Form 870 may not litigate the tax deficiency in the Tax Court, but may sue for a refund after paying the tax and filing a refund claim. Importantly, the IRS later may assess additional deficiencies for the same tax year covered by the Form 870.
- When the examiner has completed his examination of a return, he must explain any proposed adjustments to the taxpayer. If the taxpayer agrees with the proposed adjustments, she is asked to sign an appropriate form, which usually will have the effect of preventing her from challenging any deficiency in the Tax Court. Execution of the form (usually a Form 4159, “Income Tax Examination Changes,” or a Form 870, “Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment”) will not prohibit the taxpayer from paying the tax and filing a claim for refund. Thus, a written consent to the proposed adjustments will not bar later refund litigation if the refund claim is denied, but it will bar a Tax Court suit if the taxpayer signs a Form 4159 or Form 870. Adjustments agreed to by the taxpayer after an office audit are usually reflected in a Form 1902-E, “Report of Individual Income Tax Audit Changes,” which does not prevent litigation of the...
- Settlements reached with Appeals are usually memorialized on a Form 870-AD (or Form 890-AD for estate taxes). Form 870-AD, when executed by the taxpayer, is an offer to waive the statutory notice of deficiency in exchange for the Government’s concessions in the settlement. Unlike the Form 870, which expressly recognizes the taxpayer’s right to seek a refund of taxes paid pursuant to it and which does not prevent the Government from assessing additional deficiencies, the Form 870-AD is intended to be final and binding on both the taxpayer and the Government. The taxpayer is prohibited from filing or prosecuting a claim for refund or credit, and the Government is prevented from reopening the case in the absence of fraud, misrepresentation or concealment of a material fact, or gross mathematical errors.
- If the taxpayer takes no action after receiving the “30-day letter,” the IRS will issue a “notice of deficiency,” also known as a “90-day letter” and discussed in detail in Chapter 7. The taxpayer then will have 90 days in which to pay the tax or file a Tax Court petition.
- Returns are selected for audit in several ways. The Internal Revenue Manual (Part IV) contains a wealth of information about the IRS’s selection and examination procedures, and those seeking more detailed information than is warranted here should consult the IRM. Although some are selected after manual examination, most income tax returns are selected through a computer analysis called the “Discriminant Function” or “DIF” system, which is designed to identify returns with a high probability of error and a resulting significant tax change. For example, returns with enormous deductions that would appear beyond the taxpayer’s financial ability (because claimed deductible expenses nearly equal reported income) will result in a high DIF score. After a total DIF score is assigned by the computer analysis, the returns with high DIF scores are examined manually to eliminate returns that do not warrant further examination and to determine the type of audit appropriate for the others. Some will
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Chapter 12. Bankruptcy Proceedings 32 results (showing 5 best matches)
- The Bankruptcy Court and the Tax Court have concurrent jurisdiction to determine the debtor’s tax liability but the Bankruptcy Court decides which court will hear the case. If a Tax Court petition is filed before the bankruptcy petition, the bankruptcy petition will stay the proceedings in the Tax Court. Either the IRS, the bankruptcy trustee, or the debtor/taxpayer may request that the stay be lifted in order for the Tax Court to hear the case. If the Bankruptcy Court grants the request and the case is heard by the Tax Court, the decision of the Tax Court is . If the request is denied, the stay remains effective until the case is closed or dismissed or the debtor is discharged, and during the pendency of the bankruptcy case the Bankruptcy Court may decide the case. The Tax Court, which retains jurisdiction over the claim until the case is decided by the Bankruptcy Court, may determine the liability for the nondischargeable claims at the close of the bankruptcy proceeding. If the...
- Priority of claims determines the order in which the claims are satisfied and whether the claims are dischargeable. There are currently 10 categories of priority claims under the Bankruptcy Code. 11 U.S.C. § 507(a). The 2005 Bankruptcy Act elevated domestic support obligations from seventh to first priority. Trustee fees also are accorded first level priority. Administrative expenses, including tax liabilities incurred during the administration of the bankruptcy estate are accorded second priority. Taxes that accrue during the ordinary course of business during the “gap period” between the commencement of an involuntary bankruptcy case and the appointment of a trustee are accorded third priority. Unsecured claims for income taxes withheld on wages and salaries earned within 180 days prior to the filing of the bankruptcy petition are entitled to fourth priority. Unsecured income tax or gross receipts tax claims that meet certain requirements (mostly pertaining to when the return was...
- A debtor files a bankruptcy petition on July 1, 2015. She has property valued at $20,000 that is subject to a $14,000 secured lien for unpaid federal income taxes, which includes $1,000 in interest that accrued pre-petition, $8,000 in claims attributable to first through seventh priority under § 507 of the Bankruptcy Code, and a $4,000 secured nontax lien that is junior to the tax lien. Under § 724(b), the $8,000 of priority claims will be allowed first in full. The excess of the difference between the amount of the federal tax lien and the amount of the priority claims ($6,000) will be allocated to the federal tax claim. The junior nontax lien then will be satisfied in full, and the remaining $2,000 will be allocated to the federal tax lien.
- Claims of creditors generally fall into three categories: secured, priority and unsecured. In general, secured claims are entitled to first priority because they are satisfied by specific assets (i.e., collateral). A tax lien is secured to the extent of the value of the property to which the lien attaches, provided that Notice of the Lien has been filed prior to the date of the bankruptcy petition. Even though the lien is perfected, a bankruptcy trustee may set aside certain transfers and liens, such as fraudulent transfers and perfected liens that are subordinate to those claims having superpriority status. Thus, the tax lien must secure an allowed claim for taxes that is not avoidable by the bankruptcy trustee. Any non-tax secured claims allowed by the court that are senior to the tax claim will take priority over the secured tax lien.
- Section 724(b) at first blush provides an odd distribution scheme. But the rationale behind this scheme rests on three considerations: (1) if the tax claim is allowed in full, secured creditors will bear the burden of the debtor’s unpaid tax liability, (2) some of the priority claims are subject to dollar limitations on the amount of recovery, so it is only fair to subject the Government to a limitation as well, and (3) the tax lien survives the bankruptcy and can be satisfied from later acquired property of the debtor. See § 12.3.B,
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Chapter 8. Overpayments: Administrative Refunds 17 results (showing 5 best matches)
- An overpayment of tax is simply when the amount paid exceeds the amount owed. Before an overpayment can arise, there first must be a payment of tax. Occasionally, there may be a question as to whether a remittance is a payment or a deposit. Under some circumstances, a taxpayer may make a deposit against the tax owed in order to stop the running of interest. The issue of whether a remittance constitutes a payment or a deposit is an important one because the two-year statute of limitations runs from the date the tax is paid (see § 8.3, ), while a deposit has no effect on the statute of limitations. The taxpayer is entitled to recover a deposit at any time without following the specific procedure for a refund, although the taxpayer is not entitled to interest on a deposit. See discussion of § 6603 deposits at § 10.8,
- Once a tax has been assessed and collected, the IRS has no authority to refund or credit the amount of any overpayment (except in the case of a math error on the return) unless the taxpayer files a claim for refund. IRC § 6511(b)(1) and § 6514. Claims for refund of taxes overpaid for the current year are made routinely by individuals on Form 1040. Claims for refunds of income taxes overpaid in previous years are made by individuals on Form 1040X and by corporations on Form 1120X. All claims for refunds of taxes other than income taxes must be made on Form 843. Claims for refund of taxes overpaid in previous years must “set forth in detail each ground on which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.” Reg. § 301.6402–2(b)(1). Because the refund claim will serve as the basis of any subsequent suit on the claim, it should be carefully drafted to comply with all requirements in the Regulations and to specify the exact...
- Refund claims are filed with the IRS service center/campus in the region in which the tax was paid. A separate claim must be filed for each taxable year and for each type of tax. The taxpayer bears the burden of establishing that the claim was timely made. Under § 6402(a), the IRS will refund or credit the amount of an overpayment to the person who made the overpayment. Refund claims generally are nonassignable. But in , 514 U.S. 527 (1995), the U.S. Supreme Court held that the taxpayer who paid the tax in order to remove a lien against her property was entitled to the refund even though she was not the party against whom the tax was assessed. The Court did not decide the extent to which a party who volunteers to pay a tax assessed against someone else is entitled to seek a refund of the overpayment. The result was overturned in 1998, however, when Congress enacted § 6325(b), which provides redress for third party owners in which they may obtain a certificate of discharge of tax...
- An overpayment can occur in any of several ways: (1) by overwithholding tax on wages or salary, (2) by inadvertent error in calculating the tax liability, (3) by carrybacks from other taxable years, (4) by a payment made after the close of the statute of limitations (IRC § 6401), and (5) by a judicial determination. In (1) through (4), the Service either will automatically refund the amount of the overpayment, or the taxpayer will have to file a , for a discussion of the case defining an overpayment.
- The IRS service center/campus generally will process and refund (or credit against an existing tax liability) any claimed overpayment for the current year prior to any audit or other action, but claims for refund of taxes overpaid in previous years are usually examined by the Compliance Team of the Operating Division. If the Government either denies the claim for refund, by issuing a statutory notice of claim disallowance under § 6532(a)(1), or six months passes in which the refund claim is not granted, the taxpayer may then file a refund suit in the U.S. for a discussion of refund suits. Taxpayers who do not wish to pursue an administrative appeal may expedite the process by requesting in writing that their claim for refund be immediately rejected. The IRS will issue a notice of claim disallowance promptly after receiving such a request.
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Chapter 9. Remedies to Absolve the Harshness of the Statute of Limitations on Assessments and Claims for Refund 31 results (showing 5 best matches)
- Similarly, the Seventh Circuit, in 766 F.2d 1038 (7th Cir.1985), denied relief through the mitigation provisions in a case involving a dispute over stock valuation. The stock was valued in 1974 for estate tax purposes at $215 per share, but the Commissioner asserted a higher value. The executor petitioned the Tax Court to resolve the dispute. In 1975, the corporation was liquidated, and the recipient of the stock, the decedent’s son, reported his taxable gain using the $215 basis established by the estate tax return. In 1980, the Tax Court ruled that the stock’s basis was $280 per share. The son then filed a refund claim to recover the overpayment from his 1975 return, asserting that the basis he had used to compute his taxable gain had been determined to be erroneous by the Tax Court’s 1980 decision. The court denied relief, ruling that the error had not occurred “in respect of” the father’s death and the son’s acquisition of the stock, but instead had occurred “in respect of” the...
- Once it has been determined that an adjustment is warranted, the method of making the adjustment depends on whether the adjustment results in a deficiency or an overpayment. In either case, the adjustment will bear interest and be subject to additions to tax under the laws governing deficiencies and overpayments for the year to which the adjustment relates. If the adjustment results in a deficiency (that is, it is in the Government’s favor), then it is to be assessed and collected under the deficiency procedure the same as any other deficiency. If the adjustment results in an overpayment (that is, it is in the taxpayer’s favor), then the taxpayer must file a claim for refund, unless the Government refunds the amount without a formal claim being filed. If the claim is denied or is not acted on in six months, the taxpayer then may sue for a refund. See § 14.3.B.
- In 2006, Congress resolved the longstanding question of whether the Tax Court has jurisdiction to apply equitable doctrines like recoupment. Section 6214(b) provides that the Tax Court may apply equitable recoupment to the same extent that it may be applied in the federal district courts and the U.S. Court of Federal Claims. The Tax Court has held that it may apply equitable recoupment over any tax imposed, whether or not it has jurisdiction over that tax, provided that it has jurisdiction over the redetermination of the deficiency and the requirements of recoupment are met.
- Statutory setoff arose in the case of 284 U.S. 281 (1932), in which the administrator of an estate filed a refund suit against the Service to recover an alleged overpayment. The estate initially had filed a return claiming a deduction for attorney’s fees and state inheritance taxes. Several years later, the return was audited and the Commissioner disallowed all deductions, except the attorney’s fees, and assessed a deficiency. The estate paid the deficiency and then filed a claim for refund of this amount. The Commissioner conceded the substance of the estate’s argument, that the denial of the state inheritance taxes had been improper, but he also stated that the attorney’s fees had been improperly allowed. Although the statute of limitations for assessment had run, the Commissioner denied the estate’s claim on the ground that the amount of the attorney’s fees exceeded the amount of the inheritance tax deduction; therefore, there was no overpayment.
- In 1938, Congress added the statutory mitigation provisions, §§ 1311–1314, to the Code. These provisions are quite technical, but have a simple goal. They are designed to permit a taxpayer or the government to take a qualified “peek” into a time-barred year in order to use an inconsistent position to setoff or increase the current tax liability. In other words, if there is an adjustment to an item on a return in a current year that is inconsistent with the treatment of that item in an earlier year, the mitigation provisions allow the earlier year to be opened to adjust the treatment of the earlier item to make it consistent with the current treatment. The effect of the adjustment, however, occurs in the current year. These provisions can be used either by taxpayers (to decrease their current tax liability) or by the IRS (to increase the taxpayer’s current tax liability). In either case, the party seeking to take advantage of mitigation must show that the other party took a position in
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Chapter 4. Disclosure of IRS Materials and Confidentiality of Return Information 35 results (showing 5 best matches)
- 4. Committees of Congress, the President, White House employees and other federal government employees not involved in the administration of tax laws are given access to return information under §§ 6103(f), (g) and (i), although there are numerous restrictions and procedures to be followed.
- The tension between the citizens’ desire for privacy and their simultaneous demand for access to Government information is more acute in the tax area than perhaps any other. Because the federal tax system is based on voluntary compliance, the Government must foster compliance by assuring citizens that information reported by them will remain private. Tax returns contain a wealth of information that many individuals and businesses might not furnish if not assured of confidentiality. On the other hand, the principle that secrecy breeds misconduct is reflected in numerous state and federal laws ensuring public access to Government records. This chapter discusses the principal laws governing confidentiality of tax return information and mandatory disclosure of IRS documents and records.
- When it enacted the Privacy Act, Congress created a special commission to determine the types of safeguards that should be enacted for federal tax return information. The commission recommended that tax return information be more carefully protected than the Privacy Act guidelines required, and Congress adopted many of the recommendations in 1976.
- The second exception that deserves special mention is provided by § 6103(h)(4)(A), described in number 5 above. The courts are currently split on the following question: once return information is disclosed in a judicial proceeding, does it lose its confidentiality and thereby become publicly disclosable by Government employees? In a 1988 decision, the Ninth Circuit condoned the issuance of press releases by the IRS and U.S. Attorneys announcing an injunction action against a taxpayer and the entry of guilty pleas by taxpayers charged with tax evasion. court recognized that its decision conflicted with those of some courts, but it was in agreement with other courts that had sanctioned public disclosure of information previously disclosed in court proceedings. Factors that influenced the court’s decision were that strict enforcement of § 6103 would hamper the Government’s ability to publicize its tax law prosecutions, and that court records are public and any member of the public is...
- Prior to 1976, federal tax returns and return information were treated as Government property and were routinely divulged by the IRS to other Government agencies. Spurred by the commission’s recommendations and by testimony confirming numerous Watergate-era incidents involving the Nixon administration’s use of tax return information in ordering audits for political purposes, Congress amended § 6103 and added new § 6110 to the Code as part of the Tax Reform Act of 1976. Section 6103 substantially supersedes the Privacy Act for taxpayer information and is the Code’s own version of a privacy act, while § 6110 overrides the FOIA with respect to public access to certain types of IRS records. The legislative history of the 1976 enactments explained the need for the changes as follows:
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Chapter 2. The Administrative Power of the IRS 73 results (showing 5 best matches)
- Rulings issued by the IRS have less precedential value than the “rules” or “regulations” discussed in the preceding section. The IRS issues two basic types of “rulings”: revenue rulings and letter rulings (usually called “private letter rulings” or “PLRs”). In the hierarchy of tax statements of position, revenue rulings are lower than regulations but higher than letter rulings. The IRS also issues other types of statements of position, such as revenue procedures and determination letters, which are discussed at § 2.2.C, increasingly important as the tax laws have become more complex and more frequently amended. Particularly in business transactions involving large sums of money, the parties may condition the transaction on receipt of a favorable ruling if the law is uncertain.
- The regulation at issue in was not a tax regulation and in subsequent cases the Supreme Court sent mixed messages about whether deference applied to tax interpretive regulations. This caused considerable debate over whether issued under § 7805(a). The courts were split on the issue, with the Third, Sixth, Seventh, Ninth and Eleventh Circuits holding that interpretive regulations were entitled to deference, while the Fifth, Eighth and Tenth Circuits, as well as the Federal Circuit, held that deference did not apply to interpretive regulations. The Tax Court took the position that there was no distinction between the standard and the standard because both looked to the reasonableness of the agency’s interpretation. In fact, the Tax Court held that “deference only establishes the framework for judicial analysis; it does not displace it.” deference no longer applied to tax regulations.
- An exception to the notice and comment procedures of § 553 exists for cases in which the agency believes the procedures are “impracticable, unnecessary, or contrary to the public interest.” Particularly in the recent past, the Treasury Department has frequently invoked this exception in promulgating for prompt guidance following significant tax legislation. Temporary regulations are often issued in “question-and-answer” format, reflecting the Treasury Department’s positions on the most obvious and frequently noted issues generated by the legislation. Temporary regulations must also be issued as proposed regulations, but they expire if not finally adopted within three years of the date they are issued. IRC § 7805(e).
- Revenue Procedures
- Both the Code and the Administrative Procedure Act (“APA”) use the terms “rules” and “regulations” interchangeably. All except purely procedural regulations bear the characteristic of being adopted pursuant to procedures prescribed by the APA, 5 U.S.C. §§ 551 et seq. On the other hand, revenue rulings, private letter rulings, determination letters and other IRS statements of position have less precedential value and are not subject to formal APA rulemaking procedures. A chart outlining the hierarchy of tax authorities and statements of position appears at the end of this Chapter.
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Index 163 results (showing 5 best matches)
Outline 113 results (showing 5 best matches)
Table of Statutes 61 results (showing 5 best matches)
- 11 U.S.C. § 507(a)(8)(A)(i).............................................. 235
- 11 U.S.C. § 362(a)(6)....................................................... 225
- 11 U.S.C. § 507(a)................................................... 230, 234
- 11 U.S.C. § 541(a)(1)....................................................... 225
- 26 U.S.C. § 1311(a)......................................................... 154
- Open Chapter
Advisory Board 6 results (showing 5 best matches)
Table of Cases 2 results
Table of Treasury Regulations 7 results (showing 5 best matches)
- 26 C.F.R. § 601.106(a)(1)................................................ 116
- 31 C.F.R. § 10.2(a)............................................................. 43
- Treas.Reg. § 1.6851–1(a)(1)............................................ 221
- Treas.Reg. § 1.6861–1(a)................................................ 221
- Treas.Reg. § 301.6201–1(a)............................................ 285
- Open Chapter
- Publication Date: March 14th, 2016
- ISBN: 9781634599320
- Subject: Taxation
- Series: Nutshells
- Type: Overviews
- Description: Reliable source on tax procedure and tax fraud helps bridge the gap between understanding "substantive" code provisions and preparing to represent a taxpayer in an Internal Revenue Service (IRS) dispute. Coverage includes IRS and treasury rulemaking; ethics issues of tax practice; confidentiality and disclosure; audits and administrative appeals; statute of limitations; litigation considerations; penalties and collection process; liability; investigation; and tax crimes.
