Wharton Aldhizer & Weaver PLC. Tax Controversy Newsletter A Monthly Update on Tax Procedure and IRS Enforcement Actions in the Mid-Atlantic

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1 Wharton Aldhizer & Weaver PLC Tax Controversy Newsletter A Monthly Update on Tax Procedure and IRS Enforcement Actions in the Mid-Atlantic Issue Matt Von Schuch Tax Attorney and CPA Legislative Updates New Highway Funding Bill Includes Tax Law Changes The Surface Transportation and Veterans Care Choice Improvement Act of 2015 includes several new tax law changes. The most significant changes made by this legislation include: 1065 and 1120S Filing Deadlines Beginning with 2016 tax returns, the filing deadline for partnership returns has been moved to the same day as the deadline for S corporations. Now both partnership and S corporation returns are due on the 15 th day of the 3 rd month after the end of the tax year, i.e., March 15 for calendar-year taxpayers Filing Deadline Beginning with 2016 tax returns, the filing deadline for C corporation returns has been deferred a month to the 15 th day of the 4 th month after the end of the tax year, i.e., April 15 for calendar-year tax payers. (Note: for 6/30 year-end C corps this rule does not go into effect until 2026). FBAR Deadline Beginning in 2016, the FBAR filing deadline has moved up to April 15 with a maximum 6-month extension to October 15. Basis Consistency Rule Basis of property received by reason of death under Code Section 1014 must be equal to the value of the property as reported for estate tax purposes. New reporting obligations are also placed on executors to provide beneficiaries with information regarding the valuations reported on estate tax returns. Congress Reverses Supreme Court on 6-Year Limitations Period For all tax periods still open on July 31, 2015, an overstatement of basis is now an omission of gross income for purposes of applying the 6-year limitations period on tax Tax Proc. Newsletter Wharton Aldhizer & Weaver, PLC P a g e 1

2 assessments. This effectively overrules the Supreme Court s taxpayer-friendly ruling in United States v. Home Concrete & Supply, LLC. IRS and Tax Court Procedure Updates Tax Court Cannot Force Settlement on Issues of Taxpayer Disputes The Seventh Circuit held that the Tax Court could not force taxpayers to settle disputed issues with the IRS where there is no meeting of the minds as to the terms of settlement. Liens and Levies Virginia Court Dismisses Lawsuit Taxpayer Filed Against Former Employer For Complying with IRS Levy on Retirement Benefits The Court held that Fairfax County is immune from liability under I.R.C. section 6332(e) for complying with an IRS levy of retirement benefits. The Court dismissed the lawsuit that Dora Claudle filed against the County for paying her retirement benefits over to the IRS. The Court held that the statutory immunity provided to third-parties who comply with IRS levies broadly applies even where the IRS has improperly issued the levy. Moreover, the Court held that an employer has no obligation to determine if any portion of the levied retirement benefits are exempt from levy; particularly, where the IRS has not instructed it to do so and the employer does not have the information necessary to do so as it was not instructed to make such a determination and did not have the information to that determination. Collection Due Process Appeals IRS Chief Counsel Rejects D.C. Circuit s Holding that It is the Sole Appellate Venue for Appeals of CDP Cases On June 30 the Associate Chief Counsel for Procedure & Administration issued Notice CC instructing IRS Chief Counsel attorneys on appellate venue for collection due process, innocent spouse, and interest abatement cases in light of the decision in Beyers v. Comm r., 740 F.3d 668 (D.C. Cir. 2014). In that case the D.C. Circuit held that it is the sole venue to appeal CDP cases from Tax Court. This issue is important not only for venue purposes but because, under the Golsen rule, appellate venue determines the law that Tax Court applies in any particular case. IRS Chief Counsel instructs its attorneys to continue to argue that CDP cases, innocent spouse cases, and interest abatement cases are appealable to the regional circuit court in which the taxpayer resides or has its principal place of business. Even with this new IRS notice, however, Beyers presents an opportunity for taxpayers to shop for case law that is the most helpful to their case and to create issues for appeal should the taxpayer lose in the Tax Court. Tax Proc. Newsletter Wharton Aldhizer & Weaver, PLC P a g e 2

3 Tax Court Upholds IRS Appeals s Determination to Proceed with Collection Action in Three Cases In Hartman v. Comm r., the Tax Court ruled that IRS Appeals did not abuse its discretion when it rejected John A. Hartman s proposed installment agreement because he had not filed all income tax returns at the time of the CDP hearing and he had not provided supporting documentation for his Form 433 financial disclosure. In McRae v. Comm r., the Tax Court ruled that Appeals did not abuse its discretion in refusing to grant a face-to-face hearing where the taxpayer refused to provide financial information and intended only to raise frivolous arguments at the hearing. And, finally, in Abu-Dayeh v. Comm r., the Tax Court ruled that Appeals did not abuse its discretion in denying the taxpayer s proposed offer in compromise because he failed to pay the filing fee or to make an initial installment payment with the offer. Joint Returns and Innocent Spouse Relief Taxpayer Permitted to Change Filing Status from Head of Household to Married Filing Jointly The Eighth Circuit Court of Appeals reversed a Tax Court decision and held that a married taxpayer who erroneously filed as head of household can amend his return to change his filing status to married filing jointly. Generally, once married taxpayers file separate returns for a tax year they cannot later change their status to a joint return. In this case the court reasoned that filing as head of household status is not a separate return for this purpose. The Fifth and Eleventh Circuits have made similar holdings. The Tax Court takes the position that any non-joint return, even a return filed as head of household, is a separate return. Tax Court Rejects Innocent Spouse Relief for Recipient of Unemployment Benefits The Tax Court rejected Albert Arias Agudelo s argument that his ex-wife stole his unreported California unemployment benefits to pay for plastic surgery after reviewing the couples bank records. The court denied Mr. Agudelo innocence spouse relief on the grounds that the unreported item of income was attributable to him and, therefore, he was not eligible for relief. Employment Tax and Trust Fund Recovery Penalties Undeliverable Notice of Intent Does Not Prevent IRS from Assessing Trust Fund Recovery Penalty Tax Court rules that the IRS is not prevented from assessing a trust fund recovery penalty when it has properly sent the notice of intent (Letter 1153) but the notice is returned as undeliverable. The taxpayer, however, did not have a pre-collection opportunity to challenge the assessment so he may do so at a CDP hearing. Tax Proc. Newsletter Wharton Aldhizer & Weaver, PLC P a g e 3

4 IRS Whistleblowers Tax Court Holds that Whistleblowers Are Not Required to File Form 211 Before Providing Information to the IRS A whistleblower indicted as a co-conspirator in a money laundering conspiracy informed the FBI, IRS, and other government agents about a foreign business that was helping taxpayers evade income taxes. He assisted the government in its investigation of this business resulting in its indictment, guilty plea, and payment of $74 million to the US Treasury. Afterward the whistleblower filed a Form 211 with the IRS Whistleblower Office, which was rejected based on the IRS s contention to be eligible for a whistleblower award the whistleblower must file Form 211 disclosing his information before this information is provided to the IRS divisions or other law enforcement agencies. The Tax Court rejected this argument holding that providing information to other federal agencies and/or other IRS operating divisions before the Whistleblower Office on Form 211 does not render a whistleblower ineligible for an award. Civil Tax Enforcement Government Argues that Virginia Lawsuit Challenging Tax Refund Offset is Barred United States moves to dismiss a pro se action challenging the diversion of a tax refund to offset the taxpayer s past due child support obligation. The United States moved to dismiss for lack of jurisdiction as Section 6402(g) bars any action, whether legal or equitable, brought to restrain or review an offset for child support obligations. Court Orders IRS to Search Maryland Business for Records After the court found that Laurence H. Herber, Jr. failed to provide all documents ordered to be produced in this summons enforcement case, the court entered an order directing an IRS revenue officer to search Mr. Gerber s business for the missing records. Government Seeks to Permanently Enjoin South Carolina Sisters from Preparing Tax Returns The government alleges that Latasha Failey, her sister Windham Failey, and Failey s Tax Service operated a tax preparation service that engaged in a scheme to minimize its customer s liabilities or maximizing their refunds by falsely claiming itemized deductions, business deductions, exemptions, and filing statuses. Failey s Tax Service prepared 2,431 tax returns between 2009 and 2011 of which 98.9% claimed a refund. Criminal Tax Enforcement District of Columbia Tax Return Preparers Sentenced for Conspiracy Sherri Davis and her son, Andre Davis, were sentenced in July in the U.S. District Court for the District of Columbia. Sherri Davis was convicted of 1 count of conspiracy to defraud the United States, 25 counts of aiding and assisting in the preparation of false individual income tax returns, 3 counts of filing her own false returns, and was sentenced to a 48 month prison term. Andre Tax Proc. Newsletter Wharton Aldhizer & Weaver, PLC P a g e 4

5 Davis, a current D.C. public school teacher, was convicted of 1 count of conspiracy to defraud the United States, and he was sentenced to 6 months of home detention and 100 hours of community service. District of Columbia Property Manager Pleads Guilty to Tax Evasion and Embezzlement Charges This month, Lorraine Cyr plead guilty to charges of embezzlement and tax evasion in the United States District Court for the District of Columbia. Ms. Cyr owned and operated a property management company in the District of Columbia. She pled guilty to charges that she embezzled over $380,000 from her client s bank accounts. The tax evasion charge stems from Ms. Cyr s efforts to hide this income from the IRS. Sports and Tax Former Member of the Redskins Hogs Beats IRS on Timing Issue By winning his own small case in Tax Court, George Starke, an offensive lineman who won a Superbowl as a member of the Redskins Hogs, recently demonstrated why timing is just as important in tax as it is in football. After Mr. Starke retired from the NFL, he started a non-profit technical training school in the D.C. area. He taught many of the classes at the school and provided a majority of its funding. Mr. Starke had access to the school s credit card, which he used to purchase personal items during his tenure there. When he left the school in 2010, he still had outstanding purchases on the school s credit card made from 2003 through 2006 in the amount of about $83,000. The school issued him a 1099-MISC reporting this balance as income in However, Mr. Starke did not report this amount on his 2010 income tax return. The IRS examined Mr. Starke s 2010 return and issued a notice of deficiency adjusting his tax for an additional $83,000 of income. Mr. Starke argued his case before the Tax Court on his own. He successfully convinced the court that his use of the school s credit card was not a loan because he did not intend to repay the school when the purchases were made and that, if these purchases were income to him, they are attributable to earlier tax years and not The Tax Court disallowed the IRS s proposed adjustment for 2010 the only tax year before the Court. About Wharton Aldhizer & Weaver The tax lawyers at WAW represent individuals and businesses in a broad range of tax planning and controversy issues. WAW tax attorneys help clients evaluate complex taxrelated issues that affect their personal and business finances. We also represent clients in tax audits, collection matters, and other controversies before the IRS and the Virginia Department of Taxation. Matt Von Schuch is a tax attorney and CPA at Wharton Aldhizer & Weaver, PLC. Before entering private practice, he served as a trial attorney in the Tax Division at the U.S. Department of Justice where he represented the IRS in federal courts. Matt uses that unique experience to advise businesses and individuals on a variety of tax issues. Tax Proc. Newsletter Wharton Aldhizer & Weaver, PLC P a g e 5