Tax Blog/Blawg

For most citizens of the United States, the thought of an IRS audit is probably scarier than a root canal or a colonoscopy without anesthesia.  As a result, people will be pleased to learn that the Internal Revenue Service is in fact "audited" itself, and sometimes doesn't like the results of those audits.

The notion of auditing the IRS is probably surprising.  Most taxpayers know that from time to time their local media doubtless has someone who will find a horror story about a widow who really didn't owe any taxes but is being harassed because of a mistake made by the IRS computer, and from time to time Congress occasionally exercises its oversight over IRS operations above and beyond asking the Commissioner what he's doing about closing the "tax gap."  But these contacts are sporadic, and there's a question about their effectiveness.

This is a question I hear from a lot of clients who owe the IRS money, because either they were not able to pay everything on their tax return when it was filed, or they endured an IRS audit and adjustments were unfavorable to them.  The fact of the matter is that, outside the confines of an Offer in Compromise based on doubt as to collectability, which is governed by I.R.C. § 7122 and an analysis of the taxpayer's ability to pay the liability in full, the IRS has a lot less discretion in this area than most people think.

Let's look at interest first.  Pursuant to I.R.C. § 6601, interest generally runs from the time a tax return is due until the time the tax is paid.  One exception is an “assessable” penalty, for which case the interest runs from the date the penalty is assessed.  Internal Revenue Code § 6404(g) permits the IRS to waive interest, but two circumstances must be present.  First, this only relates to interest on income tax, so that if we're talking about estate tax, excise tax, or employment tax, there is no legal authority for the IRS to "waive" interest.  Second, there must be a showing that the interest ran as a result of some error or delay on the part of the Internal Revenue Service in the performance of a "ministerial" act.  As you can imagine, the IRS rarely admits that such a mistake has occurred, and there are disappointingly few cases in which taxpayers have successfully gone to Court and had this position overturned as an abuse of discretion.

In the last article, we focused on overcoming an accuracy penalty when the taxpayer uses and relies on tax preparation software.  Let’s see what the “rules of the road” are if he instead relies on professionals.

The case of Curcio v. Commissioner, T.C. Memo 2010-115, decided May 2010, provided a challenging situation.  It involved four taxpayers whose companies had participated in a "Section 419 Plan" where they claimed deductions as business expenses for significant life insurance premiums, and the Court rejected the deductions under the Plan.  The 419 Plan at issue was created by Daniel Carpenter, a lawyer with experience in tax and employee benefits law.  He designed the plan, drafted and approved all amendments, and secured a legal opinion by a separate lawyer.  These Taxpayers, however, did not just buy the Plan from him and rely upon his representations.

This is a two-part article intended to cover the challenges facing a taxpayer whose return is audited, producing a tax deficiency, on top of which the I.R.S. asserts a penalty.

First, a little bit of history.  Until 1982, outside of situations where the I.R.S. could prove an affirmative attempt to evade tax, the only sanction for errors on returns was the negligence penalty of I.R.C. § 6653(a).  That penalty was imposed at the rate of five percent and did not bear any interest, so that in the view of many it was an encouragement for people to play the "audit lottery," since owing the tax, that ...

As my readers know, I focus my practice on representing people who have “misunderstandings” with the Internal Revenue Service.  I can’t count the number of clients who have made a comment along the lines of “get me Geithner’s deal” since it came to light that he had some significant and frankly embarrassing tax problems while working for the International Monetary Fund.  In point of fact, making a statement like that to an IRS employee is probably one of the worst things a taxpayer could say, because the rank and file IRS employees realize that if they did what Mr. Geithner did, they would be fired on the spot.

Anyone paying attention to the media for the last month or so must be aware of the battle the IRS has waged with UBS in order to obtain information about owners of heretofore “secret” accounts in Switzerland.  This is part of an IRS effort to track down tax delinquents who are using overseas accounts to hide their income and assets.  A settlement was recently announced whereby the Swiss agreed to reveal a relatively small (in the grand scheme of things) number of the accounts—4,450 versus the 52,000 that the IRS originally alleged—in order to resolve the dispute.  At this point, the IRS has its eyes on other foreign institutions and one can be sure that this is not going to be the end of the IRS’ efforts.

Unfortunately, Congress has yet to create a deduction or tax credit for depression or stress, although many taxpayers would like to see it happen as part of Obamacare.  Right now, people who itemize deductions may be able to claim medical expenses for treatment of stress or depression, but the actual deduction is often disappointing because only the amount which exceeds 7% of your adjusted gross income can actually be used to reduce the taxable income. But what if you receive damages for stress or depression? A pair of recent cases decided by the United States Tax Court involving taxpayers with damages for problems in their work environment provides some insight into when and how these elements affect the taxability of the damages received.

Getting a Notice of Levy from the IRS is never fun, especially if you are the taxpayer.  However, it can be even more perilous when you receive one with respect to someone you employ that owes the IRS money, seeking to garnish the worker's compensation.

An employer would be making a serious mistake to simply ignore the levy, whether she tells the worker about it or not.  Any person who receives a levy but fails to honor it faces personal liability under I.R.C. § 6332(d) (1) in the amount of each payment that should have been turned over to the IRS.  Thus, the employer who ignores the levy could pay the worker the compensation, as well as have to pay the IRS a second time.  In addition, Subsection (d) (2) creates a second tier "penalty," up to 200% of the amount that should have been paid to the IRS, if the failure to do so was willful.

Since the passage of the first Internal Revenue Code, it has seemed as if the lion's share of personal income taxes have been paid by higher income taxpayers.  If high tax rates were not enough, Congress came up with a series of things to add to the burden. In recent times, it enacted the dreaded alternative minimum tax.  Then George H. W. Bush broke his “read my lips” promise, and signed legislation that phased out itemized deductions and deductions for exemptions as income levels rise.  Now, as the George W. Bush tax cuts are scheduled to expire after 2010, and the Obama administration and ...

The United States Tax Court has very recently issued opinions for two couples that highlight the problems that may arise from a tax point of view when someone settles a credit card debt.

As long as there have been credit cards, there have been situations where the cardholder has for one reason or another not paid the full amount billed, and has had to “settle” a debt with the credit card company.  It is probable that most people don’t think about this as an income producing event, but Internal Revenue Code Sections 61(a)(12) and 108 provide that any cancellation or forgiveness of debt ...