Showing posts with label Tax Lawyer. Show all posts
Showing posts with label Tax Lawyer. Show all posts

Friday, June 20, 2014

IRS Suffers Defeat in Appeals Court as Jury's Finding of Return Preparer Penalty Reversed

The IRS suffered a major defeat last week in the Eleventh Circuit Court of Appeals, in Carlson v. United States, Case No. 12-13736 (June 13, 2014), as the appellate court reversed in part and vacated and remanded in part a decision from a Florida district court holding a tax preparer liable for penalties under Code Section 6701.  The eleventh circuit held that the burden of proof was not the usual minimum of a "preponderance of the evidence" (sometimes described as "more likely than not") but the higher "clear and convincing evidence" usually applied in civil fraud cases.  (Note: the clear/convincing standard is lower than the "beyond a reasonable doubt" standard.)  Appellant, Frances Carlson, was a return preparer for Jackson Hewitt tax services.

Section 6701(a) of the Internal Revenue Code, 26 U.S.C., provides for a penalty to be imposed on any person:

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,
(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and
(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person.
Under IRS Section 6701(b), the penalty is $1000 for essentially every return that the tax preparer knew was claiming a false understatement of tax, but the penalty is limited to one imposition for each year involving a particular taxpayer. For example, if a return preparer prepares knowingly false returns for Jimmy in 2010, 2011, and 2012,  and a knowingly false tax return and a false amended return for Jane in 2010, the return preparer would be penalized $3000 for Jimmy's three returns but only $1000 for the two filed for Jane.

In finding against the IRS, the Court noted several facts which implied that, even though Carlson prepared tax returns as her job for Jackson Hewitt, she was unsophisticated in tax matters and was not well educated or particularly well trained.  Rather, she relied mainly on a software program.  Nonetheless, she prepared 200-300 returns in her first year.  In her second year, she was promoted to corporate returns!  (Although the IRS is the loser in this case, it certainly doesn't reflect well on Jackson Hewitt either.  It does serve as a valuable reminder that a big name is no guarantee that the individual preparing your returns is very qualified.  The other big box preparation service, HR Block, on the other hand, if I recall right, spent a great deal of its advertising last year on how experienced some of its preparers were, perhaps trying to fight this perception.)

Her boss at JH was arrested in 2006 for drug and money laundering charges.  (Wow!)  The IRS later investigated the preparation business, at which time Carlson stopped working there, but had prepared more than a thousand returns during her tenure.  The IRS penalized her for 40 of those returns, she paid 15% down and sued in district court for a refund (which is unique to certain penalties).  The DOJ saw fit to defend only 27 of those 40 in a jury trial.

As you can see, Carlson is actually fairly sympathetic in this case.  The government's decision to litigate when there was a possible adverse decision on a purely legal issue was a hazardous one.  There is a saying in litigation that "bad facts make bad law."  If the DOJ was trying to avoid making bad law, this may have been the wrong case to push.

Contrary to the government’s argument, Section 6701, even though it doesn't use the word "fraud,"requires proof of fraud before penalties can be imposed.  Essentially, knowledge that a false item would make a false refund is fraud.

The case was remanded for a whole new trial.  The appeals court held the government was required to prove by clear and convincing evidence that the individual had actual knowledge that the returns she prepared for others contained an understatement of tax.  Thus, the instruction to the jury on the lower standard of proof was improper.  In a full sweep for the return preparer, the appeals court found the government's case wanting under any standard.  There was simply insufficient evidence to support the jury’s verdict that a tax preparer was liable for penalties under Section 6701.

 Further, government presented no evidence that the preparer knew that twelve of the returns understated the correct tax. The government was required to show that the preparer knew that the returns were fraudulent; it was insufficient for the government to show only that the returns contained errors.

In contrast, the preparer presented substantial evidence that she did not know the returns she prepared understated the correct tax. Moreover, the simple fact that many of the preparer's customers either failed to substantiate their deductions during the audit or were not cooperative during the IRS's later audit was not evidence that those clients had not presented substantiation to the preparer (or misled the preparer) at the time the returns were prepared.  A jury could not reasonably infer that the preparer knew the returns contained understatements based only on those clients' conduct during audits.

This case represents a major "win" legal victory for this particular return preparer and a terrible defeat for the government.  However, the "win" is not that great if you consider the public shame the IRS has brought on the return preparer and Jackson Hewitt and the likely loss of business it may have caused her practice.  Hopefully, this case gives enough guidance to prevent similar cases from being pushed forward by the DOJ and IRS unnecessarily.

The Wilson Tax Law Group has extensive experience in return preparer penalties and criminal defense of tax return preparers. Please feel free to contact our firm with any inquiries on similar issues or any other tax problems.

Tuesday, June 17, 2014

Tax Problems Facing Marijuana Dispensaries, This Time From the City of Los Angeles



The LA times published an interesting article about marijuana dispensaries operating in Los Angeles.  The article focuses on the interesting fact that as Los Angeles tries to clamp down on the number of marijuana dispensaries operating in Los Angeles by making them follow Proposition D requirements, more than 450 medical marijuana shops filed business tax renewals with the Office of Finance.  This number is more than three times as many stores than what is estimated to be allowed to stay open.  So while local lawmakers are troubled by the number of medical marijuana shops that still exist in Los Angeles, the Office of Finance has no problem cashing in on all the taxes being collected from them.  The article states that Los Angeles collected roughly $2.1 million from medical marijuana tax renewals this year, an Office of Finance staffer told a City Council committee Monday.

The interesting thing about this article is that City Council is upset that these people are paying business taxes because now the City cannot use tax evasion statutes as a method to shut them down.   It seems to me that these people are trying to comply with the tax code so whether or not they comply with Proposition D is not the tax-collecting agencies' business.   The City is so upset at all the business tax renewals, but has no problem collecting the roughly $2.1 million in revenues from medical marijuana shops.  Nor should they have any problem with it - Council members would be forfeiting their jobs if they took the position that the illegal businesses should be issued refunds.

In reality, the juxtaposition between collecting taxes from someone while turning a blind eye to the source of the money is hardly a new story.  This happens every time the IRS comes in to count the drug money after the DEA makes a big bust.  Even illegal businesses have to pay taxes.  Nonetheless, you don't usually see the opposite scenario - e.g., the DEA swooping in after the IRS audits a tax return - as the City Council members seem to support here.   The sharing of tax information between taxing and law enforcement agencies is usually a one-way street.  In non-tax cases, the Federal tax privacy law, IRC Section 6103(i)(1), provides that the IRS can share return information with another federal investigative agency only with a court order.

The government relies on taxes to operate and it would inhibit people from filing true tax returns if they thought that the information would be made public or would be shared with other government agencies.  The privacy of tax return information was also a qualified privilege under Federal common law before Congress enacted Section 6103.  In this situation, it would behoove whoever is advocating and lobbying on behalf of the dispensaries to not only be familiar with the medical marijuana laws and business laws, but also tax law and policy.

As an attorney who understands criminal law and tax law, I can tell you that medical marijuana dispensaries get no breaks that other businesses get under the state tax code.  They are treated as illegal drug trafficking activities under the California Revenue and Taxation Code. So what does this mean? 

It means both the Feds and California will disallow all the business expenses of a marijuana dispensary that a normal business is entitled to deduct.  As a result, marijuana dispensaries will be taxed on their gross receipts for income tax purposes. California's tax code is basically "monkey see, monkey do," adopting the Federal tax code almost rule for rule.  Under Federal law, if a business violated public policy or is illegal, then it cannot take advantage of deductions or credits under the tax code.  Because federal tax law deems these activities as illegal drug trafficking activities, so does California.  These rules are completely screwed up because they encourage these types of businesses to operate under the radar for tax purposes.   Fortunately, it is not an entirely slam dunk case for the tax authorities because there are some legitimate tax "loopholes."  There are ways to operate so as to legitimately minimize these tax burdens.

Much of this is covered in a recent article I wrote on the Taxation Of Medical Marijuana Dispensaries.  I suggest any marijuana dispensary contact an experienced tax attorney who knows the marijuana dispensary tax rules inside and out.  There are ways to follow the tax rules and not have to pay taxes on the gross receipts of the dispensary.  Feel free to contact the Wilson Tax Law Group, if you have any questions. Our firm has significant experience addressing tax problems facing marijuana dispensaries.




Sunday, June 15, 2014

IRS (Probably) Spent More Money than Tax Owed in Symbolic Tax Court Victory

Symbolic of what?  I'll leave that to you.  From a Tax Court opinion released earlier this week, file this under Ridiculous Things the IRS Does:

Taxpayers filed a perfectly correct return listing their taxable social security income on the correct line.  IRS received the return and, using its big brain, decided the social security income was nontaxable, recalculates the tax, and issued the taxpayers an additional $548 refund.  Somehow, the IRS later realized the taxpayers were right and they shouldn't have sent the extra dollar bills, so they audited the couple and demanded they repay the $548.  When the couple declined, the IRS issued a notice of deficiency, on which the couple appealed to the tax court.  Somehow, probably driven by the couple's righteous indignation, the case went all the way to trial, where it was decided in a judicial opinion.  The taxpayers argued they shouldn't have to pay for the IRS's mistake, but the court found in favor of the government.

Granted, the taxpayers were technically in the wrong under the law - a "rebate refund" can be reclaimed by the IRS through examination procedures.  Also, "easy come, easy go" should prevail here.

But the real losers here are the American taxpayers.  Someone in the IRS decided it would be worthwhile to take this thing all the way, over a few measly dollars, and issue a notice of deficiency, giving appeal rights - a ticket to the Tax Court - to these taxpayers.  Hours of some IRS auditor's time dealing with these taxpayers, hours of time spent by paralegals, secretaries, and attorneys at the IRS Office of Chief Counsel to prepare and try the case, and hours spent by the judge, his/her staff, and the judicial clerk to arrive at this opinion. (And don't forget the cost of gas to Tax Court for the IRS Attorney, mailing costs for pleadings, and the cost of flying the judge to Texas and setting him/her up in a hotel to try the case.) Chances this cost the government and, by extension, the American people, far more than its worth are pretty high.  The full opinion can be found here.

Posted by our Newport Coast Tax Attorney at wilsontaxlaw.com.

Tax Court Draws Bright Line in Completed Contract Method of Accounting Cases



What the Tax Court gives with one hand, it can take away with the other.

That's the lesson one can learn from the pair of cases issued this year dealing with the completed contract method of accounting (CCM).  The Tax Court's opinion in Shea Homes, Inc. v. Commissioner, 142 T.C. No.3 (2014) was a great win for large-scale home developers like Shea Homes whose contracts to build and develop entire communities can take several years to complete.  The IRS had taken the unfortunate position that Shea Homes' contracts were not long term contracts and that the infrastructure improvements to the roads and building community areas were not included in determining when the contract was completed - which would have forced Shea Homes to recognize all of its income before knowing how much it would ultimately have in expenses.  It was a resounding victory for Shea Homes, though, as the Tax Court found that they were long term home-construction contracts and the contracts were not completed in earlier years when the contracts closed escrow.  The Tax Court relied on the facts that the community areas and the infrastructure were part of their contracts with the ultimate home purchasers and held that those costs were properly included in the tests to determine whether the CCM could be used and when the contracts were completed.  A broad reading of that opinion could have been used to support the proposition that builders who only did infrastructure and community improvements could also use the CCM.

That is, until the Tax Court issued its recent opinion in Howard Hughes Company, LLC v. Commissioner, 142 T.C. No. 20 (2014).  In what appeared to be less of a sequel and more of a two-part movie, the Tax Court drew a bright line to exclude builders who build infrastructure and community areas, but don't also construct homes, from the test.  The Tax Court made no bones about it, saying:

"Our Opinion today draws a bright line.  A taxpayer's contract can qualify as a home construction contract only if the taxpayer builds... or installs integral components to dwelling units... .  It is not enough for the taxpayer to merely pave the road leading to the home, though that may be necessary to the ultimate sale and use of a home."

While there is some logic to the Tax Court's opinion, a plain reading of the regulations and the statute don't give this tax attorney the sense that they are so narrow.  Especially in light of the proposed regulations which would broaden the costs that can be included.  Proposed Income Tax Regs., 73 Fed. Reg. 45182 (Aug. 4, 2008) (I don't buy the idea that the IRS can, on the one hand, issue regulations but, on the other hand, say that the regulation is not supported by the terms of the statute.  Chevron, anyone?  Separation of powers?).  I think we can expect the taxpayers in Hughes to appeal, so there will certainly be more to the story.  Stay posted.

If you are in need of an attorney on this or any other tax issue, you can contact our Newport Beach Tax Lawyer at wilsontaxlaw.com

IRS "Adopts" Taxpayer Bill of Rights, Except No Actual Taxpayer Rights Adopted

The IRS issued a press releases this week, which can be found here, alerting taxpayers to the newly adopted Taxpayer Bill of Rights, which are outlined here.  Except there are no new rights and nothing can be "adopted" when it is a list of responsibilities and rights already belonging to the IRS and taxpayers.  Imagine if McDonald's put a customer "Bill of Rights" on their menu, which said that, when you pay for a hamburger, we'll give you a hamburger, except when we don't, in which case you can complain to your cashier and then to the manager to see if they care.  The IRS's Taxpayer Bill of Rights, included in Publication 1, which presumably will be sent to taxpayers during audits, provides the following:


The Right to Be Informed
The Right to Quality Service
The Right to Pay No More than the Correct Amount of Tax
The Right to Challenge the IRS’s Position and Be Heard
The Right to Appeal an IRS Decision in an Independent Forum
The Right to Finality
The Right to Privacy
The Right to Confidentiality
The Right to Retain Representation
The Right to a Fair and Just Tax System

The problem with this list of rights isn't just that they don't (and can't, as a matter of law) provide additional, substantive, judicially-enforceable rights to taxpayers than can be found in statutes, regulations, and case law.  Even outside of a court of law, parallel changes to the IRS's Internal Revenue Manual would be needed adding more responsibilities to IRS employees for this list to have any teeth when a taxpayer fights against the IRS. Without the force of law or a substantive change in internal IRS procedures, they are little more than PR Buzz.  It is as though they were trying to put a positive spin on something that intuitively sounds unpleasant.  I imaging the process went something like this:

     IRS Commissioner, to PR Guy: I want to make sure the taxpayers know that the IRS can collect every penny you owe in taxes, including interest and penalties, every cent of it! 

     PR Guy:  But that sounds pretty negative.  It won't come off well for us...

    IRS Commissioner:  How about, "The good news is the IRS can't collect more than you owe."

     PR Guy:  I don't know.  I think taxpayers will see right through it.

     IRS Commissioner:  Make it happen!

Even if that weren't the exchange, we still somehow ended up with "The Right to Pay No More than the Correct Amount of Tax."

According to the IRS, this means "Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly."  That sounds great!  But, what is "the amount of tax legally due?"  Under the law, when the IRS assesses a tax, that becomes tax legally due.  That amount grows with interest and penalties, and you have to pay those, too, because they are also legally due. Then, what does it mean to "apply all tax payments properly?"  Under well-established law, unless you specifically direct a tax payment you make to a specific tax year, the IRS can properly apply that payment to any of your tax liabilities for any year as the IRS sees fit.  So, this "right" amounts to this: "The IRS can collect all the taxes, penalties, and interest you owe until they are fully paid, and the IRS will apply your payments to your taxes, but will do so in a manner fits its own best interest in most cases."

Ultimately, there should be one item in the Taxpayer Bill of Rights, bolded for emphasis: You have the right to not blindly trust the IRS to act in your best interest.  Put that on a poster and slap it on the IRS walls.

Form more, visit Wilsontaxlaw.com, the best Newport Beach tax attorney.

Welcome to the Wilson Tax Law Blog - a Newport Beach Tax Attorney Blog

The Wilson Tax Law Group is a tax firm serving the Newport Beach and Yorba Linda areas.  This blog is meant to be both a service to our clients, where we can post IRS, California Franchise Tax Board, FBAR, and Orange County property tax news that may be of interest to them.  It will also be a place where we will post on topics that are of interest to us and other tax professionals following hot tax topics of the moment.  Sometimes, those areas will intersect, because we handle cutting edge cases including tax audits and tax planning for marijuana dispensaries (sales tax and income tax) and defending taxpayers in criminal investigations of the FBAR penalties.  This blog will be constantly evolving, so please give us feedback in the comments section if you think of future topics you would like to read more about.

For more information on our firm, read about our Newport Beach and Yorba Linda area tax attorney at wilsontaxlaw.com.