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JOURNAL OF

10030427-0350ISSN 1159-9279PUBLISHED BY

DECEMBER 2018–JANUARY 2019


JOURNAL OF

Published Bimonthly by Wolters Kluwer

34th AnnualTax Controversy Institute

1

COLUMNSExamBy George A. Hani 5CollectionBy Giovanni V. Alberotanza and Michael J. March 9Global ViewBy Robert Misey 11IRS WatchBy Michael P. Dolan 13ARTICLESMessage from the Institute ChairBy Steven Toscher 15The Future of Virtual Currency Tax Prosecutions

By Sandra R. Brown 19How Your Clients Can Lose Their Passports by Falling Behind on Their Taxes (and What to Do About It)By Dennis Brager 21The TCJA and Uncertain PositionsBy Kip Dellinger 25What Garrity Teaches About FBARs, Foreign Trusts, “Stacking” of International Penalties, and Simultaneously Fighting the U.S. Government on Multiple FrontsBy Hale E. Sheppard 27Judicial Tax CollectionBy William D. Elliott 37


JO U RNAL OF

VOL . 20, NO. 6 DECEMBER 2018–JANUARY 2019

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Advisory BoardEDITOR-IN-CHIEFClaudia A. Hill

Frank AgostinoAgostino & Associates Hackensack, NJ

Larry A. CampagnaChamberlain, Hrdlicka, White, Williams & MartinHouston, TX

Caroline D. CiraoloKostelanetz & Fink, LLPWashington, D.C.

Harvey CoustanErnst & Young, LLP (Retired)Chicago, IL

Michael P. DolanKPMGWashington, D.C.

William D. Elliott Elliott, Thomason & Gibson, LLPDallas, TX

Karen L. HawkinsAttorney at LawYachats, OR

Lawrence B. GibbsMiller & Chevalier, CharteredWashington, D.C.

Eric L. GreenGreen & Sklarz LLC New Haven, CT

Larry JonesFreeman Law Dallas, TX

John KeenanDeloitte Tax LLPWashington, D.C.

Kathryn KeneallyJones Day New York, NY

Sid KessKostelanetz & FinkNew York, NY

Carol M. LuttatiLaw Offices of Carol LuttatiNew York, NY

Robert E. McKenzieArnstein & LehrChicago, IL

Robert J. Misey, Jr.Reinhart Boerner Van Deuren s.c.Milwaukee, WI

Fred F. MurrayGrant Thornton LLPWashington, D.C.

Hale E. SheppardChamberlain, Hrdlicka, White, Williams & MartinAtlanta, GA

Bryan C. SkarlatosKostelanetz & FinkNew York, NY

ADVISORY BOARD

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JOURNAL OF TAX PRACTICE & PROCEDURE DECEMBER 2018–JANUARY 2019

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service and that the authors are not offering such advice in this publication. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. All views expressed in the articles and columns are those of the author and not necessarily those of Wolters Kluwer or any other person.

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JOURNAL OF TAX PRACTICE & PROCEDURE (ISSN 1529-9279) is published bimonthly by Wolters Kluwer, 2700 Lake Cook Road, Riverwoods, IL 60015, 1-800-449-8114, CCHGroup.com. POSTMASTER: SEND ADDRESS CHANGES TO JOURNAL OF TAX PRACTICE AND PROCEDURE, 2700 LAKE COOK ROAD, RIVERWOODS, ILLINOIS 60017. DECEMBER 2018–JANUARY 2019. Vol. 20, No. 6. Change of address should be received at least 30 days before the date of the issue with which it is to take effect. Printed in U.S.A.

© 2019 CCH Incorporated and its affilliates. All rights reserved.

MANAGING EDITORKaren A. Notaro, J.D., LL.M

LEGAL EDITORShannon Jett-Fischer, J.D.

PRODUCT MANAGER Jose Robles

3DECEMBER 2018–JANUARY 2019 © 2019 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED.

A Note from the Editor-in-Chief

T his year’s UCLA Tax Controversy Institute brought together both govern-ment and industry tax professionals with the usual collegial spirit and friend-liness we’ve enjoyed over the years. But unique to 2018 was the uncertainty

brought by thoughts of implementing major tax reform legislation and the IRS change of tack on voluntary compliance initiatives. Tax accounting practitioners voiced concerns about the challenges of facing a filing season without adequate guidance to implement new legislation. Tax controversy practitioners listened for changes in the direction IRS enforcement initiatives would take us this coming year.

When we left the sessions, we were still reasonably upbeat about the direc-tion our profession was headed. Besides, the new Commissioner of IRS, Chuck Rettig, had just taken the helm and we looked forward to the direction he would lead the Agency. This was well before the Mid-December closure of the Federal government and IRS work stoppage that now creates huge challenges to this coming filing season.

For over a month, at a critical time for IRS preparation for the coming filing season, it was next to impossible to send faxes to the CAF unit to post Power of Attorney documents, send fax responses to the Under Reporter unit or Correspondence Exam or feel comfortable that mailed responses were received, or communicate responses regarding client collection, appeals or tax court issues. So many tax advocacy matters are time-sensitive, and telephones were not being answered or fax numbers accepting documents; tax court petitions were either being returned or held at the DC Post Office. As we have recently learned from returning Practitioner Support personnel, the usual year-end/beginning-of-the-year staff training for the new filing season didn’t take place either.

IRS did issue a news release with important and updated information as they resumed operations.1 In it they linked to Frequently Asked Questions addressing Audits, Collections, Appeals, and Tax Court filings. They also assured taxpayers that IRS will be doing everything they can to have a smooth tax season and mini-mize the impact on taxpayers. I know the tax services community, tax practitioners who prepare returns as well as those who advocate for taxpayers, will be doing the same. We all benefit when the tax system is functioning as it should and our government is funded and operating.

Our columnists in this edition bring a variety of interesting topics:George Hani on Exam coaches practitioners on Responding Strategically to the

Acknowledgment of Facts IDR. While each case has its own issues and atmosphere, strategic considerations are part of the response, too, with a focus on where you believe the case will likely be resolved.

Giovanni Alberotanza on Collection looks at Pre-Notice Levies: When the IRS Can Levy Before Notifying Taxpayers of Their Right to a Hearing. While CDP hear-ings are a taxpayer’s right in most situations, Giovanni looks at four exceptions where circumstances when pre-notice levies can be enforced.

CLAUDIA A. HILL, EA, MBA, is the Owner and Principal of Tax Mam, Inc./TMI Services Group, Inc., a tax preparation, planning and controversy representation firm in Cupertino, CA. She is a nationally recognized tax professional and frequent lecturer on taxation of individuals and representation before the IRS.

Robert Misey on Global View shares How to Elect Code Sec. 962 Treatment: New Uses for an Old Tool? This election has previously been viewed as a one-time use tool for tran-sition tax issues, but more recently it is being considered as a tool to reduce the U.S. taxation of Global Intangible Low-Taxed Income (“GILTI”). Rob analyzes use of the election and suggests other possibilities.

Michael P. Dolan on IRS Watch reviews IRSACs 2018 annual public report. It’s no surprise that one of the key findings relates to major budget cuts over the last decade, reduction by over 24,000 full-time employees, and the number of full-time employees eligible for retirement.

Traditionally for our special editions, we feature a Message from the Institute Chair. Steve Toscher took the reins from Chuck Rettig this year as Chair of the UCLA Controversy Institute. Be sure to look over Steve’s Message for a list of the government guests that

took the time to join us for this year’s event. Friends of the JTPP, Mary Beth Murphy and Lisa Beard of

A NOTE FROM THE EDITOR-IN-CHIEF

THOMAS OSER, STEVEN TOSCHER AND ROGER TORNEDEN

STEVE MATHER, AMANDA BARTMANN, RONSON SHAMOUN, JOSEPH BROYLES DENNIS BRAGER, DAWN HARRIS AND DARREN GUILLOT

EVAN DAVIS, DENNIS BRAGER, CAROLINE CIRAOLO, STEVE TOSCHER, JOSEPH BROYLES AND DENNIS PEREZ

Continued on page 41

NATHAN HOCKMAN, ERIC HYLTON, SANDRA BROWN, GARY HOWARD, RICK SPEIER AND MARTY SCHAINBAUM

MICHELLE FERREIRA, STEVEN JAGER, PHILLIP WILSON, CLAUDIA HILL AND JOHN TUZYNSKI


DECEMBER 2018–JANUARY 2019 5

GEORGE A. HANI is a member and Chair of the Tax Department with Miller & Chevalier in Washington, DC.

ExamResponding Strategically to the Acknowledgment of Facts IDR

By George A. Hani*

I. Introduction

For more than two years now, the Acknowledgment of Facts (AOF) Information Document Request (IDR) has become standard practice in examinations con-ducted by the IRS’s Large Business and International (LB&I) but it continues to cause consternation among taxpayers and practitioners alike. Generally speaking, there is no right way or wrong way to respond to the AOF IDR. Nor is there a standardized response for taxpayers to utilize. Each response depends on the particular issue and the atmosphere of the audit and should take into account a variety of strategic considerations. This column will review the background and evolution of the AOF IDR, including updates to the Internal Revenue Manual (IRM) provisions regarding the AOF IDR made in December 2018, and identify some of the strategic considerations to consider in formulating a response.

II. BackgroundThe roots of the AOF IDR appear to be a response to an initiative by IRS Appeals referred to clarify or rest is role within our tax administration system. As part of that initiative, referred to (at least initially) as the Appeals Judicial Approach and Culture (AJAC) project, Appeals adopted a policy under which cases would be returned to LB&I exam teams if taxpayers produced “new facts” during its discussions with Appeals. As explained in the IRM, Appeals officers “are not investigators or examining officers and may not act as such.”1 Under this policy, “taxpayers may present new information or evidence to Appeals, [but] the presen-tation of new factual information generally will require that the case be returned to Examination.”2

While Appeals clearly wanted all facts to be disclosed and considered during the examination phase, Appeals was not concerned with when during the examination phase those facts were examined. A fact first disclosed in a taxpayer’s protest (which is part of the process to elevate disputed issues from examination to Appeals) would not be considered a new fact that would cause the case to be returned to exam. This is because the examination team has the opportunity to prepare a rebuttal to the protest before sending the case to Appeals and therefore has the opportunity to address the implications of any new fact included in the protest.

That said, examination teams understandably would want to know all the facts as early in the audit as possible. Accordingly, along comes the AOF IDR. While

DECEMBER 2018– © 2019 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED.

EXAM

something akin to the AOF IDR may have been used by exam teams previously, the practice was embraced and formalized by LB&I in early 2016 with the release of Publication 5125, the LB&I Examination Process (LEP), which replaced the Quality Examination Process (QEP), and updates to the relevant provisions in the IRM (4.46.4). Publication 5125 outlined a new examination process that would be issue-based.3 A core theme of the new examination process is transparency and cooperation by both taxpayers and examination teams, much like the core principles of a Compliance Assurance Program (CAP) audit. In discussing the obligations of the LB&I exam team, Publication 5125 instructs them to “[w]ork transparently in a collaborative manner with the taxpayer to understand their business and share the issues that have been identified for examination.”4 Similarly, Publication 5125 provides that taxpayers (or their representatives) should “work transparently with the exam team by providing a thorough overview of business activities, operational structure, accounting systems, and a global tax organizational chart.”5

With respect to the acknowledgment of facts, Publication 5125 provides:

LB&I issue team members are responsible for docu-menting all the facts that they have secured so that they can accurately apply the law. For potentially unagreed issues, the issue team members are expected to seek the taxpayer’s acknowledgment on the facts, resolve any factual differences and/or document factual disputes. The issue manager should ensure that all relevant facts, including additional and/or disputed facts, are appropriately considered before a Notice of Proposed Adjustment is issued. If a case is closed to Appeals and the taxpayer provides relevant new information that requires investigation or additional analysis, the case will be returned to exam’s jurisdiction for consideration.6

Implementation of this idea is guided by provisions in the IRM.7 The key element is the pro-forma IDR, which is included in the IRM as Exhibit 4.46.4-3, along with a Form 886-A (Explanation of Items) “to solicit the tax-payer’s written acknowledgment of the facts on potentially unagreed issues.”8 The initial pro-forma IDR gave the taxpayer three choices for a response:1. Taxpayer agrees to the facts as written;2. Taxpayer provides additional relevant facts and sup-

porting documentation; and3. Taxpayer identifies disputed facts and provides clari-

fication and/or supporting documentation.The pro-forma AOF IDR updated in December 2018 now allows a fourth response: “Other, please explain.” This

seemingly minor change may ally some anxiety about the AOF IDR. With the original pro-forma AOF IDR, some taxpayers felt that they had to choose between one of the three original options (agree, provide additional facts, or identify disputed facts). Taxpayers should never have felt bound to pick between only those three and should always have had the ability to respond in whatever man-ner thought to be appropriate. However, the addition of the “other” option is a welcomed change to the pro-forma AOF IDR.

Both the IRM provisions and the pro-forma AOF IDR itself provide additional information that explains the purpose and use of the AOF IDR. In addition to pointing out the benefits of identifying “all relevant facts necessary to arrive at an accurate tax determination,” the pro-forma AOF IDR also references the Appeals policy regarding the pre-sentation of new facts and notes that cases may be delayed if they need to be returned to exam based on new facts introduced at Appeals. The pro-forma AOF IDR also makes explicit that the AOF IDR is not subject to normal IDR enforcement procedures and the prospect for the issuance of a summons,9 which is a recognition that a response to such a request could not be compelled through a summons. However, and importantly to the strategic considerations discussed below, the pro-forma AOF IDR notes that the taxpayer’s “response or lack of response to the IDR will be referenced as part of the final Form 886-A when the Form 5701, Notice of Proposed Adjustment, is issued.”

The pro-forma AOF IDR also attempts to alleviate taxpayer anxiety by saying that the taxpayer’s response to the AOF IDR “does not indicate agreement to the issue or any proposed tax adjustment.” In addition, the pro-forma AOF IDR notes that “[w]hile the interpretation of the law or the amount of the proposed adjustment may be unagreed, all relevant facts should be included in the attached draft Form 886-A.”

III. Responding to the AOF IDRResponses to the AOF IDR can run the full spectrum of completely ignoring the IDR to a full-blown re-write of a comprehensive fact statement. Where along that spec-trum your response falls should depend on an assessment of how your response (or various options for responding) will impact the resolution of the potential dispute.

A. Strategic Considerations

1. How Developed Is the Issue?As a threshold matter, a taxpayer should seek a full understand-ing of the exam team’s legal position prior to responding to


any AOF IDR. Without knowing Exam’s legal position, it is difficult to evaluate the relevance or completeness of the factual statement presented. Early in the evolution of the AOF IDR, some exam teams issued AOF IDRs with only the fact section of the draft Form 886-A. This was happening despite the IRM provisions released in March 2016 specifically providing that “[w]ithout an understanding of LB&I’s tax position and the law applied, the taxpayer may not have the context needed to ascertain whether all of the relevant facts have been identified for the tax issue.”10 The IRM provisions as revised in December 2018 no longer provide this very helpful and direct statement. The updated IRM provision merely provides that “the draft Form 886-A should be prepared following the format outlined in IRM [section] 4.46.6.11.”11 Those provisions provide that the Form 886-A in all LB&I cases should follow a format that includes (1) Title, (2) Facts, (3) Applicable Law, (4) Taxpayer’s Position, (5) Argument, and (6) Conclusion. Although not as express as was provided in the 2016 version of the IRM, these provisions taken together make clear that the draft Form 886-A that accompanies any AOF IDR should include the applicable law and the exam team’s argument. Without the full draft Form 886-A, the taxpayer should politely decline to even entertain a response to the AOF IDR until such time as the draft Form 886-A complies with the instruc-tions in IRM pt. 4.46.6.11 and includes a description of the exam team’s position.

Taxpayers should also consider what response they may take to the later Form 5701, Notice of Proposed Adjustment (NOPA), which is generally accompanied by a Form 886-A. The Form 5701 includes a request for the taxpayer’s response to the proposed adjustment. The IRM requires exam teams to first solicit a response to the AOF IDR before issuing the NOPA.12 So, which part do you respond to when? The AOF IDR requests a response to the facts while the NOPA requests a response to all aspects of the proposed adjustment. Taxpayers could view this as two-bites at the apple (and respond to both), or they could wait and respond to the NOPA, or they could wait even longer and respond in the protest to the finalized Revenue Agent’s Report (RAR). Depending on the taxpayer’s perception of the exam team’s willingness to drop or narrow the issues will be a major influence on which of these opportunities to respond is in the best interests of issue resolution.

2. Impact on Issue Resolution at ExamOnce the taxpayer has an AOF IDR worthy of a response, the first consideration should be the extent to which you believe the exam team is willing to resolve the issue. The opening provision in the IRM dealing with the AOF IDR provides that the AOF IDR is required for potentially unagreed issues.13 Viewing this statement with the most

optimistic lens, that must mean that there are circum-stances in which the exam team may drop the issue and a fulsome response to the AOF IDR will help clarify factual misunderstandings that could lead to the exam team actu-ally dropping the issue.

Even if the exam team is unwilling or unlikely to drop the issue, a fulsome response could have some benefits for the taxpayer. In certain circumstances, particularly if the issue is a purely legal one, clarifying factual disputes with the exam team helps streamline and focus the Appeals proceedings. Certainly, if there are substantiation issues (or even hints at substantiation issues), these are issues that are best resolved at the exam level. So, even if exam continues to pursue the issue, the Appeals proceeding is not cluttered with extraneous issues.

3. Impact of Issue Resolution at AppealsIn most circumstances, however, the exam team is likely to pursue the issue in some fashion. In these circumstances, it may be best to view the “real” audience for any response as your Appeals officer or some other decision maker. After all, the IRM (and the pro-forma AOF IDR itself ) make clear that the taxpayer’s response to the AOF IDR must be included in any final Form 886-A. With that in mind, how fulsome should the response be?

While not responding at all is a viable option (primarily because as noted in the IRM and the pro-forma AOF IDR itself, the IRS cannot compel a response though a sum-mons), not responding could have consequences at Appeals. Could the Appeals discussions (and ultimate settlement if reached) be less fruitful if exam can paint the taxpayer as uncooperative or even obstinate? Of course, certain issues may be bound for litigation (even if not officially designated for litigation) and thus the lack of a response to the AOF IDR is understandable and perfectly appropriate.

Assuming that the taxpayer hopes to resolve the issue at Appeals, some response is probably better than a complete lack of a response. The response need not be substantive but should at least provide an explanation for the lack of a substantive response. This may help rebut any assertion by the exam team that the taxpayer was a “bad” taxpayer. A polite rebuff can be effective, something along the lines of “we understand that the exam team intends to propose adjustment [x] and we will respond accordingly in our protest with any factual corrections or additions at that time.” An alternative responsive non-response might be something along the lines of “we provided extensive factual explanations and documentation in our responses to IDRs x, y, and z, which do not appear to be fully incorporated or accurately reflected in the draft Form 886-A.” Each of these responses (or something similar) will most likely


EXAM

prompt requests follow up discussions with the exam team, but it may still be advantageous to have those discussions orally with the exam team rather than in an IDR response. Keep in mind that for some exam teams, such a response may have little or no adverse impact on the relationship with the exam team, but other exam teams may view such responses as an affront to the relationship. Eroding the relationship may impact other issues for which the exam team may not be as entrenched. For all interactions with the exam team, don’t lose sight of the forest for the trees.

4. How Much Editing Is Appropriate?When responding to the AOF IDR, taxpayers need to decide to what extent it will edit the exam team’s work. Especially in circumstances (noted above) in which the taxpayer hopes to turn around the exam team and provide a submission that may cause the exam team to drop the issue, the taxpayer may be better off starting from scratch and providing a whole new fact statement with legal analysis much like would be provided in a protest. This has the benefit of framing the discussion and dictating the flow in a manner most beneficial to the taxpayer. It also has the advantage of not editing the exam team’s work, which can have more personal or emo-tional flavor despite what some might say about not having “any pride of authorship.” It is hard to know what nerves can be touched when one starts editing someone else’s work.

Some edits are simple enough, and some typos can be more important than others (especially when considering dates and numbers). However, even correcting simple errors may not always be in a taxpayer’s best interests. If the draft Form 886-A contains clear and incontrovertible errors, and those errors remain in the final Form 886-A, that final Form 886-A forms the basis of the Appeals process and taxpayers can use those errors to undermine the credibility of the exam team.

If the taxpayer does try to edit the exam team’s work, there are many sensitivities beyond the personal and emotional ones. The write-ups by exam teams are them-selves advocacy pieces. These drafts will often include

facts presented in an argumentative manner or charac-terized in a manner that is favorable to exam’s position. Differentiating between a “fact” and a “characterization of a fact” can be difficult. The exam team’s draft can some-times also include statements of law or the exam team’s legal position masquerading as a statement of fact. For example, what if the fact statement said that the funds transferred on a certain date constituted a capital contri-bution when the entire legal issue is whether that amount was debt or equity?

The pro-form AOF IDR, as revised in December 2018, now includes the following admonition: “limit your response to reviewing relevant facts, advising if relevant facts are excluded, and not providing stylistic or editorial changes.” What one person may view as a “stylistic or editorial change” may be what someone else believes is necessary to avoid mischaracterizing facts, avoid stating legal conclusions as facts, or make the statement of fact objective rather than argumentative. For these reasons, to the extent the taxpayer edits the fact statement at all, it may be prudent to limit the edits to simple ones. Efforts to provide more extensive editing, no matter how provable, may take up time and resources but lead to no changes in the final Form 886-A. The taxpayer’s response will be in the final Form 886-A, but other than getting brownie points for cooperating, there may not be much of an advantage as compared to preparing a wholly new fact statement either in response to the AOF IDR or in the protest.

IV. ConclusionThat AOF IDR appears here to stay. While it started as an LB&I initiative, taxpayers should expect the concept to filter out to all IRS audits. With more experience with this standard IDR, taxpayers are becoming more comfortable formulating responses to this IDR. Rather than being daunted by the IDR, taxpayers can hopefully view the IDR as an opportunity to advance their own strategic goals to resolve the issue. With a thoughtful approach to the IDR response, that can be achieved.

ENDNOTES

* The author can be reached at [email protected].

1 IRM pt. 8.7.11.6.3(1) (Sept. 4, 18). For further discus-sion of AJAC, see John Keenan and Colleen Hawkins, IRS Watch – IRS Issues Implementation Guidance for Phase 2 of the Appeals Judicial Approach and Culture (AJAC) Project, J. Tax Practice and Procedure, Dec. 3, 2015, and James R. Gadwood, Appeals Judicial Approach and Culture Project, J. Tax Practice and Procedure, Sept. 29, 2015, at 31.

2 Id.3 The LEP replaced the prior publication known

as the Quality Examination Process (QEP).

4 Pub. 5125, at 1.5 Id.6 Pub. 5125, at 3.7 The applicable IRM provisions originally could

be found in part 4.46.4.9 but as of December 13, 2018, can now be found in 4.46.4.10.

8 IRM 4.46.4.10.3 (Dec. 13, 2018).9 For further discussion of the LB&I IDR enforce-

ment process, see Charles Rettig, IRS LB&I Revised IDR Enforcement Process, J. Tax Practice and Procedure, May 2, 2014, at 19.

10 IRM pt. 4.46.4.9.2(2) (Mar. 9, 2016).11 IRM pt. 4.46.4.10.2(2) (Dec. 13, 2018).

12 IRM pt. 4.46.4.12 (Dec. 13, 2018).13 IRM pt. 4.46.4.10(1) (Dec. 13, 2018). The IRM provi-

sions released in 2016 did not specify that the AOF IDR should only be used for potentially unagreed issues, which left open the possibil-ity that an AOF IDR was required for all issues, agreed and unagreed. Some exam teams in fact issued AOF IDRs for agreed issues. The change to the IRM provisions released in December 2018 is a welcome confirmation that an AOF IDR is not needed for agreed issues. An exception, however,



9

CollectionPre-Notice Levies: When the IRS Can Levy Before Notifying Taxpayers of Their Right to a Hearing

By Giovanni V. Alberotanza and Michael J. March*

GIOVANNI V. ALBEROTANZA is a Partner with Rosenberg Martin Greenberg, LLP in Baltimore, Maryland. MICHAEL J. MARCH is an Associate with Rosenberg Martin Greenberg, LLP in Baltimore, Maryland.

DECEMBER 2018–JANUARY 2019 © 2019 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED.

A. IntroductionOne of the most important rights a taxpayer has during the Internal Revenue Service (“IRS”) administrative collection process is to be notified of their right to a collection due process hearing before the IRS issues a levy. Generally, the opportunity to participate in this hearing is one of the last steps in the IRS collec-tion process before a levy occurs. However, in certain circumstances the IRS may issue a levy before notifying a taxpayer of their right to a collection due process hearing. Tax practitioners should familiarize themselves with those circumstances so that they are not caught by surprise when a pre-notice levy is made against their clients.

B. General Rule: No Levy Unless Written Notice of Right to a Hearing Is Provided

Code Sec. 6331(a) authorizes the IRS to levy upon a taxpayer’s property or rights to property if that taxpayer is liable for any tax and neglects or refuses to pay that liability within 10 days after notice and demand for payment is made.

Code Sec. 6330(a)(1) provides the general rule that “[n]o levy may be made on any property or right to property of any person unless the [IRS] has notified such person in writing of their right to a hearing under this section before such levy is made.” The notice can be provided in person, left at the dwelling or usual place of business of the taxpayer, or sent by certified or registered mail to the taxpayer’s last known address.1 The notice must include the amount of unpaid tax, the right of the taxpayer to request a hearing within 30 days, and the proposed action by the IRS.2

C. Four ExceptionsIn certain limited circumstances, however, the IRS is not required to provide notice to the taxpayer of their right to a hearing before taking levy action. The

COLLECTION

IRS may issue such a “pre-notice levy” in situations where the IRS has:

(1) Made a finding that the collection of tax is in jeopardy;(2) Served a disqualified employment tax levy (“DETL”);(3) Served a Federal contractor levy3; or(4) Served a levy on a State to collect the liability from a

State tax refund.4

The IRS must still provide the taxpayer with the opportunity for a hearing within a reasonable period of time after the levy.5 We will address each exception in more detail below.

1. Jeopardy LevyThe IRS may issue a pre-notice levy when collection of the tax is in jeopardy.6 Grounds for a jeopardy levy may exist if the taxpayer is planning to quickly leave the United States or conceal themselves, the taxpayer is planning to place their assets beyond the reach of the federal govern-ment, or the taxpayer’s financial solvency is threatened.7 The determination as to whether collection of the tax is in jeopardy requires a highly factual analysis and approval must be obtained from the appropriate IRS group man-ager, IRS territory manager, and IRS Chief Counsel’s office before a jeopardy levy can occur.8 If approval is granted, then the IRS will issue a levy before providing notice to the taxpayer of their right to a hearing.9

Once the levy occurs, a taxpayer may have rights to file an appeal under Code Sec. 7429, a request for a collection due process hearing under Code Sec. 6330, or request a hearing under the IRS collection appeals program.10 A Code Sec. 7429 appeal focuses on whether the levy was reasonable based on the circumstances.11 To that effect, within five days the IRS will provide the taxpayer with a written state-ment explaining why such a levy occurred.12 Thereafter, the taxpayer has 30 days to request an administrative review.13 If the taxpayer does not agree with the determination of the administrative review, they can file an action with the U.S. District Court that has jurisdiction over the claim.14

2. Disqualified Employment Tax LevyA DETL is a levy to collect employment taxes if the taxpayer already requested a collection due process hear-ing for unpaid employment taxes arising in the two-year period before the tax period for which the levy is served.15

The two-year lookback period is measured from the beginning of the period for which the DETL is served.16 It can be difficult to know whether a new client has previ-ously filed a collection due process hearing. To resolve this potential difficulty, tax practitioners should request and carefully review IRS account transcripts, interview their

clients about previous communications with the IRS, and ensure that they have reviewed all IRS notices carefully. It is important to note that requests for an equivalent hearing or untimely collection due process hearings do not count as a basis for issuing a DETL.17

3. A Federal Contractor LevyIf the taxpayer is a federal contractor, then the IRS can issue a pre-notice levy.18 “Federal contractors are any per-son or entity who currently has a contract with the federal government to sell or lease property, goods or services. This does not include a taxpayer who was in the past a federal contractor but currently is not involved in any contractual relationship with the federal government.”19

A federal contractor levy is a continuous levy on federal payments which are disbursed by the Bureau of Fiscal Service.20 This can include federal employee retirement benefits, any payments related to contractor or vendors doing business with the federal government (including defense contracts), federal employee travel advances or reimbursements, social security benefits, federal salaries, Medicare, and military retirement.21

Applicability of a federal contractor levy is automatically identified by IRS computer systems.22 However, an IRS revenue officer can also identify federal contractor cases.23 If a levy is issued, then the IRS will send the taxpayer a post levy notice of their right to a hearing.24

4. Levy on a State Tax RefundThe IRS may issue a pre-notice levy on an individual’s state tax refund.25 Again, the IRS uses an automated process to match federal tax delinquent accounts against a database of state tax refunds.26 If your client’s state tax refund is levied, then the state will issue a notice advising of the levy, and provide an opportunity to appeal the levy. However, if the IRS previously issued a notice of intent to levy and the right to a hearing, a new appeal right will not be provided.27 Currently, the IRS can only levy on an individual’s state tax refund, but may be able to levy on business state tax refunds in the future.28

D. ConclusionPractitioners should review these circumstances with their clients to determine whether the IRS can issue a pre-notice levy. In many cases, a pre-notice levy can be avoided by proactive measures such as submitting an installment agreement request, offer-in-compromise, or by contacting the IRS early in the administrative collection process to



11

Global ViewHow to Elect Code Sec. 962 Treatment: New Uses for an Old Tool?

By Robert Misey

ROBERT MISEY is Chair of the International Department at the Chicago and Milwaukee-based law firm of Reinhart Boerner Van Deuren s.c. He is the Chair of the International Tax Committee for the American Bar Association.

DECEMBER 2018–JANUARY 2019 © 2019 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED.

E ver since passage of the Tax Reform Act of 2017, international tax pro-fessionals have advised U.S. individuals to consider the use of making a Code Sec. 962 election. Immediately after the Act, international tax pro-

fessionals considered the election with respect to the one-time transition tax,1 which is old news. Now, international tax professionals are considering the use of the Code Sec. 962 election to reduce the U.S. taxation of Global Intangible Low-Taxed Income (“GILTI”).2

Why Does the Code Sec. 962 Election Exist?Congress created Code Sec. 962 in 1962 as part of the Subpart F regime that ended deferral from U.S. tax for U.S. Shareholders of certain income earned by controlled foreign corporations (“CFC”).3 If a U.S. Shareholder was a C corporation, the C corporation could avoid double taxation (taxation by both the foreign country and the United States) via the deemed paid foreign tax credit.4 However, U.S. Shareholders who were individuals could not and never could obtain a deemed paid foreign tax credit. Moreover, the outrageously-high U.S. individual tax rate in 1962 made it tax prohibitive for a U.S. individual to directly own a CFC that earned Subpart F income.

Code Sec. 962 provides an alternative tax regime for individual U.S. Shareholders of CFCs. More specifically, an individual U.S. Shareholder may elect to be taxed on her share of Subpart F income at the U.S. corporate income tax rate. This election also entitles the individual to claim deemed paid foreign tax credits5 that would otherwise be unavailable.6

However, a special rule replicates the double tax impact of a U.S. individual receiving a distribution from a U.S. C corporation that pays tax on Subpart F income. More specifically, when a CFC eventually distributes earnings and profits previously taxed in the United States (e.g., Subpart F income), the U.S. Shareholder must still include the distribution to the extent the distribution exceeds the U.S. corporate taxes she previously paid.

Despite all the current talk of employing a Code Sec. 962 election, little has been written about the process of making the election. The individual (and only individual) U.S. Shareholder must make an election by filing a statement making

GLOBAL VIEW

the election with her return.7 The statement must include the following information:1. The name, address, and taxable year of each CFC

to which the individual is making an election and all other entities in the direct or indirect chain of ownership;

2. The amounts from each corporation that are included in the individual’s gross income under Subpart F;

3. The individual’s pro rata share of the earnings and profits of each CFC that the individual includes under Subpart F and, accordingly, the foreign income taxes paid; and

4. The amount of distributions received by the indi-vidual from each CFC from excludable earnings and profits (i.e., the amount of U.S. corporate taxes paid) and from all other earnings and profits, which are includable.

An individual U.S. Shareholder must also provide other information as the IRS may require, but the IRS has never required any additional information since promulgating the election regulations in 1965.

Although this column describes how to make the Code Sec. 962 election, the author questions the technical use of making the Code Sec. 962 election to reduce the GILTI tax burden of the GILTI regime on individual U.S. Shareholders.

As part of the Tax Reform Act of 2017, Congress insti-tuted the GILTI regime.8 The GILTI regime requires an

inclusion of a CFC’s income in excess of a 10% return on assets. More specifically, GILTI is the CFC’s income (excluding Subpart F income) less 10% of the adjusted basis of the CFC’s depreciable assets. U.S. C corpora-tions receive a 50% deduction from GILTI and a limited deemed paid foreign tax credit, effectively eliminating the U.S. corporate tax for a U.S. C corporation that owns a CFC paying foreign tax at a rate greater than 13.125%.

In contrast, because individual U.S. Shareholders do not receive either the 50% deduction or the lim-ited deemed paid foreign tax credit, individual U.S. Shareholders will pay tax at a 37% rate on their GILTI inclusion. This significant tax difference between a C corporation and an individual has resulted in many inter-national tax professionals pondering the use of the Code Sec. 962 election. Nevertheless, the effectiveness of the Code Sec. 962 election is uncertain. First, it is uncertain that a Code Sec. 962 election will enable an individual U.S. Shareholder to obtain the 50% GILTI deduction and current rumors emanating from the IRS regulation writers in Washington indicate that it will not. Second, it is uncertain whether the subsequent post-corporate tax distribution will receive qualified dividend treatment that is taxed at capital gain rates instead of at ordinary income rates.9

Instead of a Code Sec. 962 election, the proper planning would be for the U.S. Shareholder to contribute her CFC to a C corporation. Doing so would ensure the 50% GILTI deduction to the C corporation and a qualified dividend to U.S. Shareholder.

It is somewhat amusing to see international profes-sionals trying to deal with the Act’s GILTI regime by making an election under Code Sec. 962, which they have ignored since the 1960s. Despite the relatively straightforward manner to make the Code Sec. 962 election, international tax professionals should more carefully analyze other possibilities, such as having an individual U.S. Shareholder contribute their CFC to a U.S. C corporation.

Now, international tax professionals are considering the use of the Code Sec. 962 election to reduce the U.S. taxation of Global Intangible Low-Taxed Income (“GILTI”).

ENDNOTES1 Code Sec. 965.2 Code Sec. 951A.3 A controlled foreign corporation is a foreign

corporation in which 10% U.S. Shareholders collectively owned more than 50%.

4 Code Sec. 960.5 Code Sec. 962(a)(2).6 Code Sec. 902.7 Reg. §1.962-2(b). Note that the election does not

need to be made on a “timely” filed return.

8 Code Sec. 951A.9 B.M. Smith, 151 TC, No. 5, Dec. 61,269 (2018).


13

IRS WatchIRSAC Provides Advice to New Commissioner

By Michael P. Dolan

A s I complete this column, the calendar year is coming to a close. A new IRS commissioner is in place. The chief counsel nominee, for some unknown reason, remains stuck in the confirmation pipeline and an unprecedented

amount of Tax Cut and Jobs Act (TCJA)1 related guidance flows daily from the IRS/Treasury as they try to resolve the many remaining questions that will affect 2018 tax returns.

Near the close of the year, the Internal Revenue Service Advisory Council (IRSAC) delivered its annual public report2 which includes a spectrum of advice for the new Commissioner. Much of the advice reinforces prior recommendations but it also addresses several other significant areas.

Most tax advisors will recognize the IRSAC as an advice-giving body that traces its roots to the original Commissioner’s Advisory Group (CAG). The CAG was established in 1953 and was a regular source of input to IRS commissioners and senior leadership. Ultimately the CAG was supplanted by the IRSAC. The 2018 IRSAC was made up of 18 persons representing the taxpaying public, the tax professional community, small and large businesses, academia and the payroll community.

The 2018 IRSAC public report includes a general report section—encompass-ing broad agency-wide advice and recommendations, and four more detailed and focused sections that address issues identified with the: Digital Services, Small Business and Self-Employed (SBSE)/Wage and Investment (W&I), Office of Professional Responsibility (OPR) and Large Business and International (LB&I) subgroups. A third section of the report—“Progress on IRSAC’s 2017 Recommendations”—summarizes IRS progress against the prior year’s recommendations.

The IRSAC General ReportThe general report identified five broad issues of significance: (1) the continuing need for Congress to provide the IRS adequate and reliable funding so the IRS can fulfill its core service, compliance and enforcement missions; (2) improving the Free File program by increasing IRS oversight and restructuring the Memorandum of Understanding; (3) the need for Congress to provide the IRS express statutory authority to establish and enforce minimum standards of competence for all tax practitioners, including tax return preparers; (4) improving real-time IRS com-munications with tax practitioners and taxpayers during exigent circumstances;

MICHAEL P. DOLAN is the National Director of IRS Policies and Dispute Resolution at KPMG, LLP—Washington National Tax.

DECEMBER 2018–JANUARY 2019 © 2019 KPMG LLP AND ITS AFFILIATES. ALL RIGHTS RESERVED.

IRS WATCH

and (5) considering the future of the IRSAC—exploring strengthening the role and effectiveness of the IRSAC in improving federal tax administration.3

Among the key findings and recommendations pre-sented in the general report are the following.

IRS BudgetDue to budget cuts the IRS has almost 24,000 fewer full-time employees today than in 2010. In that same time, the audit rate has fallen by almost one-half. As an example, in 2010 IRS audited nearly 100 percent of companies reflecting more than $20 billion in assets compared to only 58 percent in 2017. In that same period IRS workload increased substantially with almost 12.5 million taxpayers added to the roles since 2010 while numerous new laws added to the IRS workload during that same period. In addition to the overall reduction in staffing, 25 percent of the IRS full-time workforce is eligible for retirement.

The IRSAC report highlights a variety of other data points which underscore the urgency with which they believe the IRS budget predicament should be addressed. The IRSAC members express some encouragement derived from supportive comments and testimony of both the Treasury Secretary and the new commissioner. Ultimately, however, improvements in the IRS budget posture will require bipartisan recognition that the status quo cannot persist without significantly impeding the collection of revenue and undermining citizen willingness to voluntarily comply with the tax laws.

Free File ProgramThe report expresses frustration with what the IRSAC found to be a lack of adequate oversight over the pro-gram and it urged the IRS to establish clearly delineated short and long-term goals, objectives and performance metrics against which to measure the program’s future success or failure. Currently, the Free File program oper-ates under the seventh version of a Memorandum of Understanding (MOU) between the Free File Alliance and the IRS. IRSAC exhorts the IRS to use the occasion of the MOU’s expiration in 2020 to substantially improve its protection and oversight components. Inherent in the IRSAC critique is the fundamental question of whether Free File ought to continue. The program only served 2.2 million taxpayers in 2017. While IRSAC finds Free File still viable, that assessment appears to hinge on the degree to which IRS can significantly change the way the program is presented and managed. The report includes 14 precise recommendations, making this an area ripe for continued monitoring.

Statutory Authority to Establish and Enforce Minimum Standards of CompetenceThe report points out that IRSAC has previously urged the Congress to act to grant such authority to the IRS. This year’s report classifies the recommendation as an “urgent priority.”4 The accompanying narrative suggest that the council members believe that during the last two years a bipartisan consensus has emerged for provid-ing the IRS with the express authority to establish and enforce minimum standards of competence for all tax practitioners. The report points to a variety of devel-opments which are believed to signal this consensus, including language in the Presidents 2018 and 2019 budgets, inclusion of statutory provisions in proposed IRS restructuring legislation and the support voiced by the American Institute of Certified Public Accountants (AICPA).

Improve Real-Time IRS CommunicationsIRSAC described two communication challenges that emerged early in the 2018 filing season that exposed what it views as systemic shortcomings in how the IRS communicates with tax professionals and taxpayers. The first of the two referenced incidents was the Bipartisan Budget Act of 2017 which was signed into law on February 9, 2018 retroactively extending multiple expired provisions. The report details the specific lags between passage of the extenders and any meaningful communication between the IRS and practitioners or taxpayers. The second highlighted challenge related to the unprecedented delay of the 2017 filing season as a result of IRS hardware failure. While the IRSAC acknowledged the inherent filing season challenges that confronted the IRS, it recommended the Service use the two incidences as motivation to reevaluate its overall contingency plans. Under similar exigent circumstances, IRS is encouraged to communicate early and often with both practitioners and taxpayers. IRSAC recommended that both IRS.gov and the “Tax Professionals” landing page should immediately indicate the existence of a problem with frequent time-stamped updates rather than the information gaps that characterized the two cited examples.

Future of the IRSACIn its 2017 report the IRSAC considered ways it might operate more effectively. In particular, members



Message from the Institute ChairBy Steven Toscher*

STEVEN TOSCHER, Esq., is a Principal with Hochman, Salkin, Toscher & Perez P.C., in Beverly Hills, California.

F or 34 years, the Annual Tax Controversy Institute has been among the preeminent tax conferences in the United States exclusively dedicated to tax controversy and tax litigation! This year, I was honored and privileged

to serve as Chair of The Annual Tax Controversy Institute.Institute Chair Emeritus. The Institute was founded by Eugene “Gene”

Silverman, deceased, formerly of the firm now known as De Castro, West, Chodorow, Mendler & Glickfeld, Inc. Gene set the foundation for extremely high-quality, practical presentations by sophisticated government and private practitioners from throughout the United States who enjoy an open discussion of sometimes sensitive practice issues with the audience. For years, we were blessed to attend presentations about accountability and life in the tax trenches from the “titans of tax controversy”—including Bruce I. Hochman, Elliott H. Kajan and Gene Silverman, each an Institute Chair Emeritus of the Annual Tax Controversy Institute.

The Institute enjoys national recognition in the field of tax controversy, repre-senting a true partnership among members of the tax judiciary, government, and private tax practitioners. We have avoided many potentially awkward situations by providing an informal forum for the discussion and exchange of concerns and information among government and private tax practitioners. Our responsibilities to tax administration and to the profession dictate an ongoing, strong commit-ment to this annual Institute. This year we again had a wealth of suggestions for potential topics and speakers—remember the Institute during the coming year and please let us know if you’re interested in participating in the future.

This year we were honored to have as our opening keynote speaker, Eric Hylton, Deputy Chief, Criminal Investigation Division, speaking on IRS criminal inves-tigation priorities. Eric hit it out of the park and set the tone for a lively and informative conference. We were also fortunate to have extraordinary govern-ment participation, including Cassidy Collins, IRS Office of Chief Counsel, Magdalena (“Maggie”) Rivas-Bezerra, Territory manager LB&I, Rebecca Warren, EDD Southern Region Program Manager, Amanda Bartman, Attorney Advisor to the National Taxpayer Advocate, Darren John Guillot, Director, IRS Field Collection Operations, John Tuzynski, SBSE Director Examination-Central, TCJA Implementation Team, Dawn Harris, Western Collection Area Director, Luis Tejeda, Fraud Technical Advisor and Damon Rowe, Special Agent in Charge, IRS Criminal Investigation, Los Angeles. We are indebted to all of the Government speakers for their assistance and participation.

VETS COUNT! The VETS COUNT Scholarship fund was launched at the 2016 Tax Controversy Institute, and will hopefully inspire a wide audience of patriots and professionals to assist in giving back to those who have given so much.


MESSAGE FROM THE CHAIR

VETS COUNT is intended to provide financial assistance for active and former military personnel who desire to pursue a career in tax, accounting, wealth management, and other aspects of financial services. Funds raised will also cover basic coursework for personal growth in budget-ing, financial literacy, and investing. For nearly 100 years, UCLA Extension has been helping adult learners to take their education wherever their imagination leads them, whether it’s following a dream to change careers, learn a new skill, or position oneself for a promotion. More than 50,000 individuals join in this journey each year, some 2,000 earning a coveted Professional Certificate and the rest dabbling, deep-diving, or designing a curriculum path-way that suits their needs, curiosity, and life circumstances.

We were pleased to announce a Vets Count Scholarship matching gift program—contributions made were matched by Hochman Salkin Toscher Perez, P.C, up to a total of $10,000. Contributions in any amount are welcome—for more information contact Olivia Lam at 310-206-5255 or [email protected] or go online re https://giving.ucla.edu/vetscount.

2018 Annual Bruce I. Hochman Award to Avram Salkin. At the luncheon, we were honored to present the 2018 Annual Bruce I. Hochman Award to Avram Salkin. The 2018 Annual Bruce I. Hochman Award is presented in recognition of the many outstanding achievements and contributions of Avram Salkin as a leader, friend and colleague in the tax practitioner community which will always be remembered and appreciated. We were honored to have Avram’s wife Dorothy present a special tribute to Avram, which appears below.

Previous recipients of the Annual Bruce I. Hochman Award include 2017—Miles Friedman 2016—Frank Agostino, Agostino & Associates, Hackensack, N.J.; 2015—Karen L. Hawkins; 2014—Steve Sims, KPMG, formerly the Taxpayer Rights Advocate of the California Franchise Tax Board; 2013—Elliott H. Kajan of, Kajan Mather Barish; 2012—Ted B. Meyer, CPA, Former IRS Examination Territory Manager Los Angeles, SB/SE; 2011—Jerry Feffer, Williams & Connolly, Washington, D.C.; 2010—William Taggart, Law Offices of William E. Taggart Jr., APC, Oakland, CA; 2009—Martin A. Schainbaum, Law Offices of Martin A. Schainbaum, San Francisco, CA; 2008—Sidney Machtenger, Greenberg Glusker, Los Angeles, CA; 2007—Mary Ann Cohen, Judge, U.S. Tax Court, Washington, D.C.; 2006—Cono Namorato, Caplin & Drysdale Chartered, Washington, D.C.; 2005—Stephen J. Swift, Judge, U.S. Tax Court, Washington, D.C.; 2004—Irene Scott Carroll, Special Litigation Assistant, IRS Counsel, SB/SE; 2003—B. John Williams, Skadden, Washington, D.C.; 2002—Gene

Silverman, formerly with DeCastro, West, Chodorow, Mendler, Glickfeld & Nass, founder of the UCLA Extension Annual Tax Controversy Institute in 1984.

Thank You to the Staff at UCLA Extension, the Advisory Board and the Planning Committee. We are most appreciative of the year-long efforts by the dedicated staff at UCLA Extension. We are also honored to have a supportive private practitioner Planning Committee together with our government Advisory Board. The Advisory Board includes many dedicated government representatives from throughout the country.

We are especially thankful for the participation of the Co-Chairs of our Advisory Board—former IRS Territory Manager Ted Meyer and IRS Exam Territory Manager (Southwest Area, SB/SE) Mark Tracht—who have each been instrumental in coordinating the Advisory Board and inviting many government speakers.

Thank You to our Sponsors and Planning Committee. The Annual Tax Controversy Institute could not function without the strong financial commitments of our spon-sors. This year we were most appreciative to include as invaluable Gold Sponsors Gaynor & Umanoff, LLP. Our Silver Sponsors A. Lavar Taylor, LLP; Caplin & Drysdale; Greenberg Traurig: Holthouse, Carlin & Van Trigt, LLP; Kirsch Kohn & Bridge, CPAs LLP; Marcum, LLP; and RJS Law. Our Bronze Sponsors Cooper, Moss, Resnick; The Law Offices of Joseph A. Broyles; Holtz Slavett & Drabkin, APLC; Steven L. Jager, CPA Corporation; Mather Turanchik Law Corporation; Michael Blue, Attorney at Law; and the University of San Francisco. Each and every sponsor is critical to the ongoing success of the Institute.

CCH has continued their strong, ongoing involve-ment by publicizing the Institute throughout the country and again publishing papers from our panelists in this special issue of the CCH Journal of Tax Practice and Procedure dedicated to the 2018 Annual Tax Controversy Institute. A very special thanks to our good friend Claudia Hill for continuing to coordinate this effort with CCH!

2018 UCLA Extension Annual Tax Controversy Institute. We all share a concern for the accountability of both government and private practitioners to our system of tax administration and to the profession—lessons not to be forgotten by any of us in these most difficult times. Working together, we can continue to improve tax compli-ance within the taxpayer community, eliminate problems before they arise and enhance the reputation of the profes-sion for credibility, integrity, and responsibility to others.

In closing, I wish to extend my personal appreciation to each of you for the honor and privilege to serve as Chair of the UCLA Extension Annual Tax Controversy Institute.


Learn to respect those who can do nothing for you or to you and help those who are less fortunate and unable to help themselves.

Steven Toscher, 2018 Institute ChairHochman Salkin Toscher Perez, P.C.

Beverly Hills, CA

Avram TributeWritten and presented by his wife, Dorothy SalkinHochman, Salkin, what a pair, relationship unique and rare,And they became a team.Super lawyers, ethics high, helping clients to get by,And held in top esteem.1960 that was the date, boutique tax firm they did create,For forty long years, were renowned and they were great!In the days when Bruce was gone, Avram Salkin carried on,The firm’s reputation grew, justice and success were there,Client service that was rare, and the Internal Revenue.Avram Salkin, modest, low key, respected, admired, cool as can be,Able, resourceful, the Tax Lawyer’s Lawyer is he!Understated guy, you see, at Cal he got his LLB,He’s calm, good listener too. Controversy, complex tax,Always got his clients backs, he tells them what to do.

Martindale-Hubbell, always an A, got Honors in accounting at UCLAMammoth and Lake Arrowhead are where he likes to play.Abe’s the guy you gotta see, he knows the Code from A to Z,in Tax Law, he’s the best.Partnerships and real estate, he never files the taxes late,He’s famous in the West.Acquisitions, making a deal, estate planning, property real,Knows how to do it, so that Uncle Sam can’t take the money.Tax technical whiz is what he is, Master of Regulation Quiz,He quotes subchapter S,Liquidation and formation, how to form a corporation,All done with finess.So if your affairs are in a mess, no need to panic or to stress,‘Cause Abe’ll show you how to sock to the IRS.Every night he dreams of Tax, That’s why his knowl-edge never lacks,Tax lawyer for so long, reading always up to date,New solutions does create, Goin’ strong in year 58Husband, father, grandfather fine,Clients think that he is divine, at numbers a real star,Makes adversaries tow the line.In many sports he does excel, skiing, swimming, more as well,Been active in the Bar.Respected and admired he, loves doing living trusts, you see,He is quite a star.Litigator, integrity true,He is known for thinking things through,Advisor, compensator, analytic and assertive too.Your peers, law firm and family here, Honor Avram - you this year,You’ve set the bar so high, helpful mentor and good friend,So many reasons why.Unflappable, all can attest, no question at all,You’ve met every testDeficiency Destroyer, the ultimate tax lawyer,Avram you are the best, yes!Salkin the very best!!!

2018 ANNUAL BRUCE I. HOCHMAN AWARD WINNER: AVRAM SALKIN

ENDNOTE

* The author can be reached at [email protected].

17DECEMBER 2018–JANUARY 2019

TAXLAW

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Taxes The Tax Magazine® covering all aspects of federal, state and international tax. International Tax Journal examining U.S. tax on domestic and international business. Journal of Taxation of Financial Products focusing on the tax ramifications of financial products. Journal of Tax Practice and Procedure embracing the complex area of tax practice and procedure. Journal of State Taxation examining today’s complex state tax challenges. Journal of Passthrough Entities focusing on all forms of passthrough entities.

*Journals available in print and CCH® AnswerConnectwww.CCHanswerconnect.com

The tax and accounting industry moves and evolves rapidly. Let the Wolters Kluwer Journal experts provide you with the tax information you need.

When you have to be right

The Future of Virtual Currency Tax Prosecutions—A Matter of When, Not IfBy Sandra R. Brown*

Sandra R. Brown examines virtual currency and the challenges facing taxpayers, tax professions and the IRS.

Got Bitcoin or Other Virtual Currency?

The explosion of virtual currency has created challenging tax reporting issues for taxpayers and tax professionals alike. But does this uncertainty mean the federal government will shy away from prosecuting criminal tax cases involving the failure to report virtual currency? The odds-on favorite answer is simply: no.

To that point, the IRS has signaled two important things with respect to virtual currency and tax enforcement. First, the IRS has made it a priority to go after “data” in its enforcement of the tax laws with respect to taxpayer’s obligations to accurately report financial transactions, including transactions involving virtual currency. Second, the IRS Criminal Investigation (“IRS CI”) has already taken steps to put together a unit of cybercrime special agents with the skill set and tools to investigate virtual currency tax crimes.

In other words, IRS CI not only has the motive but also the means to investigate taxpayers who willfully violate the tax laws through the use of virtual currency.

What Is Virtual Currency?1

In very simplistic terms, virtual currency is a type of unregulated digital currency that is only available in electronic form and not in a physical form. It is stored and transacted only through designated software, mobile or computer application, or through dedicated digital wallets. The transactions occur over the Internet or over secure dedicated networks.

Virtual currencies use decentralized control as opposed to centralized electronic money and central banking systems, based on “blockchain” technology. A block-chain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a cryptographic hash of the previous block, a timestamp and transaction data. By design, a blockchain is inherently resistant to modifications of the data.

SANDRA R. BROWN, Esq., is a Principal of Hochman Salkin Toscher and Perez, P.C., where she specializes in criminal and civil tax controversy and litigation. Ms. Brown is a former Chief of the Tax Division and Acting U.S. Attorney for the United States Attorney’s Office, Central District of California.

19DECEMBER 2018–JANUARY 2019 © 2019 S.R. BROWN

VIRTUAL CURRENCY TAX PROSECUTIONS

Virtual currency is not real currency. Unlike real cur-rency, virtual currency lacks legal tender status and is not within the control of any jurisdiction or sovereign. As a result, the value of virtual currency can be, and has been, as the market has shown over the past few years, volatile. If it is so volatile, why would anyone deal with virtual currency?

Some of the benefits of virtual currency are: (1) there is no bank, credit card processor, or other middleman to take a cut of the payment; (2) transactions are verified and authenticated before money is transferred; (3) users of virtual currency do not need access to special hard-ware, payment cards, or other single-purpose devices; and (4) user’s identities are, in large part, protected in the process of sending and receiving cryptocurrency. Alas, it is this last point, e.g., anonymity, a close cousin to concealment, which predictably raises the proverbial eyebrow of the IRS. Similar to the “badges of fraud” posed by the act of structuring cash transactions to avoid reporting disclosures to the IRS, the very nature of virtual currency’s lack of transparency will place such individuals, who thereafter chose to fail to make necessary and complete disclosures, squarely in the crosshairs of the IRS’s long history of viewing such behavior to be an indicia of fraud ~ worthy of a criminal tax investigation.2

Virtual Currency Is a Focus of the IRS Criminal Investigation Division

As a direct result of its extensive work in recent years investigating identity-theft cases, which more often than not were perpetrated by cybercriminals, the IRS CI has not only gained expertise in tracking cryptocurrency and cybercrimes, it has gained an awareness of, and an appreciation for, the need to get ahead of the next wave of tax cheats.3

IRS CI has identified cryptocurrencies as an immedi-ate tax administration concern. Don Fort, the Chief of IRS CI, has issued public warnings that IRS CI has put together a team of elite criminal agents assigned to inves-tigate tax cases involving virtual currency being used to commit tax crimes. Mr. Fort has also made it clear, both to IRS CI and the public, that a top law enforcement priority of the tax agency is, and will be for some time in the future, going after those who use virtual currencies to evade the payment of taxes.4

Further, recognizing that virtual currency flows inter-nationally as well as domestically and looking to develop high-impact cases, Mr. Fort announced recently that IRS

CI has formed the Joint Chiefs of Global Tax Enforcement (“J5 Alliance”) consisting of tax authorities in the United States, United Kingdom, Canada, Australia and the Netherlands. One of the J5 Alliances’ key priorities is focusing on virtual currency, which based upon estimates, places cryptocurrency-related tax liabilities for 2017 at $25 billion in the U.S. alone.5

Virtual Currency as a Criminal Tax Case

With a cadre of elite IRS CI Special Agents with the technical knowhow, key international alliances, and the backing of their top cop, all focused on going after the bad guys and gals intent on engaging in criminal tax fraud involving virtual currency, it appears that veil of secrecy that beckons many users of virtual currency may be ripped away in a repeat of the crumbling of the walls of secrecy that previously surrounded the Swiss banking world. Thus, allowing IRS CI to not only do what it does best, e.g., “follow the money,” but also trace it back to its taxable owner.

Dispensing of such modes of secrecy and concealment places the targets of these criminal tax investigations back into the familiar world of traditional criminal tax cases. A criminal tax world which requires IRS CI to not just identify the “who done it” but more importantly, the “was it a certain, taxable event” and “was it done willfully.” These questions involve not only legal issues, but also the neces-sary gathering of facts, specifically facts involving one’s state of mind. Generally, the most difficult question in a criminal tax case is proving the target’s state of mind. In the world of virtual currency, however, attempts to answer the first question, e.g., what are the legal tax consequences of a virtual currency transaction, may not be so simple.

While the IRS issued Notice 2014-21, setting forth its view that virtual currency, under U.S. tax laws, is to be treated as property, we currently have no statutory or regulatory tax authority on this issue.6 Even presuming the Courts will uniformly accept the IRS’s view in these tax cases, the tax implications of like-kind exchange considerations to virtual currency transactions occurring prior to January 1, 2018, when the limitations on Code Sec. 1031 became effective under the Tax Cuts and Jobs Act (“TCJA”), will undoubtedly raise additional legal questions for tax computations.7 Tax computations are, of course, a significant aspect, if not an absolute necessity of proof,8 in every criminal tax prosecution.



How Your Clients Can Lose Their Passports by Falling Behind on Their Taxes (and What to Do About It)By Dennis Brager

Dennis Brager examines Code Sec. 7345 which provides that if an individual has a “seriously delinquent tax debt,” the Secretary of the Treasury shall transmit a certification of the debt for action to the Secretary of State for the denial, revocation, or limitation of a passport.

DENNIS BRAGER is a California State Bar Certified Tax Specialist and a former Senior Trial Attorney for the Internal Revenue Service’s Office of Chief Counsel. He is the founder of the Brager Tax Law Group, a Los Angeles-based tax litigation and tax controversy law firm.

Background

As part of the Fix America’s Surface Transportation Act (FAST) Congress enacted Code Sec. 7345 which provides that if an individual has a “seriously delinquent tax debt,” the Secretary of the Treasury shall transmit a certification of the debt for action to the Secretary of State for the denial, revocation, or limitation of a passport. Code Sec. 7345 cross references Section 32101 of the FAST Act which is not part of the Internal Revenue Code. Despite the potentially catastrophic consequences of an error by the IRS or the Secretary of State, if the IRS or the Secretary of State make a mistake, they cannot be held liable.1

Seriously Delinquent Tax DebtSeriously delinquent tax debt is defined as a legally enforceable federal tax liability which has been assessed, is greater than $50,000, and with respect to which—(i) a notice of lien has been filed pursuant to section 6323 and the admin-

istrative rights under section 63202 with respect to such filing have been exhausted or have lapsed, or

(ii) a levy is made pursuant to section 6331.3

The $50,000 amount is indexed for inflation. As of January 2019, the amount is $52,000. The $52,000 amount includes not only tax, but also assessed interest and

21DECEMBER 2018–JANUARY 2019 © 2019 D. BRAGER

HOW YOUR CLIENTS CAN LOSE THEIR PASSPORTS

penalties. It doesn’t include accrued interest and penalties.4 The threshold amount also doesn’t include such items as:

■■ ACA assessments, Individual Shared Responsibility Payment;

■■ Employer Shared Responsibility Payments;■■ Criminal Restitution assessments;■■ Child Support Obligations; or■■ Report of Foreign Bank and Financial Accounts

(FBAR) assessments.It does, however, include trust fund recovery penalties, and payroll taxes assessed against an individual.5 A levy that is made on a tax refund will not be counted as a levy for the purposes of Code Sec. 7345.6

It is important to note that the above lien or levy require-ments are in the disjunctive. Thus, if a levy is served or a lien is filed, and Collection Due Process (CDP) rights have been exhausted or lapsed, the debt is considered seriously delinquent. This means that it is absolutely critical to file a CDP lien request. If the request is timely filed (and there is also no levy) then the debt will not be seriously delinquent until the CDP hearing is resolved, and all judicial rights have been exhausted.7 A request for an Equivalent Hearing does prevent a debt from being seriously delinquent.

Even if a Federal Tax Lien has not been filed or the CDP lien request remains unresolved, if a levy is made then the debt may be considered seriously delinquent. Generally speaking in order for the IRS to levy on a taxpayer’s assets it must first issue a CDP Levy Notice pursuant to Code Sec. 6330 giving the taxpayer 30 days to file a request for a hearing. Since until the hearing and any judicial appeal is resolved, the IRS is prohibited from levying, it also becomes necessary to make sure that a separate request for a CDP hearing on the levy is requested.

Exclusions from Seriously Delinquent Tax Debt

There are certain tax debts which would otherwise meet the definition of a seriously delinquent tax debt, but they are still excluded. These fall into two categories; one is prescribed by statute8 and the other are discretionary exclu-sions which the IRS has set forth in the Internal Revenue Manual.9 The statutory exemptions are:1. A tax debt that is being paid timely pursuant to an

installment agreement with the IRS;2. Tax debt that is being paid timely pursuant to an

offer in compromise accepted by the IRS;3. Tax debt that is being paid in a timely manner as

part of a settlement agreement entered into with the Department of Justice;

4. Tax debt in connection with a levy for which collec-tion is suspended for a timely requested or pending CDP Hearing under Code Sec. 6330; or

5. Tax debt which is covered by a pending claim for Innocent Spouse Relief under Code Sec. 6015.

The statutory exclusions are fairly narrow and don’t begin to cover all the types of tax debt where the taxpayer is attempting to resolve his issues with the IRS. Presumably in recognition of that concern, the IRS issued a list of discretionary exclusions. Those exclusions are:1. Tax debt that is in currently non-collectible (CNC)

status with the IRS,2. Tax debt that resulted from identity theft or taxpay-

ers in a Disaster Zone,3. Tax debt of a taxpayer in bankruptcy,4. Tax debt of a deceased taxpayer,10

5. Tax debt that is included in a pending OIC,6. Tax debt that is included in a pending IA,11 and7. Tax Debt if there is a pending claim, and the result-

ing adjustment is expected to result in no balance due.12

As a practical matter there doesn’t appear to be any differ-ence in the way the IRS treats taxpayers who qualify for a discretionary exclusion as opposed to a statutory exclusion, except that, as the IRS points out in the Internal Revenue Manual, the discretionary exclusions are subject to change by the IRS. Additionally, if the IRS failed to abide by one of the discretionary exclusions, there is no guarantee that the courts would enforce the exclusion.

Once the tax debt has been determined to be “seri-ously delinquent,” the IRS will certify the tax debt to the Secretary of State, who by law is required to refrain from issuing a new passport or renewing a passport. The IRS will issue a Notice 508C to the taxpayer at the time the debt is certified, and the Secretary of State is notified. It will be sent by regular mail, NOT certified mail, to the taxpayer’s “last known address.”13 According to IRM 5.1.12.27.7(6),14 the Secretary of State will not revoke a passport for 90 days to allow the taxpayer time to clear up any certification issues.

One of the (many) problems with this process is that the IRS issues the certifications on a “systemic basis.” In other words, if a computer determines that, based upon the codes entered on the account, that the debt is a seri-ously delinquent tax debt, a certification notice will be issued. On the other hand, individual employees are not authorized to enter the codes into the IRS computer to directly certify the tax debt as seriously delinquent.15

The Secretary of State MAY revoke a passport that has been previously issued16; however, neither the IRS nor the Secretary of State has issued any guidance as to


when this discretion will be exercised. Based on informal conversations with the Taxpayer Advocate’s Office, there are no known instances of a revocation of a passport as opposed to a non-renewal. The author has, however, had the experience of a client going to the Secretary of State because there were not enough pages in his passport which was not otherwise up for renewal, and had his passport confiscated based upon the previous certification of a seriously delinquent tax debt.

The FAST Act provides that the Secretary of State may issue a passport in an emergency or for humanitarian reasons.17 There are apparently no guidelines for when the Secretary of State will issue a passport under these circumstances.18

Reversal of CertificationOnce the IRS has certified a seriously delinquent tax debt, reversing the certification is not that easy. For example, paying the tax debt down below the threshold amount will not result in decertification, instead full payment is necessary.19 Generally speaking, the IRS will decertify a seriously delinquent tax debt any time a statutory or discretionary exclusion condition is met.20 These include:A. The tax debt becomes legally unenforceable.21

B. A taxpayer enters into an installment agreement, or there is a pending installment agreement.

C. A taxpayer files an application for an offer in com-promise, and it is accepted for processing.

D. A certified taxpayer later files bankruptcy.E. A certified taxpayer enters a Combat Zone.F. A certified taxpayer who is later determined to be in

CNC status.G. The Department of State requests the IRS to

decertify.H. An adjustment to the account that reduces the origi-

nal certification amount below the threshold as long as the original return has been filed and processed or the adjustment has posted.

Perhaps the two most efficient methods of obtaining decertification or preventing certification in the first place are to request an installment agreement or an offer in compromise. However, simply requesting the installment agreement or offer in compromise does not prevent cer-tification. The request for an installment agreement must be identified as “pending.” In order for an installment agreement request to be treated as pending, taxpayers must do the following22:1. Provide information sufficient to identify the tax-

payer—generally, the taxpayer’s name and taxpayer identification number (TIN). If a taxpayer furnishes

a name, but no TIN, and the taxpayer’s identity can be determined, then pending status should be identified;

2. Identify the tax liability to be covered by the agreement;

3. Propose a monthly or other periodic payment of a specific amount; and

4. Be in compliance with filing requirements.Requests that meet these criteria are treated as pending installment agreements even if taxpayers are not in com-pliance with estimated (ES) payment requirements or federal tax deposit (FTD) requirements.23 However, even if the request meets all the criteria it will not be treated as pending if the proposal was made to delay collection.24 In the case of an offer in compromise, the offer must be processable to be pending.25 An offer will not be process-able, and therefore not treated as pending if:A. The taxpayer is in bankruptcy.B. The application fee is not included, and low-income

certification is not completed.C. The TIPRA26 payment is not fully paid.D. A referral is pending with the Department of Justice.E. The OIC only covers unassessed liabilities.F. No liabilities exist.G. The OIC only covers liabilities for which the collec-

tion statute of limitations (“CSED”) has expired.27

H. The taxpayer is out of filing compliance, i.e., unfiled, but required returns exist for any of the prior six years. A substitute for return (“SFR”) counts as a filed return for this purpose).28

The reversal of certification does not happen instanta-neously. Generally, the IRS will notify the Secretary of State within 30 days that the tax debt is no longer certified if the debt is:A. Full satisfied,B. Becomes legally enforceable, orC. Ceases to be a seriously delinquent tax debt.29

A tax debt ceases to be a seriously delinquent tax debt when it meets one of the statutory or discretionary exclu-sions. Generally, a tax debt does not lose its status as a seriously delinquent tax debt if it is paid down below the threshold amount.30 However, if there is an adjustment to the account which reduces the original amount below the certification threshold, then the account will cease to be a seriously delinquent tax debt.31 For example, if the total liability is $60,000 and the IRS abates a late filing penalty of $9,000 based upon reasonable cause, then once the decrease in the assessment posts to the IRS computers, the tax debt will no longer be a seriously delinquent tax debt.

If a certification is determined to have been made erro-neously then the IRS will notify the State Department


HOW YOUR CLIENTS CAN LOSE THEIR PASSPORTS

“as soon as practicable.”32 The IRS has a process for expediting the decertification. The process is limited to a few situations. The taxpayer must either live abroad or have foreign travel scheduled within the next 45 days. The taxpayer must also have a pending application for a passport or renewal and provide the IRS with the Passport Application number. IRS employees are cautioned not to offer expedited processing. It is reserved for those taxpayers who know enough to ask.33

National Taxpayer AdvocateThe National Taxpayer Advocate has taken a very aggressive stance with respect to certifications by the IRS, and in a statement to Congress expressed her concern that taxpayer rights were being violated.34 Perhaps of more immediate help is that the National Taxpayer Advocate has issued guidelines to her staff for advocating on behalf of taxpayers who have run afoul of the passport certification process.35 A thorough reading of the guidelines will reveal several ways in which the Taxpayer Advocate’s Office can assist, and expedite passport decertification. As part of the guidelines Local Taxpayer Advocates are encouraged to issue Taxpayer Assistance Orders to have IRS management act within one business day if the taxpayer has foreign travel plans within the next 45 days, or otherwise within five days.36

Litigation AlternativesIf the taxpayer wants to litigate the IRS’ decision to certify the tax debt, or the failure to decertify, she has

the option to file an action either in the U.S. Tax Court or the U.S. District Court.37 There is no path to the IRS Appeals Division.38 According to the IRS, the statute of limitations for bringing suit is six years from the date of the certification, or six years from the date grounds for reversal existed.39 Code Sec. 7345 does not specify the standard or the scope of review. Therefore, it is unknown whether review will be de novo or limited to the admin-istrative record. The IRS position is that it is limited to the administrative record which in turn is restricted to the computer records which indicates the various codes entered into the system.40 Furthermore, the IRS’ stance is that the court can only review the record to determine the IRS actions were arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.41 IRS guidance also states that a taxpayer cannot dispute the underlying liability in the certification action.42 Whether any or all of the IRS litigating positions will be upheld by the courts will be determined over the coming months and years.

ConclusionThe non-issuance of a passport can result in significant financial and other hardships to taxpayers, especially if they need to travel for business. Resolving these cases will involve skillful advocacy by taxpayers’ representa-tives. Taxpayers’ representatives must be vigilant in filing appropriate responses to notices from the IRS since failure to do so may expose them to malpractice claims by clients who are harmed unnecessarily.

ENDNOTES1 FAST Act, Section 32101(e)(3).2 These are the so-called Collection Due Process

Lien rights, as opposed to the levy rights.3 Code Sec. 7345(b).4 IRM 5.19.1.5.19.2 (Dec. 26, 2017).5 Id.6 IRM 5.19.1.5.19.5(4) (Dec. 26, 2017).7 IRM 5.19.1.5.19.2 (Dec. 26, 2017).8 Code Sec. 7345(b)(2).9 IRM 5.19.1.5.19.4 (Dec. 26, 2017).10 Because, by definition, a deceased taxpayer

doesn’t need a passport, the reason for this exclusion is somewhat mysterious to the author, although perhaps it is simply a way of not send-ing unnecessary certification requests to the Secretary of State.

11 This exclusion does not apply if the proposal does not meet Pending IA criteria.

12 IRM 5.19.1.5.19.4 (Dec. 26, 2017).13 “Last known address” is a term of art, the mean-

ing of which is beyond the scope of this article.14 IRM 5.1.12.27.7(6) (Dec. 20, 2017).

15 See IRM 5.19.1.5.19.6 (Dec. 26, 2017).16 FAST Act, Section 32101(e).17 FAST Act, Section 32101(e)(1)(B).18 The author has filed a Freedom of Information

Act request with the Secretary of State request-ing all written guidance regarding Code Sec. 7345, but a response is not expected until at least May of 2019.

19 Code Sec. 7345(c)(1).20 IRM 5.19.1.5.19.9 (Dec. 26, 2017).21 As, for example, if the statute of limitations on

collection has expired.22 IRM 5.19.1.6.4.7 (Sept. 26, 2018).23 Id.24 See IRM 5.19.1.6.4.9(3) & (4), IA Rejection Criteria.25 See IRM 5.8.2.4.1(4) (May 25, 2018).26 The Tax Increase and Prevention Reconciliation

Act (TIPRA) of 2005 was enacted on May 17, 2006, and generally requires a 20-percent deposit to be made with OIC applications.

27 IRM 5.8.2.4.1(1) (May 25, 2018).28 IRM 5.8.2.4.1(2) (May 25, 2018).

29 IRM 5.19.1.5.19.9 (Dec. 26, 2017).30 See Code Sec. 7345(c).31 IRM 5.19.1.5.19.9(4)(e) (Dec. 26, 2017).32 IRM 5.19.1.5.19.9(2) (Dec. 26, 2017).33 IRM 5.19.1.5.19.10 (Dec. 26, 2017).34 Statement of Nina E. Olson, National Taxpayer

Advocate, Joint Hearing on Continued Oversight over the Internal Revenue Service Before the Subcommittee on Health Care, Benefits, and Administrative Rules and Subcommittee on Government Operations, Committee on Oversight and Government Reform, U.S. House of Representatives (Apr. 17, 2018), at 40–43.

35 Memorandum for Taxpayer Advocate Service Employees (Apr. 26, 2018).

36 Id., at 6.37 Code Sec. 7345(e).38 Chief Counsel Notice 2018-005.39 Id.40 Id.41 Id.42 Id.


The TCJA and Uncertain PositionsBy Kip Dellinger

Kip Dellinger examines several statutory provisions in the TCJA that are imprecise and may lead to various interpretations by tax professionals.

KIP DELLINGER, CPA, is a Senior Tax Partner at Cooper Moss Resnick Klein & Co. LLP in Van Nuys, California.

M any statutory provisions in the 2017 Tax Cuts and Jobs Act (TCJA of 2017) are imprecise and may lead to various interpretations that do not come close to providing certainty of the ultimate tax treatment.

Moreover, in drafting proposed regulations Treasury may well take positions that tax practitioners believe are not supported by or consistent with the statute.

For example, in applying the 20% passthrough deduction provision of Code Sec. 199A for members of pass-entities and sole proprietors tax adviser’s task is particularly troublesome because when applying the accuracy-related penalty to examination adjustments for purposes of calculating a “substantial understate-ment” of income tax arising for an adjustment to the “passthrough deduction” the threshold trigger for the penalty is the greater of an increase of tax of $5,000 or 5% of the tax shown on the return rather than $5,000 or 10% of the tax normally shown on the return.

The combination of a lack of precise guidance under Code Sec. 199A—the 20% deduction provision—coupled with the lower threshold for the penalty on a taxpayer-client will be unnerving for many tax professionals, particularly because where the accuracy-related penalty applies to a taxpayer it may well also result in imposition of a preparer penalty under Code Sec. 6694. While the 10% and $5,000 thresholds remain for purposes of applying the accuracy-related penalty provisions to other areas of the TCJA legislation the risk of exposure to the penalty due to the lack of clarity in the law. There are countless other provisions where regulatory guidance is needed and then, when issued, the guidance may well be subject to judicial challenge as overreaching or as an improper reading of the statute.

For example, there will likely be situations where a tax adviser recommends that a taxpayer take a position under the statute or regulations that other tax practi-tioners advise their clients not to take out of an abundance of caution because of the penalty exposure. Alternatively, a taxpayer may fear taking an aggressive position for concern of inviting an examination. Yet some taxpayer may eventu-ally prevail with regard to the same or very similar position another taxpayer was advised not to or chose not to take—only later to lead to disgruntled taxpayers filing suit against their tax advisers for failing to inform them of the possibilities of claiming the tax benefit for multiple years where some if not all those years

25DECEMBER 2018–JANUARY 2019 © 2019 K. DELLINGER

THE TCJA AND UNCERTAIN POSITIONS

are beyond the statutory period for claiming a refund of income taxes—generally three years from the original due date of filing a return or, if later, the date the return was actually filed.

What is a practitioner to do in addressing these uncer-tainties? Several procedural steps come to mind that may be taken to protect against penalties or later court deci-sions that would have permitted a tax benefit not claimed.

Disclosures Forms 8275 and 8275-R: The Tax Adviser’s Friend

Forms 8275 and 8275-R (where the taxpayer takes excep-tion to a regulation) are an important and useful tool for assuring avoidance of a penalty when the tax treatment of an item or tax position recommended by a tax adviser or preparer) lacks substantial authority but an argument can be made that there is a reasonable basis for the treat-ment (or position). Reasonable basis includes a reasonable interpretation of a statute consistent with the intent of Congress.

While the filing of one or more of the Forms may increase the chances of an examination, it can also reduce that possibility based on the strength of reasoning support-ing the position as expressed in the disclosure. Importantly, it will generally take the penalty “off the table” at the com-mencement of the examination reducing tension between the examiner and the taxpayer’s representative regarding the matter and, potentially, the costs of undergoing the examination. It will also reduce if not eliminate the pos-sible conflict that might arise between the taxpayer and the preparer representing the taxpayer in the examination.1 As described earlier, the 5% threshold for imposition of the accuracy-related penalty is almost an invitation to assess the penalty for understatements attributable to Code Sec. 199A adjustments. Consequently, caution may be the watchword with regard to disclosures with regard to issues surrounding the application of that section.

Amended Returns Uses and ProblemsA more conservative approach with regard to some posi-tions that may be taken—particularly where the position is either decidedly unclear or where it seemingly is not supported by the regulations but appear to comply with the Congressional intent in enacting the provision—may be for the taxpayer to omit the controversial item from the his or her or the entity’s income tax return, but to file an amended income tax return to claim a refund for the tax benefit.

Amended returns and claims for refund, of course, carry their own potential for a penalty imposed under Code Sec. 6676. An excessive refund under that provision is subject to a penalty of 20%; excessive is the amount by which the amount claimed exceeds the actual amount refundable. However, there is a reasonable cause exception to any excessive amount and one would presume a reasonable basis recommendation supporting item on the amended return should suffice.2

In the case of an amended return claim for refund, the major problem confronting the taxpayer is that the Internal Revenue Service will simply disallow the claim set forth in the amended return and put the taxpayer in the position of having to pursue the tax refund in Federal district court or the U.S. Court of Claims (in Washington, D.C.). Both avenues lead to costly litigation that would likely be beyond the means of all but very wealthy taxpay-ers with very large sums at stake in tax benefits available in the TCJA of 2017—admittedly the type of taxpayer that will likely claim the benefit on their original returns and willingly square off with the Internal Revenue Service in any dispute including the possible imposition of an accuracy-related penalty. Nonetheless, it remains an option for many taxpayers and, in fact, if a refund is denied for a known controversial issue, IRS Appeals may suspend the matter pending litigation with another taxpayer.

Another problem with pursuing a denied refund is that litigation must commence within two years from the denial mailed by certified or registered mail.3 Thus, considering the lengthy periods of time for litigation of tax matters, the taxpayer is unable sit and wait for another taxpayer to prevail on the same or a similar issue before proceeding for fear statute limitations will eliminate any opportunity to obtain a refund.

However, there is one approach tax advisers should bring to the attention of their clients.

Use the Protective Claim for RefundA useful tool for taxpayers and tax adviser-preparers for dealing with positions that may be contrary to the regula-tions or where the taxpayer may be entitled to the deduc-tion based on successful court by another taxpayer is the “protective claim for refund.”4 As IRS states in Publication 17: “Generally, a protective claim is a formal claim or amended return for credit or refund normally based on current litigation or expected changes in tax law or other legislation. You file a protective claim when your right to a refund is contingent on future events and may not be



What Garrity Teaches About FBARs, Foreign Trusts, “Stacking” of International Penalties, and Simultaneously Fighting the U.S. Government on Multiple FrontsBy Hale E. Sheppard*

Hale E. Sheppard examines the lessons that Garrity teaches.

HALE E. SHEPPARD, Esq. (B.S., M.A., J.D., LL.M., LL.M.T.) is a Shareholder in the Tax Controversy & Litigation Section of Chamberlain Hrdlicka and Chair of the International Tax Group.

I. Introduction

Taxpayers often misunderstand their international tax and information-reporting duties, which can trigger big problems with the IRS. Taxpayers, likewise, are frequently clueless about what fighting the IRS on an international matter really entails, which can create even bigger troubles. A recent case, Garrity, helps put these matters in context.1 The case is noteworthy because it involves income taxes, estate taxes, and a variety of international penalties, it takes place in multiple venues (i.e., Tax Court, District Court, and Probate Court), and it addresses two fundamental issues to taxpayers, namely, whether willful FBAR penalties are capped at $100,000 per violation, and whether the IRS is constitutionally banned from “stacking” Financial Crimes Enforcement Network (“FinCEN”) Form 114 (“FBAR”) penalties and information-reporting penalties stemming from the same activities. This article examines the lessons that Garrity teaches.

II. Summary of International DutiesUnderstanding the key issues in Garrity first requires some basic knowledge about the relevant tax and information-reporting obligations, the potential penalties for violations, etc. These items are summarized below.

A. A Short HistoryCongress enacted the Bank Secrecy Act in 1970.2 One purpose of this legislation was to require the filing of certain reports, like the FBAR, where doing so would

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FBARS, FOREIGN TRUSTS, “STACKING” OF INTERNATIONAL PENALTIES

be helpful to the U.S. government in carrying out criminal, tax, and regulatory investigations.3

Congress was concerned about widespread non-compli-ance; therefore, it enacted more stringent FBAR penalty provisions in 2004 as part of the American Jobs Creation Act (“Jobs Act”).4 Under the law in existence before the Jobs Act, the IRS could only assert penalties where it could demonstrate that taxpayers “willfully” violated the FBAR rules.5 If the IRS managed to satisfy this high standard, it could impose a relatively small penalty, ranging from $25,000 to $100,000, regardless of the size of the hidden accounts.6

Thanks to the Jobs Act, the IRS may now impose a civil penalty on any person who fails to file an FBAR when required, period.7 In the case of non-willful vio-lations, the maximum penalty is $10,000.8 The Jobs Act calls for higher penalties where willfulness exists. Specifically, in situations where a taxpayer willfully fails to file an FBAR, the IRS may assert a penalty equal to $100,000 or 50 percent of the balance in the undis-closed account at the time of the violation, whichever amount is larger.9 Given the multi-million dollar bal-ances in some unreported accounts, FBAR penalties can be enormous.

B. Disclosure of Foreign Accounts, Assets, and IncomeThe relevant law mandates the filing of an FBAR in situ-ations where (i) a U.S. person, including U.S. citizens, U.S. residents, and domestic entities, (ii) had a direct financial interest in, had an indirect financial interest in, had signature authority over, or had some other type of authority over (iii) one or more financial accounts (iv) located in a foreign country (v) whose aggregate value exceeded $10,000 (vi) at any point during the relevant year.10

When it comes to individuals, they have several duties, in addition to filing FBARs, linked to holding a reportable interest in a foreign financial account:

■■ They must check the “yes” box on Schedule B (Interest and Ordinary Dividends) to Form 1040 (U.S. Individual Income Tax Return) to disclose the existence of the foreign account;

■■ They must identify the foreign country in which the account is located, also on Schedule B to Form 1040;

■■ They must declare all income generated by the account (such as interest, dividends, and capital gains) on Form 1040; and

■■ They generally must report the account on Form 8938 (Statement of Specified Foreign Financial Assets), which is enclosed with Form 1040.11

C. Questions and Cross-References on Schedule B

One of the duties listed above is checking “yes” to the foreign-account inquiry found on Schedule B to Form 1040. The IRS has slightly modified and expanded this language over the years, with the materials for 2017 stat-ing the following:

At any time during 2017, did you have a financial interest in or a signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions.

If “Yes,” are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority? See FinCEN Form 114 and its instruc-tions for filing requirements and exceptions to those requirements.

If you are required to file a FinCEN Form 114, enter the name of the foreign country where the financial account is located.

D. The Significance of Signing Forms 1040Taxpayers must sign and date their Forms 1040 in order for them to be valid. Many seem unaware that by executing Forms 1040 they are making the following broad, sworn statement to the IRS, which often comes back to haunt them in tax and penalty disputes:

Under penalties of perjury, I declare that I have exam-ined this return and accompanying schedules [including Schedule B] and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year.

E. Form 3520 and Form 3520-A—Duty to Report Foreign TrustsTaxpayers are obligated to file a Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) and/or Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner) in certain situations involving foreign trusts.


1. Form 3520Form 3520 generally must be filed in two circumstances. First, a “responsible party” generally must file a Form 3520 within 90 days of certain “reportable events,” such as the creation of any foreign trust by a U.S. person, the transfer of any money or other property (directly or indirectly or constructively) to a foreign trust by a U.S. person, and the death of a U.S. person, if the decedent was treated as the “owner” of any portion under the grantor trust rules, or if any portion of the foreign trust was included in the gross estate of the decedent.12 Second, a U.S. person ordinarily must file a Form 3520 if he receives during a year (directly or indirectly or con-structively) any distribution from a foreign trust.13 The penalty for not filing a Form 3520 is equal to $10,000 or 35 percent of the so-called “gross reportable amount,” whichever amount is larger.14 However, the IRS will not assert penalties where there is “reasonable cause” for the violation.15

2. Form 3520-AA Form 3520-A normally must be filed if, at any time during the relevant year, a U.S. person is treated as the “owner” of any portion of the foreign trust under the grantor trust rules.16 A person, other than the grantor, is treated as the owner if he has “a power exercisable solely by himself ” to vest the assets or income from the trust in himself.17 Moreover, a U.S. person who transfers property, directly or indirectly, to a foreign trust generally shall be treated as the owner during the year of the transfer for his portion of the trust attributable to such property, if there is a U.S. beneficiary of such trust.18 The normal penalty for Form 3520-A violations is the higher of $10,000 or five percent of the “gross reportable amount.”19 Penalties will not be asserted where there is “reasonable cause” for the violation.20

3. Questions About Foreign Trusts on Schedule BAs explained above, Schedule B to Form 1040 asks about the existence and location of foreign accounts. It inquires about foreign trusts, too. The language from the Schedule B for 2017 is set forth below:

During 2017, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If “Yes,” you may have to file Form 3520. See instructions on back.

The IRS’s Instructions to Schedule B expand on the foreign trust concept, providing the following guidance:

If you received a distribution from a foreign trust, you must provide additional information. For this purpose, a loan of cash or marketable securities gener-ally is considered to be a distribution. See Form 3520 for details. If you were the grantor of, or transferor to, a foreign trust that existed during 2017, you may have to file Form 3520. Don’t attach Form 3520 to Form 1040. Instead, file it at the address shown in its instructions. If you were treated as the owner of a foreign trust under the grantor trust rules, you are also responsible for ensuring that the foreign trust files Form 3520-A. Form 3520-A is due on March 15, 2018, for a calendar year trust. See the instructions for Form 3520-A for more details.

III. So Many Fights on So Many FrontsTaxpayers with undeclared foreign accounts, assets, entities and/or income often find themselves engaged in a multi-faceted war against the U.S. government.

A simple example shows how this works. Assume that Scofflaw Stan held foreign accounts during 2017, with an aggregate balance of approximately $2 million, which yielded a total of $100,000 in interest income. Further assume that Scofflaw Stan did not report the foreign-source income on his 2017 Form 1040, did not disclose the existence of the foreign accounts by checking the “yes” box on Schedule B to the 2017 Form 1040, did not enclose a Form 8938 with his 2017 Form 1040, and did not electronically file an FBAR.

After conducting an audit, the IRS might issue the fol-lowing items to Scofflaw Stan: (i) a Notice of Deficiency proposing increased taxes on the $100,000 of unreported income, an accuracy-related penalty, and interest charges, (ii) an FBAR 30-day letter (i.e., Letter 3709) and an FBAR Agreement to Assessment and Collection (i.e., Letter 13449) asserting a penalty of $1 million, which constitutes the maximum sanction of 50 percent of the highest aggregate balance of the unreported foreign accounts, and (iii) a Notice Letter (i.e., Letter 4618) and/or Form 8278 (Assessment and Abatement of Miscellaneous Civil Penalties) asserting a penalty of $10,000 for failure to file Form 8938.21

If Scofflaw Stan disputes all proposed taxes and penal-ties, then he will become familiar with at least three dif-ferent venues, as well as the costs of fighting in each. First, Scofflaw Stan would file a Petition with the Tax Court to dispute the income taxes and tax-related penalties pro-posed in the Notice of Deficiency.22 As explained further below, this is what happened in Garrity.



Second, because the FBAR penalty derives from Title 31 of the U.S. Code (i.e., Money and Finance) as opposed to Title 26 of the U.S. Code (i.e., Internal Revenue Code), it cannot be challenged in Tax Court.23 Thus, after Scofflaw Stan exhausts his administrative appeal rights with the IRS, the Department of Justice (“DOJ”) will bring a col-lection action against him in District Court.24 Again, this is exactly what occurred with Garrity.

Third, given that penalties for not filing Form 8938 are not related to a tax deficiency, the IRS takes the position that they are not challengeable in Tax Court.25 Since the Form 8938 sanction is an “assessable” penalty, taxpayers generally find themselves challenging it in one or more of the following manners: (i) filing a Protest Letter, essen-tially requesting penalty abatement, in response to the first notice from the IRS; (ii) administratively challenging with the Appeals Office any negative decision by the IRS Service Center about the penalty-abatement request; (iii) filing a request for, and participating in, a Collection Due Process (“CDP”) hearing with the IRS, after the IRS issues its notice threatening imminent levies of the taxpayer’s property to satisfy the penalty; and (iv) seeking review of an unfavorable CDP determination in the Tax Court, paying the penalty under protest and then initiating a refund action with the IRS, or simply waiting for the DOJ to start a collection suit in District Court. A variation of this happened with Garrity, as the IRS assessed penalties for unfiled Forms 3520 and Forms 3520-A, instead of Forms 8938. Congress did not introduce the Form 8938 filing duty until 2011, and the years involved in Garrity preceded that. If the IRS were authorized to assert Form 8938 penalties in Garrity, one must assume that it would have done so, adding them to the long list of taxes and penalties assessed by the IRS.

IV. Relevant Facts in GarritySynthesizing multiple court documents and making some basic assumptions, the key facts in Garrity appear to be the following.26

Paul G. Garrity, Sr. (“Paul”) founded Garrity Industries, Inc. (“Domestic Company”) in 1967. It primarily manu-factures and sells lighting products.

About two decades later, in 1989, Paul established the Lion Rock Foundation, a so-called Stiftung in Liechtenstein (“Foreign Trust”). Paul was named the primary beneficiary of the Foreign Trust from inception, and, during his lifetime, he retained the right to amend or revoke the governing documents. Paul entered into an agreement with BIL Treuhand AG (“Foreign Trustee”), whereby it would appoint the Board of Directors for the

Foreign Trust. The agreement with the Foreign Trustee expressly mandated that all members of the Board of Directors act in accordance with instructions from Paul or anyone authorized to act on his behalf.

In 1989, Paul also opened an account in Liechtenstein in the name of the Foreign Trust with a predecessor to LGT Bank (“LGT Account”).

In 1990, the Foreign Trustee formed a company in the British Virgin Islands (“Foreign Corporation”), whose own-ership was memorialized solely by bearer shares. Then, the Foreign Trustee arranged for another company (“Nominee”) to act as principal for the Foreign Corporation, holding the bearer shares. Next, the Nominee opened an account at Standard Chartered Bank, presumably in the British Virgin Islands (“Standard Chartered Account”). The DOJ alleges that all documents related to this international structure were either signed or initialed by Paul.

Later, in 1990, Paul instructed the Foreign Trustee to arrange for “suitable documentation” between the Domestic Company and the Foreign Corporation, show-ing that the former was supposedly paying the latter “inspection fees.” It appears that the money flowed in the following manner: The Foreign Corporation would send invoices to the Domestic Company for “inspection services”; the Domestic Company would send payment of the invoices to the Standard Chartered Account; and the Nominee would cause the funds to be transferred to the LGT Account, which was held directly by the Foreign Trust. The DOJ claims that (i) the Foreign Corporation never performed any “inspection services,” and (ii) the purpose of the foreign entities, accounts, and transac-tions was to “disguise” transfers of pre-tax funds from the Domestic Company to Paul.

In 2004, Paul traveled to Liechtenstein with his three sons, withdrew $100,000 from the LGT Account, kept $25,000 for himself, and divided the remainder equally between his sons. During this trip in 2004, the Foreign Trustees allegedly notified Paul that the arrangement might trigger U.S. tax and information-reporting issues for Paul and suggested that he seek advice from a U.S. tax professional. Paul agreed to act as the U.S. agent for the Foreign Trust during this same trip, likely without appreciating the duties associated with such title.

V. Protracted Battle with the IRS and DOJ

Garrity is fascinating for a number of reasons, one of which is that the fight with the U.S. government has involved five rounds thus far. They are described below.


A. Round One—Income Tax CaseThe IRS issued a Notice of Deficiency in 2011 for unpaid taxes of $65,147, accuracy-related penalties of $13,029, and interest charges related to the 2005 Form 1040. Representatives of Paul’s estate filed a timely Petition, and the case now sits with the Tax Court.27 This litigation has stalled for approximately six years, since 2013, awaiting resolution of issues in other courts. The most recent Order from the Tax Court aptly describes the situation:

This case [involving tax underpayments and accu-racy-related penalties for 2005] was on the Court’s May 20, 2013 trial calendar for Buffalo, New York, but is only a small piece of much larger legal troubles. The Court put it on a long-term status-report track, and the parties report that the government’s claim for [FBAR] penalties recently led to a jury verdict in U.S. District Court. Post-trial motions and a likely appeal await, and it is ordered that the parties file another status report on or before June 21, 2019, to describe their progress toward settlement or a narrowing of the issues to be tried, and any relevant developments in the probate-court and district-court matters.28

B. Round Two—FBAR Penalty CasePaul died in February 2008, at the age of 84, after a long battle with brain cancer and related illnesses. In May 2008, just three months after his death, the IRS started a civil audit.

In October 2009, representatives of Paul’s estate filed various tax returns, international information returns, and FBARs for 2003 through 2008, apparently attempting to participate in the Offshore Voluntary Disclosure Program (“OVDP”). The court pleadings are unclear, but the important point is that the IRS, predictably, rejected the OVDP application because the audit had already started many months earlier.

As anyone who regularly defends taxpayers with inter-national tax problems would guess, the audit did not go well. Among other things, the IRS assessed a willful FBAR penalty for 2005 related to the LGT Account. The balance in the account on the date of the FBAR violation (i.e., June 30, 2006) was at least $1,873,382; therefore, the IRS asserted a penalty equal to 50 percent of that amount, or $936,691.

The DOJ made the following allegations with respect to the FBAR violation for 2005: (i) Paul did not report the existence of the LGT Account on Schedule B to the 2005 Form 1040 in response to the foreign account question; (ii)

Paul did not report any income generated by the Foreign Trust or the LGT Account on his 2005 Form 1040; (iii) Paul executed his 2005 Form 1040 under penalties of perjury, thereby indicating that he had reviewed Schedule B; (iv) Paul did not notify his accountant about the LGT Account; and (v) Paul failed to file an FBAR disclosing the LGT Account.

The DOJ later clarified its position in the following manner:

[T]he government has not merely asserted that [Paul] “should have known” of the FBAR requirement. Rather, the government will show that [Paul] acted willfully in failing to file an FBAR because either he knew that he had to file an FBAR (actual knowledge), or he acted with reckless disregard of his FBAR requirement (willful blindness). Presumably, the Defendants equate the “reckless disregard” standard with “should have known.” But the standards are not the same. The government is alleging that [Paul] acted with reckless disregard in that he failed to inquire or learn that he had a requirement to file an FBAR after he was specifically alerted to the fact that he needed to do so, and thus [Paul] was “willfully blind” to the FBAR requirement. The government is not arguing that he “should have known” to file an FBAR simply because it is the law.29

After clarifying its tax and legal positions, the DOJ iden-tified for the District Court what it calls “just a sample” of the actions and inactions that it intended to prove at trial to demonstrate that Paul’s FBAR violation was willful. First, Paul signed and filed his 2005 Form 1040, checking the “no” box in response to the foreign-account question on Schedule B. Second, Paul exhibited “willful blindness” by not reviewing the instructions, explicitly cross-referenced in Schedule B, about the need to report

Taxpayers, likewise, are frequently clueless about what fighting the IRS on an international matter really entails, which can create even bigger troubles. A recent case, Garrity, helps put these matters in context.



foreign financial accounts.30 Third, Paul completed the “organizer” provided by his longstanding accountant in connection with the 2005 Form 1040, falsely indicating that he did not have an interest in a foreign account.31 Fourth, Paul filed at least one FBAR in earlier years for the Domestic Company, meaning that he knew of its existence and purpose.32 Fifth, Paul was a sophisticated businessman, who formed the Foreign Trust, instructed the Foreign Trustee to open the LGT Account, and personally visited Liechtenstein in 2004 and withdrew funds.33 Finally, Paul was told in 2004 to consult U.S. tax advisors about potential tax and information-reporting duties related to the Foreign Trust and LGT Account, but he did not do so.34

Ultimately, the DOJ filed a collection lawsuit in District Court.

Many FBAR cases are decided by judges, but the representatives in Garrity opted for a jury, presumably seeking some leniency from a group of Paul’s supposed peers. The members of the jury sided with the DOJ on all points, rendering the following decisions: (i) Paul had a financial interest in, signature authority over, or some other type of authority over the unreported LGT Account in 2005; (ii) his failure to file the 2005 FBAR was “willful”; and (iii) the amount of the FBAR penalty assessed by the IRS was equal to, or less than, 50 percent of the balance in the LGT Account as of the date of the violation. Notably, the verdict did not contain a specific dollar amount.

C. Round Three—Form 3520 and Form 3520-A Penalty CaseAs explained above, Paul established the Foreign Trust in 1989. He was named the primary beneficiary from inception, and, while he was alive, he retained the right to amend or revoke the governing documents. Paul entered into an agreement with the Foreign Trustee, pursuant to which it appointed the members of the Board of Directors for the Foreign Trust, all of whom were required to act in accordance with instructions from Paul or somebody acting on Paul’s behalf. Based on these facts, the U.S. gov-ernment took the position that Paul “exercised complete control” over the Foreign Trust, and it should be treated as a foreign grantor trust for U.S. tax purposes, necessitating the filing of Forms 3520 and Forms 3520-A.

The IRS assessed penalties in December 2012 for unfiled Forms 3520 for 1996, 1997, 1998, and 2004, as well as for unfiled Forms 3520-A for 1997 through 2008. When the representatives of Paul’s estate refused to pay, the DOJ filed a collection lawsuit in District Court, seeking a total of $1,504,388.35

The representatives challenged the DOJ on two grounds. First, with respect to Forms 3520, they argued that the DOJ failed to allege any facts in its Complaint establishing precisely which “reportable transactions” occurred during the relevant years.36 Second, the representatives claimed that “stacking penalties” against Paul was unconstitutional in that it violated the Eighth Amendment prohibiting excessive fines. The representatives cited to the proposed FBAR penalties of approximately $1.1 million (addressed in another District Court action), accuracy-related pen-alties of about $13,000 (addressed in Tax Court), and the proposed Forms 3520 and Forms 3520-A penalties reaching over $1.5 million. The representatives urged the District Court to hold that the U.S. government “uncon-stitutionally stacked” penalties in connection with the same activities, entities, and funds.37

As explained further below, the representatives of Paul’s estate, for strategic reasons, ultimately agreed to settle the Foreign Trust matters with the DOJ, paying a total of $850,000 to resolve all Form 3520 and Form 3520-A penalties.38

D. Round Four—Post-Trial Motion to Reduce FBAR PenaltiesTo streamline the dispute and not waste resources unnec-essarily, the DOJ and representatives of Paul’s estate entered into a pre-trial Stipulation in the FBAR penalty case, which indicated that, if the jury were to determine that Paul’s FBAR violation for 2005 was “willful,” then the parties would be given the opportunity to file post-trial briefs to address two issues pertaining to the proper amount of the penalty: (i) whether, consistent with the recent decision by a District Court in Texas in Colliot, the maximum penalty for a willful FBAR violation is $100,000, not 50 percent of the balance of the unreported account39; and (ii) whether the total penalty amount, covering FBARs, Forms 3520, and Forms 3520-A are excessive and thus violate the Eighth Amendment of the U.S. Constitution.

1. Summary of Main Arguments by Paul’s EstateThe jury in the FBAR penalty case determined that Paul’s non-compliance was willful. Accordingly, the two issues identified in the pre-trial Stipulation gained importance. They were addressed in a series of post-trial briefs by the parties, which are summarized below.40

a. Capping Willful FBAR Penalties at $100,000. Taxpayers recently celebrated a significant victory in Colliot. This case essentially held that the IRS could not


assert an FBAR penalty exceeding $100,000 per violation, even if such violation were willful.41

Here is an abbreviated version of the winning legal/tax argument in Colliot. A previous version of 31 USC §5321(a)(5) allowed the Treasury Department to impose willful FBAR penalties equal to, the greater of, (i) $25,000 or (ii) the balance of the unreported account up to $100,000. The related regulation promulgated via notice-and-comment rulemaking, 31 CFR §103.57, reiterated that “[f ]or any willful violation committed after October 26, 1986 … the Secretary may assess upon any person a civil penalty … not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000.”42

In 2002, the Treasury Department delegated author-ity to assess FBAR penalties to the FinCEN, specifically stating that the related regulations would be unaffected by such transfer of power and would continue in effect “until superseded or revised.”43 Roughly six months later, FinCEN re-delegated the authority to assess FBAR penal-ties to the IRS.44

In 2004, Congress amended 31 USC §5321 to raise the maximum willful FBAR penalties.45 Under the revised stat-ute, willful FBAR penalties increased to a (i) minimum of $100,000 and (ii) a maximum of 50 percent of the balance in the unreported account at the time of the violation.46 Despite this change by Congress, the regulations remained unchanged; that is, 31 CFR §103.57 continued to indicate that the willful FBAR penalty was capped at $100,000.

FinCEN later renumbered 31 CFR §103.57 as part of a large-scale reorganization of regulations; it is now called 31 CFR §1010.820. FinCEN also amended part of the relevant regulation for inflation.47 However, FinCEN did not revise the regulation to account for the increased maximum penalty, enacted by Congress in 2004, rang-ing from $100,000 to 50 percent of the balance in the unreported account.

31 USC §5321(a)(5), in its current form, gives the Treasury Department discretion to determine the amount of willful FBAR penalties, so long as they do not exceed the ceiling set by 31 USC §5321(a)(5)(C) (i.e., 50 percent of the account balance at the time of the violation). However, 31 CFR §1010.820, a regulation validly issued many years ago, never changed, and still in effect, limits the penalty to $100,000. The U.S. Supreme Court has held that rules issued via the notice-and-comment procedures must be repealed in the same manner.48 31 CFR §1010.820 has not been repealed; it was in effect when Paul allegedly committed the willful FBAR violation, and also when the IRS assessed the related FBAR penalty for 2005.

Based on the preceding argument, as supplemented in the post-trial briefing with the District Court, the representatives of Paul’s estate took the position that the FBAR penalty for 2005 should be lowered from $936,691 to $100,000.

b. Large and “Stacked” Penalties Are Unconstitutional. The representatives of Paul’s estate also advanced the fol-lowing argument in challenging the FBAR penalty. The Eighth Amendment to the U.S. Constitution states that “[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” Under the relevant two-prong standard developed by the Supreme Court, the Eighth Amendment will invalidate a penalty if (i) it is at least partly punitive, and (ii) it is “grossly disproportional” to the level of the violation.

The representatives of Paul’s estate contend that both prongs are met in Garrity because the FBAR penalty is based solely on the value of the unreported LGT Account and bears no relation to any financial loss to the govern-ment. In this regard, they pointed out that the jury upheld the FBAR penalty “with no proof of harm presented by the government”49 and “[t]he government set forth no evidence that the penalties … bear any relationship whatsoever—rational or irrational—to an actual loss or harm to the government.”50 Moreover, the representa-tives argued that applicable law allows for a “maximum” FBAR penalty, rather than setting a “mandatory” penalty, which tends to indicate that the highest penalty, such as the one asserted against Paul, is only appropriate in the most egregious circumstances.51 Unlike in previous FBAR cases upholding large penalties, the representatives claim that Paul’s situation did not involve tax evasion or other illegal activities. The representatives also underscored that the civil FBAR penalty asserted against Paul was nearly four times the maximum fine for the same criminal viola-tion.52 In addition, the representatives pointed out that

Taxpayers with undeclared foreign accounts, assets, entities and/or income often find themselves engaged in a multi-faceted war against the U.S. government.



the IRS “simply stacked” multiple penalties for FBAR, Form 3520, and Form 3520-A violations to trigger a “massive combined penalty” of more than $2.5 million, which far exceeds the total amount in the unreported LGT Account.53 Lastly, the representative asked the District Court to consider the overall economic effect, because, in addition to the penalties, Paul’s estate already paid approximately $1 million in U.S. estate tax on the value of the Foreign Trust.54

2. Summary of Main Arguments by the DOJThe DOJ disagreed with all points made by the represen-tatives of Paul’s estate, of course. The argument by the DOJ regarding the interplay between statutory provisions, congressional acts, and the relevant regulations was, as one would expect, dense and technical. Perhaps the most interesting aspect was the commentary about whether an FBAR penalty for the unreported LGT Account, in conjunction with Form 3520 and Form 3520-A penalties for the unreported Foreign Trust, violates the restriction in the Eighth Amendment against “excessive fines.”

The DOJ denied that these items are related in any manner, considering that they are imposed under entirely separate parts of the U.S. Code (i.e., Title 31 for FBAR penalties and Title 26 for Form 3520 and Form 3520-A penalties) and that they relate to different behaviors (i.e., failing to report information about foreign accounts ver-sus foreign trusts). Nevertheless, the DOJ surmised that Paul’s estate figures that they are interrelated because Paul established the Foreign Trust solely for purposes of hold-ing the LGT Account, such that all penalties arise out of the same conduct.55

In addition to the fact that the penalties are not techni-cally related, the DOJ urged the District Court to reject the “stacking” argument for the following reasons. First, the DOJ explained that taxpayers are free to organize their affairs in the manner they choose, but they are stuck with the tax consequences of their choices. Here, Paul elected to hold the LGT Account through the

Foreign Trust and report neither to the IRS; therefore, his estate must live with the ramifications.56 Second, the FBAR penalty and Form 3520 and Form 3520-A penalties are not considered “fines” for purposes of the Eighth Amendment because they serve a remedial, not punitive, purpose.57 Third, the fact that the U.S. estate tax paid by Paul’s estate took into account the value of the Foreign Trust should be disregarded because, as the DOJ flippantly put it, “[a]pparently, Defendants want credit for complying with their obligation to pay taxes.”58 Finally, the DOJ explained that the “stacking” argument was premature because (i) Paul’s estate was challenging at the same time, in a separate District Court action, the Form 3520 and Form 3520-A penalties, (ii) until such penalties have been conclusively determined, it would be improper to consider their impact, if any, on the FBAR penalty, and (iii) the District Court should focus solely on the FBAR penalty issue, and obligate Paul’s estate to raise the “stacking” issue subsequently in the Form 3520 and Form 3520-A penalty action.59

Paul’s estate then took strategic action to place the “stacking” argument properly before the District Court in the FBAR penalty case. With how-do-you-like-that flair, Paul’s estate announced the settlement of the Form 3520 and Form 3520-A issue, as follows:

In the [DOJ’s] opposition to Defendants’ motion, it stated that it was premature to consider the Eighth Amendment argument in relation to the 3520 Case until the penalties in that case are “fixed” by a judg-ment. Recently, however, penalties in the 3520 Case became “fixed” due to a settlement between [the DOJ] and Defendants, leading to dismissal of that case. Under the executed Settlement Agreement, Defendants paid $850,000 to the [DOJ], which the Court can take into account when considering Defendants’ motion. That fixed sum of $850,000, in conjunction with the FBAR penalty, and in view of the net assets of the [Foreign Estate] fol-lowing payment of estate taxes to the Government, requires a reduction in the FBAR penalty to avoid a violation of the Eighth Amendment. The [DOJ’s] argument that the constitutional issue is premature is now moot.60

E. Round Five—Probate CourtThe DOJ also filed a claim in the Probate Court against Paul’s estate, presumably requesting an amount equal to all the liabilities described in the preceding suits in Tax Court and District Court.61

Garrity is an interesting case for many reasons. For starters, it involves income taxes, estate taxes, and a long list of international penalties. Its duration is also notable.


ENDNOTES

* Hale specializes in tax audits, tax appeals, and tax litigation. You can reach Hale by phone at (404) 658-5441 or by email at [email protected].

1 D.M. Garrity, P.G. Garrity, Jr., and P.M. Sterczala, as fiduciaries of the P.G. Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. Conn. 2018).

2 P.L. 91-508, Title I and Title II (Oct. 26, 1970).3 P.L. 91-508, Title I and Title II (Oct. 26, 1970) at

§202.4 P.L. 108-357 (Oct. 22, 2004).5 31 USC §5321(a)(5)(A) (as in effect before Oct. 22,

2004).6 31 USC §5321(a)(5)(B)(ii) (as in effect before Oct.

22, 2004).7 31 USC §5321(a)(5)(A).8 31 USC §5321(a)(5)(B)(i). This penalty cannot be

asserted if the taxpayer was “non-willful” and there was “reasonable cause” for the violation. See 31 USC §5321(a)(5)(B)(ii).

9 31 USC §5321(a)(5)(C)(i).10 31 USC §5314; 31 CFR §1010.350(a).11 For a detailed analysis of the Form 8938 filing

requirement, see the following articles by the same author: Hale E. Sheppard, The New Duty to Report Foreign Financial Assets on Form 8938: Demystifying the Complex Rules and Severe Consequences of Noncompliance, Int’l Tax J., 2012, at 11; Hale E. Sheppard, Form 8938 and Foreign Financial Assets: A Comprehensive Analysis of the Reporting Rules After IRS Issues Final Regulations, Int’l Tax J., 2015, at 25; Hale E. Sheppard, Specified Domestic Entities Must Now File Form 8938: Code Sec. 6038D, New Regulations in 2016, and Expanded Foreign Financial Asset Reporting, Int’l Tax J., 2016, at 5; Hale E. Sheppard, Canadian Retirement Plans: What Does Revenue Procedure 2014-55 Mean for U.S. Tax Deferral, Form 8891, Form 8938, and the FBAR? Int’l Tax J., 2016, at 25; and Hale E. Sheppard, Unlimited Assessment-Period for Form 8938 Violations: Ruling Shows IRS’s Intent to Attack Multiple Tax Returns, Taxes, 2017, at 31; Hale E. Sheppard, Extended Assessment Periods and International Tax Enforcement: Rafizadeh v. Commissioner, Unreported Foreign Assets, and Use of FATCA

Weapons, Taxes, 2018, at 35 and J. Int’l Taxation 25 (2018).

12 Code Sec. 6048(a)(1); Code Sec. 6048(a)(4).13 Code Sec. 6048(c)(1).14 Code Sec. 6677(a).15 Code Sec. 6677(d).16 Code Sec. 6048(b)(1). The grantor trust rules are

located in Code Secs. 671 to 679.17 Code Sec. 678(a)(1).18 Code Sec. 679(a)(1).19 Code Sec. 6677(b).20 Code Sec. 6677(d).21 IRM 4.26.17.3 (Jan. 1, 2007); IRM 20.1.9.2 (Apr. 22,

2011); IRM 20.1.9.2.1 (Apr. 22, 2011); IRM 20.1.9. 22 (Apr. 22, 2011).

22 Code Sec. 6213(a).23 See Hale E. Sheppard, Two More Blows to

Foreign Account Holders: Tax Court Lacks FBAR Jurisdiction and Bankruptcy Offers No Relief from FBAR Penalties, J. Tax Practice & Procedure, 2009, at 27.

24 31 USC §5321(b)(2).25 IRM 20.1.9.2 (Apr. 22, 2011) (emphasis added); IRM

Exhibit 20.1.9-4; see also CCA 201226028.26 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of

the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. Conn. 2018). The author obtained and reviewed the following documents pertaining to this case in preparing this article: Complaint and Jury Demand filed February 20, 2015; Defendant’s Answer and Affirmative Defenses filed April 24, 2015; Expert Report by Howard B. Epstein, CPA dated April 28, 2017; Memorandum and Order regarding Standard of Proof filed April 3, 2018; Plaintiff’s Motion in Limine to Exclude the Testimony of Howard B. Epstein filed April 3, 2018; Plaintiff’s Memorandum in Support of Its Motion in Limine to Exclude Opinion Testimony of Howard B. Epstein filed April 3, 2018; Defendant’s Opposition to Plaintiff’s Motion in Limine to Exclude Opinion Testimony of Howard B. Epstein filed April 24, 2018; Joint Trial Memorandum filed May 4, 2018; Stipulation regarding Determination of Factual and Legal Issues filed May 30, 2018; and Memorandum and Order regarding Proposed Expert Testimony of Howard B. Epstein filed June 1, 2018; Jury

Instructions filed June 12, 2018; Verdict Form filed June 13, 2018; Judgment filed June 13, 2018.

27 Garrity Est., Deceased, Garrity, Garrity, Jr., and Sterczala, co-executors, Tax Court Docket No. 006561-12.

28 Garrity Est., Sr., Tax Court Docket No. 006561-12, Order dated December 26, 2018.

29 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. Conn. 2018). Plaintiff’s Memorandum in Support of Its Motion in Limine to Exclude Opinion Testimony of Howard B. Epstein filed April 3, 2018, at 8.

30 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. Conn. 2018). Plaintiff’s Memorandum in Support of Its Motion in Limine to Exclude Opinion Testimony of Howard B. Epstein filed April 3, 2018, at 4–5.





35 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., Case No. 2:18-cv-00111 (D.C. Conn.). The author obtained and reviewed the following documents pertaining to this

VI. Conclusion

Garrity is an interesting case for many reasons. For starters, it involves income taxes, estate taxes, and a long list of international penalties. Its duration is also notable. The alleged violations by Paul occurred in 1996 through 2008, the IRS started its audit in 2008, and, more than a decade later, only one of the many cases (pending in Tax Court, District Court, and Probate Court) has been resolved, and that is solely because the representatives of Paul’s estate finally decided to settle, as a strategic matter, to obligate the

District Court to consider their novel FBAR argu-ments. Finally, Garrity will result in a legal opinion regarding two fundamental issues to taxpayers, namely, whether willful FBAR penalties must be capped at $100,000 per violation, and whether the IRS is consti-tutionally prohibited from “stacking” FBAR penalties and information-reporting penalties. Regardless of the District Court’s ultimate decision about the appropri-ate size of the FBAR penalty, Garrity is already valuable in helping taxpayers understand the complexities of defending themselves against international challenges by the IRS and DOJ.



case in preparing the article: Complaint filed January 18, 2018; Defendant’s Answer and Affirmative Defenses filed February 26, 2018; Stipulation for Dismissal dated January 28, 2019.

36 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., Case No. 2:18-cv-00111 (D.C. Conn.). Defendant’s Answer and Affirmative Defenses filed February 26, 2018.

37 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., Case No. 2:18-cv-00111 (D.C. Conn.). Defendant’s Answer and Affirmative Defenses filed February 26, 2018.

38 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., Case No. 2:18-cv-00111 (D.C. Conn.). Stipulation for Dismissal dated January 28, 2019.

39 Colliot, No. AU-16-CA-01281-SS (W.D. Tex. May 16, 2018).

40 Garrity, Garrity, Jr., and Sterczala, as fiducia-ries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. Conn.). The author reviewed the following documents in preparing this portion of the article: Defendants’ Motion to Alter and Reduce Judgment filed July 11, 2018; Plaintiff United States of America’s Motion to Amend Judgment filed July 11, 2018; Defendants’ Opposition to Plaintiff USA’s Motion to Amend Judgment filed July 20, 2018; Defendants’ Notice of Supplemental Authority Regarding Their Motion to Alter and Reduce Judgment filed July 20, 2018; Plaintiff United States’ Response in Opposition to Defendants’ Motion to Alter and Reduce Judgment filed August 1, 2018; Defendants’ Reply Memorandum in Support of Their Motion to Alter and Reduce Judgment filed August 15, 2018; and Defendants’ Notice of Supplemental Information for Post-Verdict Motion under Rule 59 filed January 21, 2019.

41 Colliot was later followed by Wadhan, WL 3454973 (D. Colo. July 18, 2018), of which the

District Court in Garrity was timely notified. See Defendants’ Notice of Supplemental Information for Post-Verdict Motion under Rule 59 filed January 21, 2019.

42 Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 FR 11436, 11445–46 (1987).

43 Treasury Order 180-01, 67 FR 64697 (2002).44 Memorandum of Agreement and Delegation of

Authority for Enforcement of FBAR Requirements (2002).

45 American Jobs Creation Act of 2004, P.L. 108-357, §821, 118 Stat. 1418 (2004).

46 31 USC §5321(a)(5)(C).47 Civil Monetary Penalty Adjustment and Table, 81

FR 42503, 42504 (2016).48 Perez v. Mortgage Bankers Ass’n, SCt, 135 SCt

1199, 1206 (2015).49 Garrity, Garrity, Jr., and Sterczala, as fiduciaries

of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. Conn.). Defendants’ Motion to Alter and Reduce Judgment filed July 11, 2018, at 14.

50 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. D. Conn.). Defendants’ Motion to Alter and Reduce Judgment filed July 11, 2018, at 15.




54 Garrity, Garrity, Jr., and Sterczala, as fiducia-ries of the Garrity Est., Sr., deceased, Case No.

3:15-cv-243 (D.C. D. Conn.). Defendants’ Motion to Alter and Reduce Judgment filed July 11, 2018, at 17.

55 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. D. Conn.). Plaintiff United States’ Response in Opposition to Defendants’ Motion to Alter and Reduce Judgment filed August 1, 2018, at 38–39.

56 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. D. Conn.). Plaintiff United States’ Response in Opposition to Defendants’ Motion to Alter and Reduce Judgment filed August 1, 2018, pg. 39.

57 Garrity, Garrity, Jr., and Sterczala, as fiduciaries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. D. Conn.). Plaintiff United States’ Response in Opposition to Defendants’ Motion to Alter and Reduce Judgment filed August 1, 2018, at 39.



60 Garrity, Garrity, Jr., and Sterczala, as fiducia-ries of the Garrity Est., Sr., deceased, Case No. 3:15-cv-243 (D.C. D. Conn.). Defendants’ Notice of Supplemental Information for Post-Verdict Motion under Rule 59 filed January 21, 2019.

61 Garrity Est., Sr., Case No. 08-0211 (Saybrook, Conn. Probate Court) (filed March 3, 2008).


Judicial Tax Collection—Part 1By William D. Elliott*

William D. Elliott examines judicial tax collection. Included is a discussion of the statutory authority for the United States to bring the action, the nature of the judgment entered by the court, the Federal Debt Collections Act provisions, and the judgment lien.

WILLIAM D. ELLIOTT practices tax law in Dallas, Texas, with particular expertise in tax procedure and controversy, and IRS conflict resolution.

T he Internal Revenue Code provides two principal methods for collection of taxes. One is administrative collection by the IRS by means of levy and seizure. Under the Code, this administrative method must be triggered by

an assessment of the tax, which is accompanied by means of a notice and demand for payment within 60 days. The administrative method of tax collection is the prominent method. In a large portion of the collection provisions of the Internal Revenue Code and the collection function of the IRS, most of the case law and ruling activity, and most tax revenue are collected using the administrative means available to the Service to collect unpaid taxes.

A second method is judicial tax collection. It is less obvious, but potent. The lawyers of the Tax Division of the Department of Justice and the U.S. Attorney offices, working in harmony with the IRS, are principally responsible for initi-ating and enforcing tax collection through judicial means. The judicial process commences with the United States bringing a civil action in district court seek-ing a judgment for any unpaid tax liability. It is this judgment for unpaid tax liability that is source of the power. The judgment of the U.S. District Court that a federal tax liability owed is the judicial analog to the tax assessment. The judgment declares the tax debt due and owing. Once the judicial process starts, the federal government has a powerful set of pre-judgment and post-judgment tax collection tools available to it.

This article is the first in a series examining judicial tax collection. Reviewed in this article will be the statutory authority for the United States to bring the action, the nature of the judgment entered by the court, the Federal Debt Collections Act provisions, and the judgment lien.

Introduction to Judicial Collection of TaxCode Sec. 7401 provides that actions for the collection or recovery of taxes, or of any fine, penalty, and forfeiture can be commenced only with the authority granted by the Secretary of the Treasury and at the direction of the Attorney General, or his delegate.1 This authorization by the Secretary

37DECEMBER 2018–JANUARY 2019 © 2019 W.D. ELLIOTT

JUDICIAL TAX COLLECTION

of the Treasury and the Attorney General is ordinarily presumed and specific authorization is shown by letter from IRS counsel authorizing the commencement of a suit.2 The Attorney General’s authorization is satisfied by the Department of Justice Tax Division or the U.S. Attorney instituting an action.3 The jurisdiction of the U.S. district court to hear collection suits is discussed in Code Sec. 7402(a).

No particular notice is required to notify the taxpayer of the amount of his tax liability in advance of such a suit, or to make a prior “demand for payment” upon him, such as might be the case in an administrative collection proceeding, since there is no possibility of non-judicial seizure of his property against which he must be warned. Just as with any other lawsuit, the filing of the complaint provides all the notice that the taxpayer needs to protect the taxpayer’s interests.4

The judicial action to collect a tax debt is independent of the administrative collection process. It has long been settled that the government’s failure to assess taxes does not preclude it from exercising its right to sue the delinquent taxpayer for those taxes.5 In many judicial tax collection proceedings, the tax has been assessed, and the IRS has attempted administrative tax collection, usually by levy. Because of the constraints imposed by the 10-year statute of limitations on collection, the IRS will refer a case to the Department of Justice Tax Division to bring suit to obtain a judgment for taxes and to seek other judicial remedies, such as foreclosure on specific property.6

In other instances, the IRS could not or did not use administrative remedies to collect the tax. Several examples of these types of cases are

■■ trust fund penalty recovery under Code Sec. 6672,■■ setting aside fraudulent conveyances,■■ injunctions or receivership actions,■■ third-party liability for employment taxes under Code

Sec. 3505, and■■ imposition and enforcement of so-called FBAR

penalties.7

The judicial collection process is employed to seek a judgment for taxes or pertinent liabilities arising from a tax liability. The power of this process derives from the civil judgment, which lasts for 20 years, plus renewals. Further, a judgment lien is imposed on taxpayer’s (or other defendants’) property, with robust priorities given to the federal government, somewhat comparable to the Code Sec. 6323 lien priorities.8

The judicial tax collection process contains numerous pre-judgment and post-judgment remedies available to the federal government with which to collect the delinquent tax liabilities.9

The Federal Debt Collection Procedures Act

Introduction

The primary method of collection of a tax liability by judicial means is the civil judgment. Since 1991, the statutory authority for collecting a civil judgment has been The Federal Debt Collection Procedures Act,10 which erased the reliance on state court judgment execution laws in favor of a set of comprehensive federal remedies for judgment enforcement. The remedies for judgments entered in favor of the federal government include pre-judgment remedies, judgment execution remedies (i.e. post-judgment remedies), and fraudulent transfer rules.11

The reach of the Act is limited in a few respects. First, despite the extensive federal judgment enforcement rem-edies and a legislative desire for a uniform federal statute, state exemptions were not preempted. The enforcement of federal judgments will confront state exemptions. Second, Internal Revenue Code and state judgment collection remedies were left to co-exist alongside the Act. Third, the federal tax lien and judicial sale procedures were left untouched. The Act provides a remedy under the category of judicial execution sales.

The Judgment

The principal object of a federal lawsuit for collection of taxes is obviously to collect the delinquent taxes, but the procedural focus is the entering of a judgment evidenc-ing the court’s opinion that the tax liability is owed and the person or persons who owe it. The judgment is the final decision of the court that disposes of all claims or all parties in a lawsuit.

When a decision disposes of fewer than all claims or parties in a suit, the court is permitted to direct entry of a final judgment if the court determines that there is no just reason to delay and upon an express direction for entry of judgment.12 The example most readily seen for this partial final ruling is when divisible taxes are contested, such as responsible officer penalties, among a variety of persons. The federal government will seek judgment, perhaps summary judgment, against one or some defendants before addressing all parties. Use of this strategy permits collection on the judgment against some parties without waiting for a final judgment against all parties.


Significance of Having a Judgment EnteredThe judgment is important because once entered it allows various judicial remedies to be sought to enforce the judg-ment. The statutory authority allows judicial collection actions to collect or enforce a judgment.13

Another consequence of a judgment is the creation of a judgment lien. A judgment in favor of the federal govern-ment in a civil action creates a lien on all of the judgment debtor’s real property. The lien is effective for 20 years and renewable for one additional 20-year period.14 The judg-ment lien will be discussed later in this article.

Form of a Judgment for Tax LiabilityThe form of judgment is a separate document, being a “decree or order from which an appeal lies.” As a leading treatise on Federal procedure states, no particular form of words is required in preparing a judgment, but it should be self-sufficient and not merely incorporate other docu-ments by reference. A judgment is rendered only when it is in writing and entered on the docket.15

Effect of Judgment on Collection Statute of Limitations

A principal reason for the government wanting to have a civil action brought to collect a tax is the effect of extending the statute of limitations for collection in Code Sec. 6502. It provides that if a court action is brought against the taxpayer prior to the expiration of the collection limitations period, the collection period is extended until the liability for the tax (or the judgment against the taxpayer) is satisfied or becomes unenforceable. Therefore, when a tax assessment is reduced to judgment, thereby extending the collection period, the IRS has two different avenues for collection:

■■ the tax may be collected by levy by the IRS under the Internal Revenue Code, or

■■ the judgment may be enforced by the DOJ Tax Division or U.S. Attorney Office under the Federal Debt Collection Procedures Act.16

The Code Sec. 6502(a) collection limitations period does not merge into the duration of the judgment lien derived from the judgment. The Code Sec. 6502(a) limitations continue independently.17

The Federal Debt Collection Procedures Act provides collection remedies, as discussed in this chapter. The IRS collection remedies continue to apply and be available to the Service for assessments reduced to judgment.

Effect of Judgment on Federal Tax Lien and Tax LevyThere is little effect on a judgment on the federal tax lien or tax levy. Code Sec. 6322 (relating to the period of lien) provides that where a tax assessment is reduced to a judgment, the lien continues until the underlying tax liability is satisfied or becomes unenforceable by reason of lapse of time.18

With respect to levy proceedings, Code Sec. 6502(a) (relating to length of period of collection) provides that the IRS may continue to levy beyond the normal collection period when a judgment is timely sought until the tax lia-bility or judgment is satisfied or becomes unenforceable.19

Judgment LienWhen a judgment is obtained in an action seeking to collect a federal tax, indeed in every judgment entered in a civil action, the judgment becomes a lien upon “all real property of a judgment debtor [i.e. the taxpayer].” In this manner, correct nomenclature would say that the judg-ment lien is against taxpayer’s real property, not against the taxpayer. The judgment lien arises without specific notice, except for the fact that the lawsuit itself giving rise to the judgment is a public proceeding in the public records of the federal judicial system. The lien is effective from the date when an abstract of the judgment is filed and prevails over “any other lien or encumbrance which is perfected later in time.” The amount of the judgment lien is “the amount necessary to satisfy the judgment, including costs and interests.”20

The abstract of judgment is the device to bring the judg-ment lien into existence. The court enters the judgment and the clerk files the judgment in the court’s record, but it is the creation and filing of the abstract of judgment, an action taken by the Department of Justice Tax Division and the U.S. Attorney’s Office, that gives life to the judg-ment lien and sets the judgment’s priority.

The abstract is a form that provides essential informa-tion for the public filing to place all interested parties on notice of the existence of the judgment along with the following information:

■■ Names and addresses of parties against whom judg-ments have been obtained. Since the judgment lien attaches to real property of the debtor [taxpayer], then the Tax Division prepares the abstract using the address of the real property to which the debtor [taxpayer] holds title. If the debtor [taxpayer] does not own real property, then the debtor’s [taxpayer’s] last known address is used. When the debtor [taxpayer]


JUDICIAL TAX COLLECTION

owns multiple tracts of real property, as is commonly the case, then multiple abstracts of judgment will be prepared and filed.

■■ Names of parties in whose favor judgments have been obtained, which would be the United States.

■■ Amount of the judgment. The phrase will be added “plus interest” and “plus penalties.” Possibly, an abstract of judgment could be filed for court costs, attorney fees and other sanctions.

■■ Date the judgment was docketed, and the city where the court is located.

■■ Names of attorneys for creditors, which will be the full name and address of the U.S. Attorney plus a contact designation.

■■ Signature of the U.S. District Clerk and date of signing.

■■ The responsibility for filing the abstract in the state records is the U.S. Attorney’s Office.

■■ The abstract of judgment is to be filed in the same manner as notices of federal tax liens pursuant to Code Sec. 6323(f ).21

The life of judgment liens is 20 years, a period twice as long as the period of a federal tax lien. The judgment lien can be renewed for another 20 years, making the total life of the judgment lien potentially 40 years. The renewal of the judgment lien is accomplished by the filing of a notice of renewal using the same procedures as the filing of the original judgment. If the renewal of judgment lien is filed before the expiration of the 20-year period, and the court approves the renewal of lien, then the renewed judgment lien relates back to the date of the filing of the judgment.22

If and when the judgment is satisfied, then the gov-ernment attorneys will file an instrument indicating the judgment was satisfied or released and the filing will cor-respond with the original filing.23

One effect of a judgment lien is rendering any grant or loan that is made, insured, guaranteed or financed directly or indirectly by the United States as ineligible, or to receive funds directly from the federal government in any program, except funds to which the debtor [tax-payer] is a beneficiary, until the judgment is satisfied.24 This is a far-reaching provision because of the vast pres-ence of government-sponsored indebtedness, including for example SBA loans. The effect of a judgment lien on prospective loans or grants is obvious, but the ineligibil-ity also creates defaults under existing programs. Many loan agreements not involving the federal government contain broadly phrased default provisions that would typically include the filing of a judgment lien as an event of default. The result would be, for leveraged taxpayers, that a judgment lien in a federal tax collection lawsuit

could trigger cascading defaults across a wide array of loan agreements.

Additional enforcement of the judgment lien is provided to the court in ordering a sale of any real property subject to the judgment lien. The movant for the sale would be government attorneys seeking the sale of taxpayer’s real property. There are two paths that this sale might take. The conventional approach would be 28 USC §§2001 and 2002. Another approach would be execution sales pursuant to 28 USC §3203(g). These two alternatives for sale of property will be discussed in a subsequent install-ment of this series.

The judgment lien, while powerful, is less favorable than the federal tax lien for several reasons. First, the judgment lien attaches only to real property, while the federal tax lien attaches to all of taxpayer’s property. Second, the federal tax lien has a mature body of decided law under the statutory authority of Code Secs. 6321 and 6323 available to help interpret it, while the judgment lien has modest judicial precedent. Third, Code Sec. 6323 creates important exceptions for various forms of financing, and for super-priorities that are superior to the federal tax lien even though filed subsequent. The judgment lien has no exceptions and thus will likely collide with modern real estate financing.

The judgment lien would prove valuable in those several instances when tax collection is sought, but no federal tax lien exists, such as in pursuing lender liability under Code Sec. 3505, responsible office liability under Code Sec. 6672, or liability arising from erroneous refunds.

ConclusionApart from the usual administrative tax collection meth-ods, the second method of tax collection is judicial. The United States seeks from the U.S. District Court a judg-ment that the tax liability is due and specifies the persons who owe it. Instead of the IRS seeking enforcement, the attorneys from the Tax Division of the Department of Justice are primarily responsible to do it.

The Federal Debt Collections Act, enacted in 1991, provides a comprehensive statutory mechanism for col-lection on a judgment. Powerful tax collection tools are made available, prominent of which is the judgment lien, which attaches all real property of persons adjudged owing the tax. In contrast to the federal tax lien, the judgment lien can last 40 years.

The second article in this series will examine the specific tax collection tools provided the federal government once a judgment is entered.


ENDNOTES

* This article is reprinted from the January 2019 issue of Taxes The Tax Magazine.

1 Code Sec. 7401; 28 USC §1396 establishes venue for such actions.

2 IRM 5.17.4.2 (Aug. 1, 2010), Initiating and Processing Collection Suits. Internal IRS guide-lines for determining whether it is feasible to recommend a suit to reduce assessments to judgment are found in IRM 25.3.2 (Dec. 8, 2017).

3 One 1941 Cadillac Sedan, Motor and Serial No. 5467924, CA-7, 145 F2d 296; W.R. Walters, CA-6, 638 F2d 947.

4 Jersey Shore State Bank, SCt, 87-1 ustc ¶9131, 479 US 442 (1987), Brief of the United States, 26–27.

5 See, e.g., King, US, 99 US 229, 233; The Dollar Savings Bank, US, 86 U.S. (19 Wall.) 227, 240-241; Macatee, Inc., CA-5, 54-2 ustc ¶9550, 214 F2d 717.

6 Code Secs. 7403(a), 6502(a).7 The IRS has been delegated the authority to

assess FBAR penalties in 31 CFR §1010.810(g) (former §103.56(g)), but it does not have the authority to enforce collection activity. (“Collection is not delegated in any enforcement authority with respect to FBAR penalties.” IRM 5.21.6.4(2) (Nov. 27, 2013)). The DOJ Tax Division is responsible for enforcing and collecting cer-tain non-tax claims pursuant to 31 USC §3711(g)(4)(C), including penalties (“FBAR penalties”) imposed for failure to report an interest in a foreign financial account as required by 31 USC §5314 and its implementing regulations. See R. Simonelli, DC-Conn., 614 FSupp2d 241 (FBAR penalty is a civil penalty, not a tax or tax penalty; and nothing ties the amount of the FBAR penalty to an amount of tax due. 614 FSupp2d 244 (citing 29 CFR §103.56(g) (authorizing the IRS “to assess and collect civil penalties under 31 USC §5321

… [and] investigate possible civil violations of these provisions”)).

8 See, William D. Elliott, Federal Tax Collection, Lien & Levies (WGL 2018, 2d 3d), Chapter 11 for detailed discussion of Code Sec. 6323.

9 A brief comment is made about the literature collecting on a judgment. Clearly, the weight of literature is focused on the administrative tax collection process, reflecting perhaps the reality that the administrative phase of tax collection is where the action is. There is not an abun-dance of literature on federal tax collection via collecting on a judgment. Perhaps this paucity reflects the fact that the subject of entering a judgment and collecting on the judgment partake of federal procedure mostly and to a secondary degree on tax litigation. The tax liti-gation treatises are helpful, of course, but have not been found to delve deeply into the subject of collecting tax liabilities through obtaining a judgment and enforcing the judgment. The most helpful work is the Judgment Collection Manual of the Tax Division. I have relied on the manual in this article.

10 The Federal Debt Collection Procedures Act (P.L. 101-647), 104 Stat. 4933 (codified in 28 USC §§3001–3308). Congress enacted the Federal Debt Procedures Act as part of the Crime Control Act of 1990, and it became effective June 6, 1991.

11 The organization of the Act is in 4 subtitles: Subtitle A (28 USC §3001–3015), Definitions and General Provisions; Subtitle B (28 USC §§3101–3105), Pre-judgment Remedies; Subtitle C (28 USC §§3201–3206), Post-judgment Remedies; and Subtitle D (28 USC §§3301–3308), Fraudulent Transfers.

12 Fed. R. Civ. P. 54(b).13 28 USC §3001; Fed. R. Civ. P. 69.

14 28 USC §3201(a), (c).15 Fed. R. Civ. P. 54(A), 58(a), 79(a); Charles A. Wright,

Arthur R. Miller, Mary K. Kane, Richard L. Marcus, Benjamin Spencer & Adam N. Steinman, Federal Practice & Procedure, 11 Fed. Prac. & Proc. Civ. sec. 2785 (3d. ed. 2018).

16 See 28 USC §§3001 through 3308.17 IRM 5.17.4.6.2 (Aug. 1, 2010), Effect of Judgment

on Collection Statute of Limitations.18 Code Sec. 6322.19 Code Sec. 6502(a).20 28 USC §3201(a), (b).21 See, William D. Elliott, Federal Tax Collection,

Liens and Levies (WGL 2018, 2d ed.), Chapter 10 the detailed discussion of filing requirements for notices of federal tax liens.

22 28 USC §3201(c). An odd phrasing of the effective date language of the renewal of the judgment lien creates an initial uncertainty. Code Sec. 3201(c) provides that the relation-back date for the renewal of the judgment lien is “the date the judgment is filed.” Code Sec. 3201(a) provides for the effective date of the judgment lien is the date of the filing of the abstract. The date the judgment is filed in subsection (c) can refer to the date the court enters the judgment in the court records, or the date the abstract of judgment is filed. Strictly speaking, the judgment is entered when the judge signs the judgment and the clerk enters the judg-ment in the court records. Thus the phrase “the date the judgment is filed” in subsection (c) would mean the date of the filing of the abstract. This interpretation has the additional advantage of being consistent with the mechanism in which the judgment lien is made effective.

23 28 USC §3201(d).24 28 USC §3201(e).

SB/SE delivered the Luncheon Keynote address. Caroline Ciraolo, JTPP Advisor and former Acting Assistant Attorney, Tax Division, U.S. Department of Justice was also in attendance. Avram Salkin was honored with the Bruce I. Hochman Award for his many years of outstand-ing leadership and achievements in the tax practitioner community.

Several of the topics addressed by the panels this year are discussed in our articles:

Sandra Brown was a panelist on the segment, How to Keep Your

Cryptocurrency Client in Compliance and Out of Jail with Nathan Hochman, Gary Howard, Richard Speier and Marty Schainbaum. It seems that some people have trouble understand-ing that governments are serious about those who intentionally hide assets and income. Apparently some people moved funds from offshore foreign accounts into digital transactions based on cryptography, anticipating the government’s inability to track the funds. Sandra’s article, The Future of Virtual Currency Tax Prosecutions—A Matter of When, Not If gives insights into this evolving challenge to IRS CI’s ability to “follow the money.”

Dennis Brager moderated the panel, Handling the Most Difficult

IRS Collection Problems—Including Passport Revocation with Steve Mather, Ronson Shamoun, Joseph Broyles, Amanda Bartmann, Darren Guillot and Mel Hadley. Look for Dennis’ explanation of How Your Client Can Lose Their Passports by Falling Behind on Their Taxes (and What to Do About It).

Of concern to many practitioners who will be filing returns reflecting Tax Cuts and Jobs Act law changes was the scarcity of guidance on positions that might be taken on the new deduction for Qualified Business Income. Especially frus-trating are provisions in the Act that lower the threshold for the accuracy related penalty to be

Editor-in-ChiefContinued from page 4


ExamContinued from page 8

CollectionContinued from page 10

propose an alternative to levy. If the IRS issues a pre-notice levy, practitio-ners should review options for appeal with their clients to determine their best course of action going forward.

ENDNOTES

* The authors can be reached at [email protected]

1 See Code Sec. 6330(a)(2).2 See Code Sec. 6330(a)(3).3 This is referred to as the Federal Payment Levy

Program or FPLP.4 This is referred to as the State Income Tax Levy

Program or SITLP.5 See Code Sec. 6330(f); see also IRM pt. 5.11.1.3.2(6)

(Nov. 9, 2017).6 See Code Sec. 6330(f); see also Reg. §301.6330-

1(a)(2)(ii).7 Reg. §301.6861-1; Reg. §1.6851-1; see also IRM pt.

5.17.15.2.1 (Dec. 29, 2009).8 See IRM pt. 5.17.15.2.1 (Nov. 29, 2009); IRM pt.

5.11.3.4 (Nov. 20, 2017).9 IRM pt. 5.11.3.4(4) (Nov. 20, 2017).10 IRM pt. 5.11.3.2(2)-(4) (Nov. 20, 2017).11 See Code Sec. 7429(a)(3).12 See Code Sec. 7429(a)(1)(B).13 See Code Sec. 7429(a)(2).14 See Code Sec. 7429(b)(2).15 See IRM pt. 5.19.4.3.1.1(1) (Aug. 4, 2014).16 IRM pt. 5.1.9.3.14(4) (Nov. 12, 2014).17 IRM pt. 5.1.9.3.14(2) (Nov. 12, 2014).18 See Code Sec. 6330(f); see also Reg. §301.6330-

1(a)(2)(ii).19 IRM pt. 5.11.1.6.2(2) (Aug. 1, 2014).20 See Federal Payment Levy Program, Small

Business and Self Employed (July 23, 2018), available online at www.irs.gov/businesses/ small-businesses-self-employed/federal- payment-levy-program.

21 Id.22 IRM pt. 5.11.1.6.2(3) (Aug. 1, 2014).

IRS WatchContinued from page 14

considered whether there might be a way in which IRSAC could provide the commissioner and potentially the Congress and the public, with its views on issues in tax administration that emerge during the year and might be so time sensitive that it would be impractical to wait for an annual report in which to offer views or advice. Unbeknownst to the IRSAC, the Treasury Department tasked the IRS similarly, directing it to consider ways of streamlining the overall way in which the Commissioner receives advice from the tax practitioner community.

What emerged from the Treasury review is an expanded and reconsti-tuted 2019 IRSAC. Going forward, IRSAC’s charter will be expanded to include the missions previously assigned to the Information Reporting Program Advisory Committee (IRPAC) and the Advisory Committee on Tax Exempt and Government Entities (ACT). While the specifics of how the three groups’ interests will merge within the new IRSAC remain to be worked out, the report does make clear that the “new” IRSAC will interact with the IRS primarily around four IRS business operat-ing divisions: Large Business and International, Small Business and Self Employed, Wage and Investment, and Tax Exempt and Government Entities.

23 Id.24 Id.25 See Code Sec. 6330(f); see also Reg. §301.6330-

1(a)(2)(ii).26 See Federal and State Levy Programs ,

Small Business and Self Employed (Apr. 23, 2018), available at www.irs.gov/businesses/ small-businesses-self-employed/federal- and-state-levy-programs.

27 Id.28 Id.

to this direction is that the Transfer Pricing Examination Process (TPEP), released by LB&I in June 2018, providing guidance “consistent with” Publication 5125 for planning, execution, and resolution of transfer pricing examinations. The TPEP describes as a best practice issuing the AOF IDR for all transfer pricing issues whether potentially agreed or unagreed. TPEP, at 27.

invoked when the 199A deductions are present on a tax return. Noted CPA practitioner and Institute attendee, Kip Dellinger, shares with us his view of The 2017 TCJA and Uncertain Positions. His article is consistent with the issues raised by the panel I participated on, Preparing for and Defending Examination of Emerging Issues Under the New Tax Act, Including the Pass Through Deduction with Steven Jager, Phillip Wilson and John Tuzynski, and moderated by Michelle Ferreira.

Offshore income reporting issues that gave rise to so many cases over the last decade continued as a topic of discussion. A shout out to JTPP Advisor Hale Shepard for giving us insight on What Garrity Teaches about FBARs, Foreign Trusts, “Stacking” of International Penalties, and Simultaneously Fighting the U.S. Government on Multiple Fronts.

Our final article is brought to us by JTPP Advisor Bill Elliot. We appreciate his deep understanding of the art of IRS collection mitiga-tion representation, and his willing-ness to share it, this time focusing on Judicial Tax Collection.

Live CPE conferences offer so much more than online seminars: you learn from the presentations and build your base of professional contacts. Consider planning a time out for yourself this coming Summer for the NYU Tax Controversy program or in Fall for the UCLA Institute in October. You’ll find the face-to-face opportunities to discuss issues with noted practitioners in and outside the government to be a great investment of your time.

And, if you have suggestions for the JTPP, please contact me, [email protected].

ENDNOTE1 S e e w w w . i r s . g o v / n e w s r o o m / i r s -

activities-following-the-shutdown.


Selected Sub-Group RecommendationsThe four IRSAC sub-groups identi-fied dozens of specific recommenda-tions which are available as part of the annual report. Among the most significant and interesting recommen-dations are the following.

Digital Services■■ Continue to utilize a strategic

risk-based approach to imple-menting eA3 (authentication, authorization and access).

■■ Continue implementing an enterprise-wide authorization strategy—an essential element to extending the availabil-ity of digital services to tax professionals.

■■ Implement an ACH Payments Application Program Interface (API)—an essential tool to enable digital payment services compa-rable with the experiences taxpay-ers expect from their financial institutions and other service providers.

■■ Prioritize implementation of an online account for tax profes-sionals—the so-called “Tax Pro Account.”

Self-Employed (SBSE)/Wage and Investment (W&I)

■■ Improve third-party identifica-tion in a way that will reduce the obstacles and concerns that resulted from the unilateral 2018 changes IRS made to its third-party authorization protocols.

■■ Improve and increase participa-tion in the Taxpayer Digital Correspondence (TDC) pilot—a digital initiative currently being piloted in Philadelphia as a way to improve the correspondence examination process.

Office of Professional Responsibility (OPR)

■■ Publicize the results of all OPR investigations—also including voluntarily agreed-to matters—with an eye toward increas-ing overall transparency and deterrence.

■■ Update Circular 230 for accuracy and reliability.

■■ Transition Circular 230 from a rules-based to a principles-based document.

■■ Reinforce the authority and relevance of Circular 230 by cross-referencing similar affirma-tive duties found in the penal-ties provisions of the Internal Revenue Code.

Large Business and International (LB&I)

■■ Incentivize taxpayers to improve the quality of their transfer pric-ing documentation by providing more direct guidance to taxpay-ers including information on best practices and common flaws in transfer pricing documentation. The objective is to help taxpayers understand the risk-assessment related information and docu-mentation that can increase the chance that they will either be deselected for audit or, if selected, will experience a more efficient audit.

■■ Issue non-binding FAQs accom-panied by public meetings with taxpayers and tax practitioners to further expand upon the FAQs. Several multi-part FAQs were included as examples of how taxpayer understanding might be expanded.

As with advice rendered by any third party, the recipient—in this case the IRS—must evaluate the advice within a specific context. While the recom-mendations included in the latest

Tax ProsecutionsContinued from page 20

The lack of clarity here is further compounded by the different views of virtual currency pronounced by other federal law enforcement agen-cies such as the U.S. Securities and Exchange Commission (“SEC”), the Commodity Futures Trading Commission (“CFTC”) and the Financial Crimes Enforcement Network (“FinCen”). Is virtual currency a “security,” a “commodity,” “property,” “money,” or, perhaps, all of the above?9

These questions mean IRS CI will not be dealing with the type of legal clarity normally found in criminal tax cases selected for prosecution. Further, this lack of clarity will most likely give rise to a multitude of pre-trial motions, in the context of Dalhstrom,

IRSAC report are impressively sensi-ble and have the potential to improve important aspects of tax adminis-tration, it is hard to recall a period where the workload demands on the IRS were more daunting. Both the formal advisors, and those of us who offer “arm-chair” advice, will be well served to recognize that the current context—workload balanced against resources—requires prioritization and hard choice-making. Inevitably some fine recommendations won’t make the cut, but let’s hope that a combina-tion of new Commissioner and new Congress promotes a new context in which there is more consensus on how best to support continuing improve-ment in IRS performance.

ENDNOTES1 P.L. 115-97 (Dec. 22, 2017).2 Internal Revenue Service Advisory Council Public

Report; November 2018—Publication 5316 (11-2018) Catalog Number 71824A Department of the Treasury Internal Revenue Service www.irs.gov.

3 Id., page 8.4 Id., page 19.


seeking dismissal of any criminal tax case involving the reporting, or lack thereof, of virtual currency.10

The uncertain treatment of virtual currency is likely to also impact the strength of the evidence, such as the type of evidence which typically falls within what is described as “badges of fraud” which is conventionally presented to support the one element that must be proven beyond a reason-able doubt in almost every criminal tax case, e.g., willfulness. As we clearly learned from Cheek, there is no willful violation of the tax law if someone actually believes in good faith that he or she is not violating it, even if that belief is based on an unreasonable misunderstanding of the law.11 In the case of virtual currency, the hurdle to proving willfulness may actually be the need to overcome a “reasonable” misunderstanding of the law. Which means, very simply, that what we should expect to see in criminal tax cases involving virtual currency is evidence that establishes, in the oft-repeated words of former Chief of IRS CI Nancy Jardini, that criminal tax cases really are “all about the lies.”12

ConclusionThere is no question that criminal tax prosecutions of virtual currency will have its unique challenges. Attributing digital transactions in a world based on cryptography can be difficult. But let us not forget that virtual currency leaves an indelible digital footprint and once the code is cracked, the information is all there.

It is worth remembering, whether looking down a dark alley or into the dark web, IRS CI is and always has been renowned for its ability to “fol-low the money.”

As IRS CI marks its 100th anni-versary this year, we can likely expect to also finding them following the “digital money.”

TCJA and Uncertain PositionsContinued from page 26

determinable until after the statute of limitations expires. A valid protective claim doesn’t have to list a particular dollar amount or demand an imme-diate refund.5 Generally, the IRS will delay action on the protective claim until the contingency is resolved.”

Just as with a refund claim filed on an amended return, the protective claim must be filed before the statute for a refund claim is required which is gener-ally three years.6 Tax practitioners often file the protective claim on an amended return on which it is prominently noted at the top of page 1—Protective Claim for Refund Do Not Process.

What this accomplishes is that the refund claim statute remains open until the taxpayer “perfects” the claim or IRS denies the claim. In each instance the taxpayer will be entitled to litigate the matter in Federal

District or the U.S. Court of Federal Claims. Beyond the three year period, IRS can examine the return and has the opportunity to adjust any items in the return to disallow the claim (assuming the item representing the claim is valid) but technically it may not assess a deficiency if the period for assessment of tax is beyond the statutory period for assessment—also generally three years from the later of the due date for filing or the actual date filed.7

The protective claim—in keeping the statute open for questionable positions that the taxpayer did not take, often based on the tax preparer’s advice—enables the taxpayer to pur-sue a refund if the courts eventually hold that taxpayers are entitled to the tax benefits for which IRS did not believe they were entitled. This will protect the tax practitioner from a later malpractice claim for the lost taxes by the taxpayer contending that the tax practitioner did not properly advise his or her client. In fact, with regard to advising taxpayers with regard to complex issues that arise under the TCJA of 2017, the protec-tive claim may, and likely should, become a common tool for tax prac-titioners and their clients.

ENDNOTES1 It can also reduce the possibility of a subsequent

malpractice lawsuit against the tax adviser-preparer as well.

2 While Code Sec. 6676 does not contain a cross-reference, it is assumed that the reasonable cause defenses set forth in Code Sec. 6664 are applicable in claim for refund situations.

3 Code Sec. 6532(a)(1).4 See IRM pt. 21.5.3.4.7.3.5 However, a valid protective claim must:

■ Be in writing and signed;■ Include your name, address, SSN or ITIN, and

other contact information;■ Identify and describe the contingencies

affecting the claim;■ Clearly alert the IRS to the essential nature

of the claim; and■ Identify the specific year(s) for which a refund

is sought.6 Code Sec. 6511(a).7 Code Sec. 6501.

ENDNOTES

* The author can be reached at brown@ taxlitigator.com.

1 See https://en.wikipedia.org/wiki/Virtual_ currency.

2 IRM 25.1.2.3 (Sep. 6, 2015).3 See www.bloomberg.com/news/articles/

2018-02-08/irs-cops-scouring-crypto-accounts-to-build-tax-evasion-cases.

4 See www.irs.gov/pub/irs-utl/2018_irs_crimi-nal_investigation_annual_report.pdf.

5 See www.irs.gov/pub/irs-utl/j5-media-release-7-2-18.pdf.

6 IRS Notice 2014-21, 2014-16 IRB 938 (Mar. 25, 2014).

7 Code Sec. 1031.8 Proof of a tax deficiency is a required element

of a charge filed under Code Sec. 7201.9 See https://cointelegraph.com/news/sec-

cftc-irs-and-others-a-guide-to-us-regulating-bodies.

10 K.L. Dahlstrom, CA-9, 83-2 ustc ¶9557, 713 F2d 1423, cert. denied, 466 US 980, 104 SCt 2363, 80 LEd 2d 835 (1984).

11 J.L. Cheek, SCt, 91-1 ustc ¶50,012, 498 US 192, 111 SCt 604, 112 LEd 2d 617 (1991).

12 See www.taxlit igator.com/wp-content/uploads/2016/02/Options_Arent_Looking_as_Good.pdf.


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