Tax practitioners often give tax advice on things like how to structure an investment in a business venture, sell an asset, plan for retirement or pass wealth to the next generation. Sometimes a practitioner’s tax advice turns out to be wrong and the IRS assesses a tax deficiency against the taxpayer.
Typically, the question of whether the tax practitioner could be subject to a penalty for providing faulty advice would be governed by the standards under Code Sec.6694—i.e., whether the advice had a reasonable basis and was adequately disclosed, or was supported by substantial authority or, in the case of a tax shelter, it was reasonable to believe that the position was more likely than not to be sustained on its merits. However, another standard also could apply to the tax advisor’s advice. Under Code Sec. 6700, the IRS could attempt to impose a much larger tax shelter promoter penalty if the advisor “had reason to know” the advice was wrong. Most practitioners believe that the penalty under Code Sec. 6700 is designed for abusive tax shelters that are marketed by unscrupulous tax shelter promoters. While that appears to have been the purpose behind the enactment of Code Sec. 6700, the statute itself contains some technical yet broad language which, taken literally, possibly could apply to a wide variety of arrangements that involve tax benefits. There is nothing in the body of the statute that limits the penalty to tax practitioners or tax return preparers, defines the type of investment plan or arrangement that is covered or requires any specific marketing efforts. Thus, the IRS could attempt to argue that Code Sec. 6700 applies to ordinary tax advice if the practitioner giving the advice “knew or had reason” to know that the advice was wrong.
By Bryan C. Skarlatos
Journal of Tax Practice & Procedure
August - September 2016 Edition
The tax law is famously complex. When asked how many pages are in the current version of Treasury Regulations, a former senior IRS official once responded that it could not be determined because the tax law changed so frequently. One of the anomalies of our self-assessment system is that every citizen and resident is responsible for understanding and implementing this extremely complex law when they file their tax returns each year.
An Update on the IRS's War Against Midco Transactions: Some Courts Hold That Taxpayer Knowledge Is Irrelevant When the IRS Uses State Constructive Fraud Theories to Prove Transferee Liability
Last year, we wrote about the IRS’s efforts to recover unpaid taxes after a so-called “Midco” corporate transaction, under a theory of transferee liability. We discussed how courts had focused on whether the selling shareholders of a target corporation in a Midco transaction knew or should have known that the whole Midco transaction would result in the target corporation’s tax liability remaining unpaid. Such actual or constructive knowledge justified courts in applying the judicial doctrine of “substance over form” to recast the Midco transaction as a de facto liquidating distribution to the shareholders. Since then, the IRS has become more aggressive when applying states’ versions of the Uniform Fraudulent Transfer Act (“UFTA”) to recover from Midco transferees and has succeeded in recovering in some cases without having to prove knowledge, or even reason to know, on the shareholders’ part that the Midco transaction would result in unpaid corporate taxes.
By Lee A. Sheppard
Bryan C. Skarlatos is quoted in the Tax Notes article, "News Analysis: Be Nice to Whistleblowers" by Lee A. Sheppard. With the whistleblower program celebrating its 10th anniversary, practitioners still complain about an unwillingness to take hard cases, lack of communication, and slowness in the payment of awards. In an excerpt from the article:
"LB&I has its own culture and beliefs about how things should be done. "There's a cultural issue," said Zerbe. Skarlatos said that he got the sense that overworked LB&I revenue agents, who are very expert in their specialties, seem to resent the help and may not recognize the value of the information. Zerbe concurred that it is difficult to sell LB&I on a case involving an insider at a Fortune 500 company. "C'mon, guys, this guy got fired for what he disclosed!" said Skarlatos, who praised the quality of the evidence offered by insiders.
LB&I has an audit plan and may be reluctant to take up a case when its audit of the reported company has been completed. "It's tough changing the audit plan," Skarlatos noted. There is no placeholder in the audit plan for issues raised by whistleblowers. Zerbe wanted the Whistleblower Office to have the power to go to the commissioner to change the audit plan, that is, essentially reopen the audit of the reported company."
Bryan C. Skarlatos Quoted in Tax Analysts Article, "U.S. Taxpayer Revelations From Panama Leak Expected to Be Modest"
By Amanda Athanasiou
The data are unlikely to reveal large-scale noncompliance by U.S. taxpayers that hasn't already been disclosed or cleaned up, said Bryan C. Skarlatos of Kostelanetz & Fink LLP. "The main contribution of this data is that it's lifted back the curtain, enabling us to see evidence of hidden accounts and bearer share company structures that the public hears about, but never really sees," Skarlatos said. The primary impact in the U.S. will be to raise awareness about how bank secrecy works around the world, through the use of those bearer share corporations, he added.
Bryan C. Skarlatos and Michael Sardar Published in NYSSCPA, "The Panama Papers: A Reminder to Taxpayers That It’s Not Too Late to Clean Up Unreported Offshore Assets"
Over the past few weeks, a giant trove of information regarding individuals holding assets through Panamanian corporations has been leaked to the press. So far, the “Panama Papers” - as they have come to be called - have disclosed that several high-profile individuals around the world were holding foreign bank accounts and other assets through Panamanian offshore entities. Additional information and names are expected to be released as the media sifts through the large volume of now public documents. While holding an offshore entity or bank account may be legal, the implication is that at least some implicated individuals were engaged in illegal activity or failed to properly report the assets.
Bryan C. Skarlatos Published In Journal of Tax Practice & Procedure, "The Fifth Amendment Privilege Against Self-Incrimination and Tax Returns: Oil and Water or Peanut Butter and Jelly?"
By Bryan C. Skarlatos
February - March 2016
Tax returns require a wealth of specific financial information that sometimes can be used against a taxpayer in a criminal investigation or prosecution. If a taxpayer is engaged in an illegal business, such as gambling or drugs, the disclosure that the taxpayer earns a lot of money, or has substantial assets, can be an important element of proof against the taxpayer. In less obvious cases, the fact that taxpayer will suddenly report substantial income that was not disclosed on prior returns, or will have a change of inventory valuation that will not match prior returns, or has a foreign bank account that had not been previously reported, could be used as a link in the chain of evidence leading to a tax prosecution relating to those prior tax returns. In such cases, taxpayers must carefully consider whether they have a Fifth Amendment privilege not to provide such incriminating information and, if so, how that privilege can be asserted.
Bryan C. Skarlatos Published in the Journal of Tax Practice and Procedure, Penalties: “The Key to Transferee Liability in Midco Cases: Did the Taxpayers Know Or Have Reason to Know of the Unpaid Taxes?"
Bryan C. Skarlatos
So-called “Midco” transactions have been used by taxpayers who wish to sell appreciated property owned in a C Corporation while attempting to avoid the double tax inherent in causing a C Corporation to sell stock and then distribute the proceeds to shareholders. By selling the corporate stock to a Midco entity—i.e., an entity that has favorable tax attributes such as tax losses or tax credits—the parties hope to avoid a least one level of the double tax. Typically, the sellers and the Midco agree to split the resulting tax savings. Unfortunately, in many cases, the Midco’s tax attributes prove to be illusory or nonexistent, leaving the Midco with a large tax liability when it ultimately sells the property. Even more unfortunately, the Midco is often a shell corporation that distributes all of the money it receives from the transaction, leaving it insolvent when the tax bill arrives. When this happens, the IRS seeks to recover the unpaid tax from the seller of the corporate stock under transferee liability theories pursuant to Code Sec. 6901.
Bryan C. Skarlatos Published in Journal of Tax Practice & Procedure, "Seventh Annual NYU Tax Controversy Forum Puts the Spotlight on International Enforcement"
By Bryan C. Skarlatos
August - September 2015 Edition
The Seventh Annual NYU Tax Controversy Forum took place on Friday, June 4, 2015, at the Crowne Plaza in Times Square New York. Over 250 attendees and speakers from the government and private industry came together to discuss the latest developments in tax enforcement and to share perspectives on issues that arise in daily practice.
The purpose of the Tax Controversy Forum is to facilitate communication among taxpayer representatives and government officials from the IRS and the Department of Justice. A better understanding of how the government intends to interpret and enforce the tax law as well as how practitioners are reacting to enforcement efforts in the field can only improve taxpayers’ efforts to self-assess, which is the bedrock of our voluntary compliance system. Judging by the lively discussion on the panels and in the hallways and the overall collegial atmosphere, this year’s Forum fulfilled its purpose.
Bryan C. Skarlatos and Christopher M. Ferguson Published in Journal of Tax Practice and Procedures, "Tax Malpractice Claims: The Hidden Penalty for Practitioners"
By Bryan C. Skarlatos and Christopher M. Ferguson
Taxpayers who get hit with unexpected tax bills sometimes look to their tax return preparer or tax advisor to help foot the cost. While tax practitioners may spend considerable time studying tax practitioner penalties under Code Sec. 6694, or tax practitioner standards under Circular 230 or the AICPA Statements on Standards for Tax Services (SSTS), many practitioners have not thought a lot about when they could be sued by their client for malpractice.
What constitutes malpractice in a tax case? The elements of a tax malpractice claim are the same as any malpractice claim, or any negligence claim for that matter. They consist of a duty to the plaintiff, a breach of the duty, damages and causation (i.e., was the breach of the duty the proximate cause of the plaintiff’s injury).