Tax law is famously complex - a constantly shifting maze of statutes, regulations, IRS publications, and case law. As such, the process of filing tax returns can be an arduous task for the hundreds of millions of taxpayers who are required to do so each year because the preparation of each and every tax return necessarily involves the interpretation and application of the tax laws to the facts of a particular taxpayer's financial situation. This is why taxpayers often turn to trained professionals such as return preparers, enrolled agents, accountants, and tax lawyers to help them file their returns.
Tax law is so complicated that nearly everyone makes a mistake sooner or later. What should a taxpayer do when he or she learns of a mistake on a previously filed tax return? Of course, if the taxpayer overpaid her tax, she probably will jump at the opportunity to amend the return and claim a refund. However, if the prior return underreported tax, is the taxpayer required to file an amended return to correct the understatement? And what are the consequences of filing an amended return? How should a tax practitioner advise a client? This column addresses when and how a taxpayer can or should file amended returns and how tax practitioners should approach issues relating to a taxpayer’s prior non-compliance.
Imagine a situation in which Congress passed a statute establishing civil penalties for certain conduct, including the maximum penalty that may be imposed for such conduct, and delegated enforcement of the statute to a federal agency. What if the federal agency issued a regulation stating the maximum penalty the agency would impose under the statute and then Congress later amended the statute to increase the maximum penalty the agency could impose, but the agency never changed its own self-limiting regulation? Would the agency be bound by its regulation, or could it ignore the regulation and impose the higher penalties authorized under the new statute?
Choice Of Forum Matters: Tax Court And District Court Reach Different Conclusions On Same Facts Regarding Penalties
Taxpayers in a dispute with the IRS have a choice of forum in which to litigate. The Tax Court provides a pre-payment judicial review while taxpayers who pay in advance can sue for refund in Federal District Court. The choice of forum can have a material impact on the outcome of the litigation as is demonstrated by the Federal District Court decision in McNeill1 (“McNeill 1”) and the Tax Court decision in McNeill2 (“McNeill 2”).
Op-Ed By Bryan C. Skarlatos
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Crypto currencies may have been around for less than a decade, but they are proliferating so quickly that our established tax and regulatory systems can't keep up. And that could create serious tax problems for those who would join the digital currency revolution.
Taxpayers who have underpaid their taxes can avoid accuracy-related penalties under Code Sec. 6662 by demonstrating that they acted with reasonable cause and in good faith. In general, the most important factor in determining whether a taxpayer acted with reasonable cause and good faith is the taxpayer’s effort to assess the proper tax liability.
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."