Where are those scarce government resources going?

The Internal Revenue Service employs approximately 88,000 full time staff. This is two and a half times as many as the FBI.

Then, what about Spies v. Bean counters? Incomparable! The number of the CIA’s staff cannot “at present, be publicly disclosed.”   So says cia.gov.

The almost-overnight sensation of the IRS offshore account voluntary disclosure program is about to close.

After the deadline was extended three weeks ago, from September 23rd to October 15th (see http://lifelawandtaxes.com/irs-extends-voluntary-disclosure-deadline-for-secret-offshore-account/), the final deadline is now only days away. See also the New York Times article, “Tax Evaders Face Choice: Pay or Pray” by Lynn Browning.

While touting itself as a program by which taxpayers with unreported income in foreign bank accounts can “come in from the cold,”  avoid criminal prosecution, and pay a penalty which is stiff, but not as severe as the penalties a taxpayer would be subject to outside the program, what seems to get lost in the discussion of this program is the fact that taxpayers who seek to participate are required to confess to a tax crime, waive their 5th Amendment right against self incrimination before knowing whether the Government will commit not to pursue criminal charges against them.

That is a danger of this program. Still, news accounts plus telephone conversations with IRS employees working in its criminal investigation division report that thousands of taxpayers are lining up to participate, submitting written disclosures in order to get that promise not to prosecute and the stiff but less horrible than otherwise penalty structure.

With 48 hours left before the final deadline to participate in a voluntary disclosure program designed get taxpayers with unreported foreign bank accounts to come back into the system and report their foreign income, the IRS has announced that it is extending the deadline from Wednesday September 23, 2009 until October 15, 2009.

The IRS reports that this extension was made in response to repeated requests from attorneys and other tax practitioners from all over the country.

In addition, an IRS agent working on a team evaluating the disclosures being submitted by taxpayers trying to participate in this program told me that there was a huge volume of submissions.

Within the guidelines of this program, taxpayers are given an opportunity to avoid criminal prosecution for tax crimes such as tax evasion and tax fraud.

Also, as part of this program, a taxpayer is subject to paying penalties on previously unreported income in foreign bank accounts under guidelines defined earlier this year, in March 2009. These guidelines are tough and expensive, but not nearly as tough or expensive as the sort of penalties a taxpayer would be facing if not working within this program.

A revenue agent with the Internal Revenue Service has agreed to plead guilty to a federal tax fraud charge for filing a personal income tax return that claimed he suffered a loss in a real estate transaction when in fact he realized a substantial profit. (“Revenue agent” is the official title for the people at the IRS who audit tax returns.)

In a plea agreement, Jim H. Liu, 43, of Diamond Bar, Calif., agreed to plead guilty to subscribing to a false tax return — a charge that carries a penalty of up to three years in federal prison.

‘My Gain is Your Loss’ Shenanigan Uncovered and Confessed

Liu admitted he filed a false tax return for the 2002 tax year that improperly claimed a loss on his sale of a property in Pomona. Liu sold the property for a profit of more than $48,000, but he instead claimed a loss of more than $4,200.

The tax loss to the government, as a result of Liu’s filing, was approximately $14,642.88.

If dentist Arlan R. Turley treated his teeth the way the Government alleges he’s treated his tax-filing obligations, he’d have cavities and one heck of a case of bloody, bad gums.

This 60-year-old Arizona man was indicted on two counts of willful failure to file a tax return and 20 counts of willful failure to pay over taxes. Turley operated the East Valley Dental Service in Mesa, Ariz.

The indictment alleges that the charges for failure to file are the result of Turley’s non-filing of his 2002 and 2003 income tax returns. In addition, Turley has not filed an individual tax return for a whole decade: 1997 to 2007.

The charges for failure to pay over taxes arise from Turley allegedly not turning over his employees’ payroll taxes to the government, again and again. (See http://lifelawandtaxes.com/not-just-for-bernie-madoff-or-king-tut-business-owners-build-devastating-pyramids-of-withholding-tax-debt-deducted-from-paychecks-but-not-sent-to-irs/ .)

If convicted, Turley faces up to five years in prison and a fine of up to $250,000.

What do they call it when a business owner withholds payroll taxes from his or her employees’ paychecks, spends that money on other expenses, doesn’t send the withholding tax payment to the IRS, then, does the same thing again, and then again, and then again?

The “again and again” part is called “pyramiding”: the employer is pyramiding its failure to pay one payment period after another, growing the company’s debt to the government astronomically.

Another way to describe it is digging the hole deeper, and deeper. (Recall Bill Clinton’s sensible advice: If you’re in a hole, first thing: stop digging.)

The act of failing to pay to the IRS (actually the U.S. Treasury) is a way to live especially dangerously for business owners, managers, and decision makers at the company. James Bond thinks he’s living dangerously? Feh!

The reason it is so dangerous is: The IRS has the power to hold the owners, managers, and decision-makers at the company personally responsible for the unpaid withholding tax with little more than the stroke of a pen. (This is called the “Trust Fund Recovery Penalty.”)

With this extraordinary power, the IRS can “pierce the corporate veil” with an ease unknown to ordinary creditors. Once it does, this liability is NOT deductible and it is NOT dischargable in bankruptcy. So there is a triple-whammy which can be devastating, and “pyramiding” the debt multiplies the problem.

This triple-whammy is then magnified further by the state tax dept, if the business is in a state which has an income tax; States have similarly huge, extraordinary powers and often the state is even tougher than the IRS.

One has to wonder if the House Ways and Means Committee’s subcommittee on oversight got it right when it told reporters that it could not legally release the names of the companies who received bailout money while owing back taxes, two of which owe more than $100 million each. (See Associated Press article, “Some Getting Bailout Cash Owe Millions In Back Taxes,” in the New York Times on 3/20/2009 A19 col. 6.)

Ordinarily, a taxpayer’s tax information, whether it is an individual or a business, is treated as very private, very secret. In fact, IRS employees can be, and are, fired, criminally charged, convicted, and sentenced for the Unauthorized Inspection of Tax Return Information or Accessing of Tax Account Information.

But, when a taxpayer is late in paying a tax bill, these super-strong privacy rules don’t fully apply anymore.

One of the several extraordinarily powerful tools at the IRS’s disposal for protecting its claim on unpaid taxes and ultimately compelling payment, even from the most unwilling and uncooperative of debtors, is to publicly file a Notice of Federal Tax Lien.

Notices of Federal Tax Lien are filed with public recording authorities – where deeds, liens and UCC documents are filed – all over the country. In many places, that recording authority is the county clerk. In New York City it is the office of the City Register.

Once a Notice of Federal Tax Lien is filed, the unpaid tax debt becomes public information. Anyone can know that a taxpayer has an IRS back tax debt claim against him or her, or, in the case of companies owing north of $100 Million, it. Also, the previously confidential debt shows up on credit reports and public record searches.

And the IRS is not shy about using this tool: it files lots of Notices of Federal Tax Lien. For example, in the last 30 days, in Manhattan alone, the IRS filed 601. The filings for all five boroughs were almost 1900. Based on this, in New York City, the IRS files an average of 89 liens every business day.

While the IRS’s internal procedures manual suggests filing a lien when the past due tax reaches $5,000 or more, the IRS will sometimes file liens on amounts due which are much smaller. Just a month ago, in mid-February, the IRS filed a Notice of Federal Tax Lien against a taxpayer where the past due amount owed is $41.06. This tax was assessed only four months earlier, in October, 2008.

You, me, anyone can now know all about this taxpayer who owes $41.06: that it is a company not a person, its name, its street address (in midtown Manhattan), when the tax debt was assessed and when the lien was filed.

Do you think the IRS might have exercised the same power to publicly file a lien on a $100 million debt, since it did not hesitate to do so on a debt of $41.06?

On the other end of the spectrum, public filings allow us to know that Tiffany and Company – yes, the blue box, “Breakfast at” and Audrey Hepburn people – had a $3,723,680.76 federal tax lien filed against it in August, 2008, and that the lien was released three months later, in November 2008.

If the IRS exercised its discretion to publicly file a Notice of Federal Tax Lien on these bailed-out $100 Million tax debtors, then the House Subcommittee’s position that it is legally barred from revealing their identities is mistaken – the horse is already out of the barn, as President Obama recently said. (Unless the TARP bill or other legislation created some new and additional tax debtor privacy provision, though this seems unlikely, and would be difficult to square with pre-existing public records.)

Considering the size of the tax debts involved here (well over $41.06; well over $5,000), it would seem, without knowing more, that the IRS would likely be quick to file Notices of Federal Tax Lien to help secure it’s interest in collecting these hundreds of millions in unpaid tax. (“Woulda-coulda-shoulda” as Hillary Clinton said, in a different context, a decade ago.)

So, the questions now should be:

• Did the IRS file Notices of Federal Tax Lien on these tax debtor companies which received bailout cash?

• If yes, what law prevents the House subcommittee from releasing these companies’ names? (Probably no law.)

• And, if no law prevents the releasing of these names, how about telling us, in another bold stroke toward “transparency”?

• Finally, if the IRS has opted not to file Notices of Federal Tax Lien on these companies, why not?

In the wake of the unravelling of uber-Ponzi schemer Bernard Madoff’s scam, the IRS has announced new guidance on how it will handle the tax consequences of being a victim of a Ponzi scheme — whether Madoff’s or any one else’s.

Yesterday, March 17th, IRS Commissioner Doug Shulman described the agency’s position in testimony before the Senate Finance Committee:

• The investor is entitled to a theft loss, which is not a capital loss. In other words, a theft loss from a Ponzi-type investment scheme is not subject to the normal limits on losses from investments, which typically limit the loss deduction to $3,000 per year when it exceeds capital gains from investments.

• The revenue ruling clarifies that “investment” theft losses are not subject to limitations that are applicable to “personal” casualty and theft losses. The loss is deductible as an itemized deduction, but is not subject to the 10 percent of AGI reduction or the $100 reduction that applies to many casualty and theft loss deductions

• The theft loss is deductible in the year the fraud is discovered, except to the extent there is a claim with a reasonable prospect of recovery. Determining the year of discovery and applying the “reasonable prospect of recovery” test to any particular theft is highly fact-intensive and can be the source of controversy. The revenue procedure accompanying this revenue ruling provides a safe-harbor approach that the IRS will accept for reporting Ponzi-type theft losses.

• The amount of the theft loss includes the investor’s unrecovered investment – including income as reported in past years. The ruling concludes that the investor generally can claim a theft loss deduction not only for the net amount invested, but also for the so-called “fictitious income” that the promoter of the scheme credited to the investor’s account and on which the investor reported as income on his or her tax returns for years prior to discovery of the theft.

Some taxpayers have argued that they should be permitted to amend tax returns for years prior to the discovery of the theft to exclude the phantom income and receive a refund of tax in those years. The revenue ruling does not address this argument, and the safe-harbor revenue procedure is conditioned on taxpayers not amending prior year returns.

• A theft loss deduction that creates a net operating loss for the taxpayer can be carried back and forward according to the timeframes prescribed by law to generate a refund of taxes paid in other taxable years.
  

In what appears to be a continuing bid to tell taxpayers that in the current economic downturn the IRS “feels our pain,” has become a kinder, gentler government agency and tax collector, and even perhaps that the days of being a “no more Mr. Niceguy” government agency have passed into the days of “No more ‘no more Mr. Niceguy,’” IRS Commissioner Doug Shulman recently reminded taxpayers who may be owed a refund for 2005, but have not yet filed their income tax returns for 2005, to claim that refund by filing their return and to do so quickly to avoid losing it.

This may qualify as a continuing effort in light of Commissioner Shulman’s “I feel your pain” comments, published by the IRS in early January, 2009. See Feb 5, 2009 post in this blog, “IRS to Bail Out Taxpayers?” below.

IRS estimates that there is roughly $1.3 billion in unclaimed refunds for tax year 2005 awaiting more than a million taxpayers around the country.

But time is running out for these taxpayers:  Under the rules, a taxpayer has three years from the original due date of the tax return to file his or her return and so be eligible for the refund. After three years, the obligation to file a return remains, but the taxpayer’s right to collect his refund is forfeited. Applying this to tax year 2005, tax returns were due on April 15th, 2006. Three years from April 15th, 2006 is coming up soon, on April 15th, 2009.

So, not only is April 15th this year the due date for 2008 tax returns, but it is the “drop dead date” for claiming a refund for 2005. After that, no refund, Mr. Bond.

Commissioner Shulman said, “Especially in these tough economic times, people should not lose out on the money that is rightfully theirs.” He added, “People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets.”

According to IRS estimates, about half the taxpayers who can claim a refund would receive more than $581.  IRS estimates that there are approximately 76,800 taxpayers in New York due refunds at a median higher than the national average median of $581 — $639 — and a total amount of possible refunds of $82,994. New Jersey has 41,100 taxpayers due refunds at a median of $646 and a total of $43,761. Connecticut has 23,700 taxpayers due refunds at a median of $659, and a total of $18,234.

When a taxpayer files a return in time to claim a 2005 refund, that refund might be withheld if they also did not file for 2006 or 2007. The refund might also be used to pay off unpaid child support obligations, or past due federal debts like unpaid student loans or tax debts from other years.

Along with these kinder, gentler public service announcements of the Commissioner, taxpayers should not forget that the primary purpose of the IRS is in fact to collect money through taxes to fund the federal government, and that it has enormous powers beyond those of other, ordinary creditors.

The short answer is “3 years.” But, three years from what? I will shortly post a fuller discussion about how much time the IRS has to decide whether or not to audit someone and then do something about it.