Larry's Tax Law

IRC § 6656(a) provides, in the case of any failure to timely deposit employment taxes, unless the failure is due to “reasonable cause and not due to willful neglect,” a penalty shall be imposed.  The penalty is a percentage of the amount of underpayment.

• • 2% for failures of five (5) days or less;

• • 5% for failures of more than five (5) days, but less than 15 days;

• • 10% for failures of more than 15 days; and

• • 15% for failures beyond the earlier of:  (i) 10 days after receipt of the first delinquency notice under IRC § 6303; or (ii) the day on which notice and demand is made under IRC §§ 6861, 6862 or 6331(a)(last sentence)(jeopardy assessment).

In addition to the “reasonable cause” exception contained in IRC § 6656(a), there are two other means by which taxpayers may avoid the imposition of the penalty.

1.  Secretary has authority under IRC § 6656(c) to waive the penalty if:

• • The failure is inadvertent;

• • The return was timely filed;

• • The failure was the taxpayer’s first deposit obligation or the first deposit obligation after it was require to change the frequency of deposits; and

• • The taxpayer meets the requirements of IRC § 7430(c)(4)(A)(ii) [submits a request within 30 days and comes within certain net worth parameters].

2.  The Secretary has authority under IRC § 6656(d) to waive the penalty if:

• • The taxpayer is a first time depositor; and

• • The amount required to be deposited was inadvertently sent to the Secretary instead of the appropriate government depository.

As the exceptions are limited in application, most taxpayers seeking abatement of the penalty are required to pursue the “reasonable cause” exception.

Acts of dishonesty can cost a tax practitioner his or her ability to practice before the IRS.  Charles M. Edgar (“Edgar”), formerly a licensed CPA and attorney in Massachusetts, recently learned this lesson.

On May 1, 2014, the Service issued a news release (“IR-2014-58”), announcing the disbarment of Edgar.  While the saga of Edgar is long and somewhat convoluted, it illustrates a significant point—failure to act honestly in matters before the IRS constitutes a violation of Circular 230.  It will cost you severely.

Background 

The Secretary of Treasury has express authority to regulate practice before the IRS, including the power to suspend or disbar an individual from practice before the Service for failing to comply with Circular 230.  In such instances, the practitioner must be provided notice and an opportunity for a hearing before an administrative law judge.

Circular 230 grants the Director of the Office of Professional Responsibility authority to bring proceedings to suspend or disbar practitioners from practice before the Service.  Generally, an administrative law judge, not the Office of Professional Responsibility, determines the appropriate sanction, if any, taking into consideration all relevant facts and circumstances.

Circular 230 specifically provides that a practitioner may be sanctioned for giving “false or misleading” information to the Treasury or any officer or employee thereof.  For this purpose, “information” means any facts or statements made in testimony, on federal tax returns, financial statements, and other documents or statements (written or oral).

Circular 230 also provides that a practitioner may be sanctioned if he or she is disbarred or suspended from practice as an attorney, CPA, PA, or actuary.

On April 9, 2014, Oregon Governor John Kitzhaber signed into law House Bill 4138 (“HB 4138”).  Effective June 8, 2014, the methodology by which an “Interstate Broadcaster” apportions its business income for purposes of the Oregon corporate excise tax changes in at least two (2) ways:

           1.        Method of Apportionment.  Prior to June 8, 2014, an Interstate Broadcaster included in the numerator of the “sales factor” gross receipts from broadcasting in the ratio that its audience and subscribers located in Oregon bear to its total audience and subscribers located within and without Oregon.  On or after June 8, 2014, Interstate Broadcasters will no longer use this method of apportionment.  Rather, they will include in the numerator of the “sales factor” only those gross receipts from customers (i.e., advertisers and licensees) that have their commercial domicile in Oregon, or (in the case of individuals) who are residents of Oregon.

            2.        Definition of Interstate Broadcasters.  HB 4138 amends the definition of “Interstate Broadcaster” to include anyone engaging in the for-profit business of broadcasting to persons located within and outside of Oregon.   Prior law referred to broadcasting to subscribers or to an audience.  I am not sure this change to the law is significant other than it reduces the verbiage by four (4) words.

As the Chair of the Oregon Tax Institute (OTI), I would like to invite you to the 14^th Annual Oregon Tax Institute scheduled for June 5 & 6 in Portland, Oregon.  We have grown the OTI from a local tax forum into a preeminent tax institute for both tax attorneys and CPAs.  Our topic coverage and faculty this year are fabulous and each one of our speakers is a nationally recognized expert in tax law.  This year’s OTI will be on par with the best tax institutes in the country.      

I hope you will join us in June and I encourage you to sign up for OTI as soon as possible.  Also, please feel free to share this information with your colleagues.

Best,

Larry

On March 18, 2014, the Internal Revenue Service announced that one of its employees had taken home a computer thumb drive containing unencrypted data relating to 20,000 agency workers.  The employee then plugged the thumb drive into an unsecure home computer network.  While the thumb drive did not contain any data relating to persons outside the Internal Revenue Service, it still put 20,000 individuals at risk of theft of identity and/or financial assets.

Commissioner John Koskinen described the data breach as an “isolated event.”  Isolated or not, his statement likely does not give any solace to the 20,000 affected IRS workers.  This data breach may have been narrower in scope than the recent Target Corp. data breach, but it nevertheless illustrates how vulnerable we are to data breaches and potential theft of identity and/or financial assets in this electronic era.

We have to constantly safeguard the personal information we receive from our clients, as well as our own personal information.   Loss of client information could easily lead to liability.

On March 10, 2014, the Internal Revenue Service (“Service”) issued Notice 2014?17 (“Notice”).  The Notice focuses on the tax treatment of per capita distributions made to members of Indian tribes from funds previously held in trust by the Secretary of the Interior and which were derived from interests in trust lands, trust resources and/or trust assets.

The Department of Interior (“DOI”) is responsible for holding these trust funds on behalf of federally-recognized tribes and certain individual Indians who have an interest in trust lands, trust resources, or trust assets.  The Office of Special Trustee within the DOI is tasked with the responsibility of managing these funds.

Prior to 1983, the DOI made per capita distributions of the trust funds directly to the members of the tribes.  In 1983, pursuant to the Per Capita Act, however, tribes were given authority to receive the trust funds and hold them in tribal trust accounts for subsequent per capita distributions to members.  So, now the DOI can distribute the trust funds to the tribes who, in turn, make the per capita distributions to members.

The law appears fairly clear in that per capita distributions of these funds from the DOI to tribal members are excluded from gross income.  The issue, following the enactment of the Per Capita Act, is whether per capita distributions received by members from their tribes are likewise excludable from gross income.

A California couple was recently walking their dog when they noticed a rusty tin container protruding from the soil next to a tree in their garden. Upon investigating the matter, they discovered several tin cans buried in the soil. The cans contained 1,400 gold coins. The coins, which are said to be in mint condition, date back to the 19th century. Experts have placed a preliminary value on the coins of more than $10 million. For obvious reasons, the couple is keeping their identity and the location of their home out of the media.

It appears the couple is legally entitled to retain the treasure trove. A law professor from the University of North Carolina, John Orth, recently told TIME Magazine, because the coins were found on the couple’s own property, they will likely be able to retain them.

Like the winner of a lottery, the California couple will be required to declare their new fortune as gross income for income tax purposes. This is not the first time a person has been faced with good fortune and a corresponding tax bill.

In Cesarini v. U.S., 23 AFTR 2d 69-997 (Northern District of Ohio, 1969), a couple purchased a piano in 1957 for $15. In 1964, while cleaning the piano, they discovered almost $4,500 in U.S. currency.

Following up on my summary of Congressman Dave Camp's discussion draft of the Tax Reform Act of 2014, I had the opportunity to discuss the subject with Colin O'Keefe of LXBN. In the brief interview, I describe some of the proposed tax provisions that will impact individual taxpayers and corporate taxpayers.

On March 3, 2014, the Internal Revenue Service published Announcement 2014-13 (“Announcement”).  The Announcement sets forth the disciplinary actions the Office of Professional Responsibility (“OPR”) recently took against practitioners.

The OPR is responsible for interpreting and applying the Treasury Regulations governing practice before the Internal Revenue Service (commonly known as “Circular 230”).  It has exclusive responsibility for overseeing practitioner conduct and implementing discipline.  For this purpose, practitioners include attorneys, certified public accountants, enrolled agents, enrolled actuaries, appraisers, and all other persons representing taxpayers before the Internal Revenue Service.

In essence, Circular 230 sets forth the “rules of the road” for tax practice before the Service.  Circular 230 cases generally revolve around a practitioner’s fitness to practice.

According to an article published by Kristi Eaton of the Associated Press (“AP”) on February 20, 2014, NBA star Kevin Durant filed a lawsuit against his former accountant, Joel Lynn Elliott, CPA, for alleged mistakes made in the preparation of income tax returns.  As a result of the mistakes, Durant alleges he will have to amend certain income tax returns, pay additional taxes, and possibly be subjected to penalties.

 The lawsuit, filed in California, where CPA Elliott practices accounting, alleges that the accountant made numerous errors in the preparation of Kevin Durant’s income tax returns, including deducting as business expenses the costs of personal travel and the costs of a personal chef.  According to the AP, the complaint provides with respect to the travel expenses:  “In preparing a client’s tax returns, a reasonable prudent accountant would have conducted a basic inquiry and sought documentation to confirm that each travel expense for which a deduction was recorded was truly business related.” 

As a general proposition, if a tax return preparer gives a client incorrect advice about the deductibility of certain expenses or mistakenly includes non-deductible expenses on the client’s tax return, what are the client’s damages? The taxes, the interest on the underpayment of taxes, the penalties and/or the cost to amend the tax return?   If the client ends up engaging a new preparer to amend his or her tax return, and pays the tax, interest on the underpayment of taxes and penalties, it seems logical the preparer could be liable for the cost of amending the returns and the penalties.  The client owes the tax; nothing the preparer did likely changes that conclusion.  Unless the client would have refrained from incurring the non-deductible expenses in the first place had he or she been given a correct recitation of the tax laws, how can the preparer be liable for the tax?   Interest is a bit trickier.  Since the client got the use of the money (from the time the taxes were originally due until actually paid), one can argue the preparer is not liable for the interest.  Assuming the preparer gave incorrect advice or mistakenly included non-deductible expenses on the client’s tax return, he or she will likely be liable for the cost of amending the tax return and the penalties.  Obviously, there may be facts that would cause a court to rule differently.