Civil War Horses, Con Men and Lois Lerner

I think I have been insulted.

I am reading this morning that the Court of Appeals for the D.C. Circuit is hearing the IRS appeal of the Loving decision.  That decision concerned the recent effort by the IRS to regulate tax preparers, and the IRS lost the case. There were three parts to the IRS effort:

• a unique preparer identification number, called a PTIN (“pea tin”). The PTIN would allow – in theory - the IRS to track which individuals prepared which returns. I say “in theory” because it is not uncommon for larger returns to have two or more preparers and one or more reviewers. Traditionally the highest-ranking last person in the chain is considered the official preparer, but the IRS did not write its regulations that way.

• a competency test. CPAs, enrolled actuaries, attorneys and enrolled agents were exempt, as their credentialing already includes a competency test.

• a continuing education requirement. Tax laws change frequently, so the IRS thought that continuing education would be a good idea. It is.

Here is the rub: where does the IRS get the authority to make these proclamations? I know it sounds a bit quaint to talk about “government of laws rather than of men” in the current political environment, but there are a few sticklers out there who still believe in the concept. One of them was Judge Boasberg in the Loving decision.

Yesterday the IRS trotted out its attorneys, arguing that they have the right to regulate whatever they want under the “Horse Act of 1884.” Folks, that is “18” 84. 

Do you remember the following words?

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

This is the 16^th amendment, creating the income tax and ratified in February 1913. That is “19”13. Which comes after “18”84, for most people. Let’s be blunt here: how can a law from the 1800’s give the IRS any authority over income tax preparers when the income tax was not even created until 1913?

I have to admit, I had to look up the Horse Act of 1884. We must have missed that bright shiny in high school American History. After the Civil War, people brought claims against the U.S. for dead or missing horses. Makes sense, as horses were required to work the farm or for transportation, and their loss would have been keenly felt. Always seeking a vacuum, fraudsters soon appeared to help people press horse claims against the government. Soon all horses were thoroughbreds, and the government was facing more actions than there were horses lost in the Civil War. The government realized they were being scammed by con men and, in defense, starting regulating those people. The government even used the term “enrolled agent,” a term still used today for a class of preparer who has passed a competency examination given by the IRS itself.

So the IRS attorneys are arguing that tax CPAs like me are akin to fraudsters who inflated the value of dead or missing horses in action against the government following the Civil War?

As I said, I think I have been insulted.

I am also reading that Lois Lerner, the former head of the IRS Exempt Organizations Division, is retiring. You may remember that she invoked the Fifth Amendment when appearing before Congress on May 22, 2013. She was the political hack from the Federal Elections Commission who somehow wound up at the IRS reviewing and delaying applications from conservative groups, especially Tea Party organizations, seeking 504(c)(4) status in time for the 2012 presidential election. Good thing she was there too or the election may have gone a different way. She was quite happy to initially throw a few Cincinnati IRS employees under the bus, saying they had gone “rogue.” Later investigation, including e-mails, put a rest to that lie. Congress could have instead spoken with a few practicing tax CPAs, and we could have told them the same thing.  

She has been on “administrative” leave since then, drawing an approximate $170,000 salary. Now she gets to retire. It’s a nice retirement too, as she able to look for another government position and still collect her retirement pay, estimated over $50,000 annually. 

I would love a deal like that. Unfortunately, the IRS thinks of me as a con man.

The Collections Appeal and Pace

This past Tuesday I submitted financial and other information regarding a collections appeal with an IRS officer in California. We have several clients with unpredictable income streams, and this client is one of them. We are pursuing something called a “manually monitored installment agreement,” which allows for changes in an IRS payment plan as one’s income varies. It can be difficult to obtain. In fact, a revenue officer I often work with informed me that this type of agreement was “above his grade.” That comment struck me as odd and is something I intend to follow-up on.

Back to our client. I was concerned as time was running out, and the client did not seem to register the urgency of the matter. I am working within a compressed time period. To her credit, the IRS officer showed patience and goodwill. She was within her rights to be much stricter with me, but she agreed to move the file and hearing back to Cincinnati. I was greatly relieved, as Rick wanted the file here.

“How much more do they want?” “They have everything.” “What are they going to do if I don’t?” These are all common questions. So much so I should just post the questions and answers on my office wall to save time.   

Today let’s talk about this part of IRS representation: the collections appeal. Let’s also talk about Pace v Commissioner, who got himself into collections appeal and perhaps should have been less confrontational and more forthcoming.

Your entry into the IRS will likely be through Examinations. This step is what we consider the “audit”, although these days the whole matter may be handled through the mail. The IRS is becoming fond of computerized matching, for example, as Congress provides it with ever-more tax reporting for anything that you do. Such is the new audit, I guess.

If you owe money your file will be transferred to Collections. Collections will send you a bill, and you will be working with Collections if you want a payment program, a cannot-collect status or an offer in compromise. The problem with Collections is that they are not really interested in the how-and-whys of you getting there, but they are very interested in getting money from you. They can back this up by garnishing your wages, liening your assets, levying your bank account or terminating your installment plan. Collections appeal exists as a safety valve for these more-aggressive collection actions. It takes your file out of Collections and gives it to an appeals officer. You have a chance to present information – geared to writing the IRS a check, of course – to someone who may be less “eager” to separate you from your last dollar at the earliest possible chance.

Perhaps you are talking to the appeals officer about delaying payments while you look for work, about setting up a payment plan, or having the IRS restart a payment plan they decided to terminate. Understandably, that appeals officer is going to want to know your finances. You will be sending him/her a Form 433-A or B, which is a listing of your assets and your earnings and expenses for (at least) the last three months. He/she will also want copies of bank statements as well as of significant bills, like your mortgage or car payments. You may have to send them a copy of your broker statement, for example, if you have a few dollars invested in the market. None of this is surprising. What if you don’t provide what he/she wants? Well, he/she can stop working with you and throw you back into the Collections pool. For you to do this seems self-defeating, doesn’t it? With that, let’s talk about Pace.

Pace operated a chiropractic business through a corporation (Dauntless). Pace fell behind on his 2006 and 2007 taxes. The IRS sent a Final Notice of Intent to Levy.  Pace did the right thing and requested a collection due process (CDP) hearing to discuss a collection alternative. The appeals officer requested a 433-A and B. During this process the officer learns that Pace is associated with two more entities – Achievement Therapeutic Services LLC (Achievement) and Kenneth D. Pace LLC (KDP). The officer requests a 433-B for them, as well as evidence that they are up-to-date on their tax filings. Pretty routine.

Pace provides none of it. He does have an argument. Whereas he is the registered agent for both, he has derived no income from these two entities, and he does not think producing any information regarding them is appropriate.

NOTE: Me? I think I can still play linebacker for the Bengals this upcoming football season.

The collections appeal hearing takes place.  Tell me, if you were the appeals officer, what would you do?

The appeals officer threw Pace back into Collections for their tender mercies, that is what he did. Pace next goes to Tax Court.

My Take: Pace is bonkers. I would have provided the IRS with copies of tax returns for Achievement and KDP, if tax returns existed. If the entities were dormant, then I would have discussed that fact with the appeals officer and asked what he considered a reasonable next step.  By not doing so, the Tax Court decided that Pace was the one being unreasonable.  Being unreasonable, Pace lost his case.

The IRS, Layla, Ludwig Drums and Demutualization

Well, this is not the easiest tax reading I have ever done. I just finished Cadrecha v U.S. The case is like reading a calendar.    

You ever wonder about the difference between a tax attorney and a tax CPA? There are differences in practice. The CPA of course is much more involved with numbers and the attorney is more so with contracts and documents. A big difference is that the attorney can take a case to court. Robert and Cynthia Cadrecha (Cadrecha) could have used an attorney, because the IRS beat on them like a set of Ludwig drums.

This case has to do with a life insurance company demutualization. Demutualization means the life insurance company issues stock. The IRS took the position that any stock received would have a basis of zero; a subsequent sale would therefore be all gain. Sounds like a position the IRS would take. There was a taxpayer who took the IRS to court on this matter (Fischer v U.S.) and won. Cadrecha occurred during this period of time.

Here goes:

4/15/04           Cadrecha files 2003 tax return showing no basis in the stock.

3/20/07           He learns of the Fischer case. Cadrecha mails amended return showing basis in the stock.

3/22/07           IRS receives amended return.

5/10/07           IRS writes letter asking for more information. Cadrecha provides it.

6/26/07           IRS sends letter that it is researching.

8/6/08             Fischer wins case against IRS.

8/13/07           IRS sends letter it fell asleep and will now really start researching.

8/31/07           IRS sends letter saying “fuhgetaboutit” and disallows the amended return.

The IRS, with all its efficiency, tells Cadrecha that they filed the amended return after three years had expired. This is of course incorrect. What happened is that the IRS got the 3/20/07 filing confused with the additional information provided on 5/10/07. Generally speaking, the additional information will be attributed back to the earlier filing.

OBSERVATION: This is why we recommend using certified mail.

NOTE: Something VERY important happens here. The disallowance is on Letter 105C, which includes the following language concerning an appeals or suit:

“The law permits you to do this within 2 years from the date of this letter. If you decide to appeal our decision first, the 2-year period still begins from the date of this letter.”

I believe that Cadrecha, and Cadrecha’s accountant, got mislead by the reason given on Form 105C. Granted, the amended return was filed within 3 years, but the claim was DISALLOWED.  This has significance separate and apart from any reason given and will come back to haunt Cadrecha.

8/31/07           Cadrecha sends a letter to the IRS disagreeing with the “dates” issue.

10/1/08           Cadrecha sends a letter to the IRS asking whether anyone is still alive.

11/3/08           Cadrecha files Form 843 in order to perfect the earlier (3/20/07) claim. (An amended return is a claim).

11/5/08           IRS responds to Cadrecha’s letter of 11/3/08, saying someone is still alive.

12/30/8           IRS – in a blur of motion – responds to the claim filed 11/5/08, saying it will need more time to research and to put the children through middle school.

1/15/09           The IRS writes again, stating that it is forwarding the claim filed 11/3/08 to Austin by the slowest means possible.

6/25/09           Cadrecha’s accountant contacts the Taxpayer Advocate.

12/11/09         Cadrecha’s accountant actually speaks to an IRS employee. She (the employee) explains that the IRS is delaying because it intends to appeal Fischer. She also says that the children are doing well and have started high school.

4/19/10           Cadrecha, in a moment of insanity, writes the IRS.

8/22/10           Cadrecha writes the Taxpayer Advocate imploring it to “PLEASE help.” Johnny Depp is rumored to be in consideration for the movie lead.

4/26/11           Cadrecha receives a letter from the IRS stating that their claim was “being held in suspense” while the IRS was litigating a similar demutualization case in Arizona. The IRS also remarked how the children had grown and were soon to start college.

Anyway, Cadrecha winds up in court. What did the IRS argue? That Cadrecha’s complaint was not filed timely! Can you believe the gall?

The court decided against Cadrecha. The case was not filed timely. Look back above and reread my comment on the 8/31/07 entry. Cadrecha had 2 years to file. Not 2 years and a day or 3 years less a week. He was late.

Is it equitable? Most likely not, but it was the bright-line law.

Is there a moral? Yes. When this issue got played out like Clapton’s “Layla,” Cadrecha needed an attorney. I know, I know. One does not have unlimited money to throw around, and one has to consider whether the amount of tax at issue is worth the additional cost. But Cadrecha needed something that a CPA could not provide: a court filing before the two years ran out.

The IRS Wants More Levy Power

The IRS wants Congress to expand its tax levy authority.

This is a response against the taxpayer protections under the IRS Restructuring and Reform Act of 1998 (RRA). One of the changes required the IRS to provide at least 30 days notice of a levy action, as well as the taxpayer right to appeal such action. The purpose is to slow down collections and allow the taxpayer to propose alternatives or to reiterate information that collections has chosen to ignore.

After enactment of the RRA, the number of IRS levies dropped by approximately 85 percent, from 473,000 for fiscal 1998 to 75,000 in fiscal 2000. This has reversed recently, and there was a 73 percent increase from fiscal 2009 to 2010. During fiscal 2010 the IRS filed approximately 667,000 levies.

The IRS does have some valid arguments. In some circumstances, timing requirements may require multiple levy actions. Some sources of income are difficult to reach and are currently beyond the reach of a continuous levy.

NOTE: A continuous levy remains in effect until cancelled and provides recurrent cash to the IRS. The most common example is a wage garnishment. This is in contrast to a bank levy, which is good for only one instance. Should the IRS want more cash, it has to file another bank levy.

The IRS wants to expand the continuous levy to reach rental income, nonemployee compensation, royalties and fishing boat proceeds.

Then there are questionable IRS arguments. For example, the Treasury Inspector General for Tax Administration (TIGTA) reviewed a sample of 30 cases where the taxpayer appealed a levy action. It found that appeals can be used to delay collection action. Gosh, I could have told them that without a study; it doesn’t mean, however, that the appeal right per se is without merit. In 28 cases Appeals upheld the levy action. The IRS extrapolates this to mean that the appeals protection under RRA is being abused.

Let’s talk about IRS abuses. The RRA protections were not enacted because the IRS was an innocent party. There are cases where the IRS has pursued levies for less than $30.  There are cases of IRS levies without any notification. We presently have a representation client where collections is pursuing more than $20,000 while we simultaneously are reducing that amount by almost 80 percent through a reconsideration. We put in a CDP request to put the brakes on collections and clue them that there is a favorable adjustment coming from exam. Do I even need to comment on IRS inflexibility with an unemployed/underplayed taxpayer who cannot continue a payment plan at the same amount as before being unemployed/underemployed?

Let me clue you in on a tax “secret.” The IRS says it will work with you if circumstances overwhelm your payment plan. However, the IRS keeps a golden key to itself. The IRS can reject a restructuring if one has defaulted on a payment plan. Think about this. I have a client who entered into a payment plan. Circumstances have been difficult, including foreclosure. She has continued her payments to the IRS, although sometimes in smaller amounts than agreed to. She takes pride in having lived up to her obligation. I contacted the IRS to formally restructure the plan to something like the following:

                First three months          $25 per month

                Next three months         $50 per month

                Next three months         $75 per month

               

The IRS refused. Why? Because she “defaulted” on her plan. Now think about this for a moment. My client is held in the same regard as a tax scofflaw who has never paid and has no intention of ever paying. Her default? She reduced her payment because she works for $7.50 per hour and is broke. She did not miss a payment, mind you, only reduced it. To be fair, we will work something out with the IRS, but it is a needless headache for both her and me. I do think it shows a blockheaded attitude at the IRS. Some of us – government employees excluded, apparently – can be fired.

Count me on the “nay” side of any proposal to expand IRS levy authority. Show me some proof of “kinder and gentler” before I board this bus.