The IRS Draws Congressional Attention

The IRS itself has been in the news recently. Whether it is the ham-handed treatment of Section 501(c)(4) political/nonprofit groups or the shadow funding of ObamaCare, the agency has been drawing attention and criticism. Today we are going to talk about two recent studies requested by Charles Boustany (U.S. Rep – LA). He presently serves as the Chairman of the House and Ways Subcommittee on Oversight.

The first report is titled “There Are Billions of Dollars in Undetected Tax Refund Fraud Resulting From Identity Theft.”  It addresses identity theft, which has been the number one consumer complaint with the Federal Trade Commission for 12 consecutive years.

The IRS presently processes returns and issues refunds before receiving the information forms with which to crosscheck. For example, if someone receives his/her Form W-2 and files for a refund in January, the IRS is issuing that refund check before the underlying wage information has been received from the employer, much less integrated into IRS information systems. This weakness has been exploited and has become a virtual cottage industry in certain cities such as Tampa, Florida.

Consider what TIGTA discovered:

·         2,137 returns resulting in $3.3 million in refunds were sent to one address in Lansing, Michigan

·         518 returns resulting in $1.8 million in refunds were sent to one address in Tampa, Florida

·         23,560 refunds totaling more than $16 million were issued to 10 bank accounts;  2,706 tax refunds totaling $7.3 million were issued to a single account

This is real money. TIGTA estimates that the IRS will issue almost $21 billion in identity-theft refunds over the next five years.

TIGTA made several recommendations, including:

·         Taking advantage of the information reporting available to the IRS. Social security benefit information, for example, is available in December - before filing season begins. Whereas this is a fraction of identity fraud, it is a positive step.

·         The IRS uses little of the data from its identity theft cases to develop patterns and trends which could be used to detect and prevent future tax fraud. Examples include whether the return was electronically or paper-filed, how the refund was issued, and, if issued by direct debit, the account number or debit card number receiving the refund.

·         Allow the IRS greater access to the National Directory of New Hires (NDNH). NDNH is a national database of newly-hired employees. It includes an employee’s name and address as well as wage information. By referencing information from prior year tax filings, the IRS could correlate NDNH data to determine whether reported wage reporting and claimed withholding appear fraudulent.

·         Encourage banks and work with federal agencies to ensure that direct deposit refunds are made only to an account in the taxpayer’s name.

·         Limit the number of tax refunds issued via direct deposit to the same bank account or debit card.

NOTE: That recommendation seems obvious.

“Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications”

The second report is disturbing. IRS employees had contacted Congress directly about supervisor misconduct and potential fraud in a program that reviews and verifies individual taxpayer identification numbers (ITINs). Congress then called in TIGTA to investigate.

We should explain that an ITIN is an Individual Tax Identification Number. ITINs were started in 1996 as tax identification for individuals who may have U.S. tax filing requirements but are not eligible for social security.

How can this happen?

·         Consider a German businessperson who invests in and receives income from a Miami shopping mall

·         Consider a Nigerian graduate student attending the University of Missouri (many) years ago with yours truly

·         Consider my brother-in-law’s wife, who is English and married to a U.S. citizen 

An ITIN will allow one to open a bank account and file tax returns. For example, if one’s spouse is English and one lives in England, the spouse will need an ITIN to file a U.S. income tax return. The children – who possibly have never been to the U.S. – will need ITINs to be claimed as dependents on the U.S. income tax return.

OBSERVATION: This is one of the absurd consequences of the U.S. worldwide income tax regime. A U.S. citizen has to file tax returns, even if he/she has lived outside the U.S. for many years, has a family outside the U.S. and has no immediate plans of repatriating to the U.S.

When one finally obtains a green card, one can transfer work and wage information from the ITIN to the Social Security Administration.

One applies for an ITIN by filing a form (Form W-7) and attaching supporting documents to verify one’s identity and foreign status. A passport will satisfy both the identity and foreign status requirements. The IRS will otherwise accept a combination of documents, including a foreign driver’s license, a foreign birth certificate, a foreign voter’s registration, a visa or other IRS-listed documents. The process usually takes place through the mail, which means that no US-agency employee actually sees the person applying for the ITIN.

Unfortunately, ITINs have been swept-up in political battles. For example, there is fear that the IRS will share this information with Immigration, although the IRS is not permitted by law to do so. This may discourage people from obtaining ITINs, so the argument goes. On the other hand, there are states that will allow one to obtain a driver’s license solely with an ITIN, which seems a perversion of its intended purpose.

TIGTA goes into the IRS to investigate the complaints. Here are some of its findings:

·         IRS management is not concerned with addressing fraudulent applications in the ITIN Operations Department because of the job security that a large inventory of applications to process provides. Management is interested only in the volume of applications that can be processed, regardless of whether they are fraudulent.

·         IRS management has indicated that no function of the IRS, including Criminal Investigation or the Accounts Management Taxpayer Assurance Program, is interested in dealing with ITIN application fraud.

·         IRS management has:

o    Created an environment which discourages tax examiners responsible for reviewing ITIN applications from identifying questionable applications.

o   Eliminated successful processes used to identify questionable ITIN application fraud patterns and schemes.

o   Established processes and procedures that are inadequate to verify each applicant’s identity and foreign status.

Good grief! The IRS disbanded an ITIN team that was having too much success, countered by provided virtually no training to new hires and transfers and put negative evaluations in overly-eager reviewers’ files.

TIGTA made nine recommendations in this report. The IRS agreed with seven and has already announced plans to implement interim changes. One has caused quite the consternation in the immigrant community by requiring copies of original documents with ITIN applications.

OBSERVATION: Let’s be fair here: would you be comfortable sending original copies of anything to the IRS? Assuming you can find that birth certificate from the mother country, how are you going to replace it when the IRS loses the thing?

What Does Insolvency Mean To The IRS?

Shepherd v Commissioner is a pro se case before the Tax Court. “Pro se” means that the taxpayer is representing himself/herself, without a professional. Technically that is not correct, as a taxpayer can go into Tax Court with a professional and still be considered “pro se.” This happens if the professional (say a CPA) has not passed the examination to practice before the Court. The CPA can then “advise” but not “practice,” and the taxpayer is considered “pro se.”

Today we will be talking about cancellation-of-debt income. Tax pros commonly refer to this is “COD” income. For many years I rarely saw a COD issue. In recent years it seems to be endemic. There are two common ways to generate COD: a home is foreclosed or a credit card is settled. If one pays less than the balance of the debt, the remaining balance is considered to be income to the debtor.

How can that be, you may ask. Let’s use an example. Say you go to your bank and borrow $50,000. When the loan is due, you cannot afford to pay in full. The bank agrees to accept $36,000 as full payment on the loan. From the IRS’ perspective, you received and kept a net $14,000. Perhaps you bought a car, went on vacation, or paid for a kid’s college, but you had an accession to wealth. The IRS considers the $14,000 to be income to you.

There are exceptions, and Shepherd involves the “insolvency” exception. This is different from the bankruptcy exception. Granted, in both cases you are likely insolvent, but for the insolvency exception you do not have to file with a bankruptcy court.

Let’s quickly take a look at the wording for insolvency in the tax code:

   108(d)(3) INSOLVENT.— For purposes of this section, the term “insolvent” means the excess of    liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer's assets and liabilities immediately before the discharge.

An easy way to understand insolvency is the following formula:

·        Add the fair market value of everything you own, then

·        Subtract everything you owe

If the result is negative, you are insolvent. You owe more than you own. You are negative or upside-down. There are special rules for assets such as a pension, but you get the concept.

The IRS says that – if you are insolvent – then COD income not be taxable to you to the extent you are insolvent. Let’s use numbers to help understand this:

·        You own $160,000

·        You owe $175,000

·        Visa forgives $22,000

Your COD income is $22,000 (what Visa forgave).

Your insolvency is $15,000 (175,000 – 160,000).

Therefore $7,000 of your COD income (22,000- 15,000) will be taxable to you. The rest is not taxable.

The tax law requires you to do the calculation of what you own and what you owe as of the date the debt is forgiven. It is not two years later or 18 months before. Remember: this is tax law not a tax suggestion.

Let’s swing over to Shepherd. He and his wife lived in New Jersey and owed Capital One Bank approximately $10,000. In 2008 they settled for approximately $5,500, leaving COD income of $4,500.

The Shepherds claimed insolvency and did not report the $4,500 as 2008 income. The IRS looked into it and found that the key to the insolvency calculation was the value Shepherd attached to two houses.

The first was his beach house. Shepherd received a property assessment of $380,000 for the 2010 tax year. He appealed the assessment, claiming a value closer to $340,000. He presented this as evidence before the Court. The Court had two immediate issues:

·        There is a long-standing tax doctrine that the value of property for local tax purposes is not determinative of fair market value for federal income tax purposes. This is the Gilmartin case, and it clearly established the tax code’s preference for an appraisal over property tax bills.

·        Shepherd did not present to the Court the methodology, procedures or analysis, including comparable sales, for thinking that the value was closer to $340,000. At that point it was just an opinion, and the Court was not bound by his opinion.

The Court pointed out that these events took place two years after the debt forgiveness and said fuhgeddaboudit to Shepherd’s valuation of the beach house.

The second was his principal residence.

·        Shepherd showed the Court a tax bill. The Court duly dismissed that under the Gilmartin doctrine.

·        Shepherd applied for a loan modification in 2011. Chase Home Finance showed a value of $380,000 in a modification letter. The Court wasn’t buying into this, noting that Chase’s letter did not show any analysis or procedures used in arriving at value, such as comparable sales. That is, it was not an appraisal. Oh, and by the way, the letter was three years after the debt discharge.

What is a tax pro’s take? Folks, Shepherd had virtually no leg to stand on. How can one read the tax code stating “immediately before the discharge” and reason that three years later – and after one of the worst housing markets in U.S. history – would constitute “immediately before”? This is simply not reasonable. You are going to lose this if challenged by the IRS. Shepherd’s position is so preposterous that I suspect he was truly “pro se” and did not have a professional, either when he prepared his return or when he was presenting his arguments in Court.

What Is A Quintile?

A quintile is one of five equal groups into which a population can be divided. If the top 20% of taxpayers pay 94% of the income tax, then isn't it fair that they receive 94% of any tax breaks? Isn't it unfair if they don't?

The Olympics As A Tax Haven

As you probably know, the summer Olympics began last week. For a while, east London will be the newest tax haven going.

The basic UK individual income tax rate is 20%, although incomes over 150,000 pounds are taxed at 50%.  The basic corporate tax rate is 24% and a bargain compared to the U.S. corporate rate of 35%.

The UK does have a VAT of 20%, so it is unfair to compare only income taxes.

The “London Olympic Games and Paralympic Games Tax Regulations 2010” exempt the earnings of Olympic athletes and foreign nationals working on Games –related activity, such as judges, journalists and representatives of sports bodies. The Regulations do not exempt construction workers at the sites, nor do they exempt UK residents. The exemption is solely for nonresidents.

The exemption also extends to non-resident companies doing business at the Olympic sites. There has been pressure on companies to forego the tax holiday. Both McDonald’s and Coca Cola have declined the tax break, while General Electric said that all Olympic activities are being done through resident companies and therefore are not eligible for the tax holiday.

What was the reason for this break?

I am unsure about the corporate tax holiday, but the individual tax holiday is easy to understand. The UK’s general tax rule is to tax a proportion of an athlete’s earnings. The proportion is the number of UK appearance days to total annual appearance days. As an example, say a tennis player competes at the Olympics for a week and for 35 days in total during 2012.  The general rule is that 20% of the tennis player’s earnings would be subject to UK tax. That may or may not be fair. The general rule assumes that appearance earnings are proportional.

But it gets worse. The UK will tax both the athlete’s performance and endorsement income. Take someone with significant endorsement income – say Usain Bolt – and this can get expensive. It is the reason Usain Bolt had not previously set foot on a British track since 2009. Golfer Sergio Garcia has admitted to limiting his British appearances because of this tax. It is also the reason that Wembley Stadium lost its bid for the 2010 Football (that is, soccer) Champions League. 

So, HMRC waived the rule and created a temporary tax haven for the Olympic Games.

There has been controversy over the tax holiday, with pressure groups arguing that the holiday was unnecessary if not unjust. Just and unjust are slippery terms, but the general argument is that for-profit activities – whether corporate or athlete – should pay whatever taxes the host country deems to implement. The host country should be able to recoup the cost of its Olympic facilities, for example. Seems reasonable. Tax holidays however have become a factor in the IOC decision process. The unwelcome fact is that east London may not have had the Olympics without the holiday.

Should you be going to England during the first week of August, you may want to consider the Bristol Tax Avoidance Olympics on August 4^th. In the spirit of protest, the events will include:

·        Cooking the books

·        Jumping through the tax loopholes

·        Avoiding the taxman

·        Hide (your profits) and seek

Heh.

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.

Gifting And The Rest of 2012

I met with a client last week who has a child with special needs. His daughter has a syndrome I cannot remember, except that it is quite rare and was named after a physician who practiced at Children’s Hospital here in Cincinnati. He is concerned about her welfare, especially after he passes away. We wound up talking about gifting and expected changes in gift tax law.

Let’s talk about the gift tax today.

There is an opportunity to gift up to $5,120,000 without paying gift tax, but this expires at the end of 2012. If you are married, then double that amount (10,240,000). If you exceed that amount, then gift tax is 35%. The $5,120,000 is set to drop to (approximately) $1,360,000 in 2013, and the 35% rate is slated to increase to 55%. If you are in or above this asset range, 2012 is a good time to think about gifting.

Here are some gifting ideas to consider:

(1)   Use up your $13,000 annual exemption per donee. This is off-the-top, before you even start counting. If you are married, you can have your spouse join in the gift, even if you made the gift from your separate funds. That makes the exempt gift $26,000 per donee.

(2)   Let’s say that gifting appeals to you, but you do not want to part with $5,120,000. Perhaps you could not continue your standard of living. I know I couldn’t. One option is to have one spouse gift up to $5,120,000 without gift splitting. This preserves the (approximately) $1,360,000 exemption for future use by the other spouse.

(3)   By the way, gifting between spouses does not count as a taxable gift. Should one spouse own the overwhelming majority of assets, then consider inter-spouse gifting to better equalize the estates. This is more of an estate planning concept, but it may regain interest if the estate tax exemption decreases next year.

(4)   Consider intrafamily loans. The IRS forces you to use an IRS-published interest rate, but those interest rates are at historic lows. For example, you can make a 9-year loan to a family member and charge only 0.92% interest. Granted, the monies have to be repaid (or gifted), but the interest is negligible.

(5)   Consider a family limited partnership. We have spoken of FLPs (pronounced “flips”) before. A key tax benefit is being able to discount the taxable value of the gift for the lack of control and marketability associated with a minority interest in the FLP.

(6)   Consider income-shifting trusts to move income and asset appreciation to younger family members. A common use is with family businesses. Say that you own an S corporation, for example. Perhaps the S issues nonvoting stock and you transfer the nonvoting stock to your children using Qualified Subchapter S trusts.

(7)   Consider a grantor retained annuity trust (GRAT). With this trust, you receive an annuity for a period of years. The shortest period I have seen is 2 years, but more commonly the period is 5 or more years. The amount you take back reduces the amount of the gift, of course, but not dollar-for-dollar. I am a huge fan of GRATs.

(8)   Consider a qualified personal residence trust (QPRT, pronounced “Q-pert”). This is a specialized trust into which you put your house. You continue to live in the house for a period of years, which occupancy reduces the value of the gift. If you outlive that period then you can continue to live in the house, but you must begin paying fair market rent to the trust.  I have seen these trusts infrequently and usually with second homes, although I also can see a use with a principal residence in Medicare/Medicaid planning.

(9)   Consider a life insurance trust (ILIT, pronounced “eye-let”). This trust buys a life insurance policy on you, and its purpose is to keep life insurance out of your estate. You might pay the policy premiums on behalf of the trust, using your annual gift tax exclusion. This setup is an excellent way to fund a “skip” trust, which means the trust has beneficiaries two or more generations below you. The “skip” refers to the generation-skipping tax (GST), which is yet another tax, separate and apart from the gift tax or the estate tax.

(10)  Consider a dynasty trust if you are planning two or more generations out. This technique is geared for the very wealthy and involves an especially long-lived trust. It is one of the ways that certain families (the Kennedy’s come to mind) that family wealth can be controlled for many years. A key point to this trust is minimizing or avoiding the generation-skipping tax (GST) upon transfer to the grandchildren or great grandchildren. The GST is an abstruse area of tax law, even for many tax pros.

OBSERVATION: You could incur both a gift tax and a GST tax. That would be terribly expensive and I doubt too many people would do so intentionally.

Although not frequently mentioned, remember to consider any state tax consequence to the gift. For example, does the state impose its own gift tax? If you live in California, would the transfer of real estate reset the assessable value for property taxes?

It is frustrating to plan with so much uncertainty about tax law. We do know that – for the balance of this year – you can gift over $5 million without incurring a gift tax liability. That much is a certainty. If this is you, please think about this window in combination with your overall estate plan. This opportunity may come again – or it may not.

Tarpoff, Payroll Taxes and Responsible Person Penalties

John Tarpoff was the head cattle buyer at Gateway Beef, LLC (Gateway). Gateway was formed in 2003 by Gateway Beef Cooperative and Brach’s Glatt Meat Markets (Glatt). Glatt was owned by Sam Brach (Brach).  The co-op sold cattle to Gateway, which then produced kosher beef for Glatt.

In addition to buying cattle, Tarpoff did the following:

·         Filed Gateway’s articles of incorporation, signing as “organizer’

·         Was a signatory on two Gateway checking accounts

o   When opening the accounts, he presented company resolutions which he signed above lines that said “secretary” or “member.”

·         With the resolutions he could open accounts and withdraw funds

Brach was the wallet and financed Gateway. The bookkeeper, Marsha Caughron (Marsha), handled accounts receivable and payable, payroll, and some sales. She received all the mail, including bills and any notices from the IRS. She would print checks, attach the bills and initially send them to Brach. He would sign some, sometimes not all, and send them back. Brach was pretty strict that nothing could be paid without his permission.

Procedures changed and Tarpoff started signing all Gateway checks from January to May 2004 and most checks after that through July 2004. Once again, he signed nothing without Brach’s permission. Some of the checks he signed were for delinquent 2003 taxes, although he could not easily recognize them as such. He would review invoices to be sure they matched the check, but that was pretty much all. He did not even know whether Gateway had sufficient funds to cash the checks. Remember: he was the head cattle buyer, not the accountant.

Tarpoff explained to the Court:

            Whatever checks were given to me, I would look at them, glance at them and sign them.”

He could not recall ever refusing to write or sign a check.  

Gateway was a shooting star, living a short life and burning through a lot of money. At some point, Brach stopped paying the payroll taxes. The bookkeeper, Marsha, would calculate the taxes, attach checks and send them to Brach. Brach would not sign or return the checks. When she pressed, he told her to speak with his accountant, Michelle Weiss. Brach also instructed Marsha to fax all IRS notices to Michelle. Tarpoff was unaware of these faxes.

Tarpoff wrote at least 10 checks that bounced. One (for approximately $49,000) must have been pretty important, as he tried to get it paid. Meeting with resistance, he paid it out of personal funds. He said this was the only bad check he was aware of. He was never repaid his $49,000 and ultimately had to refinance his home because of it.

Gateway finally folded in July 2004. Tarpoff left. After learning that some vendors had not been paid, he suspected shenanigans with the payroll taxes. He was informed that Brach had not paid the taxes and the bookkeeper (Marsha) told him she had been receiving IRS notices. That was the first he learned of the matter.

The IRS came in. They wanted the payroll taxes. They also wanted almost $67,000 in penalties from Tarpoff for quarters March and June, 2004.

The IRS said that Tarpoff was responsible because:

·         He held himself out as secretary or manager.

·         He attended board of directors meetings.

·         He was the organizer of Gateway Beef, LLC.

·         He could open accounts and withdraw funds.

·         He signed over 1,800 checks.

·         He could hire and fire employees.

·         He could refuse to sign checks.

·         He invested approximately $50,000.

·         He knew the government had not been paid.

·         Even if he did not know the government had not been paid, he could have deduced it. He had paid payroll taxes in the past (at another company), and he signed enough checks to realize that all taxes had not been remitted.

·         The company was losing money; he was in a position to know and review the books and records to be sure taxes were being paid.

·         He used monies to pay creditors ahead of the government

                       

The Court held the following:

·         Other than puffery, the only evidence of officer status was preprinted checks. He did not write any business title himself.

·         He never attended a board of directors meeting.

·         He only looked at the checks and invoices to see that they matched. He could not pay anything without Brach’s permission.

·         He could interview prospective employees and he handled relations with the union, but he could not hire or fire without Brach’s permission.

·         Perhaps he could have refused to write checks, but Brach would have signed instead. Brach had previously signed checks.

·         He did not “invest” $50,000. To the contrary, he had so little control he could not get his own money back.

·         He did not know about the payroll issues and did not receive IRS notices. They went instead to the bookkeeper and then to Brach’s accountant.

·         Saying that he knew in general about an employer’s responsibilities over payroll taxes is not the same as saying he willfully and consciously failed to remit Gateway taxes.

·         There was no evidence he knew the company was losing money, and he did not have authority to look at the company books.

·         He paid creditors ahead of the government because he did not know about the payroll taxes until after he left Gateway.

Tarpoff finally won, but in Court and after much time and expense.

I am curious why the IRS did not go after Brach. From reading the case it seemed quite clear that he had more control than Tarpoff. The IRS thought they saw the fact pattern they like: looks like an officer, makes business decisions, pays bills, writes checks, decides who gets paid, “in the loop” enough to know that the IRS is getting ignored.

From what I see Tarpoff was in a terrible position. He was associated with a money pit, had responsibility but no authority, was intimidated by a boss (Brach), reached into his own wallet (I can only imagine he was preserving his business reputation) and lost the money, and at the end was hounded by the IRS. Frankly, I am cynical about Brach’s behavior in this matter, as I sense that Tarpoff was set-up as a “fall guy.”

If there was a truck or dog or past girlfriend in the story, one could write a country song.

Seriously, be very careful if you have some of the “sexy” fact patterns the IRS likes and you are somehow associated with payroll at a struggling company. The IRS has a track record on this issue. You do not want to run on this track. In some areas you can work with the IRS. This is not one of them.