Welcome to TaxView with Chris Moss CPA Tax Attorney

Have you thought about locking in your record high 2016 stock market capital gains and perhaps offsetting against other current or prior year business investment losses in 2016? Sounds like a good strategy but be careful. If you have investment gains offsetting business losses in 2016, as you may be in store for a direct head on collision with the IRS and the Tax Reform Act of 1986 during an IRS Passive Loss Audit commencing a few years after you file your 2016 tax returns. The journey to disaster starts off innocently enough. You sold some stocks in June 2016 to lock in gains for a $10M long term capital gain and use the proceeds to purchase a small retail shopping center for the same price in July of 2016. You think about structuring the deal so that the losses from the first year of operations in 2016 at the shopping center could offset your 2016 capital gains from the sale of stocks. You never bothered to retain a tax attorney to create a tax plan because as you see it you have a no brainer zero tax due. You believe that a buy and sell for $10 Million equals a full and complete offset come April 15 2017; but perhaps not so fast says TaxView, because the offset is in great danger. There are land mines ahead that seem to explode at the worse possible moment with an IRS Passive Loss Audit usually years later perhaps commencing in 2020.. So if you are interested in how the IRS could dramatically change even your best tax plan for offsetting gains and losses, stay with us on TaxView with Chris Moss CPA Tax Attorney to see how the Tax Reform Act of 1986 makes your no brainer into a brain strainer and a tax disaster for you the unfortunate taxpayer victim of the creation of Section 469 and the dreaded IRS Passive Loss Audit.
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To get a better idea of the catastrophe ahead, first let’s all take a short trip back to the source of confusion to Washington DC. Fasten up your tax plan as we turn back the clock to 1984 landing us right in the middle of the center table at the DC downtown Palm over at 1225 19th Street. Dan Rostenkowski (House Ways Means) and Bob Packwood (Senate Finance) have gotten together to finalize some last minute provisions of the soon to be signed by President Ronald Reagan Tax Reform Act of 1986. Legendary DC Palm manager, who is still there today, Tommy Jacomo spots us immediately with a great table. We hear Rosti roar over the boisterous dinner crowd to Bob: You personally have quite a large portfolio in stocks and bonds. Would you really consider interest and dividends “positive” income? Rosti, says Packwood, you know I don’t like that word “positive” taken in this context. Besides, we can’t really tell the average American taxpayer that the wealthy making dividends and interest are working as hard as they are with “positive income”. Let’s just go with this term “Portfolio”. It bridges the gap between those darn “passive” tax shelters and the American W2 worker. I say we treat these items like positive income similar to a salary except it would not be subject to self-employment tax like salary, but call it “portfolio” not ordinary income. In other words we tell America that their stocks and bonds are…well like working 40 hours a week for them as their “portfolio” not subject to social security withholding. Bob, says in disbelief,  Rosti, you have got to be kidding, that is really dumb, really stupid… but you know, comparing portfolio to W2 earnings except without social security withholding, is so ridiculously outrageous it might just work. See Joint Committee on Taxation, page 209-213 which eventually morphed into IRS Code Section 469 Passive Loss Rules.

Agree or disagree with how this imaginary conversation might have unfolded that night in 1984, the fact is that Section 469 prohibits the offset of “portfolio” gains or losses and regular W2 income against “passive” but not "active"gains all losses.. In order to see the bizarre consequences of how these two opposing types of gains and losses can interact, let’s head over to US Tax Court just a five minute cab ride from the Palm over to Capitol Hill to survey a 2000 case More v IRS 115 T.C. No 9 More was an independent managing underwriter as part of a syndicate for Lloyds of London. In order to be accepted by Lloyds More had to demonstrate his ability to cover potential losses of his syndicate usually by posted a letter of credit. In 1988, More transferred his personal stock portfolio to a brokerage account at Bank Julius Baer (BJB), a London-based bank. During 1992 and 1993, petitioner underwrote £500,000 of Lloyd’s premiums which were secured by a letter of credit from BJB in the amount of £150,000. The policies written by More did in fact incur losses and More cashed in his stocks at a large gain to cover those losses as required by his letter of credit. More reported his losses and gains on his tax returns so that each offset the other. The IRS audited Moore, and disallowed all the losses, arguing “portfolio” income could not be offset against “passive” income. Moore appealed to US Tax Court.

Judge Vasquez in More writes a very short 16 page jam-packed with Section 469 Opinion. The Court then confirmed that Congress enacted passive loss regulations “to curb expansion of tax sheltering”. Judge Vasquez further noted that IRS regulation 469-2T makes an exception to the general rules regarding disposition of More’s stocks at a gain. Specifically, gross income derived in the ordinary course of a trade or business includes “income from investments made in the ordinary course of a trade or business of furnishing insurance or annuity contracts or re-insuring risks underwritten by insurance companies” The Court notices that More’s attorney, Louis B. Jack, did not refute or address this at all and was silent on the reason why More acquired the stock. If More could have shown that he primarily created this portfolio as a way to get into the insurance business and not as an investment More wins IRS loses. Unfortunately for More, no evidence was presented to the Court on when his investments in stocks turned primarily to assist More in keeping his job at Lloyds. I don’t know about you all, but it seemed More’s transfer to a brokerage account back in 1988 was primarily to show sufficient assets so he could work at Lloyds. Nevertheless, since More did not refute the Government’s argument leaving the Court no choice but to hold that More’s stocks were primarily created for investment and not for the convenience of Lloyds. Government wins, More loses.

So to win with any of your offset losses in 2016 make those losses bullet proof from the IRS Passive Loss audit and go with a fact pattern to prove that your losses were active ordinary or portfolio, just like Jose and Maria Lamas did in US Tax Court Lamas vs IRS March 25, 2015. The facts are simple: Mr and Mrs Lamas incurred substantial losses from Shoma Development Corp and Greens at Doral LLC in 2008.  Lamas carried back their losses to 2006 resulting in a refund to Lamas of over $5 Million. Unfortunately, years later IRS audited and disallowed the losses claiming the losses were passive and could not offset 2006 income. with the Government sending Lamas a $5 Million tax bill.  Lamas fought back and filed a US Tax Court petition in US Tax Court Lamas vs IRS March 25, 2016 arguing that the losses were not passive and indeed could offset ordinary and portfolio income..

During the US Tax court trial, Lamas called 10 witnesses arguing credibly that Lamas was very much involved in Shoma and Greens..  Judge Buch in a well thought out opinion opines that to establish the hours spent on the business you don't necessarily have to have contemporaneously daily records, but you can use other reasonable means to establish the facts that support that you are actively involved in the business. The Court goes on to say that "reasonable means includes the identification of the services performed over a period of time and the approximate number of hours spent performing such services during the period based on books, calendars or narrative summaries." While Lamas had none of these records the Court goes on to show that witnesses presented credible testimony and phone records to show that Lamas worked the required hours on Shoma and Green to materially participate to make the activity active not passive.. Lamas wins IRS Loses.

So in conclusion anyone out there in 2016 who wants to offset losses from one activity against gains of another be warned, the IRS in 2016 is actively and aggressively auditing these kinds of offsets, particularly any losses that offset W2 income or Investment Portfolio Income, or any gains that offset passive losses.  The fix is easy:. Prior to filing your tax return with any offsets from different sources of gains and losses, ask your tax attorney the ramifications of Section 469, with particularly emphasis on what kind of offsets you have. If you have “portfolio” and “passive” losses or gains pay particular attention to whether or not the Section 469 allows those offsets. Finally have your tax attorney insert into your tax return detailed preferably contemporaneously  prepared evidence of your tax strategy in 2016, or perhaps notarized witness affidavits if you don't have the required records,. explaining how these offsets were created, what provision of Section 469 controls, and how your tax strategy is being implemented for 2016 and beyond. For example if your tax strategy involves long range estate planning, make sure you tax attorney discloses this in the tax return before she files on April 15, 2017. Better you should support and bullet proof your tax strategy now before you file the tax return than to have to wait four years for the Government to do it for you during a surprise IRS Passive Loss audit.
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May your 2016 losses and gains offset wisely as 2016 comes to a close.. See you all next year on TaxView in 2017.

Thanks for joining Chris Moss CPA Tax Attorney on TaxView

Kindest regards,

Chris Moss CPA Tax Attorney

by Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

Do you all want your kids and grandchildren to share in some way that legacy you or your wife, your grandmother or grandfather, or other family members are leaving you. But many of you as family members are not always in concurrence as to how each generation's estate plan shall be implemented for the good of the entire family and surely not all generations are in 100% agreement as what will work best for the entire family estate plan as we end the year of 2016.  For those of you in this situation, may I suggest you think carefully before you set in motion an estate plan that might change a few years later. due to family disagreements or discord.  Any major changes in the estate plan between generations could be construed by the IRS as various steps in the deadly estate tax trap known as the  Step Transaction Doctrine. Unfortunately the IRS sees "steps" even when there are none, resulting in dramatic increase in taxes for all the family.. So whether you have created a private foundation for the arts, or whether you own a family farm or perhaps are now ready to pass your real estate portfolio on to the next generation, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to stay clear of IRS Step Transaction Traps so you can preserve and transfer these assets to your children and grandchildren safe from IRS adverse action in an IRS Step Transaction Estate Tax Audit

You will not find Step Transactions in the IRS code. The concept of Step Transactions is carved from hundreds of Federal tax court cases and is a spin-off from the Substance over Form Doctrine codified by Congress into IRS Code 7701(o) as part of the Health Care and Education Reconciliation Act of 2010. Step Transactions then remains a totally Court made law or Doctrine somewhat guided by Section 7701(o). The IRS generally argues that Step Transactions are a series of transactions or “steps” over many months or years, that when taken as a whole, convert what you all thought was the perfect estate plan to a sinister Step Transaction scheme to avoid estate taxation.

How does this happen?  A series of family disagreements or even litigation between brothers or cousins could result in innocent steps not adequately documented. years earlier when these steps occurred. The IRS audits, patiently waiting until after you die I might add, and claims to your Executor that these series of steps were part of a sinister scheme planned years earlier by you (now deceased) to avoid estate tax.  A super large tax bill is sent to your Executor which sometimes unfortunately forces your Executor to sell quickly at a great discount substantial assets to pay the tax.  

However, there is good news: If the appropriate evidence had been contemporaneously preserved years earlier in the various income, gift tax and estate tax returns before filing you are absolutely safe from the Step Transaction Trap. That is why it is critical for the tax attorney for the grandparents work with the tax attorney of the children and grandchildren to make sure any future family disagreements would not be construed by the Government as disguised "steps".

Unfortunately, there are some taxpayers out there who fall into the step transaction trap through perhaps bad advice from tax advisors. Directly in response to these poorly structured estate plans, IRS audits have been dismantling even legitimate estate plans finding step transactions even if there were none, and have been winning big in US Tax Court. See US Tax Court Bianca Gross v IRS (2008), US Tax Court Holman v IRS (2008), US Tax Court Pierre v IRS (2010), CGF Industries v IRS (1999), US Tax Court CNT Investors LLC
v IRS (2015).
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One case the IRS did lose was Klauer v IRS (2010). where the Klauer was smart enough to plan his steps with enough evidence to prove he had no illegal tax scheme, but a legitimate estate plan.  The facts are relatively simple, Peter Klauer founded Klauer Manufacturing in Iowa in 1870 and branched out in New Mexico in 1919. More recently Klauer descendants were in discussions with the US Bureau of Land Management, the US Trust for Preservation of Land and various Indian tribes regarding purchase of the Taos Overlook or at least an option to purchase. Over three years from 2001 2002 and 2003 various agreements were executed all independent of the other. Taken separately each land sale was substantially below market value. Klauer’s S Corporation tax return for 2001 2002 and 2003 claimed millions of dollars as land donated on Form 8283 Noncash Charitable Contributions and various K1s were distributed to the stockholders with their proportionate share of the contribution. All the shareholders filed their Form 1040s for 2001 2002 and 2003 with very large charitable deductions. The IRS audited as a whipsaw and disallowed all charity deductions for all three years causing large amounts of taxes owed by the individual shareholders. The Government claimed all three years were one big series of step transactions voiding the below market sales and subsequent large charity deductions. Klauer appealed to US Tax Court in Klauer v IRS 2010 claiming each year stood by itself as separate transactions.

The Court agreed with Klauer because it was clear that each year was separately negotiated with distinct separate agreements. Specifically, Judge Chiechi points out that the supposed first step created no binding commitment to take the second step siting Security Industrial Insurance v US 702 F.2d 1234 (5th Circuit 1983). The Court then focuses on whether the Klauer family intended to save taxes by structuring the three years from 2001-2003 a certain way citing King v US 418 F.2d 511 (Fed Cir 1969). Judge Chiechi argues that Klauer’s subjective intent was especially relevant in allowing the Court to see if Klauer directed a series of transactions to an intended purpose solely to save taxes. The Court found facts created in the record as evidence that Klauer’s primary intent from 2001-2003 was not to create a tax savings scheme but to work the Bureau of Land Management, the Land Trust, and various Indian tribes to allow for the preservation of the Taos Overlook, This had been the intent of the Klauer family for many years. While there were huge tax savings for the shareholders the way the sales were structured that result was secondary to the primary purpose of land preservation. Klauer wins IRS loses.

So where do we all go from here? First, now that you know Step Transactions are thinly disguised tax schemes, your goal is to protect your estate plan with plenty of written evidence and facts proving to an IRS agent years later, after you have died, that your primary goal is, was and has always been legacy preservation and protection with tax savings merely as a secondary goal. Second, discuss with your tax attorney  your options in operating a Family Limited Liability Company (FLLC) owned by SLAT, Crummey, or DAPT trusts to maximize asset protection and keep the family assets safe protected and secure for generations to come, Finally, as 2016 comes to a close ask your tax attorney to bullet proof your family estate plan factually documented with contemporaneous created facts inserted into tax returns prior to being filed with the IRS, with no one step leading to a predetermined second step. While the estate path may change direction due to family disputes, disagreements, or even litigation, if you have the facts on your side, you can relax knowing that your estate plan if protected against Step Transaction traps that lie ahead. even years after you are long gone.

Thank you joining us on TaxView with Chris Moss CPA Tax Attorney

Stay tuned for our 2016 year end TaxView.

Kindest regards

Chris Moss CPA Tax Attorney

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

Remember the cash for clunkers program Congress created in 2009 for your old beat up car. You brought in your clunker car to the dealer and got cash to buy a new car to stimulate the economy? Well in 2016 the 100 year old income tax has become the new clunkers program, an obsolete and inelastic “clunker tax” that is not working. The income tax needs to be replaced with a new tax better suited for the 21srt century, a National Sales Tax.  So if you want to see how a National Sales Tax could help you save taxes stay tuned to TaxView with Chris Moss CPA Tax Attorney to find out why a National Sales Tax is good for you and good for America.

Historically income tax has always been somewhat of a voluntary tax. History shows most Americans when given the choice, choose not to pay the income tax. That is why in 1943 with the introduction of the W2 form in just two years revenue collection increased from $7 billion to $43 billion with 60 million Americans added to the tax rolls almost overnight.

Congress realized the power of the W2 with revenue collections as a percent of Gross Domestic Product surging from less than 6% to almost 20%. Unfortunately Americans would fight back against the W2 form. Slowly an underground economy thwarted forced W2 withholding now estimated to total almost $2 Trillion a year in unreported income. Congress fought back as well

Over the last 30 years there has been an attempt by the Government to “capture” all that underground income by creating the 1099 network of reporting hoping for another W2-like increase in collections as percentage of GDP. The ultimate 1099 program was enacted in 2010 when Congress tried to capture all income from everyone, but Congress soon realized this was impossible to enforce let alone comply with. That law was repealed a year later in 2011.

The fact is that it is impossible in the 21st century to capture all income from 1099s unless the IRS audits everyone. The solution? An involuntary national sales tax, taxed at the source of each purchase at the same time state sales tax is collected. Easy, simple and very effective., and most importantly involuntary. But just in case you’re not convinced yet that a voluntary income tax does not work in the 21st century, there’s more: Identify theft, a 21st century crime is further eroding income tax collections.

The Government is losing at least $6 billion a year to identity theft as organized crime has moved its operations from drug dealing to identity theft. John Koskinen, the former Commissioner of the IRS had recently commented that he had heard from Florida police that “street crime is down, and drug deals have been replaced, because these former drug dealers are now filing false IRS returns”.

​Add identity theft to the underground economy and the IRS is losing so much money the Government is simply unable to collect enough money each year to allow America to pay its bills. Further add additional tax revenue being lost to off shore illegal tax shelters and you have the triple crown of tax evasion: Underground economy, identify theft, and offshore tax shelters. No wonder our National Debt is $19.8 Trillion dramatically approaching the unthinkable $20 Trillion level.

Furthermore, the IRS in the 21st century does not have the manpower to find, the perpetrators, prosecute the criminals and throw in jail the felons living underground, filing false returns and moving funds illegally offshore.. A national sales tax would no need an entire army of enforcement auditors and investigators to administer as such a tax would piggy back off state and local sales tax already in place and already under control.

As an added benefit of enacting a National Sales Tax, all off shore money would soon return home and many if not all tax shelters would disappear back to the 20th century where they belong. With our new President leading the way, if Congress were bold enough to embark on a 21st century solution to increase revenue collection, perhaps annual deficits would be wiped out as well. Could the dramatic rise in collections as a percent of GDP from 1943 be recreated in 2015 with a National Sales Tax?

I don’t know about you all, but I don’t want to see our Government IN 2017 cut services to Americans, including our military, just because Congress does not have the courage to see that the income tax has become a “clunker tax” income tax has become inelastic and outdated and simple Economics of Tax theory requires and demands an elastic tax for the 21st century.. If you all believe that the income tax is now an obsolete clunker, let your elected representatives know how you feel. Perhaps House Ways and Means and Senate Finance can best serve America by creating a national sales tax, a new tax, better suited for the 21st century rather than trying to reform a 100 year old clunker.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView with Chris Moss Tax Attorney CPA

Kindest regards
Chris Moss CPA

Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

Most of you know the IRS has a 3 years from the date you file your tax return to commence and complete an audit of your tax return and assess you additional tax owed to the Government.   What you might not be aware of is that the Government due to budget cuts in 2016 now routinely asks you to extend the three year “statute of limitations” to give the IRS more time to complete the audit.  If the IRS asks you to sign Form 872, Consent to Extend the Statute, what should you do?   If you do sign Form 872 you keep the period to assess the tax longer than required by the 3 year statute of limitations.  But if you don’t sign Form 872 the IRS in most cases immediately assesses you a tax and issues you  a 90 day Notice of Deficiency propelling the case into US Tax Court and into the hands of a high priced tax attorney. So if you are not sure what you would do, stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out just how to handle a Government request to extend the statue of limitations in a way that best protects your family and saves you taxes.

IRS Code 6501 prohibits the IRS from “assessing a tax” on your income after your tax return has been filed for 3 years.  This three year statute of limitations enacted in 1918 has worked well for almost 100 years.  But recently agents have told me that due to Federal budget cuts reducing staff the IRS has insufficient time to complete your audit in an expeditious manner within the 3 year period.  So taxpayers are now routinely asked to consent to extend the 3 year statute on Form 872.   Further complications arise as a result of agents trying to comply with a very complex set of internal rules as per this IRS audit manual yet at the same time trying as best they can to finish up a taxpayer audit prior to the expiration of the 3 year window.

In order to best ascertain whether or not to extend the 3 year statute of limitations best practice is to review with your tax attorney how your audit is going.   If you have deductions that cannot be easily and timely documented, but nevertheless know you can at some point provide the necessary documentation the Government has asked for, and you believe the IRS agent is going to need more time to complete your audit examination, you would perhaps want to extend the statute to give the agent time to finish up and give you a no change audit.  On the other hand, if you have given the agent sufficient documentation to support your deductions and the audit is taking a long time to complete through no fault of your own, then you would not extend the statute as long as your tax attorney who prepared and filed your tax return could cost effectively litigate the case in US Tax Court.

Furthermore, for those of you being audited who might have underreported income, there should begin a series of confidential attorney-client privileged discussions with your tax attorney on whether or not you should agree to sign a statute extender on Form 872.  That is because as Williamson’s Estate found out in Williams v IRS US Tax Court (1996) there are exceptions to the 3 year statute, and of particular relevance to Judge Korner is Code Section 6501 (e) which extends the statute 3 more years to 6 years if there is an undisclosed 25% understatement of gross income on your tax return.  Citing Colony v Commissioner 357 US 28 (1958)  the Supreme Court said “Congress manifested no broader purpose than to give the Commissioner an additional 2 (now 3) years in cases where because of a taxpayer’s omission to report some taxable income, the IRS is at a special disadvantage.”  In Williams, the tax return did in fact disclose the understatement so Williams wins IRS loses.

But for other taxpayers who by accident or intention, there is a 25% understatement of gross income that has not yet been discovered by the IRS audit or IRS criminal investigation unit, best practice with these facts might suggest for you not to sign Form 872 and allow the case go to US Tax Court.  Unfortunately this was not the case in Connell v IRS US Tax Court (2004).  Thomas and Sara Anne Connell had four small trusts which they used to under-report income on their personal return. This scheme was discovered by the IRS Criminal investigation division.  While a recommendation to prosecute was made by Criminal division, for reasons not known to the US Tax Court no criminal action was ever undertaken.  The IRS then issued Notices of Deficiency which were issued more than 3 but less than 6 years after the returns were filed.  Connell appealed to US Tax Court in Connell v IRS US Tax Court (2004) claiming they failed to report additional income, but they adequately disclosed this by filing the bogus trusts.

Judge Gale easily brushes aside the Connell argument and rules for the Government citing Reuter v IRS US Tax Court (1985)  requiring that the actual tax returns themselves have to disclose the understatement not some other return or document.  In Reuter there was undisclosed S Corporation distributions.  In Connell it was the trusts.  In both cases the actual 1040 personal tax returns did not disclose the omitted income.  As Reuter points out “the legislative history of the 1954 changes made to section 6501(e)(1)(A) does not suggest looking beyond the face of the return to determine disclosure of an omitted item of income.  So in Connell as in Reuter, IRS wins, Connell loses.

Further complicating understatement of income issues are the growing popularity of larger partnerships as underscored in a recent 2014 report from the US Government Accountability Office to the Senate Committee on Homeland Security.  The report claims the IRS finds it very difficult to audit all these entities within the 3 year statute even if fully staffed with no budget cuts.  What happens if you should file your personal tax return with a K1 that as a result of an audit at the partnership level puts you at risk of a substantial understatement?  If you get audited personally should you agree to sign Form 872 even though you know you might have substantially overstated your basis on various sales from complex partnerships you have an ownership interest in causing you to have a substantial 25% understatement of income?

In fact, this very question was addressed by a divided US Supreme Court in,  US v Home Concrete and Supply LLC, US Supreme Court  566 US_____(2012) affirming 634 F 3d 249.   The facts in Concrete were simple, but existing Federal law as applied to these facts was anything but simple. Here are the facts:  Partnership tax shelters generated losses to Home Concrete.  The losses were a result of an overstated basis which in turn caused a substantial understatement of income.  The question presented to the Supreme Court was whether a basis overstatement on sold property can trigger the 6 year statute under 6501(e) and US Treasury regulation 301.6501(e )(1)(A).  The majority opinion given by Justice Breyer ruled that based on the facts in this case, Congress did not intend to make basis overstatement the same as substantial understatement of “gross”  income subject to the 6 year statute of limitations, thereby in effect overruling the US Treasury regulation.  The reason given by Justice Breyer: “taken literally, “omit” limits the statute’s scope to situations in which specific receipts or accruals of income are left out of the computation of gross income; to inflate the basis, however, is not to “omit” a specific item, not even of profit.”

But Justice Kennedy, Ginsburg, Sotomayor and Kagan strongly dissented arguing that “there is a serious difficulty to insisting, as the Court does today, that an ambiguous provision must continue to be read the same way even after it has been reenacted with additional language suggesting Congress would permit a different interpretation. Agencies with the responsibility and expertise necessary to administer ongoing regulatory schemes should have the latitude and discretion to implement their interpretation of provisions reenacted in a new statutory framework.”

So what can you do if the IRS asks you in 2016 to sign Form 872?  Perhaps  you could do the same thing Home Concrete and their tax attorney did when they saw a gray area of the law:  You just might decide not to sign Form 872 and have your tax attorney take the case to US Tax Court and perhaps as did Home Concrete achieve ultimate victory in the US Supreme Court.  So first and foremost if you are asked by the Government to sign Form 872 retain the services of a tax attorney, hopefully the same tax attorney who prepared, filed and handled the audit of  your tax return in the first place, before you make a decision whether to sign Form 872 or not.  Second, make sure you always contemporaneously prepare the documents and records needed to support your tax return in the unlikely event of an IRS audit, and include summary documents in the tax return you file to create the facts and records you need to win an audit.  With a good set of records supporting your tax positions you will hopefully finish up the audit with no adjustments.  Finally, if your audit is taking too much time due to staff reductions over at the IRS and US Treasury, whether due to Government budget cuts, or for lack of records, make sure you have your tax attorney standing by to help you answer the soon to be asked question by your IRS agent:  Would you please sign Form 872 to extend the statute of limitations on your audit?  If the IRS asks you to sign Form 872, Consent to Extend the Statute, what would you do?  Whether you sign or not may ultimately decide whether you win or lose.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

​by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

Many large public businesses have their corporate operations legally headquartered offshore. For example Apple, General Electric, Pfizer, IBM, and Merck have offshore operations legally sheltering billions of dollars from US income taxation.   However, if any of you individuals or small business owners out there are ever approached with a too good to be true personal tax savings arrangement that involves offshore investing or business operations that result in you personally saving taxes on your From 1040 get a second opinion before you invest in and activate such a scheme.  Once the scheme is discovered by the Government action is immediate and devastating to the promoter of the shelter.  Unfortunately in many cases you the taxpayer/victim are accused of tax fraud as well resulting in severe civil fraud penalties in addition to all the additional income tax you owe.  So if you have money offshore right now or are thinking about a plan that purportedly legally allows you to send money offshore, please stay with us here on TaxView with Chris Moss CPA Tax Attorney to give you a fair warning that such schemes lead nowhere but to large civil fraud penalties and in some cases criminal Government tax investigations.

Big and small business have always been able to operate abroad and save taxes.  But owners of closely held businesses are not legally able to take advantage of these provisions.  In fact Americans are taxed on worldwide income regardless of whether or not the funds are deposited to a foreign bank in a tax free haven. Unfortunately there are many taxpayers out there who don’t know that these schemes are illegal, like Stanley and Ruth Alexander who were in US Tax Court over this very issue in Alexander vs IRS T.C. Memo 2013-203.

The facts are very complex in this 71 page Opinion.  Dr Alexander, a plastic surgeon, used offshore tax strategy to lease back his medical services to his professional Ohio practice.  Alexander met attorney Reiserer from Seattle who reviewed offshore employment leasing with Alexander.  There were numerous doctors who were well versed through seminars in the Bahamas about this strategy. Reiserer and a CPA Kritt “structured, implemented and managed” the offshore strategy for tax year 1996-2003 for Alexander.  In 2003 the IRS initiated a criminal investigation of Kritt.  Kritt was charged with criminal tax evasion, but Kritt was found not guilty by jury of any criminal misconduct.

As a result of the Kritt criminal investigation, Alexander and hundreds of other doctors were audited by the IRS for years 2000-2002 and were accused of substantial understatement of income and tax fraud.  Alexander appealed to US Tax Court in Alexander vs IRS US Tax Court (2013).  Alexander claimed the offshore strategy was to create retirement for his family.  The Government argued that the motivation was avoidance of tax as there was no meaningful economic substance to the strategy.  Judge Goeke on Page 45 of the Opinion opines Alexander relied on Krit and Riserer and Alexander had limited ability to understand the tax law.  As the case unfolds the Court seems to have sympathy for Alexander who “placed a great deal of reliance on Kritt”.  The Court concludes that Alexander did not possess the education that would allow him to know he should have reported additional income”. Page 50.  IRS loses on tax fraud, but IRS wins on understatement.

Our next case involves Dr Child in Child vs IRS T.C. Memo 2010-58.   The facts are relatively simple.  Dennis Evanson designed organized and promoted schemes to shelter income from taxation.  He was ultimately convicted of Federal income tax evasion by a jury in 2008.  All of Evanson’s tax evasion schemes used sham transactions to transfer clients’ untaxed income to offshore entities that Evanson created and controlled.  The funds were typically returned to his clients disguised as disbursements from fictitious loans to avoid taxation.

Dr Child was a highly compensated radiologist who met Evanson at a party.  Evanson helped Child and hundreds of over doctors create a tax evasion scheme which allowed a fictitious offshore insurance company to providing insurance coverage for Child. Premiums were paid and deducted on Child’s tax returns from 1997-2003.  The IRS audited not only disallowing over $280K of deductions but  claimed Child was guilty of tax fraud as the whole scheme was nothing but a tax avoidance sham transaction lacking any economic substance. Child appealed to US Tax Court in Child vs IRS US Tax Court (2010). Judge Kroupa concluded that indeed Child fraudulently intended to evade taxes and this was liable for additional fraud penalties under Section 6663 of the IRS Code which increases the penalty by 75% of the tax owed. IRS wins and Child loses on fraud under IRS Code Section 6663.

If you lose on Fraud you owe additional 75% of the tax owed, a lot of money for most of us.  So why did Child lose on Fraud but not Alexander?   The law says you commit tax fraud if “badges of fraud” are present:  you have inadequate records, you participate in the promoter’s scheme to mislead the Government, you give implausible explanations of behavior to conceal the fraud, you file false documents, and you fail to respond to subpoenas.  Finally you don’t cooperate with the Government. Judge Kroupa in Child argued that “most of the badges of fraud upon which this Court relies were present in Child”. Page 23.   Judge Goeke didn’t feel that way with Alexander and so Alexander did not have to pay the 75% fraud penalty.

In conclusion, if you are a small business owner who attends a seminar on offshore investing schemes, simply say no.  There is no legal tax strategy for individuals and small business owners to keep their offshore earnings from being reported on their personal tax return Form 1040.  Unless you are willing to give up your US Citizenship and leave the country there is simply no legal way to avoid paying personal income taxes by keeping your earnings offshore.  Work within the system to change the tax to perhaps a flat tax or national sales tax, but say no to offshore tax schemes.  You will be happy you did when the IRS comes knocking on your door for an offshore tax audit.

Thank you joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.
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Kindest regardS

Chris Moss CPA Tax Attorney