Welcome to TaxView with Chris Moss CPA Tax Attorney

Are any of you battling the IRS over a Federal IRS Tax Lien or Levy?  If you are in this unfortunate situation it would appear that for you have ignored countless IRS bills, letters and certified letters over a period of perhaps many years. You may think there is nothing you can do now to fight back, but you might have one last chance: you should consider requesting a Collection Due Process hearing (CDP) to temporarily stop enforcement action of a lien, levy or garnishment until your tax attorney puts forth her best “offer in compromise” to settle your tax debts with the Government. So stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how you can fight back with a CDP hearing and save taxes..

So how does a taxpayer get served with an IRS lien in the first place?  One reason could be payroll tax withholding that had not been remitted to the Government.  Another reason could be the filing of a tax return with a large amount of tax due but you have no money to pay the tax.  Or perhaps you never filed a tax return in the first place and the Government has filed one for you?  To make matters worse, you never responded to the IRS letters you received and thereby gave up your right to litigate the substantive issues as to whether or not you owed the tax in the first place. Now you are only left with an IRS lien, levy or garnishment coming your way, and left with only one way to fight back: the CDP hearing.  So what is a CDP hearing?

First, your CDP hearing must be before an impartial noninvolved appeals officer.  Moosally v IRS US Tax Court (2014).  Patricia Moosally never argued that she did not owe payroll tax and penalties.  In fact, she consented in 2001 to the Government assessing her almost $50K in penalties back to 2000.  Apparently the IRS was unable to collect this tax from Moosally and years later in 2010 Moosally submitted Form 656 Offer in Compromise (OIC) for $200 claiming she had insufficient assets to pay.  Moosally and the IRS represented by among others appeals officer Smeck could not come to an agreement so the Government issued her a Federal tax lien in 2011.  Moosally asked for a CDP hearing and to Moosally’s surprise there was Ms. Smeck again involved in a minor capacity during the hearing.  Unable to resolve the case at the CDP hearing level, Moosally appealed to US Tax Court for relief in Moosally v IRS US Tax Court (2014).

Judge Wells makes clear that pursuant to Section 6321 a notice of Lien must be accompanied by the right to request an appeals hearing to be conducted by an impartial officer or employee of the Appeals office who had no prior involvement with respect to the unpaid tax.  Section 6320(a)(3)(B)(b)(1)   Moosally argues for a new hearing claiming the appeal was tainted with prior involvement by Ms. Smeck.  The Government denied this claim. US Tax Court sided with Moosally concluding that she was entitled to a new CDP hearing before an impartial officer.  Moosally wins (at least for another hearing) IRS loses.

Second, your CDP hearing is not about whether or not you owe the tax, but rather whether the IRS has unreasonably rejected your offer in compromise or “settlement” based on your ability to pay the tax.   Remember by the time you are being levied attached or garnished, the time to appeal based on the merits to US Tax Court has long vanished 90 days after you were issued a notice of deficiency perhaps years if not many years earlier.  All you can do now is to appeal that the Government unreasonably rejected your settlement offer based on your ability to pay.  Which brings us to what is called an “offer in compromise”.  It is your best chance to settle with the IRS before the liens, levy, garnishments and attachments are issued to your employer, bank, customers and vendors. 

Why is the CPD hearing so important?  If the IRS unreasonably had rejected your offer in compromise, it is at the CPD hearing that you can have the IRS decision overturned and if you are still not satisfied you can take your case all the way up to US Tax Court.  But as Eugene Dinino found out, In Dinino vs IRS US Tax Court (2009) the US Tax Court will not tolerate taxpayers using CPD hearings just to delay the inevitable.

Dinino owed the US Government over $600K in back payroll taxes and penalties from 2000-2004.  For many years the IRS sent Dinino many notices including a final “Intent to Levy Notice” in 2008.  The levy notice advised Dinino that he could receive a CDP hearing before the IRS office of Appeals.  In April of 2008 the IRS received from Dinino’s tax attorney Form 12153 requesting a CDP hearing so he could submit an Offer in Compromise.  After almost a year of cancelled appointments and no shows the IRS finally closed the appeal and sustained the levy.  Dinino appealed to US Tax Court in March of 2009 claiming he was never granted a CDP hearing and was never allowed to submit an “offer in compromise”.

Judge Gustafson points out that “except when the underlying tax liability is at issue, the Court will review the determination of the Office of Appeals for abuse of discretion, citing Goza v IRS, 114 T.C. 12 (2000)--that is, the Court will decide whether the determination was arbitrary, capricious or without sound basis in fact or law citing Murphy v IRS, 125. T.C. 301 (2005). Affirmed on appeal 469 F.3d 27 (1st Cir 2006).  In this case Dinino simply failed to appear to the hearing and failed to participate in various other telephone hearings.  Judge Gustafson further opines that Dinino is not guaranteed an “indefinite number of sessions that Dinino unilaterally demands.   Finally Judge Gustafson concludes that the appeals officer conducting the CDP hearing was never given an updated Form 433-A providing the Government current adequate financial information.  Therefore it was not an abuse of discretion for the appeals office to sustain the levy.  IRS wins Dinino loses.

So what does this mean for anyone facing a levy, lien, or attachment?  If you face imminent lien or levy or attachment of your wages, your bank accounts or your real estate and other assets, make sure your tax attorney files for the CDP hearing submitting Form 12153 allowing you one more chance to settle with the Government.  If you have submitted your Form 433-A for an offer in compromise and made your best offer, and you believe the Appeals decision process has been arbitrary and capricious, by all means appeal to the US Tax Court for relief.  Work with the Government towards a fair and reasonable “offer in compromise” to settle your case before the levy, liens and attachments come flying at your vendors, employer and real estate.  You will be glad you did.

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

See you all next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Innocent Spouse Relief Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

Have any of you wives out there perhaps sometimes not quite understood the tax strategy your husband has used to prepare your income tax return?  Any husbands out there traveling so much for work that your wife pays all the bills and files all tax returns? If any of these situations apply to you, then you can see why innocent Spouse Relief allowed by IRS Code Section 6015(a)(1) is probably one of most litigated of all tax strategies particularly when couples split up and divorce. In fact, chances are the IRS may just be waiting, patiently I might add, to begin a Whipsaw Innocent Spouse Audit soon after your Divorce decree is finalized. So for all you couples out there, happily married or soon to be divorced, stay tuned to TaxView with Chris Moss CPA Tax Attorney as we journey through real life Innocent Spouse Court cases to discover the best tax strategy for you to win an IRS Innocent Spouse Audit and keep your assets safe and protected from long reach of the IRS Innocent Spouse Audit agents.

Innocent Spouse Relief is litigated in US Tax Court more than just about any other tax strategy.  There were 5 cases in 2015 alone including Willie and Sandra Scott decided last month in September 2015.  In Scott vs IRS US Tax Court 2015-180, the facts are simple except that in this case both husband and wife stayed married. Husband was in charge of the finances and was responsible for filing the 2008 and 2009 tax returns. His wife played no role at all in filing the tax return except she gave her husband information on her two businesses for him to include in the tax return he prepared. The IRS audited and in addition to other minor adjustments against the husband’s businesses disallowed over $200,000 of expenses for wife’s businesses.

Wife did not dispute the tax she owed when she appealed to US Tax Court, but instead, claimed the resulting tax liability should not be joint and several to her because she did not have any involvement with preparation of the tax return. Judge Goeke states that Section 6015(b) provides that a taxpayer will be relieved of liability for an understatement of tax if: (1) a joint return was filed for the taxable year in question; (2) there is an understatement of tax attributable to erroneous items of the nonrequesting spouse; (3) the taxpayer requesting relief “did not know, and had no reason to know, that there was such understatement” when he or she signed the return; (4) taking into account all of the facts and circumstances, it would be inequitable to hold the taxpayer liable for the deficiency attributable to such understatement; and (5) the taxpayer elects to have section 6015(b) apply within two years of the initial collection action.

The Court further determined that of all these factors, the key and most important factor was whether the wife “had a reason to know” of the understatement.  The Court of Appeals for the Eleventh Circuit, has held that a spouse has reason to know of a substantial understatement if a reasonably prudent taxpayer in her position could be expected to know that the return contained the substantial understatement. See Kistner v. Commissioner, 18 F.3d 1521 (11th Cir. 1994), rev’g T.C. Memo. 1991-463; Stevens v. Commissioner, 872 F.2d 1499 (11th Cir. 1989).

The Court then reviewed the four factor inquiry that has generally been used in deciding the question of whether a spouse asking for innocent relief has “reason to know” 1. Level of Education, 2. Involvement in family finances, 3. Routine vs lavish expenditures and 4. Deceit by the other spouse. Citing Butler v. Commissioner, 114 T.C. 276, 284 (2000). The Court noted that Wife had a college education and should have had knowledge of income tax owed relating to her own business.  The Court concluded that Wife had in fact “reason to know” of the understatement.  IRS Wins Wife loses Husband wins.   However, the Court also concluded that Wife would have relief from husband’s business tax adjustments, since she had “no reason to know” of her husband’s business.  Wife wins, IRS loses, and Husband has a partial loss.

Unlike the Scotts who stayed married, most of these innocent spouse cases end in tragic Whipsaw divorce as did Demeter v Demeter v IRS in US Tax Court 2014-238 decided November 24, 2014.  The facts are simple: Husband and wife filed tax returns for 2004 2005 and 2006 prepared by tax attorney Ron Mulchi.  Wife signed returns in 2007 having never met or talked with Mulchi.  Taxes were not paid by husband due to his business failing and wife first became aware of this when she started receiving levy notices from IRS.  Both husband and wife filed bankruptcy in 2008 and later divorced in 2009.  Wife filed for Innocent Spouse Relief in 2011 and the IRS was about to grant relief, but her ex-husband filed an appeal in Demeter v Demeter v IRS in US Tax Court 2014-238  as an “Intervenor” opposing in this Whipsaw case relief to his ex-wife.  With the Government conceding to the Ex-Wife, Judge Vasquez eventually ruled in favor of the Ex-wife, finding that she filed for innocent spouse relief after the divorce, during a personal economic hardship, and that her ex-husband agreed as part of the divorce settlement agreement to pay the back taxes, thereby giving the ex-wife “no reason to know” that her ex-husband, the Intervenor, would not pay the tax.  Ex-wife and Government win, Intervenor Ex-husband loses.

Our final case involves a husband fighting for innocent spouse relief in Richard vs IRS vs Ellis Intervenor US Tax Court 2011-144 decided on June 27, 2011.  The facts are fairly simple in that Husband and Wife filed a joint return in 2004 with the bulk of the taxable income attributed to the wife.  Not reported on this tax return was an early distribution from the wife’s retirement account.  The couple divorced in 2006.  Shortly after the divorce, the IRS audited their joint 2004 return and increased the tax due by the failure to report the retirement income distribution.  In 2007 ex-husband filed for innocent spouse relief for the early retirement distribution.  Now here comes the Whipsaw:  The ex-wife intervened claiming the ex-husband very well knew that they did not report the early retirement distribution on their 2004 tax return.  Chief Judge Colvin ultimately finds for the Ex-husband because he credibly testified that he was unaware of his Ex-wife Intervenor’s early distribution. This is in spite of the ex-wife Intervenor testifying that ex-husband and she discussed the early retirement distribution before and after she requested the funds.  Perhaps Judge Colvin heard “she said” but believed “he said” as ex-husband appears to have been more credible than ex-wife to the Court. Ex-husband wins, IRS loses, and Ex-wife loses.

So what does this all mean for anyone out there who wants to file for innocent spouse relief?  First and foremost, figure out whether or not you benefited from your husband’s tax error, mistake or in some cases civil or criminal fraud. If you did not, and are separating from your spouse, make sure your divorce attorney includes Innocent Spouse Relief language in the settlement agreement. Also, if you are the ex-husband be prepared for your ex-wife to intervene to US Tax Court denying much of what you are claiming creating the tragic Whipsaw.  Second, hire a tax attorney who can effectively gather sufficient evidence to prove to the Court that you had “no reason to know” of the tax liability you are claiming relief from.  Perhaps if you are the ex-wife, you had “no reason to know” because you traveled a lot working out of town, or didn’t have the educational background to understand, or perhaps just didn’t get the whole truth from your now ex-husband. In other words, if your tax attorney sufficiently gathers from you the evidence needed to win, provided your testimony is credible, you will in fact win the IRS Innocent Spouse Relief Audit, Whipsaw your Ex-spouse, and at the same time keep your assets safe and protected from the long reach of IRS Innocent Spouse Relief Audit agents.

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

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Offset Tax Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

Have any of you ever had your income tax refund from the IRS or your social security retirement income intercepted by the Government because you owed income tax or child support or were in default on your student loan?  Unfortunately for those Americans who owe taxes there are more offsets coming your way. Just weeks ago Congress passed H.R 22 Surface Transportation Reauthorization and Reform Act of 2015 which allows the Government to confiscate your Passport if you owe back income tax. Many feel the Government is overstepping its collection powers in restricting international travel as if you had been indicted in a criminal investigation and being ordered by a Federal Judge to surrender your passport so you don’t flee the country before trial.  So stay with us here in TaxView with Chris Moss CPA Tax Attorney to see where the IRS Offset Tax Audit is trending in 2015 and beyond and what you need to do now to protect yourself against an IRS Offset Tax Audit.

The Government Accountability Office (GAO) has been conducting ongoing studies called “High Risk Enforcement of the Tax Laws” for years, but the March 2011 study entitled Federal Tax Collection, “Potential for Using Passport Issuance to Increase Collection “appears to be the basis of Congressional legislation to revoke passports of folks who owe income tax.  The 21 page study claims that there were 224,000 individuals issued passports in 2008 who owed a total of $5.8 billion in unpaid Federal taxes.  The report concludes that because Federal law already allows linkage of debt collection to passport issuance in the area of Child Support Enforcement there is reason to believe the same linkage can be made to delinquent taxes.

From this GAO study a consensus in the Senate seemed to take hold that it was time to add passport confiscation for taxpayers who owe income tax to the Government. Who authored the provision in Senate Bill 1813 revoking or denying a passport to anyone who owes certain unpaid income taxes to the Federal Government?  A Forbes article claims Senator Harry Reid originally proposed the idea to Orin Hatch and links a Press Release from Senator Orin Hatch as the source.

Regardless of who inserted the provision, the bill cleared the Senate 65-34 on July 30, 2015 and passed in the House 363-64 on November 5, 2015 with the passport provision still intact. HR 22 Surface Transportation Reauthorization and Reform Act 2015 was then sent to Conference last week.  The bill left Conference and was approved by both Houses 359-65 in the House and 83-16 in the Senate on December 3 2015 and was sent to the White House for President Barack Obama's signature.  The President signed the bill this week and HR22 FAST Act is now law. Section 32101 of the bill Subtitle A Tax Provisions requires that Section 7345 will be added to the IRS Code, requiring the Secretary of the Treasury to transmit to the State Department in accordance with the Passport Act of 1926 a request the passport of any individual who has a seriously delinquent tax debt be revoked. More specifically, HR22 Fast Act reads in part "If the Secretary receives certification by the Commissioner of the Internal Revenue Service that any individual has a seriously delinquent tax debt in tan amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation or limitation of a passport pursuant to Section 32101 Subtitle A of FAST Act HR22.

Some scholars are questioning the Constitutionality of revoking a passport for back taxes owed. A February 2015 Penn State Law Review article by Gancarlo Seratto points out that Passport revocation is usually reserved for criminals or individuals who pose national security risks. But as the GAP study points out there are certainly similar statutes as described in 22 CFR 51.60 which requires the State Department to deny the issuance of a passport to any applicant who has been certified by the Secretary of Health and Human Services to be in arrears of child support. For example, the Passport Denial Program (PDP) established by Federal law in 1997 requires that if you are owe more than $2500 in back child support your passport will be restricted and revoked.

So assuming the law is deemed Constitutional, if your passport can be revoked for back child support or back taxes, can your passport also be revoked for other Federal infractions.  While 31 USC 3716 specifically excludes and exempts Title IV delinquent unpaid student loans all other student loans backed by the Government are subject to offset. Indeed, as far back as 1983 the Senate Finance Committee Subcommittee on Oversight of the IRS had a hearing specifically addressingTax Refund Offset Program for Delinquents Student Loans.

One more point: What about taxpayers who have not filed tax returns? It appears that there is no provision in HR 22 for Americans who have joined the underground economy and have not filed income tax returns for many years. Perhaps an income tax nonfiler for 3 successive years should also lose his or her Passport?

In conclusion, regardless of whether you agree or disagree with expanding the Government offset program to Passports, there is no question that the ever expanding US Government offset program will keep growing its collection of enforcement tools against Americans who owe back taxes to the IRS. One may ask what could be next on the horizon of Government offset enforcement if you are a delinquent taxpayer. What about Professional licenses? Government Contracts?  Drivers Licenses?  Or simple Business Licenses?  What about denial of Federal Home Loan approved mortgages, low income housing or even Federal subsidized health care?

What can you do now?  The best advice is to hire the best tax advisors you can afford, pay your taxes in full and timely file your tax returns each year knowing with confidence that you can withstand any IRS Offset Tax Audit the Government throws your way.

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

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Alimony Audit

by Chris Moss CPA

Welcome to TaxView with Chris Moss CPA Tax Attorney

While it is hard to believe that a divorcing spouse in the 21st century would need or want Alimony, it is even harder for many to understand why Alimony is so often litigated by divorced taxpayers in United States Courts. Furthermore, since Alimony is taxable usually to the wife, and tax deductible usually to the husband, IRS Alimony audits Whipsaw a husband or wife against each other with the Government very often winning by default.  So if you are paying or receiving alimony and not aware of the danger ahead please stay with us here on TaxView with Chris Moss CPA Tax Attorney to see where IRS Alimony Audits are trending in 2015 so you can make sure tax return is safe and protected if an IRS agent comes knocking on your door.

Alimony also known as spousal support or maintenance derives from ancient ecclesiastical laws requiring husbands to continue to support their wives.  Eventually when “fault” divorce became legal it was the party “at fault” usually the husband, who would be required to pay Alimony, particularly because until recently, women could not own real estate.

I was surprised to find that in 2015 alone to date there were already nine (9) Alimony US Tax Court Opinions and hundreds of Alimony audits commenced around the country this year, many of which will end up in IRS Appeals and US Tax Court years from now.  In the last 10 years there have been probably thousands of IRS Alimony Audits.  Why is there so much litigation over Alimony?  Is Alimony tax law that complex?  Let’s ask the Court this question as we review hot off the press last week, Crabtree v IRS US Tax Court 2015.

The facts in Crabtree are simple. Crabtree (formerly Mrs. Girard) was married to Donald Girard until 2006. The Girard’s petitioned the Delaware Family Court in an uncontested proceeding “without a hearing”.  The Divorce Agreement required “unallocated alimony/child support for 8 years”.  Crabtree filed her 2010 tax return and did not report this money as taxable Alimony.  The IRS audited Crabtree requiring her to be taxed on what the Government concluded to be Alimony. Crabtree appealed to US Tax Court in Crabtree v IRS US Tax Court 2015.

Judge Lauber notes that IRS Code Section 71(a) provides that gross income includes amounts received as Alimony subject to 4 conditions as per 71(b). First the payment must be received by wife under a divorce agreement. Second the agreement does not include the payment as a property settlement. Third the husband and wife must be living in separate households, and fourth, the payment must terminate upon death of the wife.

It is fourth condition, termination at death of recipient that the Court found ambiguous because the Divorce Agreement was silent on whether Mr. Girard’s Alimony obligation terminated upon Crabtree’s death. The IRS argued that Delaware law Title 13 Section 1512(g) controls in this case.  The IRS further argued that with these facts Delaware recognizes these payments as Alimony.

The Court however found for Crabtree who argued that the Delaware “order” was entered without a hearing and “agreed by the parties in writing” as required by Del. Code section 1519(b) and could have been construed as not terminating upon death.  Judge Lauber in a very close call opines that both the Divorce Agreement and Delaware law are unclear and finds for Crabtree in that “Delaware law does not unambiguously provide for automatic termination in the event of death.” Crabtree wins IRS loses.

The next case Iglicki v IRS US Tax Court April 27 2015 involves a Maryland divorce in 1999.  The Agreement required Iglicki to pay $1000 a month in spousal support “but only if he would default.”  After the divorce the Iglicki moved to Colorado and defaulted. The ex-wife Stultz sued in Colorado for spousal support and won a judgement against the Iglicki. In a post-judgement proceeding Stultz obtained a Court ordered garnishment of Iglicki’s wages. Iglicki deducted the garnished wages on his tax return as Alimony.  The IRS audited and disallowed the deduction. Iglicki appealed to US Tax Court Iglicki v IRS US Tax Court April 27 2015.

The question presented to the Court was whether or not the Iglicki’s financial obligation terminated upon death of Stultz. The Court recognized, as the Court did in Crabtree, that when a divorce agreement is silent as to the existence of a post-death obligation, the requirements of section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee’s death by operation of State law in this case Colorado, citing. Johanson v. Commissioner, 541 F.3d at 973.

Judge Kerrigan finds that Colorado law, unlike Delaware law in Crabtree, very clearly requires future spousal support obligations to terminate at the death of either spouse unless otherwise agreed in writing or expressly provided in the decree.  But also under Colorado law after Stultz received a judgement against Iglicki the obligation of Iglicki previously considered Alimony was legally converted to a “past due” judgement. Under Colorado law an Estate can enforce a judgement even after the death of the debtor.  Therefore spousal support obligations that have converted to a judgement in Colorado fail to qualify as Alimony under Federal tax law. IRS wins, Iglicki loses.

Our final case again involves simple facts in Muniz v IRS US Tax Court July 9, 2015.  Muniz husband and wife Filippini divorced in Palm Beach Florida in 2009. Muniz was required to pay $45,000 to Filippini and deducted Alimony on his 2011 return. IRS audited and claimed the $45,000 was a nondeductible property settlement. Muniz appealed to US Tax Court in Muniz v IRS US Tax Court July 9, 2015.

The Government argued that even though the $45,000 was a lump-sum alimony payment, it could not be Alimony because under Code 61.08 of the Florida Code the Filippini’s estate upon her death would continue to have a vested right to collect the $45,000 lump sum. Judge Nega agreed with the Government concluding that under Florida law, lump-sum alimony constitutes a property settlement for Federal income tax purposes and therefore is not deductible as Alimony.  IRS wins, Muniz loses.

By now you all can see why on very simple facts Alimony payments could easily become nondeductible after commencement of an IRS Alimony audit.

What can you all do now?  First, if you are going through a divorce and have moved to a new State, or you are experiencing Alimony collection issues in your current State, make sure you have tax attorney confer with your divorce attorney to make sure you are protected in the very likely event of an IRS Alimony audit commencing shortly after Court action.  Second, require whoever prepares your tax return to give you a written opinion on whether your Alimony payments are tax deductible or not and include this contemporaneously created document in your tax return before you file. This evidence will prove invaluable if and when an Alimony audit comes your way.  Finally be prepared for the Whipsaw and hopefully with a properly prepared tax return you will be the one that wins.

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

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney