April 05, 2018

Trust-Fund Liability: The IRS and Ohio Department of Taxation May Hold Business Owners Personally Responsible

    As tax attorneys in Columbus, Ohio, Nardone Limited routinely advises taxpayers about their potential personal liability relating to liabilities owed by a business as part of our tax controversy work. When an IRS revenue officer contacts you or your business, it is important that you understand your rights and obligations. The IRS has broad authority and tools available to collect delinquent taxes, including conducting a trust-fund investigation of responsible persons. Most companies operate as a business entity that shields owners from personal liability for the company’s obligations. But, a major exception exists to this rule, commonly referred to as trust-fund liability. If an employer fails to pay certain taxes on behalf of their employees, the IRS and the Ohio Department of Taxation have the right to collect monies due from an owner’s personal assets. This article is the first in a series discussing trust-fund liability taxes at the state and federal levels.

What Monies are Subject to Trust-Fund Liability?

    Amounts subject to trust-fund liability consist of money withheld from an employee’s wages for the purposes of paying their income tax, social security, and Medicare taxes. An employer must withhold the money in trust on the government’s behalf until the funds are paid at both the federal and state level. The most common taxes subjected to trust-fund liability are taxes associated with employment, however, other types of taxes may be included, such as fuel taxes, sales taxes, and excise taxes.

Trust-Fund Liability at the Federal Level

    At the federal level, an employer must pay withheld funds to the U.S. Treasury through the Federal Tax Deposit System. Internal Revenue Code §6672, known as the trust-fund recovery penalty or the “100% penalty,” subjects the individuals considered responsible for the collection and payment of withholding taxes to personal liability for the total amount of taxes that should have been withheld from employees. But, the IRS will only impose personal liability if two conditions are met: (i) the party can be held responsible for failing to withhold the taxes and (ii) the responsible party’s act leading to the failure to collect the taxes was willful. A responsible party’s act is generally considered willful when they know that the taxes are due and choose to use the funds for some other purpose. If the IRS believes that an individual is responsible, an IRS revenue officer will contact that individual to begin proceedings to collect the unpaid trust-fund liabilities. We will be discussing what it means to be willful and responsible under federal law in subsequent articles.

Trust-Fund Liability at the State Level

     At the state level, Ohio trust-fund liability is far more stringent than its federal counterpart, removing the willful requirement, and imposing interest and penalties. Moreover, the failure of an employer to withhold or remit taxes on behalf of an employee does not relieve the employee from liability for the tax. But, Ohio does have a safe harbor provision, protecting employers whose failure to withhold was based on the employer's good faith reliance on an employee's statement as to his liability. Ohio Rev. Code §5747.07(E)(2).

    Under Ohio Adm. Code §5703-7-15, any employee of a corporation having control, supervision, or the responsibility of paying the state trust-fund tax may be held personally liable for failing to do so. Subject to a few exceptions, this also extends to officers of the corporation who own more than 50% of the ownership interest in the corporation, regardless of any attempt to delegate responsibility. Under Ohio Rev. Code §5747.07, the law holds those officers and employees personally liable for the unpaid withholding tax liability, including penalties and interest. The Ohio Department of Taxation determines whether a person has control and supervision by examining a number of factors, so it is advisable that you consult with a professional in determining potential personal liability under state trust-fund liability taxes.

Conclusion

    While this article addresses trust-fund liability generally, the next few articles will discuss personal liability for responsible parties at the state and federal level in more detail. Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by an IRS revenue officer or the Ohio Department of Taxation, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine your potential personal liability, as well as what options and alternatives are available to you.

January 31, 2018

Ohio’s Tax Amnesty Program - Upcoming Deadline

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     Our tax attorneys at Nardone Limited would like to remind everybody regarding Ohio’s Tax Amnesty Program and the upcoming deadline of February 15, 2018. Applications, including the delinquent tax returns and payments, must be filed with the Ohio Department of Taxation by February 15, 2018. Please see our prior article: Ohio Department of Taxation Offers 2018 Tax Amnesty and Voluntary Disclosure Program for more information.

Questions? Contact Us

     The tax attorneys at Nardone Limited routinely represent businesses and individuals in state and federal tax issues, including federal tax collection alternative resolutions. If you are dealing with a local, federal or state tax issue, you should contact an experienced tax attorney today. Nardone Limited’s tax attorneys and professionals have vast experience representing clients before the Ohio Department of Taxation and the IRS. We will thoroughly review your case to determine what options and alternatives are available, including the Ohio Tax Amnesty program.

December 11, 2017

Tax Attorney Vince Nardone Speaks on Drastic Changes to IRS Partnership Audit Rules

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     As part of the work that our tax attorneys continue to do on behalf of our clients related to IRS examinations, appeals, or litigation with the IRS, tax attorney Vince Nardone spoke on Monday, December 11, 2017, at The Ohio Society of CPAs’ Mega Tax Conference.  Mr. Nardone spoke to a large group, consisting mostly of CPAs and accountants from across the state of Ohio, on the upcoming drastic changes to IRS partnership audit rules.  The updated IRS partnership audit rules become effective as of January 1, 2018.  It is important that taxpayers, and their tax advisors, fully understand their rights and obligations under the new rules, if contacted by the IRS.  Therefore, Vince Nardone provided a thorough and comprehensive review of the new IRS partnership audit rules and discussed the practicality and planning opportunities that arise based upon those new rules.  We appreciate and thank The Ohio Society of CPAs accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate.

December 08, 2017

Ohio Department of Taxation Offers 2018 Tax Amnesty and Voluntary Disclosure Program

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     The tax attorneys at Nardone Limited in Columbus, Ohio routinely advise and assist taxpayers regarding their ability to utilize amnesty and voluntary disclosure programs, prior to being audited by the Internal Revenue Service or the Ohio Department of Taxation (the “Department”).  Recently, the Ohio Department of Taxation announced that they will offer a tax amnesty program beginning January 1, 2018, and ending February 15, 2018.  If eligible for the program, any taxpayers with delinquent Ohio taxes who voluntarily come forward during this short amnesty period must pay the full amount of all delinquent taxes plus one-half of the interest due.  The Department will then waive all penalties and one-half of all interest otherwise due.  In addition, the Department will not pursue any potential civil or criminal action.  The Ohio Tax Amnesty only applies to taxpayers who voluntarily disclose and pay their delinquent Ohio taxes during the amnesty period. Taxpayers who have received a notice of assessment, or are under audit/have been audited are not eligible for abatement under this program. 

Eligible Taxes

     Both individuals and businesses are eligible for amnesty, if they meet the necessary requirements.  Taxpayers may seek amnesty for all unreported or under-reported qualifying delinquent taxes that were due and owing as of May 1, 2017 and have not yet been paid.  Eligible taxes for the amnesty program include: individual income tax; school district income tax; employer withholding tax; employer withholding for school district income tax; pass-through entity tax; sales tax; use tax; commercial activity tax; financial institutions tax; cigarette and other tobacco products taxes; and alcoholic beverage taxes.

Need assistance with the Ohio Tax Amnesty Program?  Contact Us

     To be approved for Ohio Tax Amnesty, a taxpayer must submit an application, all appropriate tax returns, and full payment of the taxes due, plus one-half of the applicable interest before the deadline of February 15, 2018.  No partial payments or credit card payments can be accepted.  The tax attorneys at Nardone Limited routinely represent businesses and individuals in state and federal tax issues, including federal tax collection alternative resolutions.  If you are dealing with a local, federal or state tax issue, you should contact an experienced tax attorney today.  Nardone Limited’s tax attorneys and professionals have vast experience representing clients before the Ohio Department of Taxation and the IRS. We will thoroughly review your case to determine what options and alternatives are available, including the Ohio Tax Amnesty program.

November 13, 2017

Tax Attorney Vince Nardone Speaks on Drastic Changes to IRS Partnership Audit Rules

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     As part of the work that our tax attorneys continue to do on behalf of our clients related to IRS examinations, appeals, or litigation with the IRS, tax attorney Vince Nardone spoke on Friday, November 10, 2017, at The Ohio Society of CPAs’ Columbus Accounting Show.  Mr. Nardone spoke to a large group, mostly consisting of CPAs and accountants from the Columbus area, on the upcoming drastic changes to IRS partnership audit rules.  The updated IRS partnership audit rules become effective as of January 1, 2018.  It is important that taxpayers, and their tax advisors, fully understand their rights and obligations under the new rules, if contacted by the IRS.  Therefore, Vince Nardone provided a thorough and comprehensive review of the new IRS partnership audit rules and discussed the practicality and planning opportunities that arise based upon those new rules.  We appreciate and thank The Ohio Society of CPAs accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate.

September 28, 2017

Vince Nardone Talks on Drastic Changes to IRS Partnership Audit Rules

As part of the work that our tax attorneys continue to do on behalf of our clients related to IRS examinations, appeals, or litigation with the IRS, tax attorney Vince Nardone spoke yesterday, September 27, 2017, at The Ohio Society of CPAs Cincinnati Accounting Show.  Mr. Nardone spoke to a large group, mostly consisting of CPAs and accountants from the Cincinnati area, on the upcoming drastic changes to IRS partnership audit rules.  As part of our efforts to continue to represent our business taxpayers and defending those taxpayers in IRS audits, examinations, and appeals, it is important that we stay on top of the most recent changes to IRS partnership audit rules.  For example, this presentation included changes that were made as recent as last week.  Nardone Limited’s tax lawyers and professionals have vast experience representing clients in litigation with the IRS.  We believe that if a taxpayer is contacted by a Revenue Agent under the new partnership audit rules that it is important to understand your rights and obligations under the new rules.  We appreciate and thank The Ohio Society of CPAs accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate.

 

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September 25, 2017

With New Policy Changes, In-Person IRS Appeals Conferences Are Likely Not a Realistic Option for Taxpayers

As tax attorneys in Columbus, Ohio, we assist many individuals and businesses with tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels. Further, the tax attorneys at Nardone Limited routinely advise taxpayers about their appeal rights as part of our tax controversy work. As an example, we assist taxpayers with filing appeals requests at the administrative level with the appropriate taxing authority, including the Internal Revenue Service (“IRS”) and the Ohio Department of Taxation, and then any necessary appeals. Taxpayers may be able to request an in-person appeals conference if the taxpayer meets certain unique facts and circumstances. This article is a follow-up to our previous article, IRS Limiting the Number of In-Person Appeals Conferences.

In-Person Appeals Conference Requests

Once a taxpayer determines that the benefits of an in-person appeals conference may outweigh the potential costs, a taxpayer may request an in-person appeals conference. It is important to remember, however, that although the IRS may grant a taxpayer’s request for an in-person appeals conference, the taxpayer may be required to travel a long distance for the in-person appeals conference. For example, the specific appeals officer assigned to the case may be located in Oklahoma, while the taxpayer is located in Ohio. As a result, traveling to the in-person appeals conference would end up being very expensive for the taxpayer. Thus, even if the IRS ultimately offers an in-person appeals conference to a taxpayer, the reality is, the expenses incurred to attend an in-person appeals conference may not be worth the potential benefit.

Prior to agreeing to an in-person appeals conference, the IRS directs its appeals employees to offer a virtual service delivery conference if such technology is available within 100 miles of the taxpayer’s address. IRM 8.6.1.4.1. If the necessary technology is not available, or the taxpayer declines the offer opportunity for a virtual service delivery conference, then the IRS may agree to an in-person appeals conference, in limited circumstances. Ultimately, the Appeals Team Manager must agree to an in-person appeals conference based upon various factors, as detailed below, and communicate their decision to the taxpayer. IRM 8.6.1.4.1.

When considering whether or not to grant a request for an in-person appeals conference, the Appeals Team Manager looks at various factors, including whether: (i) there are substantial books and records to review that cannot be easily referenced with page numbers or indices; (ii) the Appeals employee cannot judge the credibility of the taxpayer’s oral testimony without an in-person appeals conference; (iii) the taxpayer has special needs that can only be accommodated with an in-person appeals conference; and (iv) there are numerous conference participants that create a risk of an unauthorized disclosure or breach of confidentiality. IRM 8.6.1.4.1. If the Appeals Team Manager agrees to an in-person appeals conference, the appeals officer may conduct circuit riding to travel to a specified location to hold the in-person appeals conference.

Circuit Riding

An appeals officer assigned to the case may sometimes travel to the taxpayer for an in-person appeals conference in what is considered circuit riding. Not all IRS offices allow for circuit riding. In fact, from Nardone Limited’s perspective, the taxpayer is generally required to travel to the location of the appeals officer for an in-person appeals conference. But, according to the IRS, the appeals officer and the taxpayer may agree to meet at a mutually convenient location, as long as the taxpayer’s address is more than 100 miles from a customer facing virtual delivery service or 150 miles from the nearest appeals Office. IRM 8.6.1.4.1.2. Further, the Appeals Team Manager may also allow circuit riding if the nearest appeals office to the taxpayer cannot take the case due to a heavy case load or lack of local expertise. IRM 8.6.1.4.1.2.

According to the IRS, if the specific appeals office (i) does not accommodate in-person appeals conferences; (ii) is not reasonably convenient for the taxpayer or representative; or (iii) does not conduct circuit riding, the assigned officer must request case assistance to participate in the in-person appeals conference. IRM 8.6.1.4.1.1. But, case assistance does not cause the case to be transferred to the assisting appeals officer. Instead, the appeal, and the final determination of the case, stays with the original assigned appeals officer. IRM 8.6.1.4.1.1. The assigned officer will help the assisting appeals officer schedule the conference, provide the assisting appeals officer with the necessary documents for the conference, and lead the conference over the telephone. IRM 8.6.1.4.1.1. The assisting appeals officer will be present at the in-person appeals conference and both appeals officers will ultimately discuss their observations of the conference. The originally assigned appeals officer still makes the final decision regarding the taxpayer’s case. IRM 8.6.1.4.1.1.  In this instance, it may not be worth the taxpayer spending the money to travel to an in-person appeals conference when the taxpayer would not even be meeting with the specific appeals officer making the final decision. Thus, although it appears that the taxpayer has the option for an in-person appeals conference, in reality they do not. The cost of traveling for an in-person meeting with an individual who will not be making the final decision likely is not worth any potential benefit for the taxpayer.

Conclusion

In the end, although a taxpayer may request, and the IRS may grant, an in-person appeals conference, a taxpayer living in Ohio may be required to travel to Oklahoma, for example, for the conference. This could potentially be very expensive for the taxpayer. Thus, the taxpayer must decide whether the cost of traveling that far for an in-person appeals conference is worth it. In many cases, incurring the necessary travel expenses will not be worth any potential benefit for the taxpayer. In sum, choosing the right method for an appeals conference will ultimately save the taxpayer time and money. But, in reality, due to the IRS’s recent policy changes discussed in our previous article, IRS Limiting the Number of In-Person Appeals Conferences, taxpayers likely only have one option for an appeals conference, which is via telephone.

Contact Nardone Limited

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by the IRS or the Ohio Department of Taxation, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

September 07, 2017

IRS Prevails on Controversial Captive Insurance Structure

As tax attorneys in Columbus, Ohio, we assist many individuals and businesses with tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels. As part of that work, we keep up on tax cases in the United States Tax Court that may impact our clients. One case that Nardone Limited has been following is: Avrahami v. Commissioner, 149 T.C. No. 7, which was decided on August 21, 2017. Avrahami was a closely-watched case because of the recent IRS enforcement activity in the Captive Insurance area. The IRS is concerned about the abuse of Captive Insurance entities by third-party promoters and taxpayers that: (i) sincerely fail to understand the ramifications of a third-party promoter’s advice, or more likely, (ii) taxpayers that are blinded by the so-called tax savings created by the Captive Insurance structure.

What are Captive Insurance Companies?

A pure Captive Insurance company is one that insures only the risks of companies related to it by ownership (the “Captive”). When the insured pay an insurance premium to the Captive, the insured receive a deduction for the amount actually paid. On the other hand, the Captive is exempt from taxation on premiums received, up to a certain ceiling. The exemption from taxation on the insurance premiums allow the Captive to build up a large surplus. The Captive is then taxed on its investment income only. This is a significant savings for the insured that paid the premiums and, directly or indirectly, own the Captive.

So, Where Is the Abuse?

Before we talk about the specific abuse, we must first discuss the concept of economic substance—generally and in layman’s terms. The idea is this: for a transaction to have economic substance, the decision to enter into the transaction must be motivated by a legitimate business purpose and not solely for the tax benefits involved (i.e., it must have a substantial non-tax purpose). This is where the abuse lies. The Captive Insurance promoters that tout themselves to be tax attorneys, tax CPAs, and insurance experts promote the tax benefits of forming a Captive for various business owners that are generating significant amounts of income and paying a significant amount of federal taxation. These business owners are usually looking for creative ways to avoid paying taxes. The promoters are relying on the fact that the overall structure promoted is complicated and that the taxpayers will either not understand it, and therefore not challenge it, or simply be blinded by the significant tax savings promoted. As one person has attempted to explain to our firm, if it is complicated and sounds sophisticated, then it must be true, it must be consistent with the law, and the individuals promoting it must be smart since we (i.e., the business owners) do not understand it. In fact, when someone questions the business owner, the business owner will ask, “Why would my tax attorney, tax CPA, or insurance advisor steer me wrong?” Well, they are potentially steering you wrong because of the significant benefits that the promoters receive for setting up the Captive structure.

How are the Captive Insurance Structures Promoted?

The promoters will talk about the form of the transaction and how the form is consistent with and satisfies federal law, both statutory and common law.  The promoters will persuade legitimate businesses, which are already fully insured by traditional unrelated third-party insurance companies, that the business is underinsured. The promoters will tell the businesses that they need environmental insurance, terrorism insurance, and other types of insurance, not typically covered by the businesses’ current policies. The promoters will then go out and have an actuarial firm come up with the necessary premiums to implement the types of insurances chosen by the business. The two main problems with this promotion is: (i) the insurance is either not a practical risk for that particular business, and therefore does not represent an insurance coverage that an ordinary and prudent person would purchase for their business, or (ii) the premiums are unreasonably high that no person, other than one that is trying to avoid paying taxes, would actually pay. So, what happens is that the insured is either buying insurance for the next “zombie apocalypse” that will never impact that particular business or the taxpayer is purchasing insurance that could traditionally be purchased by a staple insurance company for much less than the amount paid by the insured to the insurer. It just does not pass the smell test and violates all sensibilities—other than the fact that it is entered into for the primary benefit of tax avoidance.

Nardone Limited Comment: In the Avrahami case, the Tax Court chose not to discuss the taxpayer’s or promoters’ motivations for entering into the transaction. The Tax Court missed an opportunity to send a message and deter Captive promoters and taxpayers from entering into substantially similar transactions. In my humble opinion, however, just like hundreds around the country that have yet to be identified by the IRS, this case appears to involve individuals that disguised a transaction that did not have a legitimate non-tax business purpose, and did so, for the sole purpose of obtaining the significant tax benefits, which culminated in generating deductions and sheltering income from taxation on a tax-deferred basis. It is important to point out that the Tax Court did ultimately abate certain accuracy-related penalties, likely based upon reliance upon the taxpayers’ tax professionals.  Either way, until the IRS gets more aggressive and begins going after the promoters, this abuse will continue.  To say it another way, what is the difference between a taxpayer that enters into a sophisticated scheme to shelter money through a Captive with no legitimate business purpose, and an individual that intentionally fails to report his income altogether? In both instances, they are not paying taxes; one is just more complicated than the other and harder to uncover and enforce.

The Avrahami decision is attached here. As the reader of this blog, read it yourself and come to your own conclusion. But, we will leave you with this:

“You know, you can put lipstick on a pig, but it’s still a pig.”

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by the IRS or the Ohio Department of Taxation, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

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August 18, 2017

IRS Limiting the Number of In-Person Appeals Conferences

As tax attorneys in Columbus, Ohio, we assist individuals and businesses with tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels, including with the IRS and the Ohio Department of Taxation. Further, the tax attorneys at Nardone Limited routinely advise taxpayers about their appeal rights as part of our tax controversy work. As an example, we assist taxpayers with filing appeals requests at the administrative level with the appropriate taxing authority, including the Internal Revenue Service (“IRS”) and the Ohio Department of Taxation and then any necessary appeals. Generally, taxpayers prefer in-person appeals conferences as in-person appeals conferences are potentially more beneficial than other forms of conferences, such as telephone conferences. This article is the first of two regarding the IRS’s recent policy relating to in-person appeals conferences.

IRS Policy Change

In 2016, the IRS changed its policy regarding in-person appeals conferences to try and resolve appeals in less burdensome ways, such as by telephone or through virtual conferences. IRS Fact Sheet, Changes to Case Transfer and Conference Procedure (Oct. 3, 2016). According to the IRS, the change came after the IRS found that some language in Appeals’ letters that suggested to taxpayers that they needed to request an in-person appeals conference to take full advantage of the appeals process. See IRS Fact Sheet. The IRS found that many of the cases where taxpayers requested in-person appeals conferences could be, and usually are, handled through other methods, such as by telephone. See IRS Fact Sheet. According to the IRS, the IRS believes the policy changes will clarify procedures for taxpayers and make sure taxpayer dollars are used more efficiently. See IRS Fact Sheet. In-person appeals conferences are not being eliminated. Rather, the IRS is taking the position that in-person appeals conferences are no longer the preferred method for appeals resolution. See IRS Fact Sheet. Although the IRS contends that in-person appeals conferences are not preferred over any other method of appeals resolution, there are distinct advantages to being face to face with the appeals officer.

Benefits of an In-Person Appeals Conference

From Nardone Limited’s perspective, there are many reasons why in-person appeals conferences may lead to more resolutions than other methods, such as via telephone conference. Tax appeals can be extremely complicated and technical, and it is not always possible to fully discuss such cases over the phone. Tax appeals can also be large cases that span multiple years with massive amounts of documents and figures which, again, are not easy to fully discuss over the phone. Another reason is simply human nature. It is easier to say no to someone you have never met over the phone than it is to say no directly to someone’s face. It is also much easier to establish rapport with the parties in an in-person meeting than it is over the phone. During in-person appeals conferences, taxpayers and their attorneys can read the body language and facial expressions of the IRS appeals officers to gauge how their arguments are being received, and can change their method of presentation to reach a better result for the taxpayer. This is impossible to do over the telephone.

Ultimately, from Nardone Limited’s perspective, the IRS implemented the new policy to decrease the number of in-person appeals conferences to save money. There is an argument, however, that the policy will actually end up costing both the IRS and the taxpayers more in the long run.  If appeals are unable to be resolved during a telephone conference, some taxpayers will be forced to litigate against the IRS, and, as a result, the IRS will be forced to expend more money to defend its position. Potentially, the cost of defending such cases could cost the IRS more than initially allowing more in-person appeals conferences. To take advantage of these benefits, the taxpayer should request an in-person appeals conference if the facts and circumstances of the taxpayer’s case would allow the taxpayer to benefit most from an in-person appeals conference. But, the conference may be held out of state and force the taxpayer to travel far to attend an in-person appeals conference. As a result, the taxpayers should weigh the cost of traveling to an in-person appeals conference to receive these benefits, with the cost savings of other methods of resolution, such as telephone conferences. The mechanics of how and when in-person appeals conference requests are granted are discussed in our follow-up article, Requesting an In-Person Appeals Conference.

Conclusion

An in-person appeals conference is not necessary in every case. In some cases, telephone conferences and other methods of resolution can lead to a settlement and end up saving both the taxpayer and the IRS time and resources. From Nardone Limited’s perspective, this was the reasoning behind the new IRS policy to limit the number of in-person appeals conferences. But, there are many appeals cases that would benefit from having an in-person appeals conference, especially those cases which are technical and complicated. We strongly encourage the IRS to reconsider their policy change because we believe the policy change will result in an increase of costs and less rights to taxpayers. Taxpayers should weigh the benefits of an in-person appeals conference against the potential cost of traveling to the conference, or potential litigation if the conference does not result in a favorable outcome for the taxpayer. The IRS may grant a taxpayer’s request for an in-person appeals conference, however, the IRS may require that a taxpayer located in Ohio travel to Oklahoma for the conference, as an example. Ultimately, choosing the right method for an appeals conference will ultimately save the taxpayer time and money.

Contact Nardone Limited

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by the IRS, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

July 20, 2017

Taxpayers May Request Penalty Abatements When IRS Fails to Follow Proper Assessment Procedures

IStock_000009013053_SmallAs tax attorneys in Columbus, Ohio, we assist many individuals and businesses with U.S. tax reporting requirements, tax examinations, tax audits, appeals, and litigation relating to civil tax matters at the federal, state, and local levels. Further, the tax attorneys at Nardone Limited routinely advise taxpayers about penalty assessments and penalty abatements as part of our tax controversy work. As an example, we assist taxpayers with filing penalty abatement requests at the administrative level with the appropriate taxing authority, including the IRS and then any necessary appeals. Below is a discussion on the supervisor approval requirement when the IRS assesses penalties. Taxpayers may be able to request an abatement of certain penalties if the IRS has not followed the proper procedures, including obtaining written supervisor approval.

Written Approval Required

Generally, the IRS may not assess a penalty against a taxpayer unless the penalty has been approved in writing by the immediate supervisor of the individual making the initial assessment. See Internal Revenue Code (“IRC”) § 6751(b)(1). In fact, written supervisor approval must be completed before the IRS issues a Notice of Deficiency. If the taxpayer, in good faith, has an argument that the IRS did not follow the proper procedure when assessing penalties, then the taxpayer may be able to request an abatement of those penalties. When taxpayers are requesting an abatement of penalties requiring supervisor approval, the burden is on the IRS to prove that the IRS followed the proper procedure and received written approval by a supervisor before assessing the penalty against a taxpayer, provided there is not an exception to the requirement for written supervisor approval. See IRC § 7491.

Exceptions to Written Approval Requirement

There are two exceptions to the written supervisor approval requirement. See IRC § 6751(b)(2). The first exception to the written supervisor approval requirement is penalties assessed: (i) for failure to file or failure to pay under IRC § 6651; (ii) for failure by an individual to pay estimated income tax under IRC § 6654; and (iii) for failure by a corporation to pay estimated income tax under IRC § 6655. That is, these penalties do not require written approval by a supervisor.

The second exception is for penalties that are calculated electronically, as long as the penalty is free from any independent determination by an IRS employee. Some penalties are assessed using an automated system, called the Automated Underreporter Program. The Automated Underreporter Program compares a taxpayer’s return with third-party returns and sends the taxpayer a letter if there is a proposed deficiency. The taxpayer then has the opportunity to respond. If the taxpayer responds to the IRS’ letter, written approval by an IRS supervisor is necessary before a penalty can be assessed. If the taxpayer does not respond, the penalty is considered automatically calculated and may be assessed without written supervisor approval. See IRM 20.1.1.2.3.2. Accuracy-related penalties for negligent and substantial understatement under IRC § 6662 are assessed under this program, and therefore only require supervisor approval if the taxpayer responds to the pre-notification letter. See IRM 20.1.1.2.3.2. But, as technology advances, the IRS will likely calculate more penalties automatically through electronic means, widening the electronically calculated exception to the written supervisor approval rule. As an example, penalties for frivolous filings are now calculated through an automated electronic system and therefore do not need written supervisor approval unless the taxpayer responds to the IRS letter. See Deyo v. U.S, 296 F. App’x. 157, 2008 WL 4601890.

Obtaining Information from IRS

If the IRS assesses a penalty that requires supervisor approval, the document that contains the supervisor’s written approval is kept with the taxpayer’s file. The IRS is not required to provide a copy of the written approval to the taxpayer, though it may do so as a courtesy if requested by the taxpayer. See IRC § 6751. Documentation of the supervisor’s written approval may be obtained by the taxpayer through a Freedom of Information Act request (FOIA). See IRM 20.1.1.2.3. These records are important for the taxpayer for purposes of a penalty abatement request. Without obtaining a record of the written approval, the IRS could potentially make an argument that the taxpayer’s abatement request is frivolous. Again, keeping accurate and adequate records is essential to successfully defend against an IRS examination, appeal, or ultimately, litigation. The Tax Court has not generally been treating the taxpayer’s argument that the IRS failed to obtain written supervisor approval as frivolous. But, the Tax Court does consider the argument that the IRS failed to follow proper procedure to be frivolous if the taxpayer does not have evidence that the IRS did not obtain written supervisor approval.

Ultimately, if the IRS has assessed a penalty against you or your business, the attorneys at Nardone Limited can work with you to determine whether or not you have a good faith argument for a penalty abatement request due to the IRS’ failure to follow proper procedure and obtain written supervisor approval.

Contact Nardone Limited

Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including penalty abatement requests. If you or your business have been contacted by the IRS, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available to you.

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