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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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Posted on in Tax Rants

Many clients have been contacting me these past several weeks and asking what my take is on the IRS after the change in administration.   Will enforcement activities decrease as a result of the new president’s own rancor for the agency?  Or will the Service instead react like the intelligence community, digging in its collective heels and strengthening its entrenched bureaucracy, perhaps even resurrecting the more draconian tactics of past times?

The answer I have been offering to my clients is both frustrating and disturbing:  I really have no idea.   And I do not think anyone really does know what to expect.  Playing a wait-and-see game makes substantive tax planning difficult, and tax controversy representation even more challenging. 

If the new President, with a supporting Congress, follow through on advertised tax reform proposals, the overall rates will be lowered, saving money for middle and upper income taxpayers.  And if the Affordable Care Act is repealed (Obamacare), so goes the 3.8% surtax on investment income.  While it is uncertain if these changes will happen at all, it is even more unclear now whether they would become effective for the 2017 or the 2018 tax year, making the deferral-of-income strategy a difficult recommendation to counsel at this point.

Posted on in Tax Rants

International investment is becoming easier and easier, so long as you have available funds. 

Advancements in technology, as well as the decreasing significance of language barriers and restrictive politics has made it possible for U.S. interests to invest overseas, even if the capital outlay is not massive. 

But the U.S. reporting rules are strict, and compliance essential.  Here’s what you need to know about reporting requirements prior to undertaking even a minimal foreign investment project. 

FBAR Reporting

In February of 2007, the Internal Revenue Service issued a news release outlining the reporting requirements for foreign financial accounts held by U.S. taxpayers under the Bank Secrecy Act of 1970 (BSA).    

...

Posted on in Tax Rants

Maybe I’m showing my age, but I recall the “reinvention” of the Internal Revenue Service following the nasty Senate hearings in 1998.   

This was before 9/11, when our government’s problems were consistent with a simpler, less troubled time.  For those of you who weren’t of age at the time to care about such things, or perhaps weren’t even inhabiting this planet yet, these hearings were a big deal.  The Tax Collector was put on trial, and the proceedings televised to the nation – the IRS’ Watergate.  Current employees provided testimony behind curtains with masked voices like the adults in Charlie Brown cartoons.  Taxpayers complained bitterly about the “Gestapo-like” tactics of aggressive Revenue Officers and Special (criminal) Agents. 

The aftermath?  Our government’s procurement of a million dollar consultant study analyzing the structural and other problems with the IRS bureaucracy.  The study led to some new legislation – the third, but most significant ever, Taxpayer Bill of Rights.  Also, the IRS reorganized itself, and rolled-out a functionally (rather than geographically) based bureaucracy, while at the same time publicly dedicating itself to improved customer relations and a responsive, educating, client-servicing agency.   The “New” IRS. 

Tax Lien filings and levies dropped significantly in the wake of the roll-out.  Seizures were dramatically reduced and, in part due to the new protective legislation requiring a district court order, the taking of residences to satisfy tax debts all but disappeared entirely from the IRS Collection toolbox.

Shortly thereafter, the offer in compromise program criteria were liberalized, so instead of a 95% plus rejection rate, more and more taxpayers started realizing the “fresh start” promised by the alternative.   And the government reportedly reduced its receivables significantly, making it more resemble a business.  Good for everybody. 

...

It has recently been reported that the massive, 1.2 billion dollar IRS budget cut has resulted in an employee hiring freeze, job reductions, threatened worker furloughs and an overall drop in taxpayer services, as well as the number of new IRS audits reaching historical lows.  The question of the hour, though, is whether this is something that will play out favorably for taxpayers, or will it work to their detriment?

The initial, and perhaps simplistic, analysis is that less audits means less chance of a taxpayer getting caught understating his liabilities.  Less repo men means less tax levies and other enforced collection activities against taxpayers who have past due balances.  Less employees means less harassment.  less phone calls, less site visits, less personalized attention.

All true.

But the examination and collection machine will certainly not stop.  Existing IRS employees will be forced to do more with less, and will no doubt experience more stress doing it.  Morale that plunged in October of 2013 when the federal government shut down and IRS employees were sent home from work for a week will pale when compared to the new depths it could reach as the effects of the cutbacks trickle down to the agents charged with enforcing the revenue laws in a more intense, resource-deprived environment.

Over the last several months our clinic has absolutely experienced a marked increase in Holtsville Examiner’s hostility to offers in compromise, less flexibility in Revenue Officer’s willingness to accommodate short term financial hardships, and significantly more scrutiny of IRS Chief Counsel docket attorney settlements by their managers.  Am I merely stitching together isolated cases to form a pattern that doesn’t really exist, connecting random dots to elucidate trends only in my overly-sensitive mind?  Or is this all the harbinger of worse things to come, the byproduct of severe budget pruning and the attendant manifest of tumbling employee esteem?

...

After a short but welcome honeymoon period during which the IRS absolutely reversed its decades-long historical resistance to granting offers, it now appears as if the agency has returned to its old ways, making offer in compromise again the most difficult alternative for a taxpayer to resolve his or her un-payable debts.

There is simply no doubt that Examiners of Offer in Compromise, and their Appeals Officer counterparts conducting Collection Due Process hearings, have adopted a more reductive, across-the-board scrutiny of offer proposals over the past several months in order to discourage taxpayers from pursuing them.  Here are just a few of the most obvious examples:

  1. Summary "returns" of offers – without appeal rights - when the OIC processing clerk unilaterally determines that the taxpayer is "not in compliance" due to insufficient estimated tax payments made for the current tax year.
  2. For cases in a specific Revenue Officer’s jurisdiction, field determinations that the offers are being submitted "for delay purposes", again resulting in summary returns of the offers, without any appeal rights.  And yeah, the IRS keeps the filing fee and 20% deposit.
  3. Offer Examiners disregarding the 12 month-multiple (and bank account/vehicle exemption offsets) when they determine that the taxpayer could "full-pay" over the remaining months left on the 10-year collection statute – an approach blatantly inconsistent with Offer in Compromise forms and instructions.

It’s hard to conclude that the IRS is employing these draconian measures for any reason other than that the examiners are being told by management that too many offers are being granted, too easily.  Whether this constitutes deliberate, justified enforcement policies, based on frustration with the never-ending flow of submissions by offer mills (many of which admittedly reek of frivolity), or perhaps a targeted response to the specific tactics adopted by those "tax debt relief" firms, there is no doubt that the IRS is making life harder for deserving taxpayers who seek the fresh start promised by the offer in compromise program.

To be sure, we are still getting most offers granted on behalf of our clients.  But the environment has become much less inviting, and we often spend significant time persuading offer examiners to not arbitrarily prejudge the taxpayer and his or her unique situation.  The unintended consequence of these policies is that, when a taxpayer is represented by a knowledgeable, committed tax attorney, there is more, rather than less, managerial involvement and overall time spent on the offer processing.   Clearly, not what the IRS wants or needs at this point.

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