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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  And if the Affordable Care Act is repealed (Obamacare), so goes the 3.8% surtax on investment income.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

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. 

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interest abatement, tax penalties, Chicago Tax AttorneysSo you've been unable to pay your taxes for a legitimate reason, and your taxes have accrued both interest and penalties because of the delay. I wrote last week about how to get the penalties abated for various types of 'reasonable cause’. Today, I’ll talk about getting the interest abated. In short: it probably ain't gonna happen.

Internal Revenue Manual Section 20.2.7.1 explicitly contains this warning in bold: "reasonable cause is never the basis for abating interest". In other words, it doesn't matter if you were evacuated from the hospital (where you were recovering from a stroke) due to a bomb threat and emotionally devastated because your mother passed away a day earlier and you're dead broke and need every cent you have to feed your three children and your financial advisor told you not to worry about it; you still owe the interest from your late payment. There's not even an option under the law for an IRS agent to have pity on you - the interest is due no matter what.  Why?  Its all bout the "time value of money", Congress’ justification for requiring interest accruals on all outstanding tax debts.  The idea is that you have had the government’s money all along, since the due date, and it could have been earning interest in the bank…

Unless…

Nevertheless,  there are six very limited circumstances in which the IRS is given the statutory authority to abate the interest on an account, as follows:

  1. The interest itself was assessed illegally or in error;
  2. The interest accrued as a result of "unreasonable error or delay" on the part of an IRS officer;
  3. The interest accrued on an erroneous refund;
  4. The interest accrued on a deficiency that the IRS didn't identify within its own time limits (generally speaking, 12 months);
  5. The taxpayer is living in a Federally-acknowledged disaster area;
  6. The taxpayeis participating in an active war zone.

"In Error"

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