Monthly Archive: May 2015

IRS Whistleblower

Welcome to TaxView with Chris Moss CPA

Do you know someone is defrauding the US Government by filing a false federal tax return? For example suppose you know about a group of perpetrators who are using identity theft to file hundreds of false tax returns and illegally collecting Millions of dollars of bogus refunds. Are you unconvinced or cynical that this could be happening? The fact is that Identity Theft has grown so lucrative that John Mica, (R Florida) says “Drug dealers are turning to IRS identity theft because it’s less risky and more lucrative”. Perhaps you might discover other tax crimes being committed by neighbors or co-workers hiding assets and taxable income offshore, or better yet not reporting income at all by simply not filing tax returns. Do you become a Whistleblower against these folks? But not so fast your wife says. She asks you to consider the safety and the protection of your family against retaliation before moving ahead with a Whistleblower claim? Good question right? So if you are you interested in finding out more about Whistleblowing, IRS style stay tuned to TaxView with Chris Moss CPA to get all the answers on IRS Whistleblowing, whether it is safe to participate for you and your family, and finally, at the end of the day does Whistleblowing really pay.

Just so you know the Government has had a Whistleblower Law on the books for over 100 years. The Secretary of the Treasury as early as 1867 was authorized to pay anyone for information leading to conviction of persons guilty of tax fraud. But it was not until 2006, through an enhanced Whistleblower program created in Section 7623 by the Health Care Act of 2006, that the US Tax Court was given jurisdiction to hear disputes between the Whistleblower and the IRS. Furthermore, it was not until about 2012 that taxpayer Whistleblowers started fighting back in US Tax Court to litigate adverse determinations of their awards. Fast-forward to 2015 and a review IRS Manual Part 25 Special Topics Chapter 2 Whistleblower Awards shows us a massive amount of very good and informative information on the Whistleblower program but no information on currently pending US Tax Court cases. But what about confidentiality and protection of your family?

Section 25.2.2.11 “Confidentiality of the Whistleblower”indeed claims that the Government will protect the identity of the Whistleblower as a “confidential informant” to the “fullest extent permitted by law”. But the Treasury Department in its own 2013 Report to Congress has doubts that there is sufficient protection. Specifically Treasury reports “…Unlike other laws that encourage Whistleblowers to report information to the Government, Section 7623 does not prohibit retaliation against the IRS Whistleblower…” Furthermore, if you decide to become a Whistleblower and you are an essential witness in a judicial proceeding it may not be possible to pursue the investigation or examination without revealing your identity.

Does the Whistleblower have any recourse if their claim is unreasonably rejected? If the Government will not move forward and pay you unless your reveal your identity, you can always petition the US Tax Court for a “Protective Order” to seal the record or in the alternative proceed anonymously while you dispute the Government’s position. In Whistleblower 14106 vs IRS, US Tax Court (2011), the Court sided with the Government on the dismissal of the claim, but Judge Thornton said that “Petitioner’s request to seal the record or proceed anonymously presents novel issues of balancing the public’s interest in open court proceedings against Petitioner’s privacy interests as a confidential informant. The Court noted that Section 7623 does not expressly address privacy interests of tax whistleblowers. But the US Tax Court has observed in US Tax Court 130 T.C. 586 that in appropriate cases the Court “might” permit a petitioner to proceed anonymously and might seal the record as well. The Court in Whistleblower 14106 did in fact under Section 7461(b)(1) and Rule 103(a) grant the Petitioner the right to proceed anonymously as a Whistleblower but denied the Petitioner the right to seal the record in order to preserve the case for the public’s ability to follow the proceeding, including I might add, my ability to insert the facts of the case into this article. Judge Thornton then ordered the parties to redact from the record all names and any identifying formation regarding the Petitioner. Taxpayer wins on anonymously proceeding and IRS Wins on dismissal.

Now that we know you can proceed anonymously if the IRS does not pay you, we now ask what it takes to win as a Whistleblower in US Tax Court. In other words at the end of the day if the IRS denies you compensation, what are your odds of getting paid by appealing to US Tax Court?

First some statistics: According to the Tax Executives Institute in 2012 there were 8,634 Whistleblower cases filed, 128 awards granted totaling over $125M leading to taxes collected of over $592M—a 21% return for the lucky whistleblowers whose claims were accepted by the Government on the funds they all brought in to the US Treasury. But there were also 8,506 Whistleblower cases in 2012 which are either still pending, or were dismissed. At the same time, there has been a materially significant increase of US Tax Court Whistleblower cases that are being litigated. So let’s take a look at what is going on in US Tax Court on some of these pending cases.

In Kenneth William Kasper v IRS US Tax Court (2011), the IRS denied Kasper’s Whistleblower claim determining that the information Kasper provided did not meet the criteria for an award. Kasper appealed to US Tax Court in Kasper vs IRS US Tax Court (2011). The IRS moved for motion to dismiss for lack of jurisdiction claiming that Kasper did not appeal within the 30 day statute. Judge Haines sides with Pro Se Whistleblower Kasper holding that the 30-day period of Section 7623(b)(4) begins on the date of mailing or personal delivery of the adverse determination sent to his last known address. The IRS could not prove that such a mailing had been delivered so IRS loses, Kasper wins round one. The case is now hopefully proceeding to trial to eventually be decided on its merits.

So what does all this say about your chances of winning a Whistleblower award? Of all the 8634 of claims filed in 2012 only 128 were accepted. If you feel your claim has been unreasonably rejected you at least now have the right to proceed to US Tax Court. While there has been a large group of recent US Tax Court Whistleblower cases winning preliminary jurisdictional issues, including the right of Whistleblowers to remain anonymous, it remains to be seen whether or not these same Whistleblowers will eventually win in US Tax Court on the merits of their claims. Stay tuned to TaxView in 2016 with Chris Moss CPA when we will revisit the Whistleblower claims that are winding their way through US Tax Court to ultimately answer whether or not it pays to be an IRS Whistleblower. See you all next time on TaxView.

Kindest regards,

Chris Moss CPA

IRS Whistleblower

Welcome to TaxView with Chris Moss CPA

Do you know someone is defrauding the US Government by filing a false federal tax return? For example suppose you know about a group of perpetrators who are using identity theft to file hundreds of false tax returns and illegally collecting Millions of dollars of bogus refunds. Are you unconvinced or cynical that this could be happening? The fact is that Identity Theft has grown so lucrative that John Mica, (R Florida) says “Drug dealers are turning to IRS identity theft because it’s less risky and more lucrative”. Perhaps you might discover other tax crimes being committed by neighbors or co-workers hiding assets and taxable income offshore, or better yet not reporting income at all by simply not filing tax returns. Do you become a Whistleblower against these folks? But not so fast your wife says. She asks you to consider the safety and the protection of your family against retaliation before moving ahead with a Whistleblower claim? Good question right? So if you are you interested in finding out more about Whistleblowing, IRS style stay tuned to TaxView with Chris Moss CPA to get all the answers on IRS Whistleblowing, whether it is safe to participate for you and your family, and finally, at the end of the day does Whistleblowing really pay.

Just so you know the Government has had a Whistleblower Law on the books for over 100 years. The Secretary of the Treasury as early as 1867 was authorized to pay anyone for information leading to conviction of persons guilty of tax fraud. But it was not until 2006, through an enhanced Whistleblower program created in Section 7623 by the Health Care Act of 2006, that the US Tax Court was given jurisdiction to hear disputes between the Whistleblower and the IRS. Furthermore, it was not until about 2012 that taxpayer Whistleblowers started fighting back in US Tax Court to litigate adverse determinations of their awards. Fast-forward to 2015 and a review IRS Manual Part 25 Special Topics Chapter 2 Whistleblower Awards shows us a massive amount of very good and informative information on the Whistleblower program but no information on currently pending US Tax Court cases. But what about confidentiality and protection of your family?

Section 25.2.2.11 “Confidentiality of the Whistleblower”indeed claims that the Government will protect the identity of the Whistleblower as a “confidential informant” to the “fullest extent permitted by law”. But the Treasury Department in its own 2013 Report to Congress has doubts that there is sufficient protection. Specifically Treasury reports “…Unlike other laws that encourage Whistleblowers to report information to the Government, Section 7623 does not prohibit retaliation against the IRS Whistleblower…” Furthermore, if you decide to become a Whistleblower and you are an essential witness in a judicial proceeding it may not be possible to pursue the investigation or examination without revealing your identity.

Does the Whistleblower have any recourse if their claim is unreasonably rejected? If the Government will not move forward and pay you unless your reveal your identity, you can always petition the US Tax Court for a “Protective Order” to seal the record or in the alternative proceed anonymously while you dispute the Government’s position. In Whistleblower 14106 vs IRS, US Tax Court (2011), the Court sided with the Government on the dismissal of the claim, but Judge Thornton said that “Petitioner’s request to seal the record or proceed anonymously presents novel issues of balancing the public’s interest in open court proceedings against Petitioner’s privacy interests as a confidential informant. The Court noted that Section 7623 does not expressly address privacy interests of tax whistleblowers. But the US Tax Court has observed in US Tax Court 130 T.C. 586 that in appropriate cases the Court “might” permit a petitioner to proceed anonymously and might seal the record as well. The Court in Whistleblower 14106 did in fact under Section 7461(b)(1) and Rule 103(a) grant the Petitioner the right to proceed anonymously as a Whistleblower but denied the Petitioner the right to seal the record in order to preserve the case for the public’s ability to follow the proceeding, including I might add, my ability to insert the facts of the case into this article. Judge Thornton then ordered the parties to redact from the record all names and any identifying formation regarding the Petitioner. Taxpayer wins on anonymously proceeding and IRS Wins on dismissal.

Now that we know you can proceed anonymously if the IRS does not pay you, we now ask what it takes to win as a Whistleblower in US Tax Court. In other words at the end of the day if the IRS denies you compensation, what are your odds of getting paid by appealing to US Tax Court?

First some statistics: According to the Tax Executives Institute in 2012 there were 8,634 Whistleblower cases filed, 128 awards granted totaling over $125M leading to taxes collected of over $592M—a 21% return for the lucky whistleblowers whose claims were accepted by the Government on the funds they all brought in to the US Treasury. But there were also 8,506 Whistleblower cases in 2012 which are either still pending, or were dismissed. At the same time, there has been a materially significant increase of US Tax Court Whistleblower cases that are being litigated. So let’s take a look at what is going on in US Tax Court on some of these pending cases.

In Kenneth William Kasper v IRS US Tax Court (2011), the IRS denied Kasper’s Whistleblower claim determining that the information Kasper provided did not meet the criteria for an award. Kasper appealed to US Tax Court in Kasper vs IRS US Tax Court (2011). The IRS moved for motion to dismiss for lack of jurisdiction claiming that Kasper did not appeal within the 30 day statute. Judge Haines sides with Pro Se Whistleblower Kasper holding that the 30-day period of Section 7623(b)(4) begins on the date of mailing or personal delivery of the adverse determination sent to his last known address. The IRS could not prove that such a mailing had been delivered so IRS loses, Kasper wins round one. The case is now hopefully proceeding to trial to eventually be decided on its merits.

So what does all this say about your chances of winning a Whistleblower award? Of all the 8634 of claims filed in 2012 only 128 were accepted. If you feel your claim has been unreasonably rejected you at least now have the right to proceed to US Tax Court. While there has been a large group of recent US Tax Court Whistleblower cases winning preliminary jurisdictional issues, including the right of Whistleblowers to remain anonymous, it remains to be seen whether or not these same Whistleblowers will eventually win in US Tax Court on the merits of their claims. Stay tuned to TaxView in 2016 with Chris Moss CPA when we will revisit the Whistleblower claims that are winding their way through US Tax Court to ultimately answer whether or not it pays to be an IRS Whistleblower. See you all next time on TaxView.

Kindest regards,

Chris Moss CPA

IRS Appeals Division

Welcome to TaxView with Chris Moss CPA

Many of you small business owners out there will at some point or another will be audited by the IRS. If your audit concludes with what you believe to be an incorrect application of the law to the facts in your specific case you should have the professional who prepared your tax return file a “protest” with the IRS Appeals Division. What is the IRS Appeals Division you ask? First and foremost IRS Appeals is not in the business of examining your tax return and reviewing for example the cancelled checks to support your expense deductions. The IRS Appeals Division rather is an elite group of experts, who ultimately report directly to the Commissioner. Appeals will very effectively and efficiently look at the results of your field examination audit and based on the “protest” prepared by your tax professional will make a determination as to whether or not the law was properly applied to the facts in your unique case . So if you have IRS examination tax liability stay with us here on TaxView with Chris Moss CPA to learn how to defend your business by skillfully applying the law to your unique facts before the IRS Appeals Division.

IRS promulgated Treasury regulation Section 601.106 provides and sets forth the entire framework for Appellate IRS practice. The IRS says all taxpayers have the “guaranteed right” to appeal as does the Taxpayer Bill of Rights but there is not an IRS Code Section that I can find that guarantees an absolute right to appeal. In fact, as underscored in the Estate of Weiss v IRS 90 Tax Court 566 (2005), while 26 U.S. Code § 7123 Appeals dispute resolution requires the Secretary to prescribe procedures by which any taxpayer may request early referral to the Office of Appeals, Federal law does not guarantee the taxpayer’s right to appeal as it does so with the taxpayer’s right to appeal to the US Tax Court. See Nina Olson testimony before the House Ways and Means and Joint Committee on Taxation May 19, 2005.

So if the Appeals process is not a guaranteed right, what exactly is Appeals? In my experience, appellate procedure within the IRS can be a positive cordial experience that ultimately saves both the Government and the taxpayer time and money. While the appeals process initially follows a somewhat structured path, there is invariably very informal discussions between your tax attorney, the examination division and ultimately the appeals officer.

You also now have the choice of a Fast Track Settlement by filing Form 14017 along with your written statement to your IRS appeals office detailing your position in writing on disputed issues. You may want to consider Fast Track for a quick easy compromised resolution if your facts are not contemporaneous and your intent years earlier was not easily established by the facts at that time.

Why are contemporaneous facts so valuable in establishing intent to the Courts? Contemporaneous facts, not self-serving testimony given years later, are important in establishing your intent, opines Chief Judge Phillips, in Philhall Corp. v. United States, 546 F.2d 210, 215 (6th Cir. 1976). If whoever prepared your tax return did not include contemporaneous facts in the tax return itself then at least your tax professional who prepared your tax return has a chance to compromise your tax liability through Fast Track.

For those of you who have the contemporaneously established facts that can be applied to Federal law, then you might be better off if your Tax Attorney files a more formal Protest either prepared on Form 12203 or prepared in a US Tax Court Petition type format. For example let’s take a look at a typical audit examination where the IRS agent is focusing on your rather larger than normal “office expense” deductions.

During the examination phase taking place in 2015 of your 2011 Form 1065 partnership return the IRS agent disallowed all your office expense claiming that he found substantial capital assets in office expenses that should have been capitalized. Specifically he found you purchased 20 ink jet printers at $200 each for a total of $4,000. You told the agent you decided to expense all capital purchases under $500 and record them in office expense, but both the agent his group manager declined to concede to you the deduction. All parties agreed the case was ripe for Appeal.

On Appeal your tax attorney argued that Federal law enacted in 2011 allowed for uniform expensing of capital assets for amounts that are less than $500. The Appeals Officer asked if you could establish this fact contemporaneously from 2011 records and did the law in effect at that time support your tax position taken on your tax return? As it turns out you were advised by your tax attorney in 2011 to contemporaneously include in your tax return an explanation of your $500 policy. Your tax attorney said to the Appeals Officer that such a $500 policy was created as a legal and reasonable tax strategy in accordance with Temporary Regulation 1.263(a)-2T(g). In fact, the Appeals Officer acknowledged that you had included this information in the Protest he received from you and that indeed you had a written policy in place as per disclosure in your 2011 tax return that all capital expenses less than $500 would be expensed as office expense. The Appeals Officer then noted that the temporary regulation in effect in 2011 were eventually made permanent by the IRS as fully detailed in Internal Revenue Bulletin 2013-43 issued October 21, 2013. The Appeals Officer looked one more time at your extemporaneous facts as applied to the law in your Protest and agreed that your tax position was justified, legal and reasonable. He recommended to the Commissioner that the Government concede this issue and that the examination agent’s report be adjusted with no tax due. You win, IRS losses.

So what does all this mean for you? First, always include extemporaneous evidence or “facts” to support your tax positions in your tax return prior to filing. Second, make sure your tax return preparer stands by her work and agrees in writing to represent you before the IRS all the way up at least the Appeals level to fight and defend the positions she took on your tax return. Finally, if and when there is ever an IRS audit coming your way, make sure your professional tax team has credentials and expertise to battle back and defend against the IRS adverse examination adjustments by either filing for Fast Track or submitting a formal Protest to Appeals. Remember, if you have the facts and law on your side an IRS Appeal may be just what your Tax Attorney ordered for safety and tax free living for many years to come.

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

See you next time, on TaxView

Kindest regards,

Chris Moss CPA

Related Party 1031 Tax Free Exchange

Welcome to TaxView with Chris Moss CPA

If you all are entering or coming out of a 1031 tax free exchange this year, whether it be forward or reverse, you may want to consider selling your relinquished investment property or purchasing your replacement investment property from a trusted member of your family. Sounds good right? But not so fast. There are two very dangerous IRS traps out there for your Related Party 1031 Tax Free Exchange. So stay with us on TaxView with Chris Moss CPA to make sure your Related Party 1031 Tax Free Exchange is fully protected and your tax return is bullet proof from adverse IRS audit action which could save you big tax bills many years later after the return is filed.

Before we get to IRS traps ahead, let’s review how the Government defines a related party as it would relate to your planned 1031 tax free exchange. IRS Code Section 1031(f) via IRS Section 267(b) or 707(b)(1) defines related party as your spouse, child, grandchild, parent, grandparent, brother, sister, or a related business, trust, or estate. A business related party could be an individual who owns 50% or more of a business, or two corporations which are members of the same controlled group. There are many more specific business related parties in Section 267(b) and also partnership related parties in Section 707(b)(1).

Once you determine you have a related party as part of your 1031 tax free exchange here is an easy IRS trap to watch out for and avoid: If the related party sells or disposes your relinquished property within 2 years or if you sell or dispose of the replacement property within 2 years then the whole gain is immediately taxable on the date of sale or disposition.

Setting off the 2 year 1031 related party trap results in very harsh penalties and interest on the back taxes you would owe. But if the sale or disposition, either for you, or your related party, had a principal purpose other than tax avoidance, the trap opens wide and you are free to leave. But imagine climbing out in victory of this trap only to get wacked with another hideous IRS trap. Indeed, as Ocmulgee in Ocmulgee Fields vs IRS US Tax Court (2009) found out, there is Section 1031 (f)(4), a catch all trap for anyone and everyone even those folks who escape the first IRS 2 year trap. So keep tuned to TaxView with Chris Moss CPA as we explore the Section 1031(f)(4) trap and see how to best avoid it.

Ocmulgee Fields, developed owned and managed real estate in Georgia since 1973. Owners were Charles Jones, his sons Dwight and Jefferson, and Jones Family Partnership, which was owned 1/3 each by Charles, Dwight, and Jeff. In 2003 Ocmulgee sold the Wesleyan Station property, for $7,250,000. A CPA named Pippin with McNair McLemore Middlebrooks out of Macon suggested a 1031 tax free exchange. After considering at least 6 possible replacement properties Ocmulgee purchased a replacement property called the Barnes and Noble Corner, a recently developed shopping center, which Ocmulgee sold years earlier as raw land in 1996 to a “related company” owned by Dwight and Charles called Treaty Fields for $6,740,000.

Treaty Fields filed its Form 1065 partnership tax return for 2003 with a gain of $4,185,999. Ocmulgee filed its 2004 corporate return form 1120 prepared by CPA Pippin with no gain claiming a deferral of $6,122,736 gain disclosing under part II of Form 8824 that Treaty Fields was a related party. The IRS audited Ocmulgee for 2004 and sent them a bill for $2M and penalty for $400K claiming they failed to qualify for a tax free exchange under Section 1031 (f)(4) which says: This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection. Ocmulgee appealed to US Tax Court in Ocmulgee Fields v IRS US Tax Court (2009).

Ocmulgee argued that they had a legitimate business reason for working with a related party in that the purchase “reunited its ownership” with the larger shopping center that the land had become since 1996. Ocmulgee also claimed they listened to the advice of CPA Pippin. The IRS countered that this case was like Teruya vs IRS US Tax Court (2005) where the Court found the taxpayer failed to show that tax avoidance was not one of the principal purposes of the transaction.

Judge Halpern agreeing with the Government, citing Teruya v IRS, US Tax Court (2005), opined that Ocmulgee anticipated the sale of its low basis property and was tempted to exchange the low basis property for a high basis property to a related person, with the related person then selling the property at a reduced gain—or possibly a loss—because of the shift to the property of his high basis in the property relinquished.

Applying this law to the facts, the Court notes that if Treaty Fields had received Wesleyan Station from petitioner in exchange for the Barnes & Noble Corner, Treaty Fields’s adjusted basis of $2,554,901 in the Barnes & Noble Corner would have shifted to Wesleyan Station (which, in petitioner’s hands, had a basis of only around $716,164). Because of that step-up in basis, Treaty Fields would have realized a gain on the sale of Wesleyan Station approximately $1.8 million less than Ocmulgee would have realized had it forgone an exchange with Treaty Fields and sold Wesleyan Station itself.

The US Congressional report refers to this as “basis shifting”. In effect, because of basis shifting, related persons are able to “cash out” of their investments in property having an inherent gain at relatively little or no tax cost. Also, in some cases, basis shifting allowed related persons to accelerate a loss on property that they ultimately retained. Congress concluded that “if a related party exchange is followed shortly thereafter by a disposition of the property, the related parties have, in effect, ‘cashed out’ of the investment, and the original exchange should not be accorded nonrecognition treatment. This policy is reflected in section 1031(f), as enacted in the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7601(a), 103 Stat. 2370.

Based on the facts in Ocmulgee, Judge Halperin concluded that “basis shifting” allows the Court in this case to infer that tax avoidance was the principal purpose of the 1031 exchange. While the Court conceded that it is not prepared as a matter of law to find that “basis shifting” precludes the absence of a principal purpose of tax avoidance in all cases, it in fact does show tax avoidance in the unique set of facts in Ocmulgee’s case; namely the immediate tax consequences resulting from the 1031 exchange with Treaty Fields included an approximate $1.8 million reduction in taxable gain. The tax savings are plain and Ocmulgee’s counter arguments were unconvincing or speculative. Therefore Ocmulgee has failed to convince the Court that tax avoidance was not a principal purpose of the 1031 tax free exchange. IRS wins. Ocmulgee loses.

What does this mean for you? If you are planning to Section 1031 tax free exchange with a related party, make certain the property that you sell does not sell again within the 2 year period. Likewise you cannot sell the property you purchase for 2 or more years. Even if you avoid the 2 year trap, make sure your tax attorney records the evidence of a non-tax avoidance purpose and inserts that evidence into the tax return being filed that is deferring the gain to avoid Section 1031(f)(4). If you can gather than facts contemporaneously and record them in your tax return you will be bullet proof from IRS attack. Finally, make sure there is no negative evidence of “basis shifting”. Remember you can be presumed to be avoiding tax if there is evidence of basis shifting regardless of the 2 year rule, so make certain the facts are in your favor, and fully recorded by your tax attorney in your tax return as you file. You will most likely be glad you did when the IRS comes knocking on your door. Thanks for joining Chris Moss CPA on Tax View.

See you next time on TaxView with Chris Moss CPA.

Kindest regards,

Chris Moss CPA