Tuesday, December 30, 2008

Adult Film Star Janine Sentenced to Six Months in Prison.

On July 17, 2008, the adult film star known as “Janine” (Janine Lindemulder) was charged with a misdemeanor count for willfully failing to pay tax (a violation of Internal Revenue Code section 7203). In August she pleaded guilty to the charge. Yesterday, the District Court of Oregon sentenced Ms. Lindemulder to six months in prison followed by one year of supervised release which could include up to six months in a halfway house.

Because the section 7203 willful failure to pay tax is a misdemeanor, we knew the prison sentence would be less than one year (a crime becomes a felony when the potential sentence carries potential prison time of more than one year). However, she likely received a reduction in her sentence under the United States Sentencing Guidelines for “acceptance of responsibility.” This means that if she had forced the case to trial and been convicted, she likely would have received a longer sentence. Keep in mind that while her sentence is only six months and she is likely to serve her time in a minimum security prison camp, it is still six months in prison.

In light of the more serious charges dealt with by Janine's celebrity counterparts: Richard Hatch (of CBS’ “Survivor fame) and Wesley Snipes (“Blade” movies) and the Joe Francis (creator of the “Girls Gone Wild” video series) prosecution, Janine Lindemulder’s sentence is not much of a surprise.  What these prosecutions show is that the IRS and Department of Justice are not deterred by celebrity in enforcing the tax laws.

Related news articles: here, here and here.

Monday, December 29, 2008

IRS Appeals – The Appeal.

The IRS appeals process is not terribly mysterious. The proceedings are informal. The taxpayer or representative meets with the Appeals Officer, they sit across the table from one another and discuss the facts, the proof of those facts, the law and whether the law supports the taxpayer or the IRS.

The facts of a case are fixed, how those facts are proven, however, will vary from case to case. Perhaps the taxpayer had the foresight to keep detailed books and records. Perhaps more unconventional documents will be needed to establish certain facts. If the taxpayer has witnesses that would testify on their behalf, those witnesses could provide affidavits attesting to the truth of the taxpayer’s position.

Based on these aspects of a case, the taxpayer and appeals officer will likely find some basis on which to settle the case. Any such settlement will be agreed to and documented by the IRS and taxpayer. Following that documentation, both sides will be able to rely on the settlement in any situation related to the years and items at issue in the case.

Friday, December 26, 2008

Friday's Tax Quote

“If you drive a car, I’ll tax the street.
If you try to sit, I’ll tax your seat.
If you get too cold, I’ll tax the heat.
If you take a walk, I’ll tax your feet.
Well, I’m the taxman.
Yeah, I’m the taxman.”

- The Beatles (“Taxman”)

Monday, December 22, 2008

IRS Appeals – Deciding Which IRS Letter to Appeal.

Following an audit, the IRS auditor will issue a 30-Day Letter outlining the IRS’ position on an asserted liability (and creating a right to appeal) before issuing the more formal 90-Day Letter (creating the right to appeal via a Petition the Tax Court). However, a taxpayer may request that the 30-Day Letter procedure be bypassed and that a 90-Day Letter be issued promptly. Alternately, if the taxpayer ignores the 30-Day Letter, the auditor will issue a 90-Day Letter.

Appealing after receiving a 30-Day Letter may be advantageous because it does not start a Tax Court proceeding. If additional information is submitted with the Protest, the auditor may make additional favorable adjustments before transferring the case to the IRS Appeals Division. These additional adjustments may eliminate the need to appeal the case. Moreover, while the appeal must be filed within 30 days, the auditor can retain the case for further consideration while the right to appeal can be preserved.

Appealing a 90-Day Letter may be advantageous because it may lead to a more speedy resolution of the case. Appealing a 90-Day Letter requires filing a Petition with the Tax Court. A Petition to the Tax Court will first transfer the case to the Appeals Division (if not already considered in Appeals). However, after a Petition to the Tax Court is filed, the Appeals Division will only have jurisdiction over the case for a limited timeframe. At the latest, once the Tax Court places a case on the Trial Calendar, Appeals is supposed to transfer the case to IRS attorneys and may no longer have power over the case. The limited time in which to act can be an incentive for the Appeals Division to resolve a case more quickly.

Conversely, when a 30-Day Letter is appealed, the Appeals Division obtains jurisdiction over a case without the pressure of a pending Tax Court trial. This may result in a lower prioritization of the case and it may take longer to have an appeals settlement conference.

In deciding whether to appeal the 30-Day or 90-Day letter, the factual backdrop of a case should be considered. If time considerations require a quicker resolution to a case, appealing the 90-Day Letter may be appropriate. However, as I wrote in a previous post, if a taxpayer wants to position him or herself to make a later claim for attorney’s fees, the 30-Day Letter must be appealed.

Friday, December 19, 2008

Friday's Tax Quote

“A tax can be a means for raising revenue, or a device for regulating conduct, or both.”

- Felix Frankfurter

Wednesday, December 17, 2008

IRS Appeals – The Right to Appeal Following an IRS Audit.

A taxpayer has the right to request a conference in the IRS Appeals Division following a tax audit and the issuance of an audit report (i.e. a 30-Day Letter or a 90-Day Letter).

A 30-Day Letter constitutes the auditor’s outline of items on a tax return that are under attack. A taxpayer can request an appeals conference after receiving a 30-Day Letter by filing a Protest of the proposed adjustments with the auditor within 30 days of its issuance.

A 90-Day Letter (a.k.a. Statutory Notice of Deficiency) constitutes a formal IRS determination of a tax deficiency. The 90-Day Letter may be appealed by filing a Petition to the United States Tax Court. The Petition begins a proceeding in the Tax Court, however, if the matter has not yet been considered in the Appeals Division (following a 30-Day Letter), the case will first be sent to Appeals. The Petition must be filed within 90 days of the issuance of the 90-Day Letter.

A protest of a 30-Day Letter or Petition following a 90-Day Letter can either be (1) a “skinny” document that simply satisfies the formal requirements of an appeal or (2) or a “fat” document that details a wealth of information and a thorough explanation of why each issue should be decided in favor of the taxpayer. The decision to file a skinny or fat Protest/Petition is largely a strategic decision that turns on the nature of the case and complexity of the issues in the case.

Friday, December 12, 2008

Friday's Tax Quote.

“Almost all taxes on production fall finally on the consumer."

- David Ricardo

Tuesday, December 9, 2008

The IRS Appeals Process

A taxpayer has the right to appeal the results of an IRS tax audit. There are two principal ways that taxpayers end up in the Appeals Division following an audit. Generally this right arises after the taxpayer receives one of the following:

1. 30-Day Letter (an audit report giving the taxpayer 30 days to file a written protest of the audit results), or
2. Statutory Notice of Deficiency (also known as a 90-Day Letter that formally asserts a deficiency in tax).

When deciding whether to appeal the result of an audit, a taxpayer should consider that the Appeals Division settles approximately 90% of the cases before it. This is largely because the Appeals Division has broader settlement authority than an auditor. An auditor can only resolve a case based on the law as applied to the facts. An Appeals Officer, however, can settle a case based on the “hazards of litigation” that a case presents.

The rule governing appeals settlements is: “Appeals will ordinarily give serious consideration to an offer to settle a tax controversy on a basis which fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated.” It is important to note, however, that no settlement will be made based on the nuisance value of a case.

During an appeal, if a taxpayer makes a good faith but unacceptable offer to settle a case, the appeals officer should respond in a manner that gives the taxpayer an idea as to what would constitute an acceptable settlement.

Ultimately, the appeal of an audit is a settlement negotiation. The negotiation turns on the law, the facts and the relative risks of pushing the case into litigation. It is up to the taxpayer, or representative, to explain the merits of the particular case in a way that encourages settlement.

Friday, December 5, 2008

Friday's Tax Quote

“Unquestionably, there is progress. The average American now pays out almost as much in taxes alone as he formerly got in wages.”

- H.L. Mencken

Wednesday, December 3, 2008

Recovering Attorney’s Fees and Costs from the IRS – Part 2

One of the requirements of recovering attorney’s fees in a tax case is that the taxpayer must have exhausted its administrative remedies. To exhaust administrative remedies, the taxpayer must participate in an IRS Appeals conference before a Petition is filed with the Tax Court. This opportunity is often missed because an audited taxpayer is often unaware of the requirement or procedural right to an appeal.

At the end of an audit, the IRS auditor will issue an initial report that outlines the additional tax that the auditor believes is due. This letter gives the taxpayer a 30 day time frame in which to appeal a case. As an acknowledgement to the creativity of tax professionals, this letter is known as a “30 day letter.” Submitting additional information after the issuance of a 30 day letter may result in additional reductions in the asserted tax, but only a written protest requesting an appeals conference will have the case transferred to the IRS appeals division.

If the 30 day letter window to appeal expires, the auditor will issue a Statutory Notice of Deficiency giving the taxpayer 90 days to file a Petition to have the case heard in the Tax Court (the Statutory Notice of Deficiency is also known as a “90 day letter” – again, clever).  Unless an appeal has already happened, filing a Petition with the Tax Court will also cause the case to be transferred to appeals.
Unfortunately, if the 30 day letter appeal option is missed, an audited taxpayer will not be considered to have exhausted its administrative remedies and, as a result, will be unable to recover attorneys fees regardless of the successful outcome of the case.  Appealing the 90 day letter is not enough because (even though the case will go to appeals before actually going to the Tax Court), the rules on collecting attorney's fees require that the taxpayer goes to appeals before filing a Peition with the Tax Court. 

The message? If you are audited and have a good case, the taxpayer should consider challenging the case in appeals following the 30 day letter rather than waiting for the 90 day letter. Note, there may be strategic reasons for ignoring the 30 day letter appeal period and waiting to file the case in the Tax Court after a 90 day letter.  The point to remember, however, is that the 30 day letter vs. 90 day letter appeal right should be deliberately considered.

Monday, December 1, 2008

Recovering Attorney’s Fees and Costs from the IRS.

It may be a little known fact, but, in certain circumstances, an audited business or individual may recover attorney’s fees and costs from the IRS/United States if it successfully challenges a case into the Tax Court process.

To do so, the taxpayer must be a “prevailing party” and the government must not have been “substantially justified” in its position. If the taxpayer is a prevailing party it must also satisfy the requirements of Internal Revenue Code section 7430. This means that the taxpayer must have:

(1) exhausted its administrative remedies,

(2) substantially prevailed in the controversy,

(3) satisfied certain net worth requirements at the outset of the case,

(4) not have unreasonably protracted the proceedings and

(5) the amount of the costs must be reasonable.

All of these requirements must be met to recover attorney’s fees. If the taxpayer does not satisfy all of them, it cannot recover fees and costs.