4. Taxpayer’s Choice of Forum
4
TAX COURT CLAIMS COURT DISTRICT COURT
TYPE OF COURT DEFICIENCY REFUND REFUND
JURISDICTION 90-DAY LETTER PAY NOW
LITIGATE LATER
PAY NOW
LITIGATE LATER
INTEREST? YES NO NO
EXPERTISE TAX TAX, CONTRACTS GENERAL
OPPONENT IRS DOJ DOJ
TRIER OF FACT JUDGE JUDGE JUDGE/JURY
5. Presumption of Correctness
5
EXCEPTION BURDEN OF PRODUCTION BURDEN OF PERSUASION
FRAUD IRS IRS
NEW MATTER IRS IRS
SUBSTANTIAL OMISSIONS IRS IRS
NAKED ASSESSMENT IRS TP
PENALTIES IRS TP
§7491(A) (BURDEN SHIFTING) IRS IRS
6. Statutes of Limitation
6
90-Day Letter Sent Within the Limitations Period - I.R.C. § 6212(a)
Filing a Return Begins the Running of the Statute (Except with Respect
to Fraudulent Returns) General rule = 3 Years from Filing Date or
Deemed-Filing Date. 6501(a), (b)(1)
Filing Date for Early Returns = Statutory Due Date (e.g., April 15th
for Individuals)
Date Received for Late Returns (Including Automatic Extensions)
Exceptions
6 Years from Date of Filing for “Substantial Omissions”
25% of Gross Income – IRC 6501(e)
Unlimited Assessments
No Return = No Limitation (See IRC 6501(a), (c)(3))
Extensions by Agreement – 6501(c)(4)
“False or Fraudulent Return with Intent to Evade Tax” –
6501(c)(1)
“Willful Attempt to Defeat or Evade Tax” – 6501(c)(2)
7. DEFICIENCY LITIGATION
7
THE UNITED STATES TAX COURT
95% Of Taxpayers’ Claims
“Deficiency” = Amount has not been paid
Jurisdiction
Notice of Deficiency. I.R.C. 6212(a) (Jurisdictional)
Deficiency must be determined. Scar v. Comm’r, 814 F.2d 1363
(9th Cir. 1987)
Deficiency must be timely. I.R.C. 6501
The Bond Procedure: Stops Accrual of Interest (Rev. Proc. 84-58)
Golson Rule: Rule of Decision = Court of Appeal for Taxpayer
8. REFUND LITIGATION
8
CONCURRENT JURISDICTION - I.R.C. 7422(e)
U.S. Court of Federal Claims (“Claims Court”)
U.S District Court
“Refund” = “Pay first, litigate later.” Flora v. U.S. , 362 US 145 (1960)
Entire Deficiency for the Year Must be Paid
Litigate the Claim for Refund
9. Key Factors in Deciding Where to Litigate
Your U.S. Tax Case
9
Taxpayer’s Resources
Claims Court/District Court = Pay First, Litigate Later
Tax Court = No Payment until Verdict (Avoid Accrued Interest
through Bond Procedure, Rev. Proc. 84-58
Complexity of the Legal/Factual Claim
Claims Court/District Court = Pay First, Litigate Later
Tax Court = No Payment until Verdict (Avoid Accrued Interest
through Bond Procedure, Rev. Proc. 84-58
THE RULE OF LAW
Cases of Third-Party Fraud = Outcome-Determinative
Claims Court = No Assessment Beyond 6 Years unless taxpayer
commits the fraud
Tax Court = Assessment Allowed if Fraud by “Tax Return
Preparer”
11. Commercial Tax Preparation
11
Began to Develop after the Second World War because:
Wider Base of Federal Taxes
Less than 7% of U.S. persons owed income taxes before 1940
By 1945, 75% of Americans were liable for federal taxes
Increased Complexity
Studies show that people are more likely to hire tax-return
preparers if their returns are “complex” (measured by the
number of deductible items)
Revenue Act of 1918 (47 Pages) v 1954 Code (907 Pages)
Professional and Commercial Tax Preparation began after 1954
H&R Block founded in 1955
About 50% of U.S. Taxpayers Consulted Preparers by 1972.
12. “Tax Return Preparers”
12
IRS has regulated professional and commercial tax preparers since 1976
I.R.C. 7701(a)(36) defines “Tax Return Preparers” as: Who are “Tax
Return Preparers?
1. Any person who prepares for compensation, or who employs
one or more persons to prepare for compensation
2. Any Return of Tax or any claim for refund of tax, as well as
3. Any person who prepares “a substantial portion” of the return
or claim for refund.
“Any person” = Expressly includes both U.S. and foreign persons. Treas.
Reg. 301.7701-15(e)
“Return of Tax” or “Claim for Refund” = (1) Requires a position as to an
Item of Income but (2) Expressly excludes information returns
“Substantial portion” = Facts-and-Circumstances test unless aggregate
tax positions are either:
1. Less than $10,000 or
2. Less than both $400,000 and 20 percent of the gross income
shown on the return or claim for refund. Treas. Reg. § 301.7701-
15(b)(3)(ii)
nd.
13. The Doctrine of Preparer Fraud
13
Traditional Rule:
Fraud Penalty and Statute-of-Limitations Extension are available
only in cases of fraud on the part of a taxpayer or his/her agent.
“Put simply, tax-return preparers are not agents.” Loving v. I.R.S.,
742 F.3d 1013 (D.C. Cir. 2014).
IRS Switches Course in 2001
FSA 200104006 (Jan. 29, 2001) (finding no liability in cases of
preparer fraud)
FSA 200126019 (June 29, 2001) (imposing perpetual liability on
same or similarly-situated preparer from his preparer’s fraud)
Allen v. Commissioner, 128 T.C. 37 (2007): “We are asked to decide for
the first time whether the limitations period for assessing income tax
under [the false-and-fraudulent return provision of] section 6501(c)(1)1
is extended if the tax on a return is understated due to the fraudulent
intent of the income tax return preparer. We conclude that it is.”
14. Elements of Preparer Fraud
14
Requirements:
“Clear and Convincing Evidence” that:
(1) An underpayment of tax exists, and
(2) The return preparer intended to evade taxes known to be owing by
conduct intended to conceal, mislead, or otherwise prevent the collection
of tax.
WHY “Clear and Convincing” Proof?
IRS entitled to presumption of correctness – 7422(e)
“Fraud.--In any proceeding involving the issue whether the petitioner (i.e.,
taxpayer)] has been guilty of fraud with intent to evade tax, the burden of
proof in respect of such issue shall be upon the Secretary.” I.R.C. § 7454(a)
The Petitioner = The Taxpayer
The Return Preparer = Not agents of Taxpayer. Loving v. I.R.S., 742 F.3d
1013 (D.C. Cir. 2014).
The issue in preparer-fraud cases is not “whether the petitioner has
been guilty of fraud with intent to evade tax,” but whether his/her
preparer was guilty.
How does I.R.C. § 7454(a) apply?
15. Split of Authority
15
DEFICIENCY LITIGATION:
Allen v. Comm’r, 128 T.C. 37, 38 (2007) (upholding otherwise-
untimely assessment against a UPS truck driver who’s only fault
was hiring a tax criminal)
City Wide Transit Inc. v. Comm’r, 709 F.3d 102 (2d Cir. 2013),
rev’g, T.C. Memo. 2011-279, 102 T.C.M. (CCH) 542 (2011)
(imposing liability on NYC bus company for tax frauds that were
intended to cover up crimes against the company, itself)
REFUND LITIGATION:
BASR P’ship v. United States, 795 F.3d 1338, 1339–1357 (2015),
aff’g, 113 Fed.Cl. 181 (2013) (rejecting Allen’s doctrine of
preparer fraud).
Practice Tip: If the IRS is seeking to impose liability after the
statutory period has passed, (1) pay the deficiency and (2) litigate in
Claims Court
16. Is Allen Tolerable?
16
Justice Robert H. Jackson: “It probably would be all but intolerable .
. . to have an income tax system under which there never would
come a day of final settlement.”
Text: “In the case of a false or fraudulent return with intent to evade
tax, [taxes may be assessed or collected,] at any time.” I.R.C. §
6501(c)(1).
“[T]he term ‘return’ means the return required to be filed by
the taxpayer.” I.R.C. § 6501(a).
History: 97-Year-Old Provision only Applied to Agents before Allen
Policy: The Doctrine of Preparer fraud fails both elements of sound
tax policy: (1) fairness to the taxpayer and (2) efficient tax collection
17. Evaluating the Policy of Preparer Fraud
17
Cases of preparer fraud only arise under Code § 6501(c)(1) when: (1)
the taxpayer’s preparer has committed fraud against the IRS,
(2) which resulted in an underpayment of taxes owed by the taxpayer
and
(3) which was not assessed by the IRS within three years of the date the
taxpayer’s return was filed.
IRS data indicates that only about 1 in 11,765 taxpayers (0.000085%)
will hire a fraudulent-return preparer
It is neither feasible nor economically rational for them to insure
against this risk
And since the only way to avoid the risk of a fraudulent tax-return
preparer is to avoid the industry, this uninsurable risk should cause
a diminution in the use of tax-return preparers
THE QUESTION OF WHETHER THAT COST IS WORTH IT CAN BE
ANSWERED BY EVALUATING WHETHER TAX FRAUD IS LIKELY TO BE
REDUCED UNDER A RULE THAT DISCOURAGES THE USE OF THIRD-PARTY
TAX PREPARERS
18. Empirical Analysis
18
Tax-return preparers filed 59% of U.S. tax returns over the decade
from 2004-2013, while self-preparers accounted for only 41%.
Since 2013, the IRS Criminal Investigations Division has also kept
statistics on fraudulent preparers, which show:
That only 7% (687) of the total number of persons indicted for
tax fraud were professional preparers, while the other 93%
(9,658) were self-preparers.
Of the 11,131 taxpayers prosecuted for tax fraud between
2013 and 2015, 93% (10,351) were prosecuted for returns they
filed on their own behalf, while only 7% (780) were of such
prosecutions were of abusive tax preparers.
Self-preparers also comprised 93.8% (8,599) and abusive
preparers only 6.2% (204) of those sentenced for federal tax
fraud during the years 2013–2015.
19. 19
U.S. Self-Prepared Returns
59%
U.S. Preparer Returns
41%
2004-2013 U.S. Returns Filed by
Self-Preparers and Professional Preparers
U.S. Self-Prepared Returns
U.S. Preparer Returns
20. U.S. Tax Fraud Prosecutions
2013-2015
20
2013 2014 2015
U.S. Taxpayers Prosecuted 4,083 3,217 3,051
U.S. Tax Preparers Prosecuted 281 261 238
4,083
3,217
3,051
281 261 238
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
U.S. Taxpayers Prosecuted U.S. Tax Preparers Prosecuted
21. U.S. Tax Fraud Indictments
2013-2015
21
2013 2014 2015
U.S. Taxpayers Indicted 3,632 3,042 2,984
U.S. Tax Preparers Indicted 233 230 224
3,632
3,042
2,984
233 230 224
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
U.S. Taxpayers Indicted U.S. Tax Preparers Indicted
22. U.S. Tax Evaders Sentenced
22
1 2 3
U.S. Taxpayers Sentenced 2,626 3,085 2,888
U.S. Tax Preparers Sentenced 186 183 204
2,626
3,085
2,888
186 183 204
0
500
1,000
1,500
2,000
2,500
3,000
3,500
U.S. Taxpayers Sentenced U.S. Tax Preparers Sentenced
23. Statistical Testing
23
Statistical Testing: In order to test whether tax-return preparers are
less likely than self-preparers to be indicted for tax fraud, and hence
more likely to prepare returns honestly than individual taxpayers, I
ran a chi-squared test with one degree of freedom with the null
hypothesis that tax-return preparers are indicted in the same
proportion as self-preparers for their respectively-filed returns
The Chi-Squared Test was run on indictments rather than
prosecutions or sentencing because I found tax-fraud indictments
to be the most reliable: (1) Indictments must be based on probable
cause, (2) They require agreement between the IRS and DOJ on
whether the indictment should be issued, and (3) They are less
likely than sentences to be underinclusive.
Results: The resulting p-value was less than 0.00001, requiring us
to a near-statistical certainty to reject the null hypothesis and
providing compelling evidence that self-preparers are more likely
to be indicted for tax fraud than professional preparers
24. Results of Testing and Conclusions
24
Results of Chi-Squared Test of the Null Hypothesis:
Null Hypothesis: That tax-return preparers are indicted in the
same proportion as self-preparers for their respectively-filed
returns
The Chi-Squared Test’s p-value was less than 0.00001,
requiring us to a near-statistical certainty to reject the null
hypothesis.
The results of testing expected versus observed indictments for
tax fraud by self-filers and tax-return preparers provides
compelling evidence that self-preparers are more likely to be
indicted for tax fraud than professional preparers
Odds Ratio: On the basis of the same data, I found that individual
filers are at 22.19 times greater odds of being indicted than
preparers
25. Conclusions
25
THE EMPIRICAL RESULTS CONTRADICT THE POLICY ARGUMENTS IN
FAVOR OF THE PREPARER FRAUD DOCTRINE
THEY DEMONSTRATE THAT THE IRS SHOULD BE ENCOURAGING TAX
PREPARATION RATHER THAN PUNISHING THOSE WHO USE
PREPARES
WE CAN ONLY HOPE THEY WILL
