Tax Evasion Avoidance Blog
Civil Testimony in Criminal Trial
(September 7, 2019)
Instructive Warning Cases(August 19, 2019)
Bankruptcy & Offer-In-Compromise – The Hot Dog Stand Paradigm
(August 18, 2019)
PDF Version of: A Tax Debt Only Comparison of Offer-In-Compromise & Chapter
7 Bankruptcy in California Starting From a Homelessness Base Case(August 15, 2019)
How Far Can You Delay Paying Federal Tax Authorities Before Criminal Evasion Charges are Filed?(August 10, 2019)
"TAX DEBT CONTROL" https://rebrand.ly/Aug14TD(July 22, 2019)
Taxpayer First Act Credit Card Trap(July 12, 2019)
There are Usually 6 Tax Choices At Any Given Point In Time(July 10, 2019)
Taxpayer First Act Pt 2(July 07, 2019)
Taxpayer First Act Pt 1(July 06, 2019)
Shatoya: Civil Testimony
Introduction Proper When Defendant Does Not Testify & Previous Opportunity to
Cross Examine Was Availableandy
Handy Tips From:
9th Cir. Case with Tax Evasion Effect
USA V. JOSEPH SHAYOTA (9th Cir. 2019) (No.17-10270-08/19/2019)(http://cdn.ca9.uscourts.gov/datastore/opinions/2019/08/19/17-10270.pdf)
This case answers the question of whether a defendant’s civil record
testimony can be introduced in a subsequent criminal trial. Defendants
objected to the use of their civil trial depositions in their criminal case.
The two element rule that allows the use of civil deposition in a criminal
trial is that (1) the declarant is unavailable, and (2) the defendant had a
prior opportunity to confront the declarant through cross-examination.
Defendant argued that there was no unavailability despite a decision not to
testify because the prosecutor could have granted immunity and force them to
9th Circuit panel continued that raising the Fifth Amendment privilege
renders a defendant “unavailable” for purposes of the Confrontation Clause,
and that the two element rule was satisfied. The panel went on to find that
any error was harmless and defendants would have been found guilty without
the deposition testimony.
Lessons learned from the above principle:
(a) Every civil controversy
that has any possibility to be followed by a criminal prosecution could
raise waivers and admissions in a later criminal case.
(b) For tax, the
administrative record of statements of the taxpayer begins with the tax
return, followed by every communication of fact to IRS & the courts.
“Represent Civilly” by “Thinking Criminally”.
(c) A civil deposition
might have been better, even if filled with “Fifth Amendment” excuses not to
answer, rather than a wordy, overly chatty, explanative manifesto.
Most famously, bankruptcy provides a matching set of personal financial
information which has traditionally provided a significant amount of
information relating directly to tax evasion.
Tip #1: A tax account with IRS should be treated
with the same concern and care as one would treat a credit card or billing
account. There are rights for credit card accounts, billing accounts and tax
accounts and they are each different.
Tip #2: A taxpayers opportunity to demand and make
use of taxpayer rights are maximum at the earliest possible moment of
discovery, and diminish for every time increment and deadline which passes,
whether because of not knowing the problem or ignoring the problem.
Tip #3: The procedural burden and risk on the
taxpayer to suffer the punitive financial pain from misunderstandings
regarding the tax debt account should encourage high involvement in
investigation and tracking of the taxpayer’s tax accounts, but many
taxpayers “put their heads in the sand” because facing something they
believe they cannot control is simply too painful. Ignoring the problem is a
gateway to disaster.
Tip #4: Lien, levy, garnishment should be NO REASON
for taking blind, quick action with a mind simply to stop such lien, levy,
or garnishment. First, taking action will extend the IRS collection statutes
(all years), and the bankruptcy tax discharge statutes(all years). Where
there is a distant milestone with significant savings to the taxpayer, an
immediate action is likely to push such a valuable milestone, such as a CSED
expiration date farther into the future. It could be that if the taxpayer
avoided doing such a tolling act, that the taxpayer may have a balanced
chance to achieve enough passage of time to reduce the tax owed.
Tip #5: Any criminal trouble a taxpayer has had in
the past should make them doubly anxious to insure additional corroborating
documentation and proof of legitimacy for all tax transactions, especially
since the taxpayer with prior convictions will receive longer sentences than
a taxpayer having had no such prior convictions. (Put another way, the
Justice Department can prosecute a case with a lesser tax loss and still
achieve a felony incarceration for a defendant.)
Tip #6: If the reader of this blog was sitting on a
jury and judging another taxpayer’s good faith efforts, what types of
actions would you want to see them attempt or do in order to show good
faith? For example, a tax debtor should consider making a payment to IRS
from time to time, and especially diverting a portion of an unusual windfall
to show intent to repay. Should a prosecution occur, it might be difficult
for a judge to block the evidence of payments from the jury.
Tip #7: One of the most valuable tools a taxpayer
has in dealing with the IRS is an independent tax practitioner that will
deal with IRS in a non-emotional way, keep IRS on topic to both limit the
scope of the audit where possible, as well as to document any attempts to
“hunt” for other taxpayer problems in order to leverage the outcome of the
audit to the IRS’ favor.
Tip #8: Consider choosing an attorney for IRS
representation and be completely forthright about which aspects of the IRS
interaction may likely turn criminal. An attorney that can represent a
taxpayer criminally, and who is forearmed with knowledge of the problem has
a much greater chance of either minimizing the probability of trouble, or at
least minimizing the degree of damage.
Tip #9: Depending upon all conditions, it can be a
real advantage for a taxpayer to operate their own repayment plan in accord
with month-to-month and week-to-week ability to pay. Such a “taxpayer
directed” payment plan will provide flexibility, the ability to allocate tax
and years, and proof of intent to pay.
Tip #10: Review all financial aspects and debt
relief possibilities for tax debt, including bankruptcy enabling statutes
and tolling, Bankruptcy outcomes, the collection statute and tolling, the
effect of taking an action, and the effect of monitoring and planning to
take action after specific milestones are significantly passed in the
Tip #11: A taxpayer should self-prepare and file
their own tax returns in accordance with their own involvement in their
financial lives, and also remember to keep all financial information,
discussions, and bookkeeping off the Internet and isolated from any possible
breach in confidentiality by anyone.
Other Sections within the Tax Debt Approach
Instructive Warning Cases
Bankruptcy & Offer-In-Compromise – The Hot Dog
A Tax Debt Only Comparison of Offer-In-Compromise
and Chapter 7 Bankruptcy in California Graduating From a Homelessness
How Far Can You Delay Paying Federal Tax
Authorities Before Criminal Tax Evasion Charges are Filed?
Taxpayer First Act Credit Card Trap
There are Usually 6 Tax Choices At Any Given
Point In Time
Other Articles Outside the Tax Debt Approach
Extensive Outline (8/14/2019)
Pre-Startup Efficiency – Introduction
(Parts 1&2) (2016)
9th Circuit Rejects “One Day Late Rule” for Late
Filed Return Tax Dischargeability
Give My Start-Ups a Break!
August 19, 2019
The recent case of Hugger v. Warfield (In
re Hugger), 2019 WL 1594017 (9th Cir.
BAP Apr. 5, 2019)(not officially published for citation)(http://cdn.ca9.uscourts.gov/datastore/bap/2019/04/08/Hugger%20-%20Memorandum%2018-1003.pdf),
U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) in an
Appeal from the United States Bankruptcy Court for the District of Arizona,
illustrates mathematically one of the harshest outcomes to occur when
seeking tax debt relief. A debtor sought to discharge $40,000 in tax debt
through a chapter 7 bankruptcy. The amount of non-tax debt totaled $569.
As is not untypical, the
taxpayer in this case filed late tax returns
for 2001, 2002, 2005, 2006, 2009, 2010, and 2012,
all in September 2015. Under the bankruptcy discharge of taxes rules, the
tax year due date must be at least three years old at the time of at the
time of filing the return and as to this, all years qualified except for
2012. The second requirement is that at the time of filing the bankruptcy
case, the tax filing date must have been at least two years old.
The September 2015 tax return filing date indicates
that September 2017 would have normally been the earliest date that
bankruptcy should have been filed. A decent temporal safety factor might
have even been added, depending upon potential tolling activity after all
taxpayer records were searched and analyzed. Even with no indicated tolling
it would have probably have been better to file the bankruptcy October 2017
Debtors can face significant pressure and financial
pain before taking action. However, a bankruptcy filing has significant
negative effects and is not easy to undo, and in some cases is impossible to
undo. Any bankruptcy filing that is dominated by a desire for tax debt
relief should be investigated thoroughly to avoid the type of result that In
re Hugger exemplifies.
The In re Hugger debtor filed a chapter 7
bankruptcy case on January 9, 2017, at least 9 months too early (even
without tolling). On May 9, 2017, the U.S. Bankruptcy Court for the District
of Arizona entered the Debtor’s discharge, and the bankruptcy case was
closed a few days later. By September 2017 it was realized that the
bankruptcy was filed too early and the debtor began action to re-open the
case, undo the discharge, and ask that the bankruptcy case to be dismissed
so that taxpayer could have a later “do over,” so to speak.
Requesting and receiving a chapter 7 case
withdrawal of discharge followed by a dismissal is not as easily done as in
a chapter 13 case. The main standard to be met is that the actions must be
shown to benefit, and not harm the creditors. In this case the creditor was
the United States. The premature bankruptcy filing benefited the United
States, and to allow an unwind would be prejudicial to the creditor
interests. Both the bankruptcy court and the BAP denied withdrawal of the
discharge and dismissal of the case. The bankruptcy filing and discharge
(which did not discharge the tax debt) stands.
Some factors to consider from this case are:
(1) The bankruptcy filing date was so premature
that it may be likely that the statute of limitation rules were not
(2) Even if the taxpayer was facing a garnishment,
putting up with 9 or more months of garnishment would have been preferable
to tossing away the right to discharge the balance.
(3) As in (2) above, any motivation to take quick,
thoughtless action should be avoided. Tax debt based bankruptcy filings
should be well thought out, carefully prepared, and absolutely complete.
(4) Another reason for a well thought out filing is
to make as certain as possible that bankruptcy judges will have no reason to
rule against the debtor. Where the IRS insolvency unit indicates that they
will oppose a tax debt discharge, the court requires an adversary proceeding
by the debtor. Getting IRS insolvency unit assent might encourage debtor’s
counsel to forego an adversary proceeding (which still might be risky for
(5) It is typical for IRS to simply determine
nondischargeability of part or all of the tax debt, and then sit by while a
debtor omits having an adversary, then once discharge and case closing
occurs, simply re-start collection activities. This is somewhat of a trap as
it forces a debtor to either accept the failure, or try and fix it, by
re-opening the case for the purpose of filing an adversary proceeding that
perhaps should have been filed to begin with.
(6) Where tax debt is greater than fifty percent of
all debt (as it was in this case) the means test is not necessary. This
might facilitate haste in filing rather than increase the quality of
information in the schedules.
Aside from the
limitation periods and tolling, the case of Ilko v. California State Board
of Equalization (In
re Ilko) 651 F.3d 1049 (9th Cir. 2011)
is instructive of dischargeability of derivative taxation before assessment.
In Ilko, bankruptcy was filed based upon a contingent debt under
California’s Rev. & Tax Code 6829. Debtor believed that a bankruptcy filing
based upon a contingent (possible future) secondary debt would result in
The thought may have been to simply “list”
potential creditors for contingent debts in the hope of getting an advance
discharge. This case emphasizes that by contrast tax debt cannot be
discharged in bankruptcy before it is assessed. What it means is that
assuming a tax debt that meets the 3-year, 2-year, and 240 day rule in
bankruptcy, that future assessments for that year are not dischargeable.
Thus, a taxpayer making it past the 3 year
assessment statute, knowing that some fraudulent amounts have been omitted
from the return, may have the added amounts assessed, and they will be
nondischargeable unless a further bankruptcy filing occurs more than 240
days after the assessment. So, a bankruptcy filing at year 3.5 followed by
later assessed debts based upon fraud will not discharge for at least 240
days after the assessment. So, the timing for filing bankruptcy within any
limitations period should always consider the possibility of unassessed (or
not yet assessed) tax debt liability potential.
For any later assessment, the prohibition on
bankruptcy re-filing will provide an additional obstacle as there are time
limits for filing a further bankruptcy that depending upon which chapters
were chosen for the first and subsequent bankruptcies. Failure of discharge
of tax is more often followed by an offer in compromise if there is a
genuine inability to pay, rather than a second bankruptcy. Of course, most
secondary assessments are based upon some sort of finding of “responsible
person” liability so at least there may be some ability to avoid an
assessment on that basis before considering bankruptcy, offers in
Have you ever walked down the street and made eye
contact with a hot dog stand vendor? Did you notice that the vendor grabs
his tongs and pulls out a square of hot dog wrap paper in preparation for
you to complete an order even before you have had a chance to say one word?
It can be awkward to ask the time, or to ask directions, once the vendor is
armed with their “weapons of the trade.”
The next quick action is asking you what type bun
and what type link you want. You might have been approaching the vendor to
ask for marital advice. It doesn’t matter. The vendor scoops up his tools of
the trade and positions to complete a hot dog assembly without having to
look. Its such a smooth move, as if it were the billionth time this month.
Of course, if the vendor was asked to provide a
“t-bone steak lunch,” all hell would break loose. “What do you think this
is, a fancy restaurant?” The vendor expects that when the cart says “hot
dogs,” that it can be read easily and that if you approach and make
eye-contact, that you are “going to order a hot dog.” The irritation at a
request to provide a “t-bone steak lunch,” will be greater than if you had
asked the time of day or even to provide marital advice. The point is that
asking about a service that is not along the same lines as “the usual” will
provoke hostility and rejection. You would be lucky to get a “get out of
here,” and “don’t come back”.
This “expected service” situation exists in the tax
debt world. On one side there are large numbers of tax practitioners that
can predominantly directly provide IRS based help, such as
offer-in-compromise services. On the other side there are bankruptcy
practitioners that can potentially provide tax debt relief through a
bankruptcy filing. Two factors account for the rift between these two
First, the professionals that can provide the tax
related services include enrolled agents, CPA’s, and Attorneys. CPA’s are
the most numerous and have the closest connection with taxpayers by virtue
of tax and accounting services. Next are the enrolled agents that provide
tax preparation but not accounting services. Last and fewest in number are
the attorneys that are specialized in tax and provide tax related services.
As an example, the number of tax specialists attorneys in California is less
than 310 at the time of this writing, although there are an unknown number
of attorneys that predominantly practice tax law. The number of enrolled
agents nationally is cited as 53,000 and if the distribution follows the
population, California is 12% and thus 6330 enrolled agents in California.
NASBA (nasba.org) indicates that there are 654,375
actively licensed CPAs in California. So, even if tax practice attorneys
were to number twenty times the 310 tax specialists, it can be easily seen
that the non-attorney practitioners would be 99% of the tax practitioners
available in California, excluding multiple license overlaps. This means
that the overwhelming majority of the population of tax practitioners are
generally unable or unwilling to apply their tax expertise to bankruptcy.
Practice before IRS will involve all of the IRS actions and remedies, but
bankruptcy is likely to be an unexplored mechanism for the vast majority of
Bankruptcy, on the other hand, has practitioners
that from a consumer (taxpayer) standpoint operate mostly with non-tax debt.
Most bankruptcy lawyers know the main basic bankruptcy debt-related
limitations rules relating to the 3 year from tax filing due date, 2 years
from filing late return date, and 240 day from assessment date. Some may not
know in-depth about the complexities of tolling, a mechanism that stops the
normal day-to-day progress toward getting past a limitations date.
Inaccurate and inconsistent IRS record keeping creates further difficulty in
determining which of the lesser ranked events have been recorded as tolling
and which are not.
Many bankruptcy practitioners, even those that
understand tax debt may refrain from not ordering the taxpayer’s full
records to match against transcripts to analyze tax dischargeability in
detail.. In some cases this may be driven by urgency or the necessity for
quick action. Often, the procrastinating public seeks help and perhaps even
bankruptcy practitioners versed in the basic tax mechanism will not take the
time to order a freedom-of-information act full IRS file in addition to a
full set of tax account transcripts. The bankruptcy practice approach might
be simply skewed toward immediate quick filing in response to some myopic
impression of a focused threat.
A monolithic threat is what we humans have become
most accustomed to. If we see a first hint of danger, we focus on that
danger typically ignoring other dangers that may be more deadly. Many
citizen taxpayers perceive a threat and only then approach either a tax
practitioner or bankruptcy practitioner for the first time. The citizen
taxpayer wants the matter to be resolved instantly. The problem is that the
best solution for the taxpayer may be unknown in circumstances where the
taxpayer demands immediate resolution.
To take one partial example from one of hundreds of
possible configurations, what if a taxpayer hires a bankruptcy practitioner
that computes the tax discharge eligibility based upon the
3-year/2-year/240-day computation? What if the client states that there are
no tolling events, but in fact there were tolling events? What if the
taxpayer transcripts have entries associated with tolling events, but they
are incorrect? If there is an SFR (Substitute for Return), will it be
investigated? Will the bankruptcy practitioner use the Freedom of
Information Act and order the taxpayer’s whole file to verify the
transcript, or simply ask the taxpayer to waive any possibility of
nondischargeability of tax debt for all years?
To take that same partial example again, from one of
hundreds of possible configurations, what if a taxpayer hires a tax
practitioner that computes reasonable collection potential without analyzing
the transcripts and testing for tolling? What if a tolling event was not
reported on the transcripts? What if a tolling event was reported and was
improperly entered from someone else’s records, or left open ended? Will the
tax practitioner use the Freedom of Information Act and order the taxpayer’s
whole file, or simply ask the taxpayer to waive any possibility of taking
action before a tax year collection statute expires?
In both cases, I question whether the average
taxpayer been presented with a more complete picture going forward, in order
to see when milestone opportunities occur (such as the expiration of a
collection statute). A taxpayer can blindly wait for a stressor, and then
run to one side (bankruptcy) or the other (IRS remedies) and act, often
without knowing the other side, the bankruptcy statutes, nor the tax
importantly, the taxpayer may not have a view going forward into the future
if a decision is made to take no immediate action at this time.
A taxpayer facing the need to take action now, might
not know if a 2 week wait could result in substantial tax savings, and
whether an eight week wait could produce even more savings. The taxpayer
also needs to know that taking action will generally result in a tolling
with respect to all the statutes of limitation as to other potential
actions. An overly simplistic example is that a bankruptcy filing tolls the
collection statute for later offer-in-compromise filings and later
bankruptcy filings, just as an offer-in-compromise filing will also toll the
collection statute for later offer-in-compromise filings and later
bankruptcy eligibility filings.
Therefore, for any variety of reasons, a taxpayer
might choose (in some cases wisely) to wait years before taking some form of
action, if that taxpayer knew the approximate series of dates associated
with a corresponding series of tax relief milestones going forward. Where a
tax or bankruptcy practitioner is knowledgeable about statutes of
limitation, its not unusual for the client to be informed about the next
milestone, but usually not all the milestones extending into the future.
Most practitioners don’t see themselves as having a duty to enable a
“continue to monitor” outcome (which may be in the client’s best interest).
A knowledge of the nature of things going forward,
what the future will look like without taking action and with triggering
tolling, can be advantageous particularly where the client can’t know what
exigency pressure they will face in future. The problem is that there is an
extended list of actions that can toll the statute. Putting the taxpayer in
control of continually monitoring future milestones while realizing that the
driving impetus to take action should be a decision made perhaps at that
future point in time.
Even further complicating the picture is that some
tolling actions have a higher probability of being accurately recorded (or
even recorded at all) than others. Actions may be recorded (accurately or
inaccurately) in the IRS computer system and obtainable as transcripts, as
well as a more complete total taxpayer record, possibly retrievable using
the freedom of information act (FOIA). In instances where a taxpayer is
taking an action that can only be justified based upon the ability to
favorably compromise the tax debt it is extremely important to know as much
about ALL the IRS records as is possible.
If a taxpayer is a step behind in knowledge, their
efforts can create more problems for themselves than if they took no action
at all. The IRS makes errors. IRS doesn’t always mean to make an error, but
its something for which taxpayer should not have to suffer.
Errors in the record have to be discovered and
advantageously addressed, always sooner rather than later. IRS is said to
have a 40% error rate in computing the collection statute termination dates
(dates where taxpayers no longer owe tax for a given tax years). If a
taxpayer is past the termination of collection date, a taxpayer doesn’t owe
any tax and should not be made to pay. IRS also uses substitute for returns
(SFR’s) notices and “non-filer notices” to encourage taxpayers to file
returns. This technique essentially depends upon the taxpayers to do tax
error correction. 10-20% of SFR’s and other encouragements to file are sent
in error with reliance on the taxpayer to fix the problem.
The error in SFR generation can stem from: (a) the
issue of 1099 to a contractor that wrote your social security number by
mistake, (b) making an inquiry to IRS and having the inquiry trigger a
tolling period unexpectedly or without your knowledge (such as asking the
taxpayer advocate’s office for help, as an example). For every correction
response, other mailings may have been sent to a wrong address, or SFRs may
be based upon errors in 1099s, social security numbers and many other bases
Even worse for bankruptcy filers, an SFR is
treated as a first return filing, setting a threshold below which no amount
for less than the SFR income amount can be discharged in bankruptcy. (See
Chief Counsel Memo 2010-016(SFR)) (http://www.irs.gov/pub/irs-ccdm/cc_2010_016.pdf)
For example, in a typical case of a taxpayer that normally receives $100,000
of revenue and a “cost of goods sold” of $80,000 would report (after
reduction by the $12,000 standard deduction) a salary of $8,000 and pay a
tax of about $1000. However, if IRS learns of receipt of $100,000 of revenue
after receiving no return, an SFR having $88,000 of income ( $100,000 of
revenue – $12,000 standard deduction revenue ) will be prepared and a tax of
about $21,000 will be assessed against the taxpayer.
Even if the taxpayer submits a proper return to
reduce the actual tax to $1000, any amount of tax under the threshold of
$21,000 established on the initial SFR cannot be discharged. So, checking
the SFR to the extent possible to determine if it was generated properly,
could eliminate an impediment to discharge for the year it was wrongfully
generated. It should be understood that not every non-filed return will
result in an SFR, and that a proper SFR should have some verification that
the basis upon which it was generated has significant legitimacy.
Given the above less-than-perfect state of affairs
in discovering the correct state of the record regarding tax debt, it is
important to consult with a practitioner that is interested in presenting a
full and complete picture of the taxpayer’s future milestones, including (a)
expiration of the 10 year collection statute of limitations for all years
owing, (b) the limitation periods beyond which the tax debt is dischargeable
in bankruptcy and (c) the tolling events for each tax year relating to (a)
and (b), and much much more. The “professional” that is motivated to only
serve up their standard fare regardless of the state of the client’s records
and circumstances increase an unknown potential for harm.
PDF Version of:
The result would be different for each state in accord with available state
bankruptcy exemptions. This paper does give an outline of one
approach to organizing an analysis in other states.
How Far Can You Delay Paying Federal Tax Authorities
Before Criminal Evasion Charges are Filed?
A series of related cases
illustrate the very bad results that can come from fighting the IRS in a
non-direct way. We have heard informal rules of thumb regarding tax evasion. One
rule of thumb might be that if you actually evade payment of tax for huge sum of
money that you are more likely to be prosecuted for tax evasion. Another rule of
thumb might be that if you are a well-known celebrity that evades payment of tax
for a modest sum of money that you are also more likely to be prosecuted for tax
evasion. Both ends of the well-known celebrity and high wealth parallel but
oppositely oriented continua yield a less pronounced middle span largely due to
the amount of approvals and signatures that must be obtained before launching a
tax evasion case.
The potential criminal charges for tax evasion do not
exist in a vacuum. Civil punishments can magnify the potential for criminal
liability. The fundamental time period during which a taxpayer owes the
government is either 10 years once tax has been assessed, or its an infinite
number of years of no tax return is filed and no assessment has been made. Given
a relatively slow pace of development for a non-celebrity, small dollar tax
evasion prosecution, it doesn't pay to arrange to be under the IRS microscope
for an extended period of time. It helps even less to become more noticeable
during such an extended period of time.
The typical taxpayer files a
return on time triggering an assessment (debt owed to the government) that
"exists" for 10-years. At the 10 year mark, if nothing has occurred to increase
the 10 year "statute of limitations" period (known as "tolling"), the IRS is no
longer owed the tax debt associated with the tax event. Also, from the time of
assessment, the IRS has a 3-year period to challenge the return with an audit.
If some understatement problem is found (from an audit or any other source), of
a sufficient magnitude to be characterized a presumptive fraud, the 3-year
potential audit period turns into a 6-year audit period (from assessment).
Stating this another way,
the normal flow of the process is that a taxpayer gets (1) a chance to file a
correct return on time, (2a) the government gets 3 years to challenge the return
via audit if the taxpayer made a less than presumptively fraudulent attempt to
file a correct return, or (2b) the government gets 6 years to challenge the
return via audit if the taxpayer made a more than presumptively fraudulent
attempt to file a correct return. (3) the government gets a full 10 year period
(absent tolling) from the day after assessment to the tax collection statutory
expiration date to collect the tax.
The 10 year collection is
unfortunately extended, whenever the taxpayer takes an action which requires the
government suspend its collection. Some of these actions include bankruptcy,
offer-in-compromise, filing a tax court petition. There are many more actions
that cause tolling of the collection statute of limitation to move forward into
the future. The result is that the 10 year collection period might become a 15
year collection period, or even more.
In addition, when a taxpayer
has been particularly problematic for the government, the IRS can file a civil
suit and obtain a judgement for collection of the tax which extends the period
for collection by an additional 20 years. The judgement is renewable before the
end of the additional 20 years and for an additional 20 years. So, even if there
was no tolling, the use of the civil suit to obtain judgement means a 50 year
collection period during which the taxpayer still owes the money.
There is a general
impression that the progression of tax evasion involves cheating, then filing,
and then getting caught due to the cheating mechanism. People forget that you
can evade taxes by simply not paying. An evader can take action to emit chaff in
hopes of escaping IRS attention. This may be foolishly done thinking that the
IRS will grow weary and forget about the debt. Mostly blind, reason-deficient,
struggles simply create a fervor to collect. There are procedures and rules that
govern the negotiation, should be followed for a quick resolution.
Fighting IRS collection in a
desperate way that ignores the policies that enable settlement, appears very
like an evasive action to delay and prevent payment. Couple a perceived
unwillingness to cooperate with temporal expansion (due to tolling) of the
collection statutes of limitation, and the taxpayers spend a much longer period
of time during which they owe and don't cooperate with the IRS. Even though the
transaction of the tax year is long over, and the audit activities are probably
long over, the collection period is extended, leaving the taxpayers under the
collection microscope for an extended period.
IRS then has a much longer
course of action with which to suspect and establish an evasion based upon
non-payment and lack of cooperation. So even in cases in which the transaction
and audit did not produce an evasion pattern, a long, drawn-out delay in
cooperation can possibly supply the evasive elements needed to build a criminal
Any administrative inhibition due to the extended
time required for criminal investigation and administrative approval will vanish
when the taxpayer provides extension of time via statutory tolling.
Further, when the ire of the IRS has noticed activities of the taxpayer causing
a value judgement that the taxpayer is problematic in delaying and
misrepresenting efforts to bring the matter to a proper conclusion, it is much
more likely that a judgement for collection of tax which extends the period for
collection by an additional 20 years will be done. If owing tax debt to the
government is painful, then extending that pain for an additional 20 years is
tantamount to self-torture for what could be an additional one-third of a
Imagine the following theoretical facts, and how they
might appear to the IRS:
(1) Yr 0: Taxpayer avoids paying year capital gains
on the sale of a business by using a tax shelter.
(2) Yr 3-10: IRS collection
(3) Yr 10: Taxpayer files for bankruptcy in an
attempt to discharge the tax owed, but the bankruptcy court denies discharge and
finds that taxpayers willfully attempted to evade or defeat the collection of
tax under 11 U.S.C. § 523(a)(1)(C). (which recently has been set by legal
decision to carry the same standard of proof applicable to tax evasion).
(4) Yr 12: After tolling
delay from the bankruptcy, IRS resumes collection activity.
(5) Yr 15: Taxpayer utilizes
administrative due process procedures, including collection due process and
offer-in-compromise and are unsuccessful.
(6) Yr 16: IRS refers The
Justice Department to file suit to reduce the assessments to judgement and thus
extend the period for collection for another 20 years (possibly to Yr 36, and
possibly to Yr 56 if extended before Yr 36).
(7) Yr 18: Taxpayer files a
complaint in federal district court against a number of federal workers,
including a revenue officer, collection supervisor, an advisor, a settlement
officer appeals officer, offer in compromise manager, tax examiner, offer
specialist, group manager and the acting director for area collection, and other
yet unknown tax and justice personnel in a "Bivens" action for "a conspiratorial
plot to deny him his constitutional rights, purportedly on account of his
alleged disability, at all relevant stages of the aforementioned tax collection
(8) Yr 19: The Bivens action was dismissed based upon
the fact that because the Internal Revenue Code gives taxpayers meaningful
protections against government transgressions in tax assessment and collection .
. . Bivens relief is unavailable for plaintiffs' suit.
Establishment of evasion
using the courses of action from the past can possibly be added to acts
occurring in future to perhaps show a continuous course of dealing, an intent,
establishment of a plan for tax evasion. Would YOU wish a quick resolution to
this tax debt? What actions would YOU take begin such resolution?
(1) Would you start a stream
of payment to IRS on a regular basis?
(2) Would you compute your
reasonable collection amount and liquidate everything else and attempt a further
offer-in-compromise without delay?
(3) Would you begin your own
payment plan subject to a formula that was based upon the IRS cost of living
(4) If your income was steady, would you set up and
be willing to risk failure to try a long-term repayment plan?
(5) Given that a tax crime
conviction would set up the tax debt owing as an even more onerous restitution
payment, what acts and statements could you telegraph to IRS to show that steps
are being taken to begin liquidation to an IRS living standards connected
(6) After liquidation to an IRS living standards
connected subsistence level and achievement of a $0 further collection
potential, would you consider asking to being placed on currently not
collectible (CNC) status?
(7) Would you consider
living overseas in order to possibly enable yourself to repay the tax debt more
rapidly and efficiently through foreign earned income exclusion?
(8) What other actions would
you consider to stave off criminal prosecution while paying off your tax debt?
Announcing a new posting for no-cost CLE on August 14, 2019 :
California Continuing Education, Inc.,
Taxpayer First Act Credit Card Trap
President Donald Trump signed the
Taxpayer First Act on July 1, 2019. The Taxpayer First Act has a number
of provisions, some of which will help IRS with its internal processes, and some
of which are external and aspirational. As to one of the provisions, the IRS is
about to embark on a relationship with credit card companies to allow taxpayers
the ability to pay their taxes directly by credit card. As you may or may not be
aware, one major possibility for a taxpayer to favorably resolve solve their IRS
debt, when conditions permit is via bankruptcy. A resolution requires use of the
3-year, 2-year & 240 day limitation provisions with tolling.
Code §523(a)(14) states that if a nondischargeable tax debt to the United States
( such as a nondischargeable tax or a customs duty) then any credit card debt
incurred to pay such nondischargeable tax debt is excepted from discharge. As a
practical matter this has been the rule for some time, but the possibility of
paying federal tax debt directly with credit cards is expected to have a "short
circuiting" effect, exposing what was has otherwise been an obscuring
relationship between the credit card borrowing and its traceable application
directly to a tax debt.
Currently, the use of credit cards to obtain
money for use in paying taxes is difficult to trace because it probably involves
a borrowing mechanism that uses currency as an intermediate, such as with an ATM
machine. Only a few services allow transfer directly from credit card into a
bank account, but the fees range from 10%-15%. Over the next few months, the IRS
may be able to negotiate credit card transaction fees to 1-2% (not including
interest). If and when this occurs, the use of direct credit card payment to the
IRS will the greatly preferred in instances where credit cards are used as a
source of tax payment funding.
This also will probably mean that tax
transcripts can be expected to carry some indication to reflect the fact that a
tax payment was accomplished with a credit card. Whether this indication shows
up in taxpayer transcripts or is available internally at IRS, the tracing to
verify the type of payment should be expected to be easy. Because the charging
taxpayer is going to have to pay a publicly known credit card processing fee the
records of the transactions may be even more identifiable in the bank credit
card records, especially if the user fee is independently posted. In short, the
fact of the direct use of a credit card to pay tax debt should be instantly and
unambiguously available to both the IRS insolvency unit and to the credit card
The combination of direct credit card use and an
expected low initial transaction fee should make this option very popular, but
once the option is used, it will work to the detriment of tax debtors and shift
the possible remedy chosen as between bankruptcy, offer-in-compromise, and other
alternatives. Worse still, if tax debt practitioners fail to ask about
credit card tax payment, or discover and understand it on the account
transcript, and take it into account for an analysis of the debtor's options,
unpleasant surprises will result. Also needed is a warning
advisement to avoid the direct use of credit cards to pay tax debt as soon as
possible, starting before this mechanism is fully implemented.
To be fair, there are already a number of mechanisms to help taxpayers re-enter
the middle road of tax compliance. The main theme that has operated for 10 years
is "talk to me," and a need for taxpayers to get into contact with IRS.
The contact a taxpayer should have is to access & watch their IRS account in a
way not terribly different from the way they access a credit card account, bank
account, or other creditor's account.
One "meaty" provision of the Taxpayer First Act is the "single point of contact"
mechanism for ID theft. Not only will it help IRS internal mechanisms
synchronize to help combat ID theft, it will enable IRS to get and analyze a
more complete and consistent data set to help better discover the causes of such
identity theft. IRS can then formulate prevention protocols and begin to
publicize warnings and how the particular form of identity theft can be avoided.
On July 1, 2019, President Trump signed the Taxpayer
First Act. I'm expecting that enforcement of the changes may not mean much. The
main fix might be a reduction in the Tax Court Load. What has happened up to now
is that the taxpayer habit of not opening their mail has served a federal policy
requiring an issue to be raised at a first possible (due process / appeals)
hearing opportunity, or waived if the first possible hearing opportunity was
missed. Since tax court petitions are usually sent back to appeals, many
taxpayers file a skeletal tax court petition to try and generate a hearing
opportunity before appeals. If the first hearing opportunity was waived, that
waiver mechanism is still employed by appeals during the tax court remand. The
result has been a bloated number of tax court filings that were submitted not to
get to tax court, but to get to appeals.
Any mechanism that
allows a taxpayer some appeals hearings without causing them file in tax court
simply in order to get to appeals is a good thing, but the Taxpayer First law
does not upset the current "first hearing opportunity" mechanism. The Taxpayer
states that "For purposes of this section, subsections (c), (d) (other than
paragraph (3)(B) thereof), (e), and (g) of section 6330 (which contains
the "first hearing opportunity" rules) shall apply." This means
that the mechanism for challenging the underlying tax CONTINUES to depend upon such a
hearing's being the first opportunity to raise the issue. The tide of petitions
to tax court will probably not be affected. Taxpayers may not feel any increased incentive to open their IRS mail.
Tax Evasion: Conspiracy to Defraud the Government
How: Cause IRS to issue fraudulent income tax refunds
False Claims: More than $6 million
Fraudulent Refunds: More than $2 million
Prison: 18 Months + 3yrs Supervised Release +
Co-Conspirator(1) Prison: 102 Months
Co-Conspirator(2) Prison: 12 Months
Extreme measures were taken to avoid
detection; which results in sentencing enhancement under the Sentencing
Use of e-mail & telephone involves risk of message interception by third
parties (such as the government), and contacting me by a method you choose
carries this risk. Your mode of communication is my notice that you waive
the risk of interception by that mode and by such contact you consent to
return contact in the same manner. If you have ANYTHING that is sensitive to
convey to me, it should be given in a face-to-face meeting. No
attorney-client relationship exists in the absence of (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such, I am not engaged by you as an attorney, nor is any other member of my law firm.
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