USA V. RODRIGO LOZANO (9th Cir. 2019) 17-50127 This 3-page opinion for a form of tax related fraud charged a violation of 18 U.S. Code §286, rather than the more often seen 18 U.S.C. § 371. The points that the defendant raised on appeal seemed instantly fatally dismissed as based upon grounds that are known to be not well received in similar tax based criminal appeals.

Defendant’s first best ground of appeal was an objection to a jury instruction that included a “deliberate avoidance” instruction when defendant was only charged with conspiracy. However, the defendant in this case was an experienced tax preparer and should have been aware of the impropriety of the criminal actions. In addition a look back into a government press release at the time of trial reveals that the tax preparer “filed false tax refund claims totaling over $53 million, of which the IRS had already paid out more than $23 million of refunds before the preparer’s operations were disrupted. If $53 million is not adequate to establish “deliberate avoidance,” of his responsibility how much more seriousness would be required?

The second ground for appeal, was somewhat “dead before arrival” and challenged well established principles that tax loss is computed based upon intended loss, and not ‘actual’ loss. Sentencing case law is clear that when a $53 million plan is put into motion and stopped only after a $23 million slips into the offender’s pocket, the loss is the $53 million plan put in motion. The U.S. Sentencing guidelines don’t operate upon a “catch me if you can” game that would be based upon a combined criminal incompetence added to prosecution agency ineffectiveness to produce the maximum sentence based upon tax loss. The fraudulent scheme’s potential magnitude after launch is the scalar magnitude upon which a prison sentence is computed.

The third ground for appeal, again an example of a well established principle, is that restitution is normally determined without the benefit of a jury finding, because tax loss and restitution are not separate findings of guilt required to be charged and found beyond a reasonable doubt in accord with Apprendi v. New Jersey, 530 U.S. 466 (2000). The court reminds us that restitution is not a question that is subject to those Apprendi protections, especially as established in. United States v. Green, 722 F.3d 1146, 1149-50 (9th Cir. 2013).

The final teaching point of this case is the fact that the a violation of 18 U.S. Code § 286 was charged rather than the more often seen 18 U.S.C. § 371. What is the difference? Here are the statutes:

“18 U.S. Code §371. Conspiracy to commit offense or to defraud United States.
If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.” (Misdemeanor provision omitted)

“18 U.S. Code §286. Conspiracy to defraud the Government with respect to claims.
Whoever enters into any agreement, combination, or conspiracy to defraud the United States, or any department or agency thereof, by obtaining or aiding to obtain the payment or allowance of any false, fictitious or fraudulent claim, shall be fined under this title or imprisoned not more than ten years, or both.”

A first difference is that 18 U.S. Code §286 has a maximum of 10 years imprisonment while 18 U.S. Code §371 has a maximum of 5 years imprisonment. Given the size of tax loss its not difficult to understand at least one reason why 18 U.S. Code §286 was chosen, but what other factors were present? The Department of Justice Criminal Tax Manual (2001) outlines a specific difference. The Criminal Tax Manual 22.00 — FALSE, FICTITIOUS, OR FRAUDULENT CLAIMS, especially subsection 22.04 outlines a comparison entitled “18 U.S.C. § 286 — ELEMENTS.” The manual includes the following comments:

“18 U.S.C. § 286 that differ from the general conspiracy to defraud statute, 18 U.S.C. § 371. For a further discussion of the differences between section 286 and section 371, see United States v. Lanier, 920 F.2d 887, 891-95 (11th Cir. 1991). In order to establish a violation of 18 U.S.C. § 286, the following elements must be proved beyond a reasonable doubt:

1. An agreement, combination, or conspiracy to defraud the United States;
2. by obtaining or aiding to obtain the payment of any false, fictitious or fraudulent claim.”

“The crime proscribed by section 286 is the entering into an agreement to defraud the government in the manner specified. In order to convict, the government must prove that the defendants agreed to engage in a scheme to defraud the government and knew that the objective of the scheme was illegal.” (See discussion of United States v. Neder, 527 U.S. 1 (1999))

“The government need not charge or establish an overt act undertaken in furtherance of the conspiracy in order to prove a violation of section 286 because, unlike section 371, an overt act is not an element of a section 286 conspiracy. United States v. Lanier, 920 F.2d at 892.”

“The government must also prove that the conspirators agreed to defraud the government by obtaining the payment of false claims against the government. There is no requirement that the coconspirators actually obtained the payment or that the government prove that any steps were taken to consummate the filing of a false claim, so long as the existence of the agreement can be proved. As a practical matter, the proof in section 286 cases generally does not differ from proof in section 371 tax cases, because in most false claims conspiracy cases the existence of the agreement will be proved by acts that were undertaken in furthering the conspiracy or in consummating the attempt to obtain payment of the claim.”

So, 18 U.S.C. § 286 only requires one agreement and one obtaining or aiding to obtain a payment of “any false, fictitious or fraudulent claim.” The need to show an affirmative act could have resulted in multiple blame assignment and an attempt to explain or argue whether an act was in furtherance of the conspiracy or just an innocent act. It may also be that in lesser cases meriting a lesser sentence the government required the greater showing of an overt act so as not to ensnare the ostensibly less innocent. A jury might weigh a 10 year sentence more critically, along with the need for certainty of the establishment of a physical act as well as the intent for such physical act.

Lastly, note that neither 18 U.S.C. § 286 nor 18 U.S.C. § 371 mandate the time consuming direct IRS administrative safeguards associated with 26 U.S.C. §§ 7201, 7202, 7203, 7206, 7207, & 7212(a). Lozano was a massive fraud not really related to any legitimate tax account. The fraud included more than 12,000 false tax returns in an 18-month period in 2011 and 2012; suspicious looking identity and W-2 documents; and hundreds of IRS warning notices to Lozano that the fabricated tax returns and fabricated W-2s were invalid.

Other details of the scheme involved false Tax Identification Numbers (“ITINs”); fake identification documents such as Matricula cards supposedly issued by the Mexican government and birth certificates; fake W-2s; 3 or 4 fictitious dependents per return; refunds in the $3,000 to $4,000 range, along with claims of Child Tax Credit (“ACTC”). This case is valuable to show that a pair of quicker, and more powerful conspiracy tools can be employed in addition to the traditional 26 U.S.C. criminal tax statutes.

References

Department of Justice Criminal Tax Manual (2001)
Criminal Tax Manual 22.00 — FALSE, FICTITIOUS, OR FRAUDULENT CLAIMS
22.04 18 U.S.C. § 286 — ELEMENTS
https://www.justice.gov/tax/criminal-tax-manual-2200-false-fictitious-or-fraudulent-claims

http://cdn.ca9.uscourts.gov/datastore/memoranda/2019/04/29/17-50127.pdf

https://www.justice.gov/usao-cdca/pr/oxnard-tax-return-preparer-convicted-53-million-tax-fraud-scheme (Friday, July 8, 2016 Conviction)

https://www.justice.gov/usao-cdca/pr/investigations-irs-lead-cases-against-tax-return-preparers (Monday, April 10, 2017 Sentence Announcement)

9th Cir. Unpublished Case Indicating Full Disclosure as a Prerequisite to use of a “following in good faith” exception to “willful intent.” (9/11/2019)

USA V. Walter Prezioso (9th Cir. 2019) Unpublished, No.18-50056. (http://cdn.ca9.uscourts.gov/datastore/memoranda/2019/07/25/18-50056.pdf) Full Disclosure was set up in a jury instruction as a prerequisite to a “following in good faith” exception to ” willful intent.” Defense objection was had, but to no avail.

Without stating it explicitly, the key issue in this case seemed to have been an implied allegation that the taxpayer didn’t tell the “whole story” to the accountant at the time the advice was sought. Of what does this case remind? If you make up a justifying fairy-tale and are then told that your fairy-tale justifies a path advantageous to you, it detracts from any “advice-of-accountant” justification. In the Supreme Court holding in Cheek v. United States, 498 U.S. 192, 200 (1991), the only mention of “advice-of-accountant” was:

“However, if the person was told by a lawyer or by an accountant erroneously that the statute is unconstitutional, and it’s my professional advice to you that you don’t have to follow it, then you have got a little different situation.”

Thus, the “advice-of-accountant” example in Cheek was an opinion of a tax practitioner based upon constitutionality, and not upon disclosure of a taxpayer’s particular circumstance. The lesson of Prezioso is clear.
(1) a taxpayer should disclose all of the pertinent facts to the tax advisor, and preferably have the tax advisor investigate to make certain of the facts.
(2) a taxpayer should also know that the intake forms and correspondence of any “incomplete disclosure” will likely readily be available to the court.
(3) As in Prezioso, any hint of omissive manipulation by taxpayer will be used in an instruction to negative the benefit of “good faith”.

Cheek dealt with a tax defier that manifested a good faith belief that labor earnings were not subject to tax. There was no intervening “advice-of-accountant” mechanism in Cheek. The fact that defendant’s proposed expert on accountant duties was denied the right to testify indicates that the accountants failure was a non-existent non-relevant matter in this case.

9th Cir. Case with Tax Evasion Effect (9/8/2019)

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 testify.

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.
(d) 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.

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 testify.

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.
(d) 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 future.

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 blog:
Instructive Warning Cases
Bankruptcy & Offer-In-Compromise – The Hot Dog Stand Paradigm
A Tax Debt Only Comparison of Offer-In-Compromise and Chapter 7 Bankruptcy in California Graduating From a Homelessness Base Case
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 blog:
Debt Control 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 (2016)
Give My Start-Ups a Break! (2015)

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 or later.

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 understood.

(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 the debtor).

(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) (http://cdn.ca9.uscourts.gov/datastore/opinions/2011/06/27/09-60049.pdf) 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 discharge.

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 compromise, etc.

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 services.

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 tax practitioners.

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 statutes.
More 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 for inaccuracy.

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.