Tax Evasion Avoidance Blog  



USA V. RODRIGO LOZANO – Memorandum Opinion Invites Further Analysis

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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.


Department of Justice Criminal Tax Manual (2001)
22.04 18 U.S.C. 286 — ELEMENTS


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)


Full Disclosure

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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.

Civil Effect

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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.









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

September 7, 2019

Handy Tips From:

Tax Debt Introductory Considerations

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)


August 19, 2019

Instructive Warning Cases

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.



August 18, 2019

Bankruptcy & Offer-In-Compromise – The Hot Dog Stand Paradigm

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.



August 15, 2019

PDF Version of:

A Tax Debt Only Comparison of
Offer-In-Compromise & Chapter
7 Bankruptcy in California Starting From a Homelessness Base Case

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.





August 10, 2019

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 case.

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 lifetime.

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 activities occur.

(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 effort."

(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 standards?

(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 subsistence level?

(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?


July 22, 2019

Announcing a new posting for no-cost CLE on August 14, 2019 :

California Continuing Education, Inc., Presents


Taking Charge of your Relationship with the IRS




July 12, 2019

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.

Bankruptcy 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 account creditor.

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.




July 10, 2019  

Introducing the Tax Debt Approach (Blog)

There are Usually 6 Tax Choices At Any Given Point In Time




July 07, 2019     Taxpayer First Act Pt 2

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.


July 06, 2019     Taxpayer First Act Pt 1

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 First law 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.


May 15, 2019              Las Vegas 19-527

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 + $362,328.00 Restitution
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 Guidelines


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