ROBERT E. MCKENZIE, ESQ.
ARNSTEIN & LEHR LLP
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CHICAGO, IL 60606
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2005 IRS REPRESENTATION UPDATE©

By Robert E. McKenzie

1. Continuing IRS Reorganization

1.10 After reorganization in 2000 we had Area Directors in 16 area offices in charge of collection and exam. Each area had several Territory Managers who supervised both collection and exam groups. As of 10/1/04, we now have Area Directors in charge of only collection or exam in each area. All Territory Managers also specialize in one discipline. The number of areas has been reduced from 16 to 7. The Area Directors for collection and exam respectively are in different cities within each of those 7 areas. The IRS has decided that specialization is a much more efficient method for collecting taxes and examining tax returns than the generalist approach used immediately after reorganization.

Submission Processing Centers

1.20 Eight former service centers dedicated to individual returns of individual 1040 returns: Andover, Atlanta, Austin, Fresno, Kansas City, Brookhaven, Memphis, and Philadelphia.

Two former service centers dedicated to business returns and TE/GE returns: Cincinnati and Ogden.

After 2003 Brookhaven ceased doing return processing

IRS Memphis center will stop processing paper returns in October 2005

IRS Establishes Office Of Professional Responsibility

1.30 In January, 2003 the Internal Revenue Service announced the creation of a new Office of Professional Responsibility as part of its modernization effort and the appointment of Brien Downing as director. The Office of Professional Responsibility will be charged with enhancing the oversight of tax professionals. It replaces the office of the Director of Practice.

New Director

1.40 In December, 2003 Cono Namorato was appointed as the second Director of the Office of Professional Responsibility, Namorato will lead an organization responsible for licensing “Enrolled Agents. His office will investigate allegations of misconduct and negligence against agents, attorneys, accountants and other professionals representing taxpayers before the IRS. The new office has more than twice the staff that was available under the previous organization. With the additional resources, the Office of Professional Responsibility is concentrating on enforcing the standards of practice for those who represent taxpayers before the IRS as detailed in Circular 230.

New Circular 230 Rules

1.50 In December the Treasury and the IRS announced new Circular 230 rules and bes practices. The rules raise the standard for tax opinions. Even emails giving tax advice now come under the tax opinion standards. The best practices sections are aspirational at this time and not mandatory.

IRS Expands Access to e-Services Products

1.60 The Internal Revenue Service has expanded the number of tax professionals who can use its suite of e-Services incentive products. The expansion meets high demand and requests from tax professionals to use these valuable online tools. Effective March 21, 2005 tax professionals who e-file any combination of five or more accepted individual and business tax returns in a calendar year can use these e-Services products: Disclosure Authorization, Electronic Account Resolution and Transcript Delivery. When first launched in the summer of 2004, the e-Services incentive products were reserved for those who e-filed 100 or more individual returns.

1.70 The IRS developed its e-Services products to meet the needs of the tax practitioner community.

Disclosure Authorization (DA)

Eligible tax professionals can complete disclosure authorization forms, view and modify existing forms, all online. Disclosure Authorization allows tax professionals to electronically submit Form 2848, Power of Attorney and Declaration of Representative; and Form 8821, Tax Information Authorization. Disclosure Authorization expedites processing and issues a real-time acknowledgement of accepted submissions. Form 8655, Reporting Agent Authorization for Magnetic Tape/Electronic Filers, may not be submitted using Disclosure Authorization.

Electronic Account Resolution (EAR)

Tax professionals using EAR can quickly resolve clients’ account problems by electronically sending and receiving inquiries about individual or business account problems, refunds, installment agreements, missing payments or notices. Tax professionals must have a power of attorney (Form 2848 only) on file before inquiring into a client’s account. Responses are delivered to a secure electronic mailbox within three business days. Use Disclosure Authorization to submit the Form 2848 to the IRS. Form 8655 authorizations may not be used to access EAR at this time.

Transcript Delivery System (TDS)

TDS resolves clients' need for return and account information quickly in a secure, online session. It allows eligible tax professionals, with a power of attorney (Form 2848 only) on file, to request and receive account transcripts, wage and income transcripts, tax return transcripts, and verification of non-filing letters for individual taxpayers and account transcripts for business taxpayers. Use Disclosure Authorization to submit the Form 2848 to the IRS. Form 8655 authorizations may not be used to access TDS at this time.

Other e-Services

1.80 Other e-Services products available to all tax professionals include:

e-Services Registration

Tax professionals who want to use any of the e-Services products must register online as individuals to create an electronic account. This is a one-time automated process where the user selects a username, password and personal identification number, or PIN. An on-screen acknowledgement confirms the successful initial registration process.

Preparer Tax Identification Number (PTIN)

Tax professionals may choose to use a PTIN, instead of a Social Security number on returns they prepare for clients. The PTIN application enables a preparer to apply for and receive online a PTIN or look up a forgotten PTIN.

IRS e-file Application

Applicants can complete and submit e-file applications online. Existing participants in IRS e-file can use it to update their applications. Principals of organizations can delegate e-Services authorities to other individuals by identifying them on their IRS e-file application.

Taxpayer Identification Number (TIN) Matching

TIN Matching is a pre-filing service offered to payers of income subject to backup withholding who submit any of six information returns (Forms 1099-B, INT, DIV, OID, PATR, and MISC). Payers must be listed in the IRS Payer Account File (PAF) database and must have filed information returns with the IRS in one of the past two tax years.

Interactive TIN Matching

Allows authorized payers to match up to 25 payee TIN and name combinations against IRS records and receive results within seconds.

Bulk TIN Matching

Allows authorized payers to match up to 100,000 TIN and name combinations and receive results within 24 hours.

2004 Progress

1.90 During 2004 the IRS made the following progress:

E-filing reached 61.5 million individual tax returns, that’s a 16 percent jump from 2003. During 2005 the IRS expects that over 50 percent of all individual taxpayers will file electronically.

Web usage of IRS.gov continued to set records, a 33 percent increase from 2003.

Visits to “Where’s My Refund” on IRS.gov reached 24 million in 2004. That’s a 41 percent increase over the 17 million uses recorded for all of 2003.

The IRS achieved the highest level of phone service in recent history and reduced by more than 20 percent the average amount of time taxpayers waited on the phone. It still only answered about 77% of questions correctly.

For the first time in 40 years, the IRS started processing tax returns on a new computer system. The Customer Account Data Engine (CADE) began processing an initial set of 1040EZ tax returns in summer 2004, the first step in the replacement of the IRS central database of taxpayer account information.

2. Taxpayer Advocate

National Taxpayer Advocate Releases Report To Congress

2.10 In December 2004 National Taxpayer Advocate Nina E. Olson released a report to Congress that tax complexity and customer service as the top two problems faced by taxpayers. In her third annual report to Congress as the National Taxpayer Advocate, Olson also sets forth strong arguments for oversight of unenrolled preparers and makes legislative recommendations for ways to enhance taxpayer protections.

The Most Serious Problems Encountered by Taxpayer

· The Confounding Complexity of the Tax Code

Customer Service in a Complex and Changing Tax Environment

· Taxpayer Access: Face-to Face Interaction

· Taxpayer Access: Remote Interaction

· Accuracy of Tax Law and Accounts Assistance

· Education and Outreach Issues

Tax Preparation in a Complex and Changing Tax Environment

· Oversight of Unenrolled Return Preparers

· Electronic Return and Filing Preparation

· Problems in the Volunteer Return Preparation Program

Processing in a Complex and Changing Tax Environment

· Inconsistent Campus Procedures

· Processing Individual Taxpayer Identification Number Applications And Amended Income Tax Returns

· Lack of Notice Clarity

· Erroneous and Miscalculated Collection Statute Expiration Dates

· Application and Filing Burdens on Small Tax-exempt Organizations

Addressing the Tax Gap in a Complex and Changing Tax Environment

· IRS Examination Strategy

· IRS Collection Strategy

· Federal Contractors and the Federal Payment Levy Program (FPLP)

Taxpayer Rights in a Complex and Changing Tax Environment

· Independence of the Office of Appeals

· IRS Mediation Programs

· Offers in Compromise

· Taxpayer Rights Training in an Environment of Increased Enforcement

· Access to the Taxpayer Advocate Service

Table 24 -- Taxpayer Advocate Service: Post-Filing Taxpayer Assistance

Program, by Type of Relief and Issues, Fiscal Year 2004

Type of relief and issues	Number	Percentage of total
Total applications for taxpayer assistance [1] Taxpayer Assistance Order issued [2]	165,622 30	100 [3]
Relief provided to taxpayer: Total Taxpayer Assistance Order issued [4]: Complied Sustained Modified No Taxpayer Assistance Order issued: Full relief Individual issue [5] Systemic issue [6] Partial relief Individual issue [5] Systemic issue [6]	111,500 23 ** ** 101,451 89,638 11,813 10,022 9,031 991	67 [3] ** ** 61 54 7 6 6 1
No relief provided to taxpayer: Total Taxpayer Assistance Order issued: Rescinded [7] No Taxpayer Assistance Order issued: No relief (no response from taxpayer) Advocate does not deem relief appropriate Relief provided prior to Taxpayer Advocate Service intervention Relief not required (taxpayer rescinded request) No relief (hardship not proven) Relief not required (hardship not related to revenue laws) No relief (tax law precluded relief)	54,049 ** 20,143 18,007 7,976 2,593 2,521 1,495 **	33 ** 12 11 5 2 2 1 **
Relief not identified	73	[3]
Congressional inquiries [8]	12,759	N/A
Issues:
Total	165,622	100

3. Enforcement

Highlights of 2004 Enforcement

3.10 The IRS brought in a record $43.1 billion in enforcement revenue in fiscal 2004. That’s an increase of $5.5 billion from the year before, or 15 percent. Enforcement revenue reflects money brought into the Treasury from our audits, collection activity and document matching.

These results demonstrate funding the IRS is a sound investment. Compared against our overall budget of just over $10 billion, which includes all taxpayer service and education, our enforcement revenues yield a 4-1 direct return on every dollar invested in tax administration.

These are figures for Fiscal Year 2004, which ended Sept. 30.

Audits of high-income taxpayers — those earning $100,000 or more — topped 195,000. That’s a 40 percent increase from 2003 and a 74 percent increase from 2002.

Total audits of all individual taxpayers topped 1 million for the first time since 1999. In 2004, we saw a nearly 19 percent increase from 2003 and almost a 36 percent jump from 2002.

After years of decline, audits of the largest businesses — those corporations with assets of $10 million and over — climbed to 9,560. That’s up from a low of 7,125 from last year. One in six of these large corporations were audited in fiscal 2004.

The number of levies — a key enforcement tool — issued topped 2 million, a 21 percent increase from 2003 and triple the number in 2001.

Criminal investigation activity increased in several areas, including more than 3,000 recommended prosecutions, a nearly 20 percent jump. A big piece of this involves financial crimes, including money laundering and other white-collar crimes where we work cooperatively with the Department of Justice.

Small businesses — those with less than $10 million in assets. The audits dropped to 7,290 in 2004 from 13,680 in 2003. The decline was due to several reasons, including diverting resources to auditing high-income individuals and labor-intensive abusive schemes. Staff time also went to the National Research Program, which will help the agency better identify audit cases.

New IRS Study Provides Preliminary Tax Gap Estimate

3.15 On March 29, 2005 the Internal Revenue Service released preliminary results today from a major research project, National Research Program (NRP), assessing compliance with the tax laws. The study reveals the vast majority of American taxpayers pay their taxes timely and accurately, but the nation still has a significant tax gap. The preliminary findings show the gross tax gap — which is the difference between what taxpayers should pay and what they actually pay on a timely basis — exceeds $300 billion per year. The results indicate the nation’s tax gap increased slightly to between $312 billion and $353 billion in tax year 2001. This compares to the old tax gap estimate for 2001 of $311 billion based on earlier studies. IR-2005-38

Net Tax Gap Tops Quarter-Trillion Dollars

3.20 IRS enforcement activities, coupled with late payments, recover about $55 billion of the tax gap, leaving a net tax gap of between $257 billion and $298 billion.

“This research confirms that the vast majority of Americans pay their taxes honestly and accurately,” IRS Commissioner Mark W. Everson said. “Even after IRS enforcement efforts and late payments, the government is being shortchanged by over a quarter-trillion dollars by those who pay less than their fair share. People who aren’t paying their taxes shift the burden to the rest of us.”

Steps to Bolster Enforcement

3.30 Since 2001, the year covered by the study, the agency has taken a number of steps to bolster enforcement. The IRS increased its enforcement revenues by nearly 28 percent from $33.8 billion in 2001 to $43.1 billion in 2004. Audits of high-income taxpayers — those earning $100,000 or more — topped 195,000 in fiscal year 2004, which is more than double those conducted in 2001. Total audits of all taxpayers topped 1 million last year — a 37 percent jump from 2001.

“We are ramping up our audits on high-income taxpayers and corporations, focusing more attention on abusive shelters and launching more criminal investigations,” Everson said. He noted that the IRS recently announced it had collected $3.2 billion in the settlement initiative for Son of Boss, a particularly abusive tax shelter. “Our enforcement efforts are designed to increase compliance and reduce the tax gap,” Everson said.

The National Research Program

3.40 Previous estimates of the tax gap relied on detailed research that was conducted for tax years 1988 and earlier. To update this research and reflect a changing economy, revisions to the tax code and more subtle shifts in individual behavior, the IRS launched the National Research Program (NRP) in 2001.

The NRP was designed to measure individual taxpayer reporting compliance for tax year 2001. Over the course of the next three years, the IRS randomly selected about 46,000 returns for review and examination. These audits were largely completed by the fall of 2004. To gather statistically valid data, the return selection process for the NRP included an oversampling of high income returns. This enables IRS researchers to draw valid conclusions about important sub-categories of taxpayers.

For instance, slightly more than 6 percent of individual taxpayers filed Schedule C as sole proprietors in 2001. These taxpayers reflect a wide range of economic activity. To draw valid conclusions on Schedule C filers, the NRP examined about 21,000 individuals who filed a Schedule C, slightly less than 46 percent of the total sample.

The current data from the NRP are preliminary, so the results are shown as ranges. As refinements are made to the tax gap analysis, some of these estimates may change. It is unlikely, but possible, that the final estimates of the tax gap will fall outside of the established range. The tax gap figure does not include taxes that should have been paid on income from the illegal sector of the economy.

Understanding the Tax Gap

3.50 The Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations. The tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time.

Components of the Tax Gap

3.60 The tax gap can be divided into three components: nonfiling, underreporting and underpayment. Nonfiling occurs when taxpayers who are required to file a return do not do so on time. Underreporting of tax occurs when taxpayers either understate their income or overstate their deductions, exemptions and credits on timely filed returns. Underpayment occurs when taxpayers file their return but fail to remit the amount due by the payment due date.

Three Components

3.70 Of these three components, underreporting of income tax, employment taxes and other taxes represents about 80 percent of the tax gap. The single largest sub-component of underreporting involves individuals understating their incomes, taking improper deductions, overstating business expenses and erroneously claiming credits. Individual underreporting represents about half of the total tax gap. Individual income tax also accounts for about half of all tax liabilities.

Underreporting Is Largest Component

3.80 Underreporting noncompliance is the largest component of the tax gap. Preliminary estimates show underreporting accounts for more than 80 percent of the total tax gap, with non-filing and underpayment at about 10 percent each. Individual income tax is the single largest source of the annual tax gap, accounting for about two-thirds of the total. For individual underreporting, more than 80 percent comes from understated income, not overstated deductions.

Design of NRP

3.90 The NRP was designed to measure individual taxpayer reporting compliance for tax year 2001. Over the course of the next three years, the IRS randomly selected about 46,000 returns for review and examination. These audits were largely completed by the fall of 2004. To gather statistically valid data, the return selection process for the NRP included an oversampling of high income returns. This enables IRS researchers to draw valid conclusions about important sub-categories of taxpayers.

The tax gap figure does not include taxes that should have been paid on income from the illegal sector of the economy.

Preliminary Findings on the Tax Gap

3.100 For Tax Year 2001, all taxpayers paid $1.767 trillion on time, a figure that represents from 83.4 percent to 85 percent of the total amount due. The 2001 tax gap, the difference between taxes owed and taxes paid on time is from $312 billion to $353 billion for all types of taxes.

Noncompliance Rising

3.110 Overall, the noncompliance rate is from 15 percent to 16.6 percent of the true tax liability. The old estimate, derived from compliance data for Tax Year 1988 and earlier, was 14.9 percent.

Finding and Collecting Some of the Tax Gap

3.120 Late payments and other IRS enforcement and compliance efforts, including taxpayer audits and collection activities (payment arrangements, liens, levies and other legal actions) recover some of the Tax Gap. For Tax Year 2001, the IRS expects eventually to collect an additional $55 billion of the tax gap, reducing the net amount of the tax gap to between $257 billion and $298 billion.

Areas Where Compliance Has Decreased

3.130 Among the areas where taxpayer compliance appears to have worsened are:

• Reporting of net income from flow-through entities, such as partnerships and S corporations
• Reporting of proprietor income and expenses, such as gross receipts, bad debts and vehicle expenses
• Reporting of various types of deductions

Areas With Improved Compliance

3.140 Among the areas where compliance seems to have improved is the reporting of farm income.

Overall, compliance is highest where there is third-party reporting and/or withholding.

For example, most wages, salaries and tip compensation are reported by employers to the IRS through Form W-2. Preliminary findings from the NRP indicate that less than 1.5 percent of this type of income is misreported on individual returns. IRS researchers anticipate identifying other specific areas of deterioration and improvement in the coming months as they complete the detailed analysis of the study’s data.

Further Benefits of This Research

3.150 More than establishing the overall extent of individual underreporting, the NRP study also offers IRS officials specific insight into the types of income reporting that have the greatest compliance problems. For example, the NRP data will not only provide the misreporting rates associated with individual lines of the tax return, but will also be the basis for updating the statistical formulas that assist IRS employees in selecting returns for audit.

New DIF Formulas

3.160 When these updated formulas become available for use, IRS employees will be better positioned to select returns for examination that have the greatest likelihood of underreporting. Using such an approach better ensures that IRS audits are focused on the returns most in need of examination. This not only improves IRS efficiency, but it also assures taxpayers that others are paying their fair share. It also lessens the likelihood that those with accurate tax returns will receive the same degree of scrutiny.

Businesses More Likely to Not Comply.

3.170 Most of the understated income comes from business activities, not wages or investment income. Compliance rates are highest where there is third-party reporting or withholding. Preliminary findings show less than 1.5 percent of wages and salaries are misreported.

Bigger IRS Budget for 2006

3.180 The President has called for a nearly 8 percent increase for enforcement activities in the administration’s 2006 IRS budget request. The additional funding will increase audits of corporations and high-income individuals as well as expand collection and criminal investigation efforts.

3.190 The President has called for a nearly 8 percent increase for enforcement activities in the administration’s 2006 IRS budget request. The additional funding will increase audits of corporations and high-income individuals as well as expand collection and criminal investigation efforts.

Fiscal Year 2005

(First Quarter - 10/1/04 through 12/31/04)

How to Interpret Criminal Investigation Data

Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.

	Totals
Investigations Initiated	998
Prosecution Recommendations	727
Information/Indictments	502
Total Convictions	512
Total Sentenced*	442
Percent to Prison	86.9%
Average Months to Serve	45

Three Fiscal Years Trends in Investigations - Criminal Investigation (CI)
How to Interpret Criminal Investigation Data Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.
	FY 2004	FY 2003	FY 2002
Investigations Initiated	3917	4001	3906
Prosecution Recommendations	3037	2541	2133
Information/Indictments	2489	2128	1924
Total Convictions	2008	1824	1926
Total Sentenced*	1777	1768	2201
Percent to Prison	84%	84%	82%

Enforcement Statistics - Criminal Investigation (CI) Enforcement Strategy
How to Interpret Criminal Investigation Data: Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.
Investigations Initiated	FY 1995	FY 1996	FY 1997	FY 1998	FY 1999	FY 2000	FY 2001	FY 2002	FY 2003	FY 2004
Tax Investigations	3090	3278	3049	2461	1916	1785	1851	2466	2446	2163
Other Financial Crimes	1910	2056	2286	2194	2036	1587	1433	1440	1555	1754
TOTAL	5000	5334	5335	4655	3952	3372	3284	3906	4001	3917
Prosecutions Recommended
Tax Investigations	1932	1944	1813	1726	1358	1043	1002	1025	1353	1461
Other Financial Crimes	1683	1661	2004	1801	1762	1391	1333	1108	1188	1576
TOTAL	3615	3605	3817	3527	3120	2434	2335	2133	2541	3037
Indictments/Informations Filed
Tax	N/A	N/A	1673	1445	1260	1122	998	954	1036	1114
Other Financial Crimes	N/A	N/A	1858	1735	1692	1347	1294	970	1092	1375
TOTAL	3384	3274	3531	3180	2952	2469	2292	1924	2128	2489
Sentenced
Tax	1373	1488	1484	1482	1167	1134	906	1023	835	855
Other Financial Crimes	1428	1289	1525	1492	1452	1341	1332	1178	933	922
TOTAL	2801	2777	3009	2974	2619	2475	2238	2201	1768	1777
Special Agents On-Board	3356	3335	3158	3004	2850	2740	2800	2903	2805	2796

Abusive Return Preparers

How to Interpret Criminal Investigation Data Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.
	FY 2004	FY 2003	FY 2002
Investigations Initiated	206	229	254
Prosecution Recommendations	167	169	89
Indictments/Informations	121	109	61
Sentenced	90	49	76
Incarceration Rate*	84.4%	83.7%	86.8%
Avg. Months to Serve	19	19	23

Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year. The following nonfiler statistics represent Criminal Investigation's (CI) efforts in the past three full fiscal years:
Nonfiler Statistics	FY 2004	FY 2003	FY 2002
Investigations Initiated	417	536	503
Prosecution Recommendations	317	302	244
Indictments//Informations	277	234	233
Sentenced	194	218	218
Incarceration Rate*	92.3%	81.7%	88.1%
Avg. Months to Serve	36	40	49
*Incarceration may include prison time, halfway house, home confinement, or a combination thereof.

Table 18 -- Criminal Investigation Program, by Status or Disposition, Fiscal Year 2004
Status or disposition	Total	Legal Source Tax Crimes	Illegal Source Financial Crimes [2]	Narcotics Related Financial Crimes [3]
	(1)	(2)	(3)	(4)
Investigations initiated [4]	3,917	1,370	1,537	1,010
Investigations discontinued	1,350	595	503	252
Referrals for prosecution	3,037	869	1,289	879
Information and indictments [5]	2,489	653	1,064	772
Convictions	2,008	578	837	593
Sentenced	1,777	507	750	520
Incarcerated [6]	1,497	417	622	458
Percentage of those who were incarcerated [6]	84.2	82.2	82.9	88.1

Source IRS 2004 Data Book

Next Steps

3.200 The next stage of the NRP will be to finish the data analysis and refine the tax gap data in late 2005. The IRS will also use the data to update its statistical tools (DIF and UIDIF) used to select individual returns for audit, an important step in strengthening compliance with the tax system. The IRS also plans to update estimates for other areas of the tax gap. The first part of this process will study reporting compliance of flow-through entities (S-corporations and partnerships).

FY 2006 Budget

3.210 The proposed 2006 budget makes a strong commitment to a sound system of tax administration. Overall, the budget calls for a 4.3 percent increase in the IRS budget, with a nearly 8 percent increase for enforcement. Each year, the IRS collects $2 trillion, providing substantially all the revenues needed to run the government. The additional enforcement funding will be used to increase audits of corporations and high-income individuals as well as expand collection and criminal investigation efforts. These investments will pay for themselves several times over.

Direct Enforcement Revenues

3.220 Last year, the IRS produced direct enforcement revenues of more than $43 billion from collection, audit and document-matching efforts. This reflects better than a 4-1 return for every dollar invested in the total agency budget. Increased enforcement funding makes good sense and contributes to deficit reduction.

Reduced Taxpayer Service

3.230 The budget calls for the IRS to do a modest amount of belt-tightening in the area of taxpayer services. The Service will make selected service cuts, including closing some taxpayer walk-in offices. These walk-in sites are relatively expensive and the number of visitors has dropped as use of the IRS Web site has dramatically increased.

Overview - Abusive Return Preparer

3.240 The IRS Criminal Investigation Return Preparer Program (RPP) was implemented in 1996, and established procedures to foster compliance by identifying, investigating and prosecuting abusive return preparers. The program was developed to enhance compliance in the return-preparer community by engaging in enforcement actions and/or asserting appropriate civil penalties against unscrupulous or incompetent return preparers. This is a significant problem for both the IRS and taxpayers. Abusive return preparers frequently prepare bad returns for large numbers of taxpayers who, at best, are stuck with paying additional taxes and interest and at worse, depending on culpability, are subject to penalties and maybe even criminal prosecution.

Some Arguments – Non-filer Enforcement

3.250 Many groups continue to promote myths regarding the duty to file returns. None have ever prevailed in civil litigation but many gullible taxpayers are persuaded to cease filing returns. Complicated arguments against the American tax system are built by stringing together unrelated ideas plucked from widely conflicting court rulings, dictionary definitions, government regulations and other sources. The Truth about Frivolous Tax Arguments addresses false arguments about the legality of not paying taxes or filing returns. Some of the most popular anti-taxation arguments include the following:

Constitutional Argument - Filing an IRS Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.

The Truth: The courts have consistently held that disclosure of the type of routine financial information required on a tax return does not incriminate an individual or violate the right to privacy.

Compensation Argument - Wages, tips and other compensation received for personal services are not income because there is allegedly no taxable gain when a person "exchanges" labor for money.

The Truth: The Internal Revenue Code defines gross income as income from whatever source derived and includes compensation for services.

Sixteenth Amendment Argument - The Constitutional Amendment establishing the basis for income tax was never properly ratified.

The Truth: The 16th Amendment was properly ratified in 1913, and it states "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

Religious Arguments - Individuals invoke the Freedom of Religion clause of the First Amendment by taking a vow of poverty or by fraudulently claiming charitable contributions of 50% or more of their adjusted gross income.

The Truth: Taking a purported vow of poverty or claiming fraudulent contributions to filter income through a church is not legal. Many fraudulent religious organizations use funds for personal expenses.

Internal Revenue Code Arguments -There is no Internal Revenue Code that imposes taxes; only "individuals" are required to pay taxes; or IRS can only assess taxes against people who file returns; income taxes are voluntary

The Truth: The tax law is found in Title 26 of the United States Code. The requirement to file an income tax return is not voluntary and it is clearly set forth in the Internal Revenue Code (IRC) Sections 6011(a), 6012(a), et seq., and 6072(a). IRS was established July 1, 1862 by an act of Congress. Our system of taxation allows taxpayers to determine the correct amount of tax and complete the appropriate forms "voluntarily" rather than have the government do it for them.

Forming a Trust Argument - Forming a business trust to hold your income and assets will avoid taxes. A family estate trust will allow you to reduce or eliminate your tax liability.

The Truth: Although there are legitimate trusts and legitimate reasons why individuals establish trusts, establishing a trust, foreign or domestic, for the sole purpose of hiding your income and assets from taxation is illegal and will not absolve you of your tax liability. The underlying claims for many "untaxing" trust packages rely on other frivolous arguments--arguments that have subjected promoters, as well as willing participants, to criminal penalties.

Some "Tax Experts" Don't Follow Their Own Advice

3.260 Some American citizens use these and other arguments advocating non-compliance with the tax laws Inspect promotional material carefully. Aside from being false and misleading, it often contains elaborate disclaimers such as "this report is offered as a vehicle for discussion and debate and for general informational purposes only. It does not constitute legal or professional advice and should not be relied on as a substitute for proper research and inquiries into original sources of authority." Many of these "tax experts" don’t even follow their own advice but choose to file and pay their own taxes.

Source: IRS Website

4. Examination

More Audits of Wealthy

4.10 The IRS increased its audits of individuals and couples making more than $100,000 last year, focusing most of the extra attention on people making $250,000 or more. Still, even high-income taxpayers faced low odds of being called upon to document their expenses and deductions. Despite the 24 percent increase for taxpayers who earned $100,000 or more, the IRS audited only one in 95 returns filed by big earners. Individuals at all income levels faced slightly higher chances of an audit last year. Overall, the IRS examined 1 in 153 returns last year, compared with 1 in 174 the previous year. The audit rate still lags from the rates in the mid-1990s when the agency looked at about 1 in 60 individual returns.

Examination Reengineering

4.20 Changes to the tax law, technology, and the business environment necessitated the IRS to make changes to its examination process. SB/SE initiated Examination Reengineering in order to improve the quality and consistency of its examinations across the country. SB/SE gathered feedback from multiple sources to design the new field and office examination processes. Practitioners, audited taxpayers, federal and state government agencies, financial institutions, and SB/SE examination employees all provided input SB/SE used to redesign its examination process.

Some of the features of the reengineered field examination process are:

Clearly communicated expectations of both the taxpayer and field agent through mandatory discussions between the revenue agent and taxpayer regarding the specific examination issues, required documentation, and a mutually agreed upon date to complete the examination.

At the beginning of each examination, field agents and their managers will meet to discuss the agent’s approach to the examination, the plan to close the examination, and the mutual commitment date arrived at with the taxpayer.

Field agents will use standardized templates for every examination issue to gather the information necessary to resolve issues. Agents will use a standardized guide when deciding if additional issues need to be added to the examination. The agent will explain to the taxpayer if any additional issues are included in the examination.

Some of the features of the reengineered office examination process are:

Clearly communicated expectations of both the taxpayer and the examiner prior to the initial appointment. Office examiners will provide the taxpayer with focused document requests that specifically identify the information needed.

Improved flexibility in the scheduling process will enable examiners and taxpayers to reduce the time it takes to complete an examination.

Office examiners will use standardized templates for every examination issue to gather the information necessary to resolve issues. Examiners will use a standardized guide when deciding if additional issues need to be added to the examination. The examiner will explain to the taxpayer if any additional issues are included in the examination.

IRS Sets New Audit Priorities

4.30 The Internal Revenue Service is realigning its audit resources to focus on key areas of non-compliance with the tax laws. The strategy represents a new direction for the agency’s compliance effort.

New Approach

4.40 Following months of research and planning, the new approach will focus on high-risk areas of non-compliance. The IRS effort will generally focus first on promoters and then on participants in these various schemes. The initiative will feature new and enhanced efforts on several priority areas, including:

• Offshore credit card users.
• High-risk, high-income taxpayers.
• Abusive schemes and promoter investigations.
• High-income non-filers.
• Unreported income.

Increased Resources For Audits Will Be Devoted To These Projects In FY 2005

4.50 The IRS Small Business/Self-Employed Division will handle the new effort in these key areas affecting individuals and businesses. Compliance efforts will continue in other parts of the agency, such as the tax shelter initiative in the Large and Mid-Sized Business Division. This initiative reflects part of a broader, agency-wide plan at the IRS. This strategy places a top priority on pursuing promoters of abusive schemes, shelters and trusts and then identifying participants in these efforts to evade taxes. To address these problems, the IRS has revamped its compliance programs to refocus on problem areas. The IRS will use a full scope of tools and techniques ranging from summons enforcement, injunctions and criminal investigation of promoters to civil audits of participants.

Strategy

4.60 The strategy reflects the new way of doing business at the IRS. Several of these efforts -- such as the credit card initiative -- reflect innovative approaches to tackle long-standing tax problems. The new audit initiative will include similar emphasis for the agency's collection area. And new levels of cooperation and coordination are underway on initiatives that involve both civil actions and criminal investigation. These illustrate how the new IRS business model positions the agency to respond to high-risk tax areas. For the five new areas, the agency will direct more examination resources to address these issues. However, the IRS will maintain a presence in other audit areas to maintain core tax administration responsibilities. Additional exam resources will help meet this requirement. Most SB/SE audits during 2005 will be in these areas.

Offshore Credit Card Project

4.70 It is not illegal to have an offshore credit card. However, there is a reasonable basis for believing that some people are using offshore credit cards to evade paying U.S. taxes. Credit cards provide easy access to offshore funds and accounts in tax haven countries that allow income to be hidden. U.S. citizens must pay tax on their worldwide income.

High-Risk, High-Income Taxpayers

4.80 High-income returns are often more complex and, generally, upper income taxpayers have resources to engage in pass-through entities such as partnerships, trusts and corporations. Even utilizing IRS’s various matching programs, income and deductions from such activities are more difficult to verify.

K-1 Matching

4.90 While the IRS has begun to match K-1 forms from pass-through entities, the technique does not provide any verification of income reported by the entity itself. Verifying the income on these returns requires an examination. Starting in Fiscal Year 2003, the IRS began utilizing a combination of filters to identify high-risk, high-income returns. The returns selected for examination will be those most likely to have unreported income or structured transactions.

Structured Transaction

4.100 A structured transaction is one with limited economic benefit and whose primary purpose is to reduce or eliminate a tax liability. Structured transactions are generally done through one or more pass-through returns, such as Forms 1065 or 1120-S. The pass-through returns create paper losses that flow back to individual income tax returns offsetting income from other sources.

Abusive Schemes And Promoter Investigations

4.110 IRS efforts to combat abusive schemes and scams (including the Offshore Credit Card Project) have significantly increased beginning in FY2002. Schemes and scams on the rise include:

• Schemes, reducing a person’s tax liability by claiming inflated expenses, false deductions, unallowable credits or excessive exemptions.
• Frivolous return arguments, telling taxpayers compliance is voluntary or the U.S. Constitution does not provide for tax collection.
• Promotion of slavery reparation claims, scams that claim compensation for people who have ancestors who were slaves.
• Abusive shelters and trusts, investments established for the purpose of hiding income from taxation.
• Employment tax schemes, employee leasing, paying in cash and filing false payroll tax returns.

Abusive Scheme Groups have been established in each Area and the use of Fraud Specialists has increased. To identify and address promoter activity, a Promoter Lead Development Center has been created. The Center systematically monitors the Internet to identify promoters of abusive activities and develops cases for injunctive investigations.

High-Income Non-Filers

4.120 The IRS efforts to address non-filers since FY 2003 have focused on the most egregious high-risk non-filers in the population.

The non-filer strategy will be pursued on many fronts:

· Re-engineered processes and work streams to improve efficiency and productivity.

· Identification and expedited assignment of the most egregious non-filers.

· Expanded and centralized automated enforcement.

· Outreach and education efforts.

Unreported Income

4.130 Unreported income represents the largest component of the tax gap. IRS has developed a new tool for identifying returns with a high probability of unreported income. The new tool is known as Unreported Income Discriminant Index Formula (UI DIF). All individual returns have traditionally been assigned a DIF score rating the probability of inaccurate information on the return. The new UI DIF score rates the probability of income being omitted from the return. The IRS has customarily used indirect examination methods to identify unreported income but until now has had no systemic method for selecting the returns at highest risk for unreported income. UI DIF gives the IRS the ability to systemically identify returns at high risk for unreported income and beginning this fall all returns will receive a UI DIF score in addition to the traditional DIF score.

The Dirty Dozen

4.140 Each year the IRS announces its Dirty Dozen and urges people to avoid these common schemes: The 2005 list is as follows:

Trust Misuse. Unscrupulous promoters for years have urged taxpayers to transfer assets into trusts. However, some trusts do not deliver the promised tax benefits, and the IRS is actively examining these arrangements. More than two dozen injunctions have been obtained against promoters since 2001, and numerous promoters and their clients have been prosecuted.

Frivolous Arguments. Promoters have been known to make the following outlandish claims: that the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; that wages are not income; that filing a return and paying taxes are merely voluntary; and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.

Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment agreements or charge high fees, monthly service charges or mandatory “contributions” that may add to debt. The IRS Tax Exempt and Government Entities Division has made auditing credit counseling organizations a priority.

"Claim of Right" Doctrine. In this scheme, a taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The promoter advises the taxpayer to label the deduction as “a necessary expense for the production of income” or “compensation for personal services actually rendered.”

“No Gain” Deduction. Similar to “Claim of Right,” filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return, referring to court documents and including the words “No Gain Realized.”

Corporation Sole. Since September 2004, the Department of Justice has obtained six injunctions against promoters of this scheme and filed complaints against 11 others. Participants apply for incorporation under the pretext of being a “bishop” or “overseer” of a one-person, phony religious organization or society with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit, religious organization. When used as intended, Corporation Sole statutes enable religious leaders to separate themselves legally from the control and ownership of church assets. But the rules have been twisted at seminars where are incorrectly told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts.

Identity Theft. The IRS is aware of several identity theft scams involving taxes. In one case, fraudsters sent bank customers fictitious correspondence and IRS forms in an attempt to trick them into disclosing their personal financial data. In another, abusive tax preparers used clients’ Social Security numbers and other information to file false tax returns without the clients’ knowledge. Last year the IRS shut down a scheme in which perpetrators used e-mail to announce to unsuspecting taxpayers that they were “under audit” and could set matters right by divulging sensitive financial information on an official-looking Web site.

Abuse of Charitable Organizations and Deductions. The IRS has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity.

Offshore Transactions. Despite a crackdown on the practice by the IRS and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so. The IRS, along with the tax agencies of U.S. states and possessions, continues to aggressively pursue taxpayers and promoters involved in such abusive transactions.

Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on the return.

Employment Tax Evasion. The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Recent cases have resulted in criminal convictions, and the courts have issued injunctions against more than a dozen persons ordering them to stop promoting the scheme. Employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

5. Appeals

5.10 Appeals has refined its structure to improve operations, employee satisfaction and customer service. The goal is that all taxpayers get their disputes resolved within the timeframes they need. The primary division is now geographic . Appeals has consolidated its Specialty Area – now called Technical Guidance – to a national position in the organization. This allows Appeals to better coordinate key issues under the Industry Specialization Program (ISP) and the Appeals Coordinated Issues (ACI) programs – something particularly important in the tax shelter area. Appeals retained a separate structure for the Appeals Team Case Leaders, reporting directly to the Chief, Appeals.

Table 17 -- Appeals Workload, by Status and Type of Case, Fiscal Year 2004
	Cases pending	Cases	Cases	Cases pending
Docketed status and type of case [1]	October 1, 2003 [2]	received [3]	closed	September 30, 2004 [2,3,4]
	(1)	(2)	(3)	(4)
Total cases	71,995	98,677	103,946	64,787
Nondocketed, total [5]	61,094	81,652	86,123	53,444
Collection due pro	21,351	28,133	31,167	17,064
Offers in compro	11,382	16,768	17,884	10,343
Innocent sp	4,867	4,197	4,132	4,802
Penalty app	5,587	13,046	14,642	3,763
Coordinated industry c	1,183	523	619	1,059
Industry c	971	605	528	952
Examination/Tax Exempt
Government	12,533	13,727	12,629	12,282
Other	3,220	4,653	4,522	3,179
Docketed, total [7]	10,901	17,025	17,823	11,343
Collection due pro	61	--	1,059	125
Offers in compro	3	--	3	--
Innocent sp	233	395	581	268
Penalty app	3	1	5	2
Coordinated industry c	30	31	34	51
Industry c	141	78	142	108
Examination/Tax Exempt
Government	10,421	16,512	15,963	10,777
Other	9	8	36	12

Fast Track Mediation for SB/SE Taxpayers

5.20 This is a streamlined process designed to expedite disputes involving some audits, offers in compromise and trust fund recovery penalties. Appeals and Settlement Officers serve as mediators to resolve disputes while cases are still in SB/SE Compliance. After pilot programs consistently showed high customer satisfaction, Fast Track Mediation was implemented nationwide in June 2002. See Publication 3605.and Revenue Procedure 2003-41

Strategic Priorities:

5.30 Appeals had set forth the following as its strategic priorities:

Address the changing and growing inventory.

· Reduce the length of the Appeals process.

· Improve quality of referrals to Appeals.

· Implement Appeals tax shelter resolution strategies

· Improve stakeholder and customer awareness of Appeal rights and processes.

· Promote employee productivity, engagement and satisfaction.

· Implement Appeals presence in campus environments.

6. Useful Information for Practitioners

Civil Rights Tax Relief Sec. 62 of the Code

6.10 Under prior law, gross income generally does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) by individuals on account of personal physical injuries (including death) or physical sickness. Expenses relating to recovering such damages are generally not deductible. Other damages are generally included in gross income. The related expenses to recover the damages, including attorneys’ fees, are generally deductible as expenses for the production of income, subject to the two-percent floor on itemized deductions. Thus, such expenses are deductible only to the extent the taxpayer’s total miscellaneous itemized deductions exceed two percent of adjusted gross income. Any amount allowable as a deduction is subject to reduction under the overall limitation of itemized deductions if the taxpayer’s adjusted gross income exceeds a threshold amount. For purposes of the alternative minimum tax, no deduction is allowed for any miscellaneous itemized deduction.

Conflict Within the Courts

6.20 The proper tax treatment of contingent fee arrangements with attorneys has been litigated in recent years. Some courts have held that the entire amount of damages is income and that the claimant is entitled to a miscellaneous itemized deduction subject to both the two-percent floor as an expense for the production of income for the portion paid to the attorney and to the overall limitation on itemized deductions. Other courts have held that the portion of the recovery that is paid directly to the attorney is not income to the claimant, holding that the claimant has no claim of right to that portion of the recovery.

American Jobs Creation Act

6.30 The Sec. 62 provides an above-the-line deduction for attorneys’ fees and costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination, certain claims against the Federal Government, or a private cause of action under the Medicare Secondary Payer statute. The amount that may be deducted above the-line may not exceed the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.

Unlawful Discrimination

6.40 Under the Act, “unlawful discrimination” means an act that is unlawful under certain provisions of any of the following: the Civil Rights Act of 1991; the Congressional Accountability Act of 1995; the National Labor Relations Act; the Fair Labor Standards Act of 1938; the Age Discrimination in Employment Act of 1967; the Rehabilitation Act of 1973; the Employee Retirement Income Security Act of 1974; the Education Amendments of 1972; the Employee Polygraph Protection Act of 1988; the Worker Adjustment and Retraining Notification Act; the Family and Medical Leave Act of 1993; chapter 43 of Title 38 of the United States Code; the Revised Statutes; the Civil Rights Act of 1964; the Fair Housing Act; the Americans with Disabilities Act of 1990; any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law; or any provision of Federal, State or local law, or common law claims permitted under Federal, State, or local law providing for the enforcement of civil rights or regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law. The conference agreement applies to fees and costs paid after the date of enactment with respect to any judgment or settlement occurring after such date.

New Bankruptcy Law

6.50 As this writing the Senate has passed a in March totally revising the Bankruptcy Code. It is an absolute certainty that the Act will be approved by the House and that the President will sign it. Generally families earning more than about $45,000 will be prohibited from filing a Chapter 7 bankruptcy and only allowed to file Chapter 13. Prior seeking the protection of bankruptcy debtors will be required to pay for debt counseling as a first step.

IRS Allowable Expense Guidelines

6.60 (Sec. 103) Expresses the sense of Congress that the Secretary of the Treasury has the authority to alter Internal Revenue Service (IRS) standards established to set guidelines for repayment plans as needed to accommodate their use under the Bankruptcy Code. Instructs the Director of the Executive Office for U.S. Trustees to report to certain congressional committees regarding the use of IRS standards for determining specified monthly debtor expenses and the impact of such standards upon debtors and the bankruptcy courts.

Other Tax Related Provisions

6.70 (Sec 315) Requires dismissal of a Chapter 7 or 13 case upon debtor's failure to provide to the bankruptcy trustee within seven days before the initial date for the first meeting of creditors a tax return for the latest taxable period prior to filing.

Mandates that, at the time of filing with the taxing authority, a Chapter 7 or 13 debtor file with the bankruptcy court specified tax documentation pertaining to the period from case commencement until case termination.

Title VII: Bankruptcy Tax Provisions – Tax Liens

6.80 (Sec. 701) Amends the bankruptcy code to modify the treatment of certain tax liens.

Addresses for Notices

6.90 (Sec. 703) Requires the clerk of each district to maintain a listing under which a governmental entity responsible for the collection of taxes within such district may designate an address for service of requests and describe where further information for filing such requests may be found.

IRS Statutory Rate

6.100 (Sec. 704) Prescribes the rate of interest to be paid on mandatory interest payments on tax claims will be the IRS statutory rate.

Tolling of Priority

6.110 (Sec. 705) Revises the specifications for income tax claims receiving eighth priority (allowed unsecured claims of governmental units). Provides for tolling of the time periods covering such tax claims for stays of proceedings in a prior bankruptcy case, and the pendency or effect of offers in compromise or installment agreements.

Tougher to Discharge Taxes in Chapter 13

6.120 (Sec. 707) Prohibits a Chapter 13 discharge of any debt for fraudulent tax payments.

Fraudulent Activities

6.130 Sec. 708) States that confirmation of a bankruptcy plan does not discharge a corporate debtor from any debt for:

1) money or credit obtained by false representation owed to a domestic governmental unit or to a person as the result of an action filed with respect to certain claims against the Federal or a State government; or

2) a tax or customs duty with respect to which the debtor made a fraudulent return or willfully attempted to evade or defeat such tax.

Stay and the U. S. Tax Court

6.140 (Sec. 709) Limits the automatic stay of U.S. Tax Court proceedings to prepetition taxes.

Plan Provision for Taxes

6.150 (Sec. 710) Sets as a prerequisite for court confirmation of a Chapter 11 bankruptcy plan that includes tax claims, that the debtor make regular cash installment payments over a period ending not later than five years after the date of entry of the order for relief, and in a manner not less favorable than the most favored nonpriority unsecured claim provided for in the plan.

Avoidance of Tax Liens

6.160 (Sec. 711) Prohibits the avoidance of statutory tax liens by certain purchasers. This provision makes it much harder for trustees and debtors in possession to avoid state and federal tax liens.

Payment of Taxes During Proceedings

6.170 (Sec. 712) Amends the Federal judicial code to require officers and agents conducting any business under court authority to pay all Federal, State, and local taxes when due in the course of the business, unless it is a property tax secured by a lien against estate property which is abandoned by the bankruptcy trustee, or payment of the tax is excused under a specific bankruptcy law. Cites circumstances in which payment of such taxes may be deferred in a case pending under chapter 7 until final distribution is made.

Entitles to administrative expense priority payment certain secured and postpetition unsecured taxes incurred by the bankruptcy estate, including ad valorem property taxes.

Declares that a governmental unit shall not be required to file a request for the payment of administrative expenses relating to a tax liability or tax penalty. Allows a trustee to recover from property securing a claim for the payment of all ad valorem property taxes relating to such property.

Tardy Tax Claims

6.180 (Sec. 713) Requires as a condition for payment of tardily filed priority tax claims that they be filed either before the trustee commences distribution, or ten days following the mailing to creditors of the summary of the trustee's final report, whichever is earlier (currently, before the trustee commences distribution of the estate).

Sec. 6020(b) Returns

6.190 ( Sec. 714) Returns involuntarily prepared by tax agencies for a taxpayer are included in the definition of tax returns

Conditions for Chapter 13 Confirmations

6.200 (Sec. 716) Conditions court confirmation of a chapter 13 bankruptcy plan upon filing by the debtor:

1) of all prepetition tax returns for the prior 4 years; and

2) before the day on which the first meeting of the creditors is convened, of all tax returns for taxable periods ending in the four-year period that ends on the date of the filing of the petition. Directs the court to dismiss a plan or convert it to chapter 7, whichever is in the best interests of the creditors and the estate, if a chapter 13 debtor fails to comply with such time frame.

Expresses the sense of Congress that the Judicial Conference of the United States should propose for adoption amended Federal Rules of Bankruptcy Procedure pertaining to objections to tax returns and to plan confirmation.

Chapter 11 Disclosure of Tax Consequences

6.210 (Sec. 717) Redefines "adequate disclosure," for Chapter 11 postpetition disclosure and solicitation purposes, to include full discussion of the potential material Federal and State tax consequences of the plan to the debtor and to a hypothetical investor that is representative of the holders of claims or interests in the case.

Setoff of Tax Refunds

6.220 (Sec. 718) Denies an automatic stay (unless specified conditions are met) to the setoff of an income tax refund for a taxable period which ended before the order for relief against an income tax liability for a taxable period which also ended before the order for relief.

Conforms State and Federal Taxable Estate Rules

6.230 (Sec. 719) Revises special provisions related to the treatment of State and local taxes, including the creation of a separate taxable estate when such is done for Federal tax purposes.

Conversion for Late Filed Returns

6.240 (Sec. 720) Permits a taxing authority to petition the court to convert or dismiss a case if the debtor fails to timely file a tax return or obtain an extension, whichever is in the best interests of creditors and the estate.

6.250 The Supreme Court rebuked the United States Tax Court in March for its adoption of a "bold" and unauthorized procedure that shields essential documents from disclosure to people with cases before the court and to federal judges who review the tax court's work on appeal. The case represents a victory for our client, the Estate of Kanter.

Special Trial Judges

6.260 A strongly worded 7-to-2 decision, with the majority opinion written by Justice Ruth Bader Ginsburg, was addressed to the tax court's use of "special trial judges," auxiliary judges who conduct trials and make recommendations to the 19 regular judges on how major tax cases should be decided. Under the tax court's rules, while the recommendations of the special judges are not binding, their findings "shall be presumed to be correct," and the regular judges are expected to defer to them. The reports are therefore extremely important to the tax court's decision-making process, yet since 1983 the court has regarded them as confidential internal documents and has refused to make them available to the parties or to appellate judges. Ballard v. C.I.R., --- S.Ct. ----, 2005 WL 516495, 73 USLW 4194, 2005 Daily Journal D.A.R. 2683(U.S. Mar 07, 2005) (NO. 03-184, 03-1034)

Posthumous Victory

6.270 The decision was a posthumous victory for our client, a prominent tax lawyer, Burton W. Kanter, who along with two other men was found liable for a $30 million tax deficiency in a case that dated to the 1970's. Although the decision did not overturn the Tax Court's 1999 judgment against Mr. Kanter and the two others, the court will now have to disclose the basis for its adverse finding and will have to change its procedures for future cases. Mr. Kanter died in 2001.

The Original Judgement

6.280 Under the tax court's procedure, the case was heard in a five-week trial in 1994 by a special trial judge, D. Irvin Couvillion, who spent four years writing his report and recommendation. A regular tax court judge, Howard A. Dawson Jr., then issued the formal judgment, a 600-page document that bore the label "opinion of the special trial judge" and that imposed substantial penalties for tax fraud.

Two Judges Disclose

6.290 But one of our lawyers told by 2 Tax Court judges that Judge Couvillion had actually reached the opposite conclusion, and that the formal judgment did not reflect his findings. The taxpayers filed three motions seeking access to the original report and were refused each time, with the Tax Court maintaining that the report was part of the "internal deliberative processes of the court" and could not be disclosed.

Collaborative Process Not Allowed

6.300 In her opinion, Justice Ginsburg said that whatever the validity of the tax court's rules, they did not provide for a "joint enterprise" in which the regular tax court judge "treats the special trial judge's report essentially as an in-house draft to be worked over collaboratively." Noting that the court's rules require the regular judges to give "due regard" to the special judge's findings, she said, "One would be hard put to explain, however, how a final decision maker, here the tax court judge, would give 'due regard' to, and 'presume to be correct,' an opinion the judge himself collaborated in producing."

Critical of the IRS

6.310 Justice Ginsburg strongly suggested that if the tax court did provide for the joint procedure in its rules, the rules would then be subject to further challenge. While assailing the tax court, the opinion was also notably critical of the executive branch for defending the procedure. "It is curious that the commissioner, always a party in tax court proceedings, argues strenuously in support of concealment," it said.

Problem Solving Appointments

6.320 You don't have to wait for a special event to get personal, face-to-face help solving your clients' federal tax problems. Problem-solving assistance is available every day at every IRS Taxpayer Assistance Center across the country. You and your clients can schedule appointments at local Taxpayer Assistance Centers in advance, and get help with innocent spouse claims, payment plans, preparation of offers in compromise, federal tax liens and levies, and IRS account or notice issues.

Telephone Numbers

6.330 Getting problem-solving help by telephone or correspondence is still an option, but Taxpayer Assistance Centers offer you the convenience of bringing in tax records and personally discussing your clients' issues across the desk from IRS representatives appointment telephone numbers for Taxpayer Assistance Centers are starting to appear in local phone directories, and are also posted on the IRS web site's under "http://www.irs.gov/localcontacts/index.html. "Please note, these phone numbers are for scheduling or changing appointments only. For telephone assistance with your clients' tax account matters:

BDO Seidman Court Breathes Life Into Accountant-Client Privilege

6.340 The IRS has been dealt a procedural blow in its war on shelters by a district court ruling upholding a statutory privilege that many assumed to be all but worthless. BDO Seidman clients, as well as clients of other accounting firms, have been unsuccessful in claiming protection under the federally authorized practitioner privilege to prevent their identities from being turned over to the IRS in the agency’s promoter summons enforcement actions against firms. But now a federal district court has become the first to apply section 7525 to block IRS access to some of the communications between an accounting firm and its clients. US vs. BDO Seidman (02 C 4822 USDC ND IL March 30,2005)

Documents Protected

6.350 In a March 30 opinion, Judge James F. Holderman of the U.S. District Court for the Northern District of Illinois held that all but one of 267 documents for which BDO clients have asserted the section 7525 privilege (the attorney-client privilege) and the work product doctrine are protected from IRS scrutiny. For one e-mail, however, the court found that the government has made a prima facie showing that the crime-fraud exception applies. [1]

Practitioners Agitated

6.360 Some tax practitioners have become increasingly agitated by the government’s labeling of people as promoters, transactions as abusive, and client relationships as fraudulent. The government is miscalculating in its strategy, several practitioners argue. The emotionalism is not going to work, because the issues require rigorous legal analysis, they say.

Speculation

6.370 The BDO Seidman decision contains favorable language for the government’s critics. The BDO court labeled the government’s promoter allegations as speculation and innuendo, rejected the government’s contentions, and supported a privilege that had not yet been applied by a court to prevent IRS access to accountant-client communications.

In an April 5, Tax Analysts published the following; "It is a brave decision in today's tax shelter environment, said Robert E. McKenzie with Arnstein & Lehr, the intervenors’ Chicago counsel. The court has wisely chosen to look beyond the current witch hunt environment with respect to tax shelters and preserve the taxpayer-practitioner privilege, he said."

New Sentencing Rules

6.380 Background: First defendant was convicted in the United States District Court for the Western District of Wisconsin, John C. Shabaz, J., for possession with intent to distribute at least 50 grams of cocaine base. The United States Court of Appeals for the Seventh Circuit, 375 F.3d 508, reversed and remanded for resentencing.

The Supreme Court, Justice Stevens, delivering the opinion of the court in part, held that

1) federal sentencing guidelines are subject to jury trial requirements of the Sixth Amendment; and

2) in an opinion by Justice Breyer, delivering the opinion of the court in part, held further that Sixth Amendment requirement that jury find certain sentencing facts was incompatible with Federal Sentencing Act, thus requiring severance of Act's provisions making guidelines mandatory and setting forth standard of review on appeal;

3) proper standard of appellate review for sentencing decisions was review for unreasonableness; and

4) holdings as to Sixth Amendment applicability and remedial interpretation of the Sentencing Act were applicable to all cases on direct 70 U. S., v. BOOKER, (2005) 125 S.Ct. 738, 160 L.Ed.2d 621.

800 Numbers

800-829-1040

IRS Tax Help Line for Individuals