audits

IRS Lacks Authority to Deny Disbarred, Suspended and Sanctioned Tax Preparers to Prepare Your Tax Returns

December 3, 2019 by Frank

Disbarred Attorney Allowed by Law to Prepare Income Tax Returns

If a tax preparer fails to file his/her federal income tax returns, fails to remit the taxes due, willfully fails to sign a tax return prepared by that person, or prepares a return without a valid preparer tax identification number (ITIN), the preparer can be disciplined by the IRS Office of Professional Responsibility (OPR). Disciplinary actions, depending upon the offense and number of infractions, can include a censure (public reprimand), suspension to practice before the IRS for a period of time, and disbarment (revoking the person’s eligibility to practice before the IRS.

However, the IRS has NO authority or jurisdiction over a disbarred attorney/tax preparer or his tax preparation practice and cannot regulate his providing tax advice given to a taxpayer per a federal district court (Sexton v. Hawkins).

Background

James Sexton Jr. was an attorney licensed in S. Carolina. He pleaded guilty to four counts of mail fraud and one count of money laundering. He was disbarred in S. Carolina and suspended from practice before the IRS by OPR. He did not challenge his IRS suspension from practice.

A former client of Sexton, learning that he had been disbarred, fired him and filed a complaint with the OPR. What happened when the IRS attempted to bar him from preparing tax returns? Sexton prevailed in court arguing that the ruling in Loving, 742 F.3d 1013, means that the IRS has no jurisdiction over him or his company as a tax preparer. Under Loving, preparing and signing tax returns is not practice before the IRS. Therefore, the IRS cannot regulate Sexton who prepared tax returns.

“Practice Before the IRS”

Practice before the IRS generally includes preparing or filing documents or communicating with the IRS. The prohibition applies to all means of communication, including person-to-person conversations, faxes, e-mails, other written materials, and telephone calls. Thus, Sexton could not represent his clients before the IRS at conferences, hearings, and meetings. He could not file a Power-of-Attorney on behalf of his clients. He could not advocate, dispute, argue or otherwise negotiate for his client’s rights, privileges or liabilities under the law or regulations administered by the IRS.

However, the restriction generally does not apply to merely preparing tax returns. Sexton could prepare tax returns for his clients and sign the returns as the preparer because the preparation of tax returns does not constitute practice before the IRS.

Tax Planning Tip #1:

If you use a professional tax preparer, the burden is upon you to verify the preparer’s credentials.

The state bar association is a good place to start to check a lawyer’s license. The Disciplinary Board of the Supreme court of Pennsylvania allows one to search by attorney name.

Most states have a Board of Accountancy that governs CPAs. In PA, go to Verify a Professional.

If you wish to verify the status of an Enrolled Agent, go directly to epp@irs.gov.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Tax Preparer Fails to File Extension To File Request and Taxpayer is Assessed $120,607 Penalty – Court Denies Abatement of Penalty

November 26, 2019 by Frank

Procrastination Cost Taxpayer $120,627

Background

Kristin Intress and Patrick Steffen (taxpayers) were a married couple who filed a joint return for the 2014 tax year. Taxpayers were out of the country at or around the tax filing deadline for 2014, so they arranged to have their tax return preparer file an extension of time to file their 2014 return. The return preparer, at 7:01 p.m. on April 15, 2015, completed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, for the taxpayers and queued it up to be filed by her e-file software. However, the preparer failed to hit “send” and the Form 4868 was not electronically received by the IRS by the April 15, 2015, deadline. The tax return preparer did not discover until October 2015 that the extension form had not been filed.

How Expensive Was This Oversight?

As a result, the IRS found that the taxpayers’ return was not filed timely and assessed a $120,607.27 late filing penalty.

IRS Appeals

IRS Appeals Office agreed with examination’s findings that the Supreme Court Boyle case was controlling. After exhausting their administrative appeals with the IRS, the couple paid the penalty on Nov. 1, 2016. In March 2017, they filed a refund and abatement request. The IRS denied the request.

Boyle Case

In Boyle, the Supreme Court held that a taxpayer’s reliance on an agent for tax filing is not reasonable cause for abatement of late penalties should the third party fail to file timely. The Court, citing Regs. Sec. 301.6651-1(c)(1), defined reasonable cause as being “unable to file the return within the prescribed time” notwithstanding the taxpayer’s exercise of “ordinary business care and prudence”. The Court reasoned that the timely filing of required returns is a duty placed on a taxpayer and not on a taxpayer’s agent, and the duty requires no special training or effort on the part of a taxpayer and, accordingly, no assistance from an agent to fulfill. Thus, relying on an agent to file a return is not reasonable.

District Court Findings

The district court found that it could rely upon Boyle because the taxpayers were not required to use tax preparation services. The court observed that, as was the case in 1985, individuals without specialized expertise can still prepare and file their own paper returns, and the decision to use a tax preparation service is within the taxpayer’s control.

Because the same filing options that existed in 1985 (mailing a personally or professionally prepared return) still existed in the year that the taxpayers were audited, the court held that the bright-line rule set out in Boyle had not changed, and, as the Supreme Court stated in its opinion, “reliance [on an agent] cannot function as a substitute for compliance with an unambiguous statute”.

Accordingly, the district court held that the taxpayers were not entitled to an abatement of the penalty. The court concluded that although the IRS relied upon the Boyle case, which was decided at a time when returns were exclusively paper-filed, the holding in that case also applies to e-filed returns.

Reasonableness Outside the Context of Boyle

The court further found that even if Boyle did not apply to e-filed returns, it would not eliminate a taxpayer’s duty to exercise “ordinary business care and prudence.” Therefore, if Boyle did not apply, the court stated, a taxpayer that claimed reliance on an agent as reasonable cause for late filing would still be required to prove that the reliance was reasonable. According to the court, “it would never be reasonable to blindly take someone’s word that he will timely file your taxes”. Thus, because it was unclear that the taxpayers had tried to verify that their tax return preparer had properly filed an extension for their return before the mistake was discovered six months after the extension was supposedly filed, the court determined that the taxpayers’ reliance on their tax return preparer was not reasonable.

Acknowledgements

We wish to acknowledge that this case was brought to our attention by James Beavers in his October 1, 2019 article in the AICPA’s “The Tax Adviser” publication.

Tax Planning Tip #1:

If you use a professional tax preparer, submit your tax information to the preparer as early as possible to minimize your anxiety and to ensure that your tax return is timely filed.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

IRS Reconstructs Income for Taxpayer Who Failed to File Tax Returns for Five Years

November 19, 2019 by Frank

Lack of Adequate Records by Taxpayer Not a Deterrent to Preventing IRS from Reconstructing Taxable Income

Background

Francis Steffan Hayes [T.C. Memo 2019-147] failed to file his tax returns for years 2005-2009 and paid no taxes during that time span. He claimed that he did not maintain adequate records, refused to cooperate with the IRS, and would not present any records to assist the IRS in its audit.

IRS Audit Steps to Reconstruct Income

To reconstruct his income, the IRS (1) summoned accounts in his name at Wells Fargo, PayPal and e-gold; (2) contacted his customers and vendors to determine his gross receipts; and (3) searched for income that he may had deposited elsewhere.

The IRS also included in his unreported income checks and money orders found in the accounts of two of his friends. Most of these checks had been addressed to Mr. Hayes or one of his business enterprises which he had endorsed over to his friends. Since Hayes had unfettered use of these funds when received, they were considered taxable to him. When customer records were subpoenaed, the IRS discovered checks written to Hayes which the IRS included as taxable income to him. The revenue agent who conducted the examination then turned his findings to another IRS revenue agent who prepared substitute for returns for Hayes.

IRS Evidentiary Matter

Gross income includes all income from whatever source derived [IRC Sec. 61(a)]. IRC Sec. 6001 states that taxpayers must keep adequate books and records from which their correct tax liabilities can be determined. When a taxpayer fails to keep records, the IRS has discretion to reconstruct the taxpayer’s income by any reasonable means [IRC Sec. 446(b)].

The IRS was able to demonstrate to the court with its documentation that it had taken the necessary evidentiary steps to reconstruct Hayes’ income and allowing him certain expenses. At this point, the burden of proof shifts to Hayes to prove (by a preponderance of the evidence) that the IRS’ determinations are arbitrary or erroneous.

Taxpayer’s Arguments Before the Court

Hayes represented himself in court and argued various variations on oft-rejected tax-defiance themes and that the returns prepared by the IRS were invalid.

Tax Court’s Findings

The court found in favor of the IRS. It stated that the taxpayer offered only meritless arguments against the IRS’ imposition of additions to tax and failed to show any reasonable cause.

Tax Planning Tip #1:

The best and easiest way to prevail in an IRS audit exam is to have substantiation for the income and expenses shown in your return.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA Updates Its Corporate Income Tax Nexus Standard

November 7, 2019 by Frank

PA Adopts Wayfair Nexus Decision that Physical Presence is Not Needed for PA to Tax Out-of-State Corporations that Receive an Economic Benefit from Their PA Marketplace Presence

Physically Presence is Not Required

PA declares that corporations do not need to be physically present in Pennsylvania in order to have nexus for corporate tax purposes. Out-of-state corporations doing business in Pennsylvania must file tax reports if they are taking advantage of the Pennsylvania economic marketplace.

Wayfair Decision

As reported in our July 24, 2018 blog, the U.S. Supreme Court decision in South Dakota v. Wayfair would have a profound affect on the nexus standard. “Nexus” being the amount of contact a business would have in a state before being subject to that state’s taxes. Whereas the former standard that a business needed a physical presence in a state before the state could tax it, Wayfair replaced the physical presence test with an economic test.

Pennsylvania states that the decision in Wayfair v. South Dakota made certain that no physical presence standard exists to limit the ability of a state to impose a net income tax on an out-of-state taxpayer. The decision confirmed that out-of-state corporations are doing business in the Pennsylvania and/or carrying on activities in Pennsylvania to the extent they are taking advantage of the economic marketplace. Taxpayers taking advantage of the economic marketplace will be required to file tax reports if they meet the minimum nexus thresholds under the U.S. Constitution.

Economic Presence Test

Pennsylvania will require taxpayers with economic nexus to file corporate tax reports after 2019. Pennsylvania will presume taxpayers without a physical presence have to file a corporate net income tax report if they have $500,000 or more of direct or indirect gross receipts sourced to the state. The presumption is rebuttable.

The gross receipts must be from the:

sale, rental, lease, or licensing of tangible personal property;
sale of services; and/or,
sale or licensing of intangibles, including franchise agreements.

amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

The PA Department of Revenue recognizes that taxpayers with or without physical presence in the Commonwealth can still potentially claim exemption from the imposition of the Corporate Net Income Tax under the provisions of P.L. 86-272. Taxpayers claiming P.L. 86-272 (physical presence) protection should still file a tax report and complete the necessary schedules to claim the exemption. Corporation Tax Bulletin 2019-04, Pennsylvania Department of Revenue, September 30, 2019.

Tax Planning Tip #1:

States will continue their efforts to tax out-of-state businesses rather than face the wrath of in-state business when taxes are increased. If you have not already consulted with your tax adviser to determine if you have nexus exposure, you need to do so.

Tax Planning Tip #2:

While reading this post, keep in mind that other states have already changed their nexus standard from physical presence to an economic benefit test, or are considering doing so, thus your activities outside of PA may be creating nexus in those states where you have activities. Refer to Tax Planning Tip #1.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

NJ Amends its Sales Tax Law Regarding Transient Accommodations

October 29, 2019 by Frank

Rental of a Transient Accommodation Obtained Directly from the Owner is No Longer Subject to NJ Sales Tax

Background

In our blog post of October 30, 2018, we alerted our readers that New Jersey had enacted legislation that imposed a fee on transient accommodations on or after October 1, 2018. The new law imposed Sales Tax, the State Occupancy Fee, and the Meadowlands Regional Hotel Use Assessment on charges associated with the rental of transient accommodations.

This law supposedly targeted homeowners who rented their investment properties themselves (classified ads, referrals from friends and family, rental signs on the lawn, Airbnb, VRBO, etc.) rather than using a realtor.

Amended NJ Sales Tax Law on Transient Accommodations

Beginning August 9, 2019, the rental of a transient accommodation obtained directly from the owner is no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees, unless it is a professionally managed unit, as defined below.

A rental obtained through a transient space marketplace, which now includes a travel agency, or a rental of property that is considered to be a professionally managed unit, is subject to the applicable taxes and fees.

What is a Transient Accommodation?

The amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

Therefore, a transient accommodation that is obtained through a transient space marketplace or is a professionally managed unit is subject to New Jersey Sales Tax, the State Occupancy Fee, and other applicable taxes and fees.

What Type of Rental Is NOT Subject to the NJ Amended Sales Tax Law?

The following rentals are no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees as long as the owner does not offer three or more units for rent (a professionally managed unit):

A rental of a transient accommodation obtained directly from the owner (such as through local newspaper ads, personal referrals, signage, etc.); or
A rental of a transient accommodation which is not obtained through a transient space marketplace.

In addition, rentals executed by a real estate broker remain not subject to the taxes and fees.

When Is a Rental Considered Obtained Through a Transient Space Marketplace?

A rental is “obtained through a transient space marketplace” where the agreement for the rental is made through the marketplace or travel agency and where payment for the accommodation is made through a means provided by the marketplace or travel agency, regardless of who receives the payment. Transient space marketplaces will continue to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees imposed on a transient accommodation when the rental is “obtained through a transient space marketplace.”

However, a transient space marketplace does not include a marketplace or travel agency that exclusively offers transient accommodations in New Jersey that are owned by the owner of the marketplace or travel agency.

What Is a Professionally Managed Unit?

A professionally managed unit is a transient accommodation that is directly or indirectly owned or controlled by a person who offers three or more units for rent in New Jersey, and the rental unit does not share living or sleeping space with other units. A professionally managed unit is a transient accommodation that is subject to the applicable taxes and fees, regardless of how the rental is obtained.

An owner who offers three or more units for rent in New Jersey and who directly rents (such as through local newspaper ads, personal referrals, signage, etc.) continues to be required to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees because the transient accommodation is a professionally managed unit.

Are Lessors Required to Register with NJ?

An owner who offers three or more units for rent in New Jersey must be registered to collect the applicable taxes and fees unless all of the rentals are obtained through a, transient space marketplace or through a real estate broker. In addition, transient space marketplaces, including travel agencies, must be registered to collect the Sales Tax, the State Occupancy Fee, and other applicable taxes and fees on all transient accommodations obtained through the transient space marketplace. However, d address any conflicts; work with the Office of Chief Counsel to see if they need legislation to use tax data to identify potential conflicts; and better manage the OES, both in terms of requiring employee compliance and management review.

Tax Planning Tip #1:

Lessors of rental properties in NJ need to consult with their tax advisor ASAP. Determinations need to be made if the lessors are subject to the amended NJ sales tax law on transient rentals, if they need to be registered to collect the sales tax, if they need not be registered by nevertheless are required to collect and remit the sales tax, and due to the effective dates of the previously enacted law and the amended law, renters may be entitled to refunds and how lessors should handle those refunds as well as the filing of a Final Tax Return if appropriate.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Did You Know that your H&R Block Tax Preparer Works for the IRS?

October 22, 2019 by Frank

Your Tax Preparer May Even Work for the Criminal Investigation Unit of the IRS

Background

The Treasury Inspector General for Tax Administration (TIGTA) found that as many as 2,200 IRS employees hold unapproved jobs outside the agency that put them at a higher risk of real or perceived conflicts of interest, and that 167 may have been doing work that is specifically prohibited — such as tax preparation. Of those 167, 51 IRS employees were working in accounting, 45 in legal services and 22 in tax, including five employees who worked with the tax prep chain H&R Block.

IRS Criminal Investigation Employees

IRS Criminal Investigation (CI) employees are special agents whose investigative jurisdiction includes tax, money laundering and Bank Secrecy Act laws. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code. If an IRS CI employee knowing violates the IRS’s rules regarding employment outside of the IRS, what other unethical behavior is being conducted?

TIGTA reported that IRS criminal investigators were the most likely to have outside employment, with 15 percent holding second jobs, and two-thirds of those were unapproved, also the most of any IRS position. Revenue agents came in second, with 7 percent holding unapproved jobs, and a total of 13 percent holding outside jobs.

How Is This Type of Misbehavior Possible?

Perhaps more important, according to the TIGTA report, is the fact that the IRS lacks adequate processes for tracking its employees’ other jobs and gauging their potential for conflicts of interest and has no way to identify employees whose outside work is unapproved or prohibited.

Government employees are not necessarily forbidden from having outside employment, but those jobs must not present conflicts of interest with their government positions, and the employees must report them and get authorization to hold them through the Outside Employment System (OES).

Why Did TIGTA Conduct this Investigation?

TIGTA conducted the audit that led to the current report because an earlier OES investigation revealed that as much as half of full-time IRS employees who had outside jobs did not have approval for them, or the jobs were not documented in the OES. In other words, TIGTA wanted to verify if the IRS had corrected its previously reported shortcomings.

The OES alone does not guarantee that employees comply with the requirements around outside work, TIGTA noted; among other things, it found that two-thirds of the 14,155 employee requests in the OES in a sample period were not reviewed by managers on a timely basis — or were not reviewed at all.

Who Has Side Jobs at the IRS?

TIGTA Recommendations

TIGTA recommended that the director of the Workforce Relations Division review all the identified employees and address any conflicts; work with the Office of Chief Counsel to see if they need legislation to use tax data to identify potential conflicts; and better manage the OES, both in terms of requiring employee compliance and management review.

IRS management agreed or partially agreed with most of the recommendations, noting that it couldn’t commit to requiring some employees to using the OES without negotiating a change in work agreements.

What Else Is Happening at the IRS?

In a separate report, TIGTA found that the IRS has improved its processes and procedures for rehiring former employees who had substantiated conduct or performance issues (which included abusive behavior towards taxpayers), but that the updated processes weren’t always followed.

Of 33 former IRS employees rehired during the sample period, the problem for 29 was one of failing to document the reasons for rehiring them, despite their previous issues. For the remaining four, the new guidelines were inappropriately applied. That’s zero compliance for the 33 new hires used as a test sample.

TIGTA recommended that the IRS update its manual and tools to increase compliance with the new procedures and processes, train the appropriate officials in their use, and it conduct periodic quality reviews of hiring decisions.

As it usually does, IRS management agreed with all the TIGTA recommendations. The bigger issue is when will management ensure that such recommendations are implemented.

Tax Planning Tip #1:

Tax professionals are not fungible goods. Some are very experienced, act professionally and ethically, and thoroughly understand the tax law and how best to reduce your tax liabilities. When you price shop to have a tax return prepared, you need to carefully consider the experience and training of those low-ball prices. Don’t forget the adage “you get what you pay for”.

While cost of tax preparation is very important when choosing a tax professional, it is more important to ensure that you are dealing with an ethical and experienced tax professional.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.