IRS AUDIT AND COLLECTION STATISTICS FOR FY 2000
IRS audit and collection statistics for the 2000 fiscal year are not impressive. IRS audit and collection activity has dropped substantially. The number of IRS employees has dropped by 17 percent while the number of tax returns filed has increased by 13 percent. There has been a steady decline in the number of tax returns that have been audited. Most IRS audits in the past few years have focused on low income taxpayers–those making less than $25">
IRS AUDIT AND COLLECTION STATISTICS FOR FY 2000
IRS audit and collection statistics for the 2000 fiscal year are not impressive. IRS audit and collection activity has dropped substantially. The number of IRS employees has dropped by 17 percent while the number of tax returns filed has increased by 13 percent. There has been a steady decline in the number of tax returns that have been audited. Most IRS audits in the past few years have focused on low income taxpayers–those making less than $25,000 per year. The IRS is making adjustments on these low income taxpayers with little or no hope of collecting the amount of taxes assessed.
Enforced collection action, levies, liens, and seizures have decreased, as have installment agreements.
While the IRS reorganization may be good, we have to wonder what the IRS has been doing for the last three years. Staffing may be down and most IRS employees have been in substantial training. However, it is time for the IRS to resume its function of enforcing the tax law. For some interesting facts and statistics about the activity of the IRS go to this site: http://www.trac.syr.edu/.
GOOD OFFICER TRUST FUND PENALTY CASE
In United States v. Bisbee, F.3d (8th Cir. 2001), the Government asserted trust fund penalty taxes under § 6672 against two officers of the corporation. (The trust fund penalty is also often referred to as the responsible person penalty.) One of the officers was the president and CEO; the other was formerly President and CEO, but was Treasurer at during the critical time period. The corporation was delinquent on its payroll taxes, a significant portion of which were the trust fund taxes withheld from employees (i.e., the income tax withholding and the employee's share of FICA). The jury determined that the President/CEO was liable for the penalty, but that the Treasurer was not. The facts showed that the President/CEO actually exercised authority as to who would get paid and had specifically limited the Treasurer's authority to act independently to pay the taxes. The district court denied the Treasurer attorneys fees under §7430 on the basis that the Government's litigating position was substantially justified.
The President/CEO appealed her loss, and the Treasurer appealed his loss of the motion for attorneys fees. The Court of Appeals routinely rejected the President/CEO's appeal. She clearly was responsible. But, the Court gave a nice victory to the Treasurer. That portion of the opinion is the most interesting and hopeful.
Normally, in trust fund tax cases, the IRS will cast the liability upon as many players as it can. The more persons liable, the better chance the IRS has of collecting the underlying trust fund taxes which it must credit to the employees' accounts. The IRS will usually pick off all of the persons holding positions that indicate under the facts or by virtue of the nature of their corporate office that they had authority to pay the taxes and chose not to. In the case at hand, the IRS had two easy targets under its general criteria – the President/CEO and the Treasurer. A Treasurer normally does have some substantial authority over the issue of which creditors get paid and specifically whether the trust fund taxes will be paid. So, often with very little inquiry into underlying facts or even consideration of the facts at hand, the IRS will often tag a Treasurer or person in a comparable position without very little thought.
In this case, at least by the time of trial, the IRS had ample facts that, in the Court of Appeals' opinion, should have shown that the mere title of Treasurer was not sufficient to tag this person with liability. Merely because the Treasurer might usually in most corporations have that authority or be a significant player in the exercise of the authority, did not mean that the Treasurer in this case had the authority. The Court said:
The IRS's position that a corporate officer is a responsible person solely because of his title and status is not reasonable where the agency is possessed of evidence indicating that the officer had no authority to pay taxes. Barton v. United States, 988 F.2d 58, 60 (8th Cir. 1993); see also Sharp v. United States, 145 F.3d 994, 996 (8th Cir. 1998). The IRS's countering argument that a responsible person cannot avoid liability on the ground that he was instructed not to exercise his authority to pay taxes, see, e.g., Greenberg v. United States, 46 F.3d 239, 243-44 (3rd Cir. 1994), begs the question of whether Green had authority to pay the taxes once Bisbee became president and CEO of IMI. The pre-litigation information possessed by the IRS included statements from Green and other IMI employees that Bisbee had decision-making authority and that he had mandated that the taxes were to be paid only after other creditors had been satisfied. In addition, the IRS was aware that the state of Iowa had determined that Green was not a responsible person under a state revenue statute similar to I.R.C. § 6672. Moreover, the IRS was aware that Bisbee was brought in, and that Green was demoted, specifically for the purpose of altering IMI's business practices. Other than Green's title at IMI, the only indication that Green had authority to pay taxes in contravention of Bisbee's directions to the contrary came from Bisbee himself, whose credibility on the subject is suspect at best.
Green's occasional payment of taxes when funds were available after other creditors had been paid and the fact that he was responsible for tendering payments to creditors do not establish that he had the authority to defy Bisbee and pay the taxes. There is no question but that Green had the ability to cause a check to be issued on one of IMI's accounts to IRS. That ability, however, does not necessarily connote the authority to do so, and it is the possession of authority by the allegedly responsible person that is relevant to the reasonableness of the IRS's position with respect to Green. See Barton, 988 F.2d at 59 ("A person's technical authority to sign checks and duty to prepare tax returns are not enough to make the person responsible under the statute."). To adopt the IRS's contentions would be to include within the definition of "responsible person" those who, like Green, are mere functionaries, lacking the authority that the law requires as a prerequisite to a finding of liability. See id. (corporate officers who lack tax-paying authority may not be held liable under section 6672 based solely on their title, corporate status, and mechanical functions). We conclude that because the IRS's litigation position with respect to Green lacked a reasonable basis in fact, it was not substantially justified, and the district court erred in holding otherwise.
Our experience is that there are many corporate officers in the Treasurer's situation here. When the corporation's financial situation begins deteriorating, the President/CEO, the Chairperson of the Board or even, in some cases, some other person (e.g., a large shareholder) effectively takes over all authority to authorize payments and takes away any authority the other corporate officers may have had. This case reminds us that, not only can those officers win their case, but they can force the IRS to pay their litigating costs. The threat of recovery of litigating costs may be a significant factor in negotiating with the IRS regarding this penalty.
IRS MUST PROVE THE ASSESSMENT TO WIN
The Court of Appeals for the Tenth Circuit held that the IRS failed to prove an assessment against a taxpayer. United States v. Timothy L. Nipper, et al., 87 AFTR2d par. 2001-494, No. 00-5057 (2/8/01).
The government brought suit in district court on income tax assessments against Timothy Nipper for tax years 1981 through 1986, seeking to set aside certain real property conveyances and foreclose on the property pursuant to pending tax liens. Timothy and Thomas Nipper each answered the suit individually, but no answer was filed on behalf of the Proprietor Property Trust. The district court granted default judgment against the trust, declaring its interest in the property foreclosed. The government also moved for summary judgment against the Nippers, but the Nippers failed to respond. After the district court granted summary judgment to the government, the Nippers filed a motion to vacate that ruling, arguing that the government had not provided sufficient evidentiary support for its tax assessments against Timothy Nipper under an unreported income exception. The district court denied the Rule 59 motion largely on the basis that the Nippers had failed to respond to the government's summary judgment motion, and without acknowledging the exception. The Nippers appealed, and the Tenth Circuit reversed the district court.
An attorney for an estate prepared and deposited an envelope containing the estate's petition with FedEx on the 87th day after the notice of deficiency was mailed. The envelope bore the correct name, address, and zip code for the Tax Court. FedEx held the envelope at a FedEx office rather than delivering it, and later returned it to the sender. The attorney re-sent the petition with FedEx, and the petition was delivered to the Court on the 101st day after the notice of deficiency was sent. The IRS filed a motion to dismiss for lack of jurisdiction. Estate of Marguerite M. Cranor v. Commissioner, T.C. Memo. 2001-27, No. 15171-99 (2/8/01).
The Tax Court held that the envelope was properly addressed as required by Section 7502(a)(2)(B) of the Code, and that the petition was timely filed because it was timely sent. See Section 7502(a), (f) of the Code.
The attorney prepared an airbill that was attached to a FedEx envelope containing the Tax Court petition. The airbill was addressed to: "Clerk, United State [sic] Tax Court, 400 Second Street, NW, Washington, D.C. 20217." This is substantially the correct name and is the correct street address, city, and zip code of the Tax Court. The boxes on the airbill were marked "FedEx Standard Overnight--Next Business Afternoon" and "Hold Saturday." The "Hold Saturday" box is under the heading "For HOLD at FedEx Location check here." It was believed by the attorney that, because the boxes "FedEx Standard Overnight--Next Business Afternoon" and "Hold Saturday" were checked, FedEx would not deliver the envelope to the Tax Court on Saturday, but would deliver it on the next business day.
If a package is marked "Hold Saturday," FedEx will hold it for Saturday pickup by the recipient at a FedEx location specified by the sender.
The envelope containing the petition was returned to the sender. The petition was removed from the original FedEx envelope and placed in a new FedEx envelope along with an affidavit concerning the manner in which the original petition was sent.
The IRS moved to dismiss the petition on the basis that the Tax Court did not have jurisdiction over the petition, since the petition was not filed within 90 days of the date on the notice of deficiency. To maintain an action in the Tax Court, a taxpayer must timely file a petition. See Section 6213. Failure to timely file prevents the Tax Court from acquiring jurisdiction. See Estate of Cerrito v. Commissioner, 73 T.C. 896, 898 (1980); Stone v. Commissioner, 73 T.C. 617, 618 (1980). A petition is timely filed if it is filed with the Tax Court within 90 days after the notice of deficiency is mailed. See Section 6213(a). If a petition is filed after the expiration of the 90-day period, it is nevertheless deemed to be timely filed if the date of the U.S. postmark stamped on the envelope in which the petition was mailed is within the time prescribed for filing (see Section 7502(a)(1), (c)(2); Section 301.7502-1, Proced. & Admin. Regs.), and if the envelope containing the petition is properly addressed and bears the proper postage (see Section 7502(a)(2)(B)). Section 7502 also applies if the taxpayer sends the petition using a private delivery service designated by the Commissioner, such as FedEx. See Section 7502(f); Notice 99-41, 1999-2 C.B. 325.
The Tax Court held that the petition was timely filed since the original envelope in which it was mailed contained the correct address. The Tax Court also found that since the box "FedEx Standard Overnight--Next Business Afternoon" was checked and the sender did not provide an address of a FedEx office to hold the envelope, it was intended that FedEx promptly deliver the envelope to the Tax Court. The meaning of "Hold Saturday" on the airbill was misunderstood.
IS THE CONSENT TO EXTEND THE STATUTE OF LIMITATIONS VALID?
In a recent Field Service Advice (FSA 200106010), the IRS has held that a consent extending the statute of limitations was not valid. The Field Service Advice found that the IRS Revenue Officer had failed to advise the taxpayer that the taxpayer had the right to refuse to extend the time for the IRS to make an assessment.
The Field Service Advice found that Section 6501 of the Internal Revenue Code applied to the Trust Fund Recovery Penalty. Section 6501(c)(4)(B) provides that the IRS must advise the taxpayer of the right to refuse to extend the period of limitations for assessment, or to limit such extension to particular issues or to a particular period of time, on each occasion when the taxpayer is requested to provide an extension. Normally, the IRS will send a letter to the taxpayer advising the taxpayer of his right to refuse to extend the statute of limitations. Also see IRS Publication 1035.
Now in all cases where the taxpayer has executed a consent to extend the statute of limitations, the procedure the IRS has followed should be checked to determine if the IRS advised the taxpayer of the right to refuse or limit the extension.
NO RELATION BACK FOR CHECKS TO DONEES IF CASHED AFTER DEATH
In Rosano v. United States, F.3d (2d Cir. 2001), shortly before death, a donor wrote and apparently delivered checks of $10,000 (the present interest exclusion amount) to each of "numerous relatives and friends." The purpose was to get those amounts out of her taxable estate and benefit the persons to whom the gifts were made. The checks were not cashed until after the taxpayer died. The executor excluded from the gross estate the amounts for which the checks had been written. The IRS determined that the checks should be included in the estate, and asserted an additional tax liability of $200,948.57 (suggesting that the number of donees of these $10,000 or less checks was quite large). The IRS also asserted penalties. The taxpayer contested the IRS assertions in this refund suit.
The Court of Appeals affirmed the lower court's holding that, as a matter of law, the gifts had not been completed during the donor's lifetime. The reason was that, under New York law, the donor "had the ability, at any time until the checks were paid, to order that payment on the checks be stopped," thereby retaining dominion and control until the checks were cashed. (Alternatively, of course, the donor could have depleted or closed out the account before the checks were presented for payment.)
The Court of Appeals distinguished the case of charitable donees because any inclusion in the estate would be offset by a charitable deduction, which is not the case where noncharitable donees are involved. Further, the Court was concerned that allowing a "relation back" theory to the date of the delivery of the check would create the opportunity for inappropriate tax avoidance by the donor and donee having an understanding that the check would not be cashed until after death.
This is a reminder that such generosity on the death bed can be a good thing, but the donees should be encouraged to cash quickly the checks to achieve the tax benefit.
LARRY JONES UPCOMING SPEAKING ENGAGEMENTS
May 22, 2001 Tax Alliance Conference - Dallas
June 5, 2001 Forum on Doing Business with the IRS - Dallas
September 20, 2001 Advanced Tax Law Course sponsored by the State Bar of Texas Tax Section - Dallas
October 25, 2001 University of Texas Tax Law Conference - Austin
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