Taxable Talk

Yesterday, the Tax Court decided Industrial Investors v. Commissioner. Industrial Investors, a corporation in Santa Monica, California, had fought the IRS in Tax Court. The case was then appealed to the 9th Circuit Court of Appeals. After the case was settled in court, the IRS attempted collection of the tax owed; Industrial owed tax for 1990 - 1992. Industrial requested a collection due process (CDP) hearing.

When Industrial made the request, the IRS revenue officer working the case sent a letter to the IRS appeals office...in Oklahoma City. (An interesting point is why the appeal went to Oklahoma from California when the IRS has several offices that I'm all too familiar with in Southern California...but I digress.) An appeals officer is supposed to independently judge the facts; thus, ex parte communications are not allowed. Here are a few of the lines from the letter of the IRS revenue officer:

"Therefore, no CDP hearing on the recorded Notices of Federal Tax Liens should be considered. As for the Notice of Intent to Levy, this should proceed accordingly....

Since Mr. William G. Wells has had numerous opportunities to sell, refinance or secure a second mortgage on all real property owned by Industrial Investors Inc and has not done so to this date, it is time that the government secure any and all interest for all assets owned by the Corporation to pay the outstanding tax debts.

That's just part of this letter. I'm not an attorney, but I do know that this is an ex parte communication.

Among the other gems of the IRS' behavior is how quickly they forced Industrial to respond. On June 21, the IRS demands information by July 8; on July 8, the IRS schedules a telephonic CDP hearing on July 19, without checking that the representative from Industrial could make that time. He couldn't, as was under subpoena for that date and time. He wrote back, asking for a change of time/date, but the IRS didn't receive the request until after July 19.

The IRS' behavior was atrocious in this case. And the Tax Court rightly takes the IRS to task. The Court notes regarding the ex parte communications,

"The Commissioner then made the guarantee of impartiality part of the IRS’s standard operating procedure by issuing Revenue Procedure 2000-43, 2000-2 C.B. 404. This procedure prohibits ex parte communications by IRS employees that would appear to compromise the independence of an Appeals officer...There can’t be any suspense in our holding on this point--the cover letter sent to Talbott that accompanied the administrative file was precisely the sort of prohibited ex parte contact that the Commissioner and Congress wanted to ban."

The IRS also lost on other issues. Industrial impliedly requested a face-to-face CDP hearing. That request is required to be granted, and the hearing is required to be at a local IRS office, not one 1500 miles away. And the IRS should have allowed more time for a corporation to prepare for a hearing, "We merely note that eighteen business days from the date of initial contact hardly seems an adequate amount of time for a corporation to provide all relevant documentation, and putting Industrial into default when Wells left word that he was under subpoena to appear in court is inexplicable."

So Industrial Investors will get a CDP here in Southern California. This is a case the IRS deserved to lose, and hopefully the patterns of behavior that were shown in this case by the IRS will go into the trash heap...but I'm not holding my breath.

Case: Industrial Investors v. Commissioner, T.C. Memo 2007-93

Because of the storm in the Northeast U.S., the IRS has, according to an email I just received, extended the due date for returns for impacted taxpayers only until April 19th.

Taxpayers who are impacted and take advantage of the extra two days will be charged interest but will not be charged a late filing penalty.

---

Update: The IRS has released its' FAQ on this issue. Some highlights:

Returns covered:
* Calendar-year 2006 federal individual income tax returns, whether filed electronically or on paper (Forms 1040, 1040A or 1040EZ).

* Requests for an automatic six-month tax-filing extension on an individual return for calendar-year 2006, whether submitted electronically or on Form 4868.

* Tax-year 2006 income tax balance-due payments, whether made electronically (direct debit or credit card) or by check.

* Corporation income tax returns, including S corporations (Forms 1120, 1120-A and 1120S) for a fiscal year ending on Jan. 31, 2007, and any balance due.

* Calendar-year estate and trust income tax returns (Form 1041) and any balance due.

* Calendar-year 2006 partnership returns (Form 1065).

* Annual information returns (Form 990) and unrelated business income tax returns (Form 990-T) for tax-exempt organizations with a fiscal year ending on Nov. 30, 2006.

* Calendar-year 2006 Form 990-T for certain employee trusts, retirement plans and education savings plans.

* Extension requests for any return.

Estimated Tax Payments are not covered.

More information is on the IRS website.

It's a parody (of course), but it reminds us what confiscatory tax rates are like....

Hat Tip: AllahPundit (via HotAir)

This is definitely an issue I'm aware of because of my practice areas. I deal with plenty of individuals who earn their living while residing abroad or through foreign sources of income. "It's tax exempt, isn't it?" They're not happy when I let them know that's not the case.

The Tax Code, which is law (Title 26, U.S.C.) states that Americans are taxed on their worldwide income. Basically, everything is taxable unless Congress specifically exempts it.

Anyway, about six months ago I was approached by an individual who was about to be levied by the IRS because of failure to pay taxes. He resided in the continental U.S., but earned all his income from royalties from the Far East. So I asked him a few questions:

"Are you an American citizen?" He was.
"Was this income taxed at its source? That is, had the countries where it comes from levied a tax on it?" No, he received all of the income.
"Do you pay income tax in any of these countries?" No, he didn't.

In summary, the individual really owed the tax. But as much as I tried to tell him that, I was talking to a brick wall. Given my dislike of talking to brick walls and of taking bozos on as clients, I suggested he try to get someone else to represent him.

---

But if you do earn income abroad, there are some real tax tips you can take advantage of. If you have a genuine residence overseas or meet the physical presence test (generally, being abroad 330 days out of 365), you may be eligible for the Earned Income Exclusion. If eligible, you can exclude up to $84,400 in 2006. And the time period does not have to be a calendar year; if you're overseas from May 1, 2006 through April 15, 2007, you would likely be eligible for a prorated credit.

If you earn income abroad and it's taxed abroad, you are likely eligible for the Foreign Tax Credit. The general principle is that income should only be taxed once, so if (say) Japan taxes your income, you should get a credit of that tax on your US tax return.

Finally, anyone who is not in the United States on April 15th (April 17th this year) gets an extra two months (until June 15th) to file his tax return. (You need to attach an explanation to your tax return.) If you're abroad, you won't be subject to penalties but you will be subject to interest on what you owe (interest is statutory).

There are numerous caveats and gotchas, and numerous ways to lessen your tax if you either have foreign source income or live abroad. Talk to a professional who can help you if you're contemplating living abroad or will soon have significant income from abroad.

With just twelve days until Tax Day, it's time to present our annual list of things not to do. All of the items on this list have been done by bozo taxpayers. Some have been successful while others have had, shall we say, a not-so-positive outcome. I'll be presenting a Bozo Tax Tip each day until April 14th. By the way, for a very good list of some excellent tax tips, see Joe Kristan's list at Roth Tax Updates. So on with Tip #10.

Everyone is looking for that extra deduction. One of the benefits of having children is that they you do get an exemption for each of them. An enterprising disk jockey in Wyoming thought, "Hmmmm, if I can get an exemption for my son, why not get an exemption for my dog Red." And so he added a dependent on his Form 1040.

At that time, you didn't have to put the social security number of your dependents on your tax return, and the IRS never noticed. However, the law changed and the disk jockey was faced with putting down a social security number for a dog. Not having one (of course), he noted on the next return that Red was deceased.

Tip: Dogs are wonderful companions, but they're not deductible. Making up social security numbers is not a good idea either. So this Bozo scheme is gone forever, unless you want to commit multiple felonies.