Hans Kasper, MS-CPA, PS

Recent IRS Cases and Announcements
 

The following are in date order from the most recent to the oldest.

June 2003

An individual was not entitled to innocent spouse relief with respect to delinquent taxes on her former husband's unreported earnings because she knew of the omitted income.
Brooks, TC,55,181

Married individuals fraudulently conveyed real property to a trust they had created in order to avoid payment of their tax liabilities.  The IRS could collect delinquent taxes by foreclosing a lien on the real property.
Engh CA-7 2003-1 USTC

A debtor who willfully and deliberately attempted to evade or defeat his tax obligations for siz years was denied a bankruptcy discharge for the delinquent taxes and accrued interest.
Rowen, BC-DC Alaska

The government could garnish the individual retirement account (IRA) of an individual convicted of conspiracy to defraud the United States, tax evasion, and filing a false federal income tax return in order to satisfy the criminal fine imposed on him.  The IRA was subject to garnishment under the Federal Debt Collection Procedures Act.
Grico, DC Pa 2003-1 USTC

April 2003

A taxpayer was liable for taxes and penalties on unreported bonus income and on prematurely withdrawn pension income.  The bonuses were not excludable as gifts, and assessment and collection were not time-barred.  Penalties were imposed.
Williams, TC.

A sole shareholder's income from his S corporations was properly reconstructed using the bank deposits method because he failed to produce adequate books and records to refute the IRS's determination.  He qualified as an employee of one of the entities, and the compensation that he received constituted taxable wage income.  Penalties were imposed.
Cohen, TC

A couple was not entitled to exclude from gross income damages received from the settlement of a sexual harassment suit.  They failed to establish that the damages were paid in connection with a physical injury or sickness.
Prasil, TC.

March 2003

S-CORPORATION DIVIDENDS VS. WAGES

The president and owners of an S corporation was classified as an employee for tax purposes.  The entity could not characterize payments made to him as distributions other than dividend distributions paid from accumulated earnings and profits, as opposed to wages.  The payments constituted compensation for services and were subject to FICA and FUTA withholding (in all of the cases below).  The court took on all of these cases at once which is very unusual which means that they are trying to send a message to all S corporation owners.
Veterinary Surgical consultants, PC, TC
Mike J Graham Trucking Inc, TC
Superior Proside Inc, TC
Specialty Transport and Delivery Service Inc, TC
Nu-Look Design Inc, TC
Water-Pure Systems, Inc, TC
 

A divorced couple that operated franchise donut businesses willfully filed false tax returns for three years.  The couple systematically deducted their personal expenses as the business expenses of two corporations.
Dunkin' Donuts, Inc. v. Martinez DC Fla, 2003-1 USTC

Married taxpayers who filled out zero-income amended tax returns were not entitled to injunctive relief in their challenge to the assessment of frivolous return penalties.
Johnson, DC Fla, 2003-1 USTC

A frivolous return penalty was properly imposed against an individual who, despite the receipt of earned income, filed a zero-income return and questioned the IRS's authority to collect taxes.
Loze, DC La, 2003-1 USTC

February 2003

An individual's outstanding tax obligations for two years was discharged in bankruptcy.  The taxpayer's returns constituted an honest and reasonable attempt to satisify the requirements of the tax laws, even though the IRS had already assessed taxes against him for those years.
Klein, BC-DC Fla 2003-1 USTC

The IRS is cracking down on promoters of frivolous tax arguments and referred cases to the Department of Justice for criminal prosecution.  The courts have repeatedly rejected these arguments and are imposing substantial penalties on taxpayers and promoters for taking frivolous positions.  Listed below are a list of these positions.

• The federal income tax system is voluntary.

• Only foreign income is taxable.

• Only government employees are taxable.

• You can invoke the first or sixteenth amendment to avoid paying taxes.

• There are special credit for minorities.

• Foreign trusts do not have to pay income taxes.

Business trusts created by married taxpayers were deemed shams and, as a result, the taxpayers were liable for the negligence and substantial understatement components fo the accuracy-related penalty.
Nichols, TC, Fed 47,955

January 2003

A federal district court properly determined the amounts embezzled by an individual from his employers based on spreadsheets and an affidavit provided by the victim.  The trial court's refusal to group the criminal counts of mail fraud and tax evasion was sustained.
Peterson, CA-10, 2003-1 USTC

An individual was not entitled to a deductions for funds he forfeited pursuant to a conviction for illegally importing, and failing to pay excise taxes on, Freon.  The forfeiture was in the nature of an economic penalty for illegal activity in contravention of established national policy.
Wood, DC, Cailf., 2003-1 USTC

An individual who had no knowledge of her husband's understatements of tax attributable to his omitted medical practice income was deemed to have constructive knowledge of the information reported on the joint returns.  This, innocent spouse relief was denied.  Equitable relief was also denied in light of the economic benefit that she received.
Barranco, TC.

Convictions against sibling owners of a family construction business in connection with aiding and assisting in the preparation of false tax returns and conspiracy were upheld.
Gambone Sr., CA-3 2003-1 USTC

Gain on the sale of a condominium was includible in an individual's income.  Unsubstantiated deductions for advertising, automobile, employee benefit program, interest, legal and professional services, repairs, tax and license, and travel, meal, and entertainment expenses were denied.  The negligence penalty was imposed.
Triplett, CA-6, 2003-1 USTC

Absent evidence to the contrary, an attorney was determined to have realized unreported income in the amount of deposits in bank accounts over which he had dominion and control. Penalties were imposed.
Woodall, TC

The IRS properly reconstructed a corporation's unreported income and the entity's unsubstantiated and illegal deductions were disallowed.  The statute of limitations did not bar the assessment of deficiencies and fraud penalties were imposed.  Shareholders were liable as transferees for the dissolved corporation's delinquent taxes.
Butler, TC

The IRS's reconstruction of an attorney's income to include unreported income from her sole proprietorship was upheld.  The taxpayer was also denied claimed deductions related to horse-breeding activities because the activities were not engaged in for profit.
Hastings, TC

The district court did not err in applying, under US Sentencing Guidelines, a four-level enhancement to two individuals' criminal sentences for being leaders or organizers of a tax conspiracy.
D'Ambrosia, CA-7, 2003-1 USTC

December 2002

An accountant and his wife were properly held liable for the accuracy-related penalty due to a failure to report income and the persistent refusal to acknowledge liability for taxes on revenues.  The imposition of delay sanctions for proceedings with frivolous arguments was also sustained.
Corcoran, unpublished CA-9 2002-2

A federal tax lien against an individual's pension payments that arose from assessments for unpaid federal income taxes, penalties and interest was enforced.
The Northern Trust Company, DC Ill 2003-1 USTC

A debtor who filed tax returns only after the IRS prepared substitute returns and assessed taxes against him was not entitled to a bankruptcy discharge for the amounts owing.
Moroney , DC Va 2003-1 USTC

A Russian translator was properly denied deductions for depreciation on his auto, cell phone, education expenses and costs for the business use of his home due to a lack of substantiation.
Vaksman, CA-5 2003-1 USTC

November 2002

A real estate broker who filed to properly substantiate her business, travel, and meal expenses was not entitled to deductions in excess of the amounts allowed by the IRS.  She was liable for the negligence component of the accuracy-related penalty.
Perrah, TC

The doctrine of res judicata barred married taxpayers from challenging the IRS's reconstruction of their income and the stipulated agreement regarding the amount of the couple's tax liability.  A final judgment had already been entered in the matter and affirmed on appeal.
Palmer, DC idaho, 2002-2 USTC

An individual was properly convicted of willfully filing false returns.  The jury was properly instructed on the law regarding willfulness, and the taxpayer's sentence did not violate his constitutional rights.
TM Bidegary, unpublished CA-9, 2002-1 USTC

October 2002

IRS raises threshold to $1,500 for filing interest and dividend income on separate schedule.

An individual's claims that unreported income was nontaxable were vague and uncorroborated.  Penalties were imposed.
O'Toole, TC

An individual was not entitled to exclude from income proceeds received in settlement of an age discrimination lawsuit against her former employer.  A significant portion of the proceeds was paid to satisfy a loss of compensation claim.
Peaco, unpublished CA-3 2002-2 USTC

The IRS's reconstruction of the income of an attorney's S corporation via the bank deposits method established that he and his former wife received unreported income.  There was no evidence that the S corporation's standard practice was to transfer all funds received in the form of credit card authorization slips from one bank account to another.  Unsubstantiated business expense deductions were disallowed; penalties were imposed.
Johnston, TC FED 48,107

The sale of the individual taxpayers' real property to satisfy his current tax debt was proper where he failed to file tax returns for four years.  A sale of the taxpayer's residence was granted subject to the deed of trust held by the bank.  Although the sale of the wife's portion could have been prevented because no assessments were outstanding against her, in this instance, her interest were not protected.
Downing, DC Iowa, 2002-2 USTC 50,661

Civil penalties were properly assessed against a married individual filing separately who failed to report any income despite being employed.  The notice of balance due served as a notice and demand for payment and Form 4340 reflected required taxpayer information to verify the tax liability.
Wilson, TC FED 48,110

September 2002

IRS announces major shift in audit priorities; high-income groups especially targeted.

• Offshore credit card abuse;

• High-risk, high-income taxpayers;

• Abusive schemes and promoter investigations; and

• Non-filing by higher-income taxpayers.

An individual was liable for a penalty assessed against him for filing frivolous returns.  His return reporting no income earned or taxes due was facially invalid.  collection was allowed to continue without restriction because the government followed proper statutory collection procedures.
Haas, DC Nevada 2002-2 USTC 50,631

A civil penalty was properly assessed against an individual for filing a frivolous return.  The return was substantially incorrect in that both the taxpayer and his spouse were employed and received Forms W-2 indicating as such, yet no taxable income was reported.  The taxpayer's argument challenging the legal authority of the penalties was properly disregarded during his CDP hearing.
Goltz, DC Texas 2002-2 USTC 50,638

 

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