Wife Who Handled House Hold Finances Does Not Qualify for Innocent Spouse Relief

According to Law360, a Florida woman can't get relief from joint liabilities with her ex-husband for income taxes from 2011 through 2014, the U.S. Tax Court said on February 3,2022 in Ana Margarita Fiengo and Pascual E. Fiengo Sr. v. Commissioner, docket number 1250-20, in the U.S. Tax Court.

Ana Margarita Fiengo can't be considered for two forms of innocent spouse relief from her joint liabilities because the liabilities are related to underpayments, not understatements or deficiencies, and she doesn't qualify for the remaining form because of her knowledge of the underpayments, the U.S. Tax Court said.

The Tax Court said Fiengo handled the finances for herself and her ex-husband, paid bills, and held check writing authority over accounts both personal and for a business they owned together. It thus concluded that she knew about the underpayment.

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Courts Confirm IRS Ability to Revoke or Not Renew Passports for Taxpayers with Serious Delinquent Debt

So what somewhere him

According to Law360, Federal courts have upheld the U.S. government's ability to deny or revoke a citizen's passport over a certified tax debt in what some tax advisers have considered a draconian enforcement mechanism: prohibiting international travel to collect unpaid taxes.

Courts over the past year have uniformly rejected challenges to Internal Revenue Code Section 7345, passed in the Fixing America's Surface Transportation Act of 2015, which effectively allows the Internal Revenue Service to deny citizens with delinquent taxes of more than $50,000 the right to travel outside the country. The IRS can certify a taxpayer's debt over that amount, indexed for inflation to $52,000, as "seriously delinquent" and transmit that determination to the State Department, which can choose then to revoke or deny a passport.

The statute gives taxpayers several avenues to negotiate with the IRS on a compromise or installment plan to pay the debt before it is certified and sent to the State Department. The IRS' website details the options taxpayers have to resolve certified tax debts, and it includes information on situations where a debt will not be certified, such as when a taxpayer is negotiating in good faith with the agency or is in bankruptcy.

Jerry August of Fox Rothschild LLP said that though there are ways to avoid the prohibition on travel, the law has left little room to raise a successful challenge in federal district courts or the U.S. Tax Court.

The Tax Court recently rejected a constitutional challenge to the program, saying in March that the law doesn't violate the Fifth Amendment. Robert Rowen's tax debt was properly certified by the IRS as seriously delinquent under Section 7345, Tax Court Judge Emin Toro said in the opinion. Rowen failed to pay federal income taxes for more than 20 years, accumulating a debt of nearly $500,000, the opinion said.

Although the State Department didn't take action to revoke Rowen's passport, he filed a petition in the Tax Court and asked the court to find the IRS' certification of his tax debt was erroneous, according to court documents.

Judge Toro said Section 7345 doesn't include any language that would prevent international travel in violation of the Fifth Amendment, as Rowen contested, and merely provides a process for the IRS to follow and transmit the certified tax debt to the State Department, which can determine whether to revoke or deny a passport.

A Georgia federal court also has found that Section 7345 doesn't violate the due process clause or other language in the Constitution. The U.S. government correctly denied Craig Thomas Jones' application to renew his passport over his tax debts, the court said in March.

When Jones tried to renew his passport in November 2019, the State Department said he was ineligible to do so because of the IRS' certification of his seriously delinquent tax debt, which stood at about $405,000, according to Jones' complaint.

Jones sued the government the next month. He argued in June 2020 that Section 7345 is unconstitutional because it violates an implied right.

U.S. District Judge J. Randal Hall disagreed. Section 7345 provides taxpayers with due process that satisfies requirements under the Fifth Amendment in the form of adequate notice by the IRS of their delinquency and the right to timely request a hearing, he said.

Jones' case is now pending before the Eleventh Circuit, where he has submitted his opening brief.

Taxpayers have so far had no more success in federal appeals courts, where they have argued the right to travel abroad as a U.S. citizen is a fundamental right protected by the Fifth Amendment.

Recently, a Tenth Circuit panel denied the appeal of a man who raised a constitutional challenge to the tax debt certification passport revocation process. However, a concurring opinion in the case offered some hope to challengers in suggesting a higher level of scrutiny should apply when a citizen's passport could be revoked.

U.S. Circuit Judge Carlos Lucero said a stricter standard of review may apply in cases that deal with the right to international travel, although the taxpayer in the case, Jeffrey T. Maehr, failed to raise that argument on appeal.

For U.S. taxpayers who have dual citizenship, the U.S.'s ability to revoke or deny passports can prove to be a nuisance even if they're living abroad.

Matthew Ledvina of Helm Advisors told Law360 that sometimes, traveling with a U.S. certified tax debt requires coordination between tax and immigration lawyers to make sure clients can prove their U.S. identity without a requisite passport and travel internationally. U.S. dual citizens can't hold themselves as foreign nationals, which can cause additional administrative burdens for clients with certified tax debts traveling back to the U.S., Ledvina said.

"I think when Congress passed this law, they never envisaged all these problems of people that are dual nationals," Ledvina said.

If You Have Serious Delinquent IRS Debt, You Should Consult with Experienced Tax Attorneys, As There Are Several Ways Taxpayers Can Avoid Having the IRS Request That the State Department Revoke Your Passport. 

  Want To Keep Your US Passport?
 

 

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Tighter Controls Over Beneficial Ownership Reporting in Panama

Panama has enacted Law 254, requiring international legal entities to provide their resident agent with accounting records annually. The Law adjusts existing legislation on anti-money laundering (AML) and aims to meet international standards on tax transparency. 

The Law is divided into three main areas, dealing with accounting records, due-diligence and registration of final beneficiaries.

 

Resident agents must obtain know-your-client information, including clients’ financial, transactional and risk profiles. They must also continuously monitor the business relationship with the client and check the clients’ declared activities. Beneficial owners must be checked against European Union, Financial Crimes Enforcement Network and United Nations sanctions lists for AML purposes.

 

Legal entities will be obliged to keep a copy of the share certificates and shareholders' registry of the corporations. These must be retained for at least five years and made available on request to the Directorate General of Revenue of Panama.

 

The timeframe for the registration of ultimate beneficial owners of legal entities will be reduced. Changes to beneficial ownership data must be updated within 15 days of a change, instead of the previous 30 days.

 

A range of penalties will be enforced for resident agent non-compliance with any of the new measures and legal entities failing to register or update beneficial ownership information may be suspended from the Public Registry of Panama.

Have an International Tax Problem?

 Contact the Tax Lawyers at
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or Toll Free at 888 8TAXAID (888-882-9243) 

Sources:

Arias Law (PDF)

Mata & Pitti

HG.org

What Happened in Collection During 2021?

Procedurally Taxing nicely summarized the National Taxpayer Advocate's annual report, which reported that collection due process notices and hearing requests continue to fall.  Some of the falloff in the most recent period is no doubt attributable to the pandemic, but the trend was set before Covid arrived.  Here is a graph displaying the trend:

The report gives more details and explanations for those interested.  It also included a chart on the number of family status cases petitioned to the Tax Court.  The number of Earned Income Tax Credit (EITC) cases seems low when you read about the number of EITC audits.

This section of the report also contains an analysis of the number of non-Tax Court cases litigated during the past year.  Even more than the CDP filing chart above, a chart showing the number of lien cases referred to the Department of Justice shows a precipitous decline.  

Perhaps, the decline should come as no surprise given the decline in revenue officers over this period.  Without revenue officers to initiate these cases, there can be no referrals to DOJ.  

The number is getting close to approaching zero which is bad news for tax administration.  Again, of course, the pandemic plays a role, but the slide started before the pandemic arrived.

The decline in suits is more than matched by the decline in liens, levies and seizures.  The chart below shows the amazing decline in these activities.  This chart shows not only the recent drop off as a result of the pandemic but also the 10-year decline as the IRS’ resources were squeezed by Congressional budgetary action.

No big surprises that the IRS is struggling in its enforcement efforts, that these efforts have declined significantly over the past decade or that they declined significantly during the pandemic.  Still, a pretty bleak picture of the IRS’ ability to pursue meaningful collection action when needed.

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What Where The Most Litigated Issues In 2021?

Procedurally Taxing nicely summarized the National Taxpayer Advocate's new approach to calculating the most litigated issues in her annual report.  You can read about her approach starting on page 183 of the report.   

Instead of just looking at the tried cases, which she does capture, she also looks at the cases in which taxpayers filed a Tax Court petition.  It’s all in how you define litigation.  Is it best measured by the relatively small number of cases that get tried and receive an opinion, i.e., looking at the end of the case where about 1% of the filed cases end up, or by looking at the filed cases in which taxpayers started litigation but for a variety of reasons did not follow it to a conclusion by trial and opinion?  Since she gives you both sets of data, it’s hard to complain no matter which set of information you prefer.

Here are the charts, with the first one based on opinions issued and the second one on petitions filed:

Some things come out the same in either measure as the report states:

[Gross income disputes] was the number one issue among those litigated in the Tax Court with 66 substantive opinions issued. It was also the largest category of cases petitioned to the Tax Court. In FY 2021, taxpayers petitioned the Tax Court in 13,558 cases where gross income was an issue during the examination.

In the same vein, trade or business disputes came in second under both methods:

50 opinions where this category of issues was litigated in the Tax Court. Taxpayers petitioned the Tax Court in 2,255 instances where trade or business expenses were an issue during the examination in FY 2021.20 This category is high on our list as the second most prevalent category of opinions issued at the Tax Court and the second most petitioned issue in the Tax Court.

Have an IRS Tax Problem?

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or Toll Free at 888 8TAXAID (888-882-9243) 

 

Ruling Moves Circuits Closer To Tax Procedure Split on Conservation Easements

According to Law360, big news came out of the U.S. Court of Appeals for the Eleventh Circuit at the end of 2021, involving a closely watched conservation easement case.

In Hewitt v. Commissioner of Internal Revenue, the Eleventh Circuit overturned the U.S. Tax Court when it held that a provision in the conservation easement regulations, promulgated in the 1980s, is procedurally flawed under the Administrative Procedure Act.

This case should be of interest to those following the developing body of cases involving the application of the APA's rules to U.S. Department of the Treasury and Internal Revenue Service determinations.

Also the holding of this case has important implications for the dozens, if not hundreds of taxpayers that have had conservation easement deductions challenged based on these regulations.

The Treasury regulations at issue in Hewitt are the so-called proceeds regulations codified at Treasury Regulation Section 1.170A-14(g)(6)(ii), which provides guidance on how to allocate condemnation sale proceeds between the donor and the donee in the rare event of an extinguishment of a conservation easement.

These regulations are intended to ensure that a donation complies with the protected-in-perpetuity requirement under Internal Revenue Code Section 170(h)(5). The proceeds regulations require a proportional allocation of proceeds between the donor and the donee according to a specific formula.

The donee must receive a share of the sale proceeds that is "at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time."

Taxpayers can deviate from that formula only where "state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction."

Under the easement at issue in Hewitt, in the unlikely event that the easement was extinguished, the share of the sales proceeds payable to the donee would generally be determined under the regulations' prescribed proportionate value formula.

But the easement also provided that the donee's share would be reduced by any appreciation attributable to post-donation improvements to the property.

Based on this improvements provision, the IRS denied the taxpayers' entire charitable contribution deduction, arguing that the easement improperly reduced the donee's share of extinguishment proceeds in violation of the proceeds regulations.

In the Tax Court, the taxpayers argued that the IRS misinterpreted the proceeds regulations and that, in any event, the proceeds regulations were procedurally and substantively invalid. The Tax Court rejected both of those arguments and sustained the IRS' determination.

On Appeal, The Eleventh Circuit Held That The Treasury Failed To Follow The APA's Procedural Rules When Promulgating The Proceeds Regulations By Neglecting To Respond To A Significant Comment Regarding The Treatment Of Post-Donation Improvements.

Therefore, the court held that the commissioner's interpretation of the regulations to disallow the subtraction of improvements "was arbitrary and capricious and therefore invalid under the APA's procedural requirements," and reversed the Tax Court, ruling in favor of the taxpayers.

For other taxpayers in the Eleventh Circuit that have only the improvements provision issue and no other identified problems with their easement deeds, this case should be considered a big win and should result in the allowance of the claimed conservation easement deductions — subject, of course, to any valuation-based challenges. But for other taxpayers, the scope of this decision is arguably less clear.

We may get more clarity on the scope of Hewitt when the Sixth Circuit issues its decision in Oakbrook. The decision is expected imminently, oral argument was held a few weeks prior to the Hewitt argument.

The Oakbrook facts overlap significantly with those in Hewitt, it has both the improvement provision issue and a similar APA challenge to the regulations.

In addition, the Oakbrook easement has a second problem under the proceeds regulations, because it provides that the donee is entitled to a fixed value determined at the time of the donation, rather than a proportionate value determined at the time of the sale.

Thus, it is possible that the Sixth Circuit will sidestep the issues in Hewitt involving the validity of the regulations entirely, by deciding that the proportionate value problem violates the statute, rather than the regulations.

Alternatively, the court could review the validity of the proceeds regulations as applied to the proportionate value issue, without addressing the improvement provision.

Finally, and most interestingly, it is possible that the Oakbrook court will address the very same issues that were addressed in Hewitt and either agree with Hewitt or set up a split in the circuits regarding the APA challenge to the regulations.

Taking a step back from its implications on conservation easement cases, Hewitt represents one of the few successful challenges to a Treasury regulation on procedural grounds.

The Treasury and IRS were long considered immune from the APA's requirements, but the trend has shifted in recent years. We expect that this trend could continue, and we may continue to see more challenges to Treasury and IRS agency determinations in appropriate cases.

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or Toll Free at 888 8TAXAID (888-882-9243) 

 

IRS New Electronic Interactions

The IRS has highlighted two options that enable taxpayers to interact with the agency electronically: using electronic or digital signatures on certain paper-filed forms and emailing documents to resolve examination and collection activities. The IRS says these expanded digital options enhance the taxpayer experience and build on the earlier addition of virtual services and online tools such as electronic signatures for third party authorizations and an online account for tax professionals.

In March 2020, the IRS issued guidance to its employees allowing electronic or digital signatures on certain forms that normally required a handwritten or "wet" signature. A complete list of the forms can be found in a fact sheet. Currently, this flexibility is authorized through October 31, 2023, and the IRS is working to extend them based on taxpayer interest, according to the agency.

The IRS Now Allows Taxpayers And Taxpayer Representatives To Send Encrypted Documents And Receive Documents Using Email During Certain Compliance Interactions.

The IRS also accepts images of signatures and digital signatures on these documents related to compliance interactions:

• Extensions of statute of limitations on assessment or collection

• Waivers of statutory notices of deficiency and consents to assessment

• Agreements to specific tax matters or tax liabilities (closing agreements)

• Any other statement or form traditionally collected by IRS personnel outside standard filing procedures.

This email option is available only for those working with an IRS enforcement employee to resolve an examination or collection activity, and the choice to transmit documents electronically is solely up to each individual. 

All existing and previously allowable means of receiving and transmitting information, such as eFax, established secured messaging systems, or postal mail remain available to anyone who chooses that option.

Have an IRS Tax Problem?

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or Toll Free at 888 8TAXAID (888-882-9243)