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Apr 27

Well, this is not the easiest tax reading I have ever done. I just finished Cadrecha v U.S. The case is like reading a calendar.    

You ever wonder about the difference between a tax attorney and a tax CPA? There are differences in practice. The CPA of course is much more involved with numbers and the attorney is more so with contracts and documents. A big difference is that the attorney can take a case to court. Robert and Cynthia Cadrecha (Cadrecha) could have used an attorney, because the IRS beat on them like a set of Ludwig drums.

This case has to do with a life insurance company demutualization. Demutualization means the life insurance company issues stock. The IRS took the position that any stock received would have a basis of zero; a subsequent sale would therefore be all gain. Sounds like a position the IRS would take. There was a taxpayer who took the IRS to court on this matter (Fischer v U.S.) and won. Cadrecha occurred during this period of time.

Here goes:

4/15/04           Cadrecha files 2003 tax return showing no  basis in the stock.

3/20/07          He learns of the Fischer case. Cadrecha mails amended return showing basis in the stock.

3/22/07          IRS receives amended return.

5/10/07          IRS writes letter asking for more information. Cadrecha provides it.

6/26/07          IRS sends letter that it is researching.

8/6/08             Fischer wins case against IRS.

8/13/07          IRS sends letter it fell asleep and will now really start researching.

8/31/07          IRS sends letter saying “fuhgetaboutit” and disallows the amended return.

The IRS, with all its efficiency, tells Cadrecha that they filed the amended return after three years had expired. This is of course incorrect. What happened is that the IRS got the 3/20/07 filing confused with the additional information provided on 5/10/07. Generally speaking, the additional information will be attributed back to the earlier filing.

OBSERVATION: This is why we recommend using certified mail.

NOTE: Something VERY important happens here. The disallowance is on Letter 105C, which includes the following language concerning an appeals or suit:

 “The law permits you to do this within 2 years from the date of this letter. If you decide to appeal our decision first, the 2-year period still begins from the date of this letter.”

I believe that Cadrecha, and Cadrecha’s accountant, got mislead by the reason given on Form 105C. Granted, the amended return was filed within 3 years, but the claim was DISALLOWED.  This has significance separate and apart from any reason given and will come back to haunt Cadrecha.

 8/31/07         Cadrecha sends a letter to the IRS disagreeing with the “dates” issue.

10/1/08          Cadrecha sends a letter to the IRS asking whether anyone is still alive.

11/3/08          Cadrecha files Form 843 in order to perfect the earlier (3/20/07) claim. (An amended return is a claim).

11/5/08          IRS responds to Cadrecha’s letter of 11/3/08, saying someone is still alive.

12/30/8          IRS – in a blur of motion – responds to the claim filed 11/5/08, saying it will need more time to research and to put the children through middle school.

1/15/09          The IRS writes again, stating that it is forwarding the claim filed 11/3/08 to Austin by the slowest means possible.

6/25/09         Cadrecha’s accountant contacts the Taxpayer Advocate.

12/11/09       Cadrecha’s accountant actually speaks to an IRS employee. She (the employee) explains that the IRS is delaying because it intends to appeal Fischer. She also says that the children are doing well and have started high school.

4/19/10         Cadrecha, in a moment of insanity, writes the IRS.

8/22/10         Cadrecha writes the Taxpayer Advocate imploring it to “PLEASE help.” Johnny Depp is rumored to be in consideration for the movie lead.

4/26/11          Cadrecha receives a letter from the IRS stating that their claim was “being held in suspense” while the IRS was litigating a similar demutualization case in Arizona. The IRS also remarked how the children had grown and were soon to start college.

 Anyway, Cadrecha winds up in court. What did the IRS argue? That Cadrecha’s complaint was not filed timely! Can you believe the gall?

 The court decided against Cadrecha. The case was not filed timely. Look back above and reread my comment on the 8/31/07 entry. Cadrecha had 2 years to file. Not 2 years and a day or 3 years less a week. He was late.

 Is it equitable? Most likely not, but it was the bright-line law.

 Is there a moral? Yes. When this issue got played out like Clapton’s “Layla,” Cadrecha needed an attorney. I know, I know. One does not have unlimited money to throw around, and one has to consider whether the amount of tax at issue is worth the additional cost. But Cadrecha needed something that a CPA could not provide: a court filing before the two years ran out.

Apr 25

Can you be on the hook for unpaid payroll taxes if you are a volunteer director for a nonprofit? What if you do not have authority to write checks?

Let’s take a look at the recent (March 8, 2012) U.S. District Court decision Bunch v Commissioner.

Perceptions, Inc. was a Tennessee nonprofit formed in 2004, Perceptions provided supportive living service for developmentally disabled clients. The incorporators and initial directors were replaced by Roy Don Bunch (Bunch) and two others. Documents filed with Tennessee listed Bunch as the chairman of the board. He was also the registered agent.

Bunch was benevolent with Perceptions. He allowed it to use one of his properties rent-free. He also made start-up loans and – later – bridge loans when Perceptions did not have sufficient money to pay its bills. His generosity was not insignificant. Between February, 2005 and August, 2007, Bunch made loans of approximately $648,000.

When Perceptions had money, it would repay him. Between 2006 and 2007 Bunch was repaid approximately $558,000.

Bunch never received a paycheck. He never hired or fired employees. He never asked to see the books. He never asked if taxes were being paid. He did speak up in December, 2006 when he learned that Perceptions was thinking about employee raises. His question was reasonable: we are almost bankrupt. Why are we talking about raises? No raises were given, but Bunch’s hopes for a Congressional career were jettisoned.

In December, 2006 Bunch learned that quarter 3, 2006 employment taxes were unpaid. He loaned money to Perceptions to pay these taxes.

In June, 2007 he finally gave up and took over financial responsibility, including writing checks. He was hoping to make Perceptions a viable business. Payroll was met, providers were paid and Bunch was repaid on his loans. Perceptions however did not pay its current or back employment taxes.

The IRS finally shows up wanting to know what is going on. In March, 2008 the IRS decides that Bunch is a “responsible person” for the second and fourth quarters of 2006 and all of 2007.  You do not want to be a “responsible person,” as this means the IRS is coming after you. The IRS wanted almost $194,000 from Bunch.

Bunch was an inquisitive sort. His attorney asked the IRS for their basis in concluding that Bunch was a “responsible person.”  The IRS sent the attorney copies of an interview questionnaire but no reasoning or other basis for their determination.

Bunch filed an appeal on April 25, 2008.

Summer comes. Fall comes. Winter comes. In January, 2009 Bunch received a letter from IRS Appeals. They want affidavits and documents, which he provides. What he did not receive, however, is the basis on which the IRS concluded he was a responsible person.

Spring comes. Summer comes. In September the IRS tells him to pay the penalties. They again fail to tell him why.

In October, 2009 Bunch filed a Request for Abatement. He attaches and documents everything.

The IRS tells him his claim would open for review on January 10, 2010. Two weeks later – January 25 – Bunch receives the IRS’ denial of his claim. Bunch can almost hear the tires squealing as the IRSmobile speeds away. The IRS still failed to tell him why he was responsible.

On February 9, 2010, Bunch sends the IRS almost $194,000. He then files a court motion. He wants his money back. And to find out why he is responsible.

In court Bunch admits that he was a responsible person as of June 22, 2007, when he took over financial responsibility for Perceptions. He disagreed that he was a responsible person before that date. He had a point. One of the key indicators is whether the person in question had discretion over cash disbursements, including signature authority. A bookkeeper who pays what he/she is instructed to pay would not be a responsible person, whereas his/her boss could be.

The court disagreed with Bunch. It did not matter that he did not hire or fire, have ownership, get paid or write checks. The court reasoned that he had authority as a director and significant financial authority because he lent a lot of money to Perceptions. In fact he could have forced Perceptions out of business by simply not loaning them money. The court did not care that he did not know or did not exercise authority. The court reasoned that he could have, and “could have” was sufficient.

Bunch was a responsible person for all periods. The IRS could keep his $194,000.


My take: sadly, I have to agree with the court. There is a long-standing tax doctrine that one cannot intentionally stick his/her head in the sand and claim ignorance. Bunch was involved enough to lend Perceptions money on an almost-monthly basis. As a director, he had the right to ask why, where the money was going, what bills were being paid and – importantly – what bills were not being paid. He already had one fright with unpaid employment taxes, and it was not unreasonable for a director to oversee that such taxes not be overlooked in the future.

The difficult part here is separating his duty as a director from his obvious generosity with the charity. As director he had authority to inquire, berate and insist. Events came to his attention which reasonably required him, as director, to get involved. It was not reasonable for a director to turn a blind eye. He was a tremendous benefactor, but not a very good director. Had he just been a benefactor, I doubt the court would have arrived at the same decision.

On April 6 Bunch filed a motion seeking to alter or amend the court’s decision. We’ll see how it turns out, but I doubt  he will be pleased.

Apr 23

As part of the 2012/2013 budget bill, Ohio has authorized a general amnesty for selected state taxes, including personal income, school district, sales and commercial activity taxes.

This is an attractive amnesty program, although it does have one significant drawback. Under the program Ohio will abate all penalties and one-half the interest. Taxes eligible for the amnesty must have been due and payable as of May 1, 2011. This means that a 2010 individual income tax will be eligible (as it was due April 15, 2011), but a May 2011 sales tax return would not (as it was due June 23, 2011). In addition, you cannot have been previously contacted by Ohio.

Ohio expects full payment when you file these tax returns. Remember – this is a revenue raiser for the state.

The significant drawback? The general amnesty window is very brief: from May 1 to June 15, 2012.

There is a separate use tax amnesty that runs from October 1, 2011 to May 1, 2013.

Note: Use tax applies to purchases of taxable products or taxable services where the seller did not collect the Ohio sales tax. The use tax applies both to individuals and businesses. The use tax is the cousin to the Ohio sales tax. It serves to prohibit one from avoiding Ohio sales tax by purchasing items from another state (free of sales tax) and then bringing them into Ohio.

If one pays all use tax due on or after January 1, 2009, Ohio will waive or abate use tax owed for prior periods. There is also a non-interest payment program available for businesses not previously registered for use tax, although this option requires an officer to personally guarantee the tax debt. On the plus side, Ohio will allow the business up to seven years to pay the back taxes. Once again, you cannot have been previously contacted by Ohio.

Apr 06

I am just finished reading Nina Olson’s most recent blog post. Nina Olson is the National Taxpayer Advocate with the IRS. The Advocate’s office is independent from the IRS, although it works with the IRS to resolve tax problems. I have worked with the Advocate’s office before, and in general I have been pleased. Recent contacts have concerned me, though. It sounds to me that they are being overworked, at least here in Cincinnati. I suspect they are feeling IRS budget restrictions.

Ms Olson commented on taxpayer frustrations with “corr exams.” These are correspondence exams and frequently address areas using computer matching. You may get a “corr” notice concerning missing dividends or interest income, for example, or possibly the sale of stock. The corr notices are notorious and can frequently take multiple contacts to resolve. Why? Well, a key reason is that no single examiner is assigned to work on your case. Rather, it floats in a pool, and when you send a letter it gets randomly assigned to an examiner. Say that the letter resolves many, but not all, the issues. The IRS sends out another notice. You respond, but it will not go to the same person who earlier worked on your file. There is no continuity in the corr exam process.

Ms Olson is proposing the use of videoconferencing in conjunction with corr exams. Upon receiving a notice, a taxpayer would have the option of making an appointment for an online meeting. The taxpayer gets a PIN and logs on from his home or office computer. If the taxpayer does not have a computer, he/she could alternatively go to the local IRS office or perhaps to a specially designated room at another government building. With a high-resolution camera, the examiner could even read a document that the taxpayer brought to the videoconference. The examiner would retain the case, and all future correspondence would contain his/her name, phone number and e-mail address.

Here is how Ms Olson phrased it:

As anyone who has looked at both the literacy levels of the United States population and the poor quality of IRS exam notices can attest, there is not a whole lot of communicating going on in IRS correspondence exams.”

A virtual face-to-face meeting would allow for diversity in taxpayers’ ability to read, write and express themselves verbally. The taxpayer would be able to explain himself and the examiner could better explain any necessary documentation without the back-and-forth of a correspondence exam.

What does this tax CPA think? Great idea! I am becoming quite the fan of Nina Olson.

Mar 27

We are visiting state taxation today. Our trip this time will take us to New Jersey, and it will highlight how tax law can simultaneously arrive at a technically correct but bumble-headed conclusion.

Let’s say you manufacture parts in New Jersey. Would you expect to file and pay state income tax to New Jersey?

That one is easy – of course. You are doing business there – in the meaningful sense of the phrase. You have a building, you have employees. You park your car out front. You visit Chipotle for lunch. You are there.

Let’s make this more challenging. You do not manufacture parts. You do not manufacture anything. You develop software. Your offices are in Rockville, Maryland. You do not have offices in New Jersey. You do not park your car in New Jersey or visit their Chipotle for lunch. You are not there. You have an employee who moves to New Jersey. You like her. You keep her on board.

Like a Jim Croce song, you have a name.  Your name is Telebright.

Let’s have her work from her new home. She begins her workday at 9:00 a.m. by checking with her project manager, who is based in Boston. She receives daily work assignments. When done, she uploads her work and sends it to you. She is expected to work 40 hours a week. She could live on the moon, for what location matters to her work.

She does not solicit customers. She does not have sales responsibility. She does not refresh products, or stock shelves, or install, or service. She does not supervise employees. She does not have management authority. You do not even reimburse for her office-in-home. She travels twice a year to Maryland. By the way, you do not pay for the travel – rather she pays for those trips out of her own pocket.

You – being enlightened – take New Jersey withholding taxes out of her paycheck so that she has no rude April 15th surprise.

New Jersey surfaces, somewhat like the mutant alligator in a bad Sci-Fi network movie. New Jersey says that you are doing business in the state, and it wants you to … (wait on it) … pay corporate income taxes!

The case goes before the New Jersey Tax Court. The court cites the New Jersey statute:

Every domestic or foreign corporation which is not hereafter exempted shall pay an annual franchise tax for each tax year, as hereafter provided … for the privilege of doing business , [or] employing or owning capital or property … in this state.”

The Court then reflects philosophically:

The term ‘doing business’ is used in a comprehensive sense and includes all activities which occupy the time or labor of men for profit.”

It rolls up its sleeves and grittily reviews the law (N.J.A.C. 18:7-1.9(b)):

Whether a foreign corporation is doing business in New Jersey is determined by the factors in each case. Consideration is given to such factors as:

(4) The employment in New Jersey of agents, officers and employees.”

Oh, oh. This is going to go wrong, isn’t it? Or is it possible the court will recognize that a lone employee in the state hardly amounts to a corporate beachhead?  Here is the Court:

There is no one, single controlling factor nor is there a bright line standard that determines whether a foreign corporation’s in-state activities meet the Director’s regulatory requirements for doing business. Rather, it is only by close scrutiny of all the facts of the case, taken as a whole, that a final determination can be made. ”

It then digs in like a free agent seeking a new sports contract and drives for the bright line.

It cannot be disputed that plaintiff satisfies factor 4 … by employing Ms. … in New Jersey.”

[Telebright] agreed to permit Ms. … regularly to perform her duties at her New Jersey home.”

This consistent contact with New Jersey was not sporadic, occasional or intermittent.”

But the Court pauses. Will it realize that you are being a good sport for even keeping her employed after the move? Will it acknowledge that this is not a 19th century economy, when a county seat could not be more than a day’s travel for any resident of the county? It hesitates:

“While it is true that [Telebright] has never maintained an office in New Jersey, nor solicited business here ….”

No! Not now Tax Court of New Jersey! You are so close!

The Court shakes it off:

 … [its] daily contact with the State through its employee is sufficient to trigger application of the CBT Act.”

The mere fact that Ms. … is the only … employee in this State does not change the court’s decision.”

Yes, the court determined that Telebright was responsible for New Jersey corporate tax because it permitted an employee to work from her home in New Jersey.

Why does this upset me?

One reason is that reasoning like this would have me filing taxes with India if I hired an on-line bookkeeper there.

Another reason is that I have read court decisions like this for more than two decades now. After a while it is like watching WWE wrestling – there really isn’t much suspense about who is going to win. There was a time when a state at least tried to develop coherent doctrines and workable principles. In recent years however state tax has become more like a hijacking on a Sopranos episode.

Another reason is this is an employee-hostile decision.

I have a friend and client, for example, who lives in Kentucky and commutes to California. Yes, you read that right. He works a week here in Kentucky and a week near San Francisco. He is situated well enough at the company that he floated the idea of having an “office” here. The company turned him down. Why? Because they do not have a footprint in Kentucky and his “office” could create one. So he commutes every other week to California. I suspect he may be their only Kentucky-resident employee.

If you were Telebright, what would you do? Would you not permit your employee to work from home, never mind the reasons? Would you even keep her as an employee?

Who gains here? Tony … er, Trenton gets a few dollars from its next mark … er, taxpayer. Who loses? For now, the company loses. In the future, the loser will be the next employee who wants to work from a New Jersey residence for an out-of-state company whose tax advisor has read Telebright.

Mar 21

Another one of the tax resolution chains is going out of business. The newest one is TaxMasters, whose commercials featured a red-headed and -bearded fellow. That fellow was Patrick Cox, the CEO. TaxMasters had battled the attorneys general of Texas and Minnesota for fraudulent practices. I am reading that Texas had accused them of not commencing work for their clients until TaxMasters was fully-paid. So much for deadlines. Did you know that they were publicly-traded?

They follow on the heels of JK Harris, which was based out of South Carolina and filed for bankruptcy last October. JK Harris had been battling the attorneys general of Texas, West Virginia and Missouri.

Before JK Harris was Roni “Tax Lady” Deutch, who was sued by California, forfeited her law license and closed shop. She had done an “Arthur Andersen” and shredded documents. Nice.

I work tax representation, and I am not particularly surprised by the fate of these companies. They were working a specific area of representation – collections. Why? Many taxpayers first take the matter seriously only when the IRS sends them a letter indicating intent to lien or levy. 

I cannot begin to tell you how many times I have heard the refrain “What are they going to do to me? Put me in jail?” No, they will not put you in jail unless you crossed the line into criminal tax. They will take your stuff, however. We presently have a revenue officer here in Cincinnati who seems quite determined to take a client’s house, for example. At that moment those late-night commercials promising pennies-on-the-dollar sound appealing and one is willing to suspend disbelief. Don’t. If it were true I would have reduced my own taxes to pennies-on-the-dollar.

How can tax representation fit into a publicly-traded company? I am at a loss. There is no way I could do what I do being constantly worried about quarterly earnings and stock performance. Hey, sometimes it takes a client forever to assemble paperwork, or an examiner is unreasonable, or every issue goes to Appeals, or we spend time fending off an overly-aggressive revenue officer. We are not profitable on that engagement. It is part of practice. We do not rock the house every time.

My advice? If you are in a collection situation, find a local practitioner who works tax representation. Please stay away from those national tax warehouses. Ask yourself: who is paying for this airtime? You know better.

Mar 18

The IRS this past Wednesday issued proposed regulations requiring taxpayers with employer identification numbers (EINs) to update them periodically with the IRS.

EINs are issued to businesses, trusts and estates.

What the IRS is concerned about is listing nominees on the original EIN application as officers, partners and what not. The nominee’s authority to act and represent thereafter expires, sometimes as soon as the EIN is received, thus obscuring the true ownership of the entity.

The IRS will be revising its application form – the SS-4 – to identify when a nominee or agent is obtaining an EIN for a principal. The IRS will refer to such nominee as a “responsible party.”

The IRS also states that it will provide further rules on updating EINs – such as forms and frequency – in the future.

Mar 17

Harry Reid introduced an amendment to a transportation bill before the Senate. The provision allows the Secretary of State to deny or revoke a passport if you owe taxes. Here is the language:



If the Secretary receives certification by the Commissioner of Internal Revenue that any individual has a seriously delinquent tax debt in an amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 4 of the Act entitled ‘An Act to regulate the issue and validity of passports, and for other purposes’, approved July 3, 1926, commonly known as the ‘Passport Act of 1926’.

Would you believe this nonsense PASSED the Senate? It now goes to the House, which hopefully has more common sense. The current transportation authorization expires at the end of March, so I suppose something will pass.

Do these people scare you – even a little bit?

Mar 16

I am starting to like Nina Olson, the National Taxpayer Advocate.

I have been negative on the IRS program called the Offshore Voluntary Disclosure Program (OVDI).  This was the government reaction to the UBS and offshore bank account scandals. That however was tax fraud committed by the extraordinarily wealthy.  My background has been the Foreign Service and expat community, primarily because my wife is the daughter of a (retired) Foreign Service officer. These are rather ordinary folk who just happen to live overseas.

Tax advisors who work this area know that the IRS pulled a bait-and-switch a year ago – on March, 2011 – with taxpayers trying to comply with the freshly-resurrected foreign reporting requirements.  The FBAR has, for example, been out there since at least the early 70s, but at no time did Treasury want to confiscate 50% or more of your highest account balance for not filing a one-page form. The IRS was waist-deep with 2009 OVDI and had previously encouraged taxpayers to enter the program with lures of reduced penalties for non-willful violations.

EXAMPLE:  You have expatriated to Costa Rica. You have next-to-no ties in the United States and pay little attention to tax developments here. You have even learned to like soccer (but why?). The requirement to file an FBAR comes as quite the surprise to you. You first thought it absurd that such reporting would apply to the most ordinary of taxpayers. Surely that is for rich people only. You have to qualify as non-willful, right?

Then last March the IRS trotted-out a memo directive that it would not consider non-willfulness, reasonable cause, or the mitigation guidelines in applying the offshore penalty. Let me phrase that a different way: the IRS instructed its examiners to assume that the violation was willful unless the taxpayer could prove that it was not. Would you further believe that, at first, the memo was kept secret?

Huh? Are you kidding? O.J. Simpson received more “benefit of the doubt” than the IRS was willing to provide.

Then in August Nina Olson issued a Taxpayer Advocate Directive ordering IRS division commissioners to revoke this position and direct examiners to live up to their own promises to thousands of affected taxpayers.  The IRS division commissioners blew her off.


Tax Analysts now reports that the main IRS commissioner – Douglas Shulman – has no intention of responding to Nina Olson on this matter. To aggravate the matter, there is a statutory requirement that the IRS commissioner respond to the Taxpayer Advocate within 90 days.  Do laws mean nothing to this crowd?

Is this a specialized tax area? Yes. Does it have greater import? I believe it does. It does because the tax attorney and tax CPA community – people such as me – pay attention, and this behavior diminishes confidence in the IRS and any trust in its word. The consequences are subtle, injurious and lasting. And for what purpose? To extract a penalty from someone whose only crime was not paying attention to increasingly obscure and inane U.S. tax law?

Mar 14

He is known for an NFL playoff game in 2004. The Eagles were playing Green Bay. It was fourth quarter. The Eagles were trailing with 1:12 remaining, 4th down and 26 yards to go for a first down.  NFL fans call this a “long shot.” He ran a slant, the Green Bay Cover 2 defense broke down, and Donovan McNabb connected with him for a 26-yard play. The play set up a David Akers field goal, which led to overtime, which led to a win for the Eagles.

The player?  Freddie Mitchell, a wide receiver.

Why are we talking about him? Because he is likely to go to jail for tax fraud.

Freddie associated himself with two people – Jamie Russ-Walls and her husband, Richard Walls. Jamie fancied herself a tax expert. For a period between 2009 and 2010, Freddie used his football contacts to lure unsuspecting athletes to Jamie, who promised them all kinds of tax refunds because she was – well, a tax expert! She and her husband prepared returns claiming refunds between $170,000 and $1.9 million. They were not deterred by things like actual W-2s. No sir. They would forge W-2s to get the refunds they promised. If not a W-2, they would manufacture a Schedule C (self-employed) to show business losses.

Freddie was the face. His job was to recruit clients.

The three had agreed to share any tax refunds they received.

These three were geniuses. What could possibly go wrong?

Freddie recruited an athlete we will call A.G. Freddie had A.G. pay $100,000 as a down payment for his 2008 tax return and 2006 and 2007 amended returns.

OBSERVATION: I have never seen a $100,000 individual income tax return. I have seen yachts with professional crews, mansions in Wyoming, airplanes, overseas residences, FLPs, rolling GRATS, skip trusts, charitable leads and a number of other high-end tax planning vehicles, but I have never seen a $100,000 individual income tax return.

Freddie and crew prepared a tax refund claim for $1,968,288.

A.G. was not the only client. The indictment cites five other tax returns claiming refunds over $2.2 million.

This will not turn out well for Freddie. There will be no “4th and 26” this time.