Showing posts with label Accuracy Related Penalty. Show all posts
Showing posts with label Accuracy Related Penalty. Show all posts

Saturday, January 18, 2014

Taxpayer Advocate Report on Efficacy of Accuracy-Related Penalties (1/18/14)

In the recently issued Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress, here, the Taxpayer Advocate included a report titled Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers?, here.  The following is the Executive Summary (one footnote omitted):
Executive Summary 
Accuracy-related penalties are supposed to promote voluntary compliance. Congress has directed the IRS to develop better information concerning the effects of penalties on voluntary compliance, and it is the IRS’s official policy to recommend changes when the Internal Revenue Code (IRC) or penalty administration does not effectively do so. The objective of this study was to estimate the effect of accuracy-related penalties on Schedule C filers (i.e., sole proprietors) whose examinations were closed in 2007. TAS compared their subsequent compliance to a group of otherwise similarly situated “matched pairs” of taxpayers who were not penalized. TAS used Discriminant Function (or “DIF”) scores — an IRS estimate of the likelihood that an audit of the taxpayer’s return would produce an adjustment — as a proxy for a taxpayer’s subsequent compliance. 
While all groups of Schedule C filers who were subject to an examination assessment improved their reporting compliance (as measured by reductions in their DIF scores), those subject to an accuracy-related penalty had no better subsequent reporting compliance than those who were not. Thus, accuracy-related penalties did not appear to improve reporting compliance among the Schedule C filers who were subject to them. Further, penalized taxpayers who were also subject to a default assessment or who appealed their assessment had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to similarly situated taxpayers who were not penalized. n2 Similarly, those whose penalty was abated had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to taxpayers whose penalty was not abated.
   n2 Except as otherwise indicated, all differences discussed in this report are statistically significant (with 95 percent confidence). We note, however, that the DIF is an approximate measure of reporting compliance, and small differences, although statistically significant, may not indicate a real difference in reporting compliance 
Prior research suggests that a taxpayer’s perception of the fairness of the tax law, the IRS and the government drive voluntary compliance decisions, and the findings of this study are consistent with that research. Taxpayers subject to default assessments may be more likely to feel the penalty assessment process was unfair, which may have caused lower levels of future compliance. Similarly, those who appeal may be more likely to feel that the actual result was unfair, which may have caused lower levels of future compliance. Finally, those subject to a penalty assessment that is later abated may also feel that the IRS initially sought to penalize them unfairly, potentially causing lower levels of future compliance. 

Wednesday, October 16, 2013

On Qualified Amended Returns and Avoiding Amnesty Penalty Costs (10/16/13)

I picked up today a recent post on the Tax Appellate Blog, Miller & Chevalier's offering to the world on things tax (at least the appellate subset of things tax).  Miller & Chevalier is a premier tax firm (see website, here) and through the Tax Appellate Blog pundits in this area.  The particular blog to which I direct my attention is this one:  Oral Argument Scheduled in Bergmann (Tax Appellate Blog 10/15/13), here.

Now, what is Bergmann about such that anyone other than the Bergmanns and the Government should even care about oral argument in the case?  First the background.  From my Federal Tax Procedure book (with bold face emphases on the particularly relevant portions):
2. Penalty Base - Tax Understatement; Qualified Amended Return (“QAR”). 
The accuracy related penalties apply a penalty rate (20% or 40%) to a penalty base which is the tax underpayment.  If a taxpayer reports $100 of tax and upon audit is determined to have owed $150, the underpayment is $50.  Some portion or all of the underpayment may be subject to the accuracy related penalty. 
I mentioned earlier in discussing amended returns that there is a special category of amended return called a qualified amended return (“QAR”).  The QAR permits a taxpayer to treat the amount of tax reported on the QAR as the tax reported on an original return so that the accuracy related penalty will not apply.  In the example above, if the taxpayer files a QAR reporting the correct $150 tax liability after reporting only $100 on the original return, the reporting of the correct $150 liability will avoid the accuracy related penalty.  QAR relief does not apply, however, as to the amounts originally underreported attributable to fraud.\ 
What are the circumstances in which the taxpayer may achieve the benefit of the QAR?  A QAR is an amended return filed after the original due date of the return (determined with extensions) but before any of the following events: (i) the date the taxpayer is first contacted for examination of the return; (ii) the date any person is contacted for a tax shelter promoter examination under § 6700; (iii) as to a pass-through entity item, the date the entity is first contacted for examination; (iv) the date a John Doe Summons is issued to identify the name of the taxpayer; and (v) as to certain tax shelter items, the dates of certain IRS initiatives published in the Internal Revenue Bulletin.  Undisclosed listed transactions are excluded.   
The QAR is a formal procedure to achieve a result in the civil penalty arena that a “voluntary disclosure” – often effected by amended return(s) – does in the criminal tax enforcement arena in generally the same relevant equitable circumstance – i.e., the IRS has not yet started a criminal investigation against the taxpayer or a related proceeding (e.g., § 6700 investigation or John Doe Summons) likely to lead to the taxpayer.  These programs that permit taxpayers to avoid penalties – civil in the case of a qualified amended return and criminal in the case of the voluntary disclosure practice – are designed to encourage taxpayers to get right voluntarily with the IRS.  The programs produce significant additional revenue that might otherwise escape the IRS net; in the circumstances, foregoing the penalties is consistent with overall revenue enforcement policies.  I discussed the criminal voluntary disclosure policy earlier in this book. 

Thursday, February 28, 2013

Yet Another Bullshit Tax Shelter Bites the Dust (2/27/13)

We have yet another court rejection of a bullshit tax shelter.  Chemtech Royalty Associates LP et al. v. United States, 2013 U.S. Dist. 26329 (MD LA 2013), here  This time it is Dow Chemical who tried unsuccessfully to underpay its taxes and thus shift its share of the burden of Government to the citizens of this country.  This bullshit tax shelter was cooked up by Goldman Sachs in league with lawyers at King & Spalding.

The trial judge says:  "Both arrangements are enormously complicated in their construction and operation."  Which brings me to the features of a tax shelter.  I address this in my Federal Tax Procedure Book and this is a portion of that discussion (footnotes omitted):
Tax shelters are many and varied.  Some are outright fraudulent wrapped in what is disguised as a real deal.  The more sophisticated, however, are often without substance but do have some at least tenuous claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee), which in the final analysis is simply a premium for putting the reputations and perhaps their freedom at risk to give a comfort opinion that the deal which will not work if discovered, and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, a Yale Law Professor has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”

Saturday, September 29, 2012

Substantial / Gross Valuation or Basis Misstatement Majority Rule Case (9/29/12)

I write this blog to advise readers of an important decision -- Gustashaw v. Commissioner, 696 F.3d 1124 (11th Cir. 2012), here, which continues the majority trend holding that the significant / gross valuation or basis misstatement penalty can apply even if there is some basis other than valuation misstatement for knocking out the shelter -- such as lack economic substance or, in lay terms, just bullshit.

The taxpayer, of course, got into a bullshit tax shelter.  I won't go into it, but suffice it to say that it was bad at many levels and, of course, lacked economic substance (and was therefore bullshit in lay terms).  Bullshit shelters usually go by acronyms or initialisms; this was was called CARDS (I won't tell you what that stands for).  Here is the guts of the holding (footnotes omitted):
A. Gross Valuation Misstatement Penalty in I.R.C. § 6662
Gustashaw argues that the Tax Court erred in upholding the IRS's imposition of the 40% gross valuation misstatement penalties for 2000 through 2002. See I.R.C. § 6662(a)—(h). Specifically, Gustashaw contends that because the CARDS transaction lacked economic substance, there was no value or basis to misstate as to trigger the valuation misstatement penalties, and the penalties should not apply as a matter of law. Gustashaw also argues that Congress has penalized lack-of-economic-substance transactions by enacting I.R.C. §§ 6662A and 6663, and therefore, he should not be subject to gross valuation misstatement penalties under § 6662. 
The Internal Revenue Code establishes penalties for underpayment of tax. Section 6662(a) of the Code imposes an accuracy-related penalty of 20% of the portion of an underpayment of tax "attributable to," inter alia, negligence, any substantial understatement of income tax, or any substantial valuation misstatement. I.R.C. § 6662(a), (b)(1)—(3). Under the applicable regulations, only one penalty may apply to a particular underpayment of tax, even if the IRS determines accuracy-related penalties on multiple grounds. Treas. Reg. § 1.6662-2(c).