privileged and confidential the antidote for rubbing salt in the wound: every conceivable defense...

PRIVILEGED AND CONFIDENTIAL

THE ANTIDOTE FOR RUBBING SALT IN THE WOUND: EVERY CONCEIVABLE DEFENSE

AGAINST PENALTIES

Chamberlain, Hrdlicka, White, Williams & AughtryMississippi Tax Institute

December 3, 2015

David D. AughtryChamberlain, Hrdlicka, White, Williams & Aughtry

191 Peachtree Street, N.E.| Thirty-Fourth FloorAtlanta, Georgia 30303-1747www.chamberlainlaw.com

[email protected]


THE NUMBER OF PENALTY

PROVISIONS IN THE INTERNAL REVENUE

CODE IN 1955


What is . . .

• 1955 Penalty Provisions:


THE NUMBER OF PENALTY

PROVISIONS IN THE INTERNAL REVENUE

CODE TODAY


What is . . .

OVER


2013 IRS DATA BOOK


Number of Civil Penalties Assessed in 2013 According to 2013 IRS Data Book:

37,942,652


The Pendulum


Administration and Compliances Act of 1989

• Penalties should exist solely for the purpose of encouraging voluntary compliance with the tax law.

• Penalties and the standards of conduct required by taxpayers should be readily known and easily understood.

• Penalties should not treat taxpayers who make a good faith effort to comply with the tax laws as harshly as taxpayers who deliberately violate the laws.

• Penalties should be fair.

• Penalties should be easily and properly administered.


Administration and Compliances Act of 1989

• Similarly situated taxpayers should be treated similarly.

• A penalty is administrable if it is easy for the IRS to determine when it should be imposed, while still allowing the IRS to exercise discretion in determining whether to waive it.

• Penalties should not be asserted unless the situation warrants their imposition.

• An adequate opportunity should exist for incorrect decisions to be corrected.

• Penalties should be reviewed periodically to see that they are achieving their desired effect.


IRM 20.2.2.3 Penalty Relief

Plop, plop, fizz, fizz…• Reasonable Cause• Statutory Exceptions• Administrative Waivers• Correction of IRS Error• (Appeals- Hazards of Litigation)


IRM 20.1.1.3.2

Reasonable Cause = Ordinary Business Care and Prudence

“For those penalties where reasonable cause can be considered, any reason which establishes that the taxpayer exercised ordinary business care and prudence, but nevertheless was unable to comply with a prescribed duty within the prescribed time, will be considered.”


Heasley v. Commissioner

“The extent of the taxpayer's effort to assess her proper tax liability under the law is the most important factor for determining reasonable cause and good faith."


United States v. Boyle

When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. United States v. Boyle, 469 U.S. 241, 251 (1985).


At the Time

The determination of the taxpayer’s reasonable cause must be based on the taxpayer’s knowledge at the time the taxpayer relied upon the advisor’s advice.

Am. Boat Co., LLC v. United States, 583 F.3d 471, 486 (7th Cir. 2009)("But whether one has reasonable cause for a tax underpayment is a fact-specific inquiry, and we must consider what [there, the managing member] knew or should have known [at the time of the transaction].'"); See also United States v. Boyle, 469 U.S. 241, 251 (1985) (second opinion not needed to meet ordinary care); Klamath Strategic Inv. Fund v. United States, 472 F. Supp. 2d 885, 904-05 (E.D. Tex. 2007) (community of interest warranted reliance on common counsel), aff'd in part and vacated in part, 568 F.3d 537 (5th Cir. 2009); Esgar Corp. v. Commissioner, T.C. Memo 2012-35; Rawls Trading, LP v. Commissioner, at T.C. Memo. 2012-340 (justified reliance on CPA who relied on tax opinion).


1. The Sweetest Defense of All:

“I don’t owe you money: you owe me money,” or

“Deficiency-based undervaluation penalty on my [gift or estate] tax return? We actually overvalued the asset on the original return because of things we did not realize and you owe us a refund – with interest,” or

“Overvaluation on any conservation easement? We undervalued it and you owe us a refund-with interest.”

ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE


2. Cheech and Chong Defense:

“I don’t owe no stinking taxes” Absolute defense to all deficiency-based civil

penalties and to evasion. Effective (discretionary) defense to Sections 7203

(failure to file) and 7206(1) (false return) – even though the existence of a deficiency is not a statutory element.




3. Will Rogers Defense:

“No one could tell if I owed taxes or not because: This turns on a novel point of law, or The law was unsettled, or The law was too complicated in this area for any

mortal man or woman to understand, or The facts were debatable, or The facts were misrepresented to me, or The facts were concealed from me,” The criminal sections are no place to pioneer new

frontiers in the tax law (Dahlstrom).”


4. Honest Mistake:

“If I made a mistake (which I am still not sure that I did),

it was an honest mistake, as evidenced by: It was a hypertechnical mistake on a narrow point

understood only by a Tibetan monk who has taken a vow of silence, or

I made mistakes both ways, or [Again] I am told that the dollars flowing from the

substantive mistakes that operate to my detriment exceed the mistakes that operate to my benefit – and I actually overpaid my taxes.”




5. Down-From-the-Mount Moses Defense:

“Controlling authority requires the position reported on the return,” or

“The weight of authority supports the position reported on the return,”

or

“Substantial authority supports the position reported on the return,” or

“Even the IRS [Commissioner’s Office, or Chief Counsel’s Office, or an

agent in East Timbuktu] thought the position we were taking was correct

as reflected in the [PLR, TAM, CCA, or other non-precedential

document] – I know the Service or the Courts now say we were wrong but

do you think we should be punished as negligent for reaching the exact

same conclusion the IRS did there?”


IRM 20.1.1.3.2.2.5 (11-25-2011)

Erroneous Advice or RelianceCan you have your cake and eat it too?


6. Ordinary Care through Reliance on Qualified Expert Such as Tax Advisor:

“I thought I reported the correct amount of tax because my [longtime

trusted CPA, tax attorney, appraiser, or shaman] told me so,” or

“I did exactly what the business men and women whom I most respect do

– I hired the best CPA I could find and gave her free access to all of our

records,” or

“Yes, I relied upon my trusted estate planner who structured our family

limited partnership she knows more about it than anyone else in the

world – despite Canal.”




7. Hanlon’s Razor/Rodney King Defense:

“As a variation on Hanlon’s razor (never attribute to malice that which can be

explained by stupidity), decent people do not presume evil from a dispute which could

be explained as an honest mistake or a genuine difference of opinion,” or

“Reasonable people ought to be able to disagree without hurling ad hominem

accusations against each other,” or

“Both of us have genuine reasons for thinking we’re right: we don’t think you ought to

be punished if it turns out we are right, any more than we think we ought to be punished

if it turns out you are right,” or

“Can’t we all just get to the right answer without the Service hurling Section 6662

penalty threats against us or our hurling Section 7430 ‘substantially unjustified’

attorney fee threats against you?” or

“Can’t we all just get along?”


IRM 20.1.1.3.2.2.6 (11-25-2011)

Ignorance of Law?



8. A Mortal Man Lacking Omniscience OR the Dumb and DumberDefense:“Really, do you or anyone you know who, unlike someone who has to run a business, spends their entire life studying taxes, know everything in them fat regulations?” or

“I dropped out of school in the [eighth grade, or high school, or college], never took any tax courses, and am intimidated by my return,” or

“If I spent a month of Sundays studying the tax rules and my return, I still wouldn’t understand it – hell, I didn’t understand the complex contracts in the one little slice you picked,” or

“How is it that an incomprehensible tax return is the only place you get punished if you don’t score a 100 – I haven’t scored a 100 since eighth grade,” or

“I am only able to employ as many people as I do because I religiously delegate tasks to people who are smarter than me in that particular area – if they stumble, I recognize that I have to pay the taxes and (nondeductible) interest but I don’t think I ought to be punished.”



9. Thurgood Marshall Death Penalty Defense

“Are you telling me I should fire my bookkeeper for

negligence,” or

“Are you telling me I should sue my [CPA or tax attorney] for

negligence,” or

“If a friend of yours left the Service and went into private

practice, do you think she should be sued for negligence based

on what happened here?”


IRM 20.1.1.3.2.2.2 (08-05-2014)

Fire, Casualty, Natural Disaster, Other Disturbance


IRM 20.1.1.32.2.3 (12-11-2009)

Unable to Obtain Records


Toby



10. Unwilling to Commit Fraud by Filing a Return Known to Be Inaccurate:

“I knew that, if I filed a return, it would be inaccurate because, again for

reasons beyond my control: My dog ate my records and I didn’t have time to get them

reconstructed with records from AmEx and the bank, or The records were burned in a fire, or The records were washed away in a flood (once again, how

exactly do you start a flood?), or My wife left me, (took my dog and records), and I wish I had my

dog back, or I’m in a lawsuit trying to get the critical records and, as soon as I

get them, I am committed to filing an amended return to correct any material mistakes – up or down.”



11. No Obligation or Ability to Anticipate Fraud on the Part of Others:

“My thieving bookkeeper first stole my money, then doctored the

records, and then stole the original records to cover her crimes,” or

“My investment advisor falsified the records to conceal his skim or my

losses or his overstated performance,” or

“Are you going to believe me or that lying snake who, after I rejected

his criminal attempts at extortion, turned me in to get a qui tam bounty

based on what he says is his personal participation in what he says is a

crime?”


IRM 20.1.1.3.2.2.1 (11-25-11)

Death, Serious Illness or Unavoidable Absence of the

Taxpayer


12. Personal and Family Physical Health Issues:

“My ability to file and accurately report my taxes were impaired for

reasons beyond my control because: I was dead, or I was crippled in an accident, or I was suffering a debilitating disease, injury, or other

health problem, or One of my family members died, or One of my family members had serious health problems

that consumed all of my available time and energy.”



13. Personal and Family Mental Health Issues:

“I hate to admit this but my health problem is a mental health problem:

Combination OCD/Perfectionist syndrome will not file return until satisfied absolutely certain that every conceivable detail is pristine and I am never quite satisfied, or

Post-Traumatic Stress Disorder (PTSD) from my tour of duty in [some foreign war, disaster, etc.], or

Manic-Depressive (Bi-Polar) Disorder, or

Schizophrenic paranoia (all three of us are afraid to report our confidential information to anyone, particularly the government which, as I am sure you already know, is controlled by the Trilateral Commission, or NSA, or Martians), or



13. Personal and Family Mental Health Issues: (continued . . .)

Panic Disorder/Form 1040 Syndrome (some AMA recognition that fear of the IRS or the return paralyzes some people and irrationally precludes action), or

Social Anxiety, ADHD, or suicidal depression, etc., AND I have since come under a doctor’s care and am now on

heavy medication, or Was under a doctor’s care and under heavy medication, or Should be under a doctor’s care so I no longer need to self-

medicate.”

• For a helpful list, see Diagnostic and Statistical Manual of Mental Disorders (“DSM”) followed by the American Psychiatric Association or the International Statistical Classification of Diseases and Related Health Problems (“ICD”).




14. Dean Martin/Ron White/Keith Richards/Madonna Defense:

“I have an alcohol problem that prevents me from meeting my

obligations – you do know it’s a disease, don’t you?” or

“My child has a substance abuse problem which threatened her life and

has consumed our lives,” or

“My thieving bookkeeper had a meth-amphetamine problem, sold

everything she had, stole what she didn’t, and falsified the books to

cover her embezzlement,” or

“I have a sex addiction problem and have lost interest in everything

else - can you blame me?”



15. Tax Advantaged Investment Ex Post Facto Defense [Not an absolute defense since Supreme Court wrote tax penalties out of the Constitutional prohibition against ex posto facto punishments during the Depression]:

“The length of the retroactivity exceeds permissible standards,” or

“The [notice, ruling, regulation, version of the statute, or case] upon

which you are relying did not exist at the time we had to make our

investment decision,” or

“At the time I had to file my returns,” or

“Why did the Service need to adopt that rule or regulation years after the

fact if it was so clear that I, a normal businessman, should have known I

was wrong before the Service issued this retroactive rule or regulation,” or

“Even today, the validity of the regulation and its retroactive application

remain unresolved questions of law.”



16. Flip Wilson “The Devil Made Me Do It” Protestor Defense:

“In my faith, I am morally obligated to trust other members of my faith

and I did,” or

“I went to the seminar about the decline of America and patriotism

where this really smart guy talked about our duty NOT to pay taxes to

an immoral government based on the Constitutional and Supreme

Court authority described in some very impressive documents – only

later did I realize he was a charlatan who would ruin my life,” or

“He made me feel stupid if I didn’t agree with him and I didn’t.”

PERCY FOREMAN



17. Adequate and Voluntary Disclosure:

“We adequately and voluntarily disclosed without any contact from

the Service,” or

“We adequately disclosed under the regulations on a Form 8275, or a

Form 8275-R, or a Reportable Transaction Form 8886, or on a

Schedule UTP,” or

“If we didn’t adequately disclose, how did you pick us up for audit?”



18. Ernest and Julio Defense:

“We file no return before its time.”


19. Snowball (Marginal Effectiveness) Defense:

“I had a heart attack, was hospitalized, and thought I was going to

die at the time my return was due; I missed that first year and couldn’t

file the second year without disclosing my problem on the first; and it

sorta snowballed for the next 15 years,” and

“Even for civil purposes, the Manual only contemplates going back

six years,” and

“What is the point of going back further when I can’t pay the last six

years.”



20. Dr. John Can’t-Cure Injunction Defense:

“If you don’t tell me where the mistake is, I can’t cure it though I am

committed to correcting any genuine error going forward,” and

“If I’m begging you to tell me what the problem is so I can cure it

going forward, what precisely are you going to enjoin?”




21. Hans Brinker Preparer/Promoter Penalty Defense:

“Mr. Agent, would you put your finger on the entry CPA Jones made on

any return that anyone in the IRS says (much less can prove by clear

and convincing evidence) was not only inaccurate but that CPA KNEW

it was inaccurate at the time of the entry AND knew it WOULD – not

maybe, not debatable – but WOULD create a tax understatement?” or

“Really, I know you think your job is to conduct a ‘fishing expedition’

but were you aware that the Courts prohibit ‘fishing expeditions’ in

Bisceglia, Tiffany Fine Arts, and Estate of Woodward?”


22. Hopeless, Helpless, and Hapless Defense:

“I lost my company, then I lost my job at Walmart (depressed

greater), then I lost my house, and then I lost my wife – did I

mention she took my dog. I didn’t have the money to pay the taxes

and was [ERRONEOUSLY] told that I couldn’t file without

paying.”



23. “Not Willful” and “Not Responsible” Scapegoat Defense:

“Yes, I knew the owner listed my name, not his, as a company

officer and signatory on the bank account but I had no authority to

do anything without the owner’s specific permission – I was set

up.”



24. Innocent/Abused Spouse Section 6015 Defense:

“I have been drawn into one abusive relationship after another and, if

ever I questioned finances, I would be beaten,” or

“My former husband handled all the tax and financial matters and, at

that point, I trusted that faithless, lying, skirt-chasing snake before I

learned his whole life was a lie and divorced him,” or

“Yes, I’m still with him because [religion, children, etc.] and I still rely

on him to handle all the financial tax matters because he is trained in

that area and I did not know about this transaction or how it was

reported.”



25. He Who Is Without Sin:

“All mortal men and women make mistakes and yet, you seem to

say their incomprehensible tax return is the one test in their lives on

which they must score 100 every year or be punished – that doesn’t

seem right,” or

“As proof that all mortal men and women err, let’s take a moment

and look at what the agent [or Engineer or appraiser] did here,” or

“Let he who is without sin cast the first stone.”



IRM 20.1.1.3.2.2.4 (12-11-2009) & IRM 20.1.1.3.2.2.7 (8-5-2014)

Mistake Was Made or ForgetfulnessThe responsibility to timely file returns and timely make

payments

cannot be delegated to others

privileged and confidential the antidote for rubbing salt in the wound: every conceivable defense...

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