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Protestors, Shelters Draw Increasing Attention(RIVERWOODS, ILL., January 2006) – While most people and businesses are struggling to figure out how much they owe the Internal Revenue Service or how big a refund they have coming, a small but perhaps growing minority is playing catch-me-if-you-can with the IRS, notes CCH, a Wolters Kluwer business and a leading provider of tax and accounting information, software and services (tax.cchgroup.com). Tax protesters, fly-by-night tax preparers promising impossibly large refunds and slick operators offering wealthy individuals and corporations sophisticated tax shelters seem to be on the rise. But beware if you’re tempted to try some do-it-yourself tax relief: Congress, the IRS, Treasury and the courts are trying to give some would-be tax cheats reason to think twice. Whether their efforts will be enough to stem a rising tide of tax chicanery is another question. Protestors Won’t Take “No” for an AnswerMany people combine a dislike for paying taxes with a devotion to one or more unusual political and legal theories. They may refuse to file, file returns with zeros on almost every line or demand a refund equal to the amounts withheld from their earnings. The beliefs behind their varied attempts at nonpayment are a crazy quilt of contentions – that Ohio was not a state when it ratified the constitutional amendment that makes the income tax possible, that paying taxes is strictly voluntary, that “sovereign citizens” of states are not subject to federal taxation, that wages represent an equal return for services rendered and hence are not “income,” and a variety of other issues. The IRS lists a total of 21 “frivolous tax arguments” on its web site (irs.gov), citing cases in which various courts have held such arguments to be invalid. But that does not keep some tax preparers and promoters from selling various services, books and kits to customers yearning to be free of taxes. And true believers find it difficult to take a firm “no” from the IRS or the courts as final. The IRS or the U.S. Tax Court may warn them not to advance a “frivolous” position, but they persist. They appeal from IRS hearings to the Tax Court or from the Tax Court to District Court, refusing to concede defeat. Frivolous Isn’t Funny, Courts and IRS SayWhen tax protestors or others try to use the courts as a soapbox or simply hope to use legal proceedings to delay the day of reckoning – and paying – their taxes, the law provides that they can be socked with a penalty of up to $25,000. The courts haven’t been shy about applying this “frivolous proceedings” penalty in recent years, according to CCH Principal Tax Analyst Mark Luscombe, JD, CPA. “In cases where the court might have warned a taxpayer in the past, they now may impose at least a token penalty. Where the courts think the taxpayer is willfully clinging to a discredited argument after they’ve been warned, it’s getting more common to see multi-thousand dollar penalties handed down,” Luscombe observed. At the end of 2004, the Tax Court imposed a $25,000 penalty for an individual who, in their opinion, abused the Collection Due Process procedure for settling collection disputes with the IRS. In December, 2005, it again imposed the maximum penalty on a New York taxpayer who claimed that wages were not income. The taxpayer – or non-taxpayer – had maintained the same position in a previous case and had been penalized $3,000. Sleight of Hand with DeductionsWhen it comes to paying less than they owe, some taxpayers find eager accomplices. According to a U.S. district court, tax preparer James E. Rosamund of Holden, Louisiana passed himself off as a former IRS employee “with special knowledge of available deductions that is not readily available to the general public.” He also misled them into believing that their returns wouldn’t be audited. Under the business name Taxes Done Rite, Rosamund prepared nearly 1,300 original returns and nearly 600 amended returns in 2002 and 2003. On them, he would inflate legitimate deductions and create other deductions out of thin air, taking a cut of the resulting refunds as part of his fee. By the end of 2004, the government was seeking an injunction to shut Rosamund down, which was granted in April, 2005. By then, the IRS had started auditing his clients’ returns, finding that all of them required adjustments in favor of the U.S. Treasury, with the average original return understating the taxpayer’s obligation by $4,100. In addition to preventing Taxes Done Rite from preparing any more returns, the permanent injunction granted by the court ordered Rosamund to turn over his complete client list to the IRS. “Although the court’s opinion stressed the preparer’s misleading of his clients, it’s hard to think that some of them didn’t realize that the inflated deductions and subsequent refunds were too good to be true,” Luscombe said. Shelters or Shell Game?One recent focus of the IRS and congressional investigators has been the tax shelters marketed to corporations and wealthy individuals to help them greatly reduce or eliminate taxes. In tax talk, a “shelter” can mean a legitimate tax-saving feature of the law, such as the various benefits associated with home ownership, or it can be a scheme for making taxable income appear untaxable, with nothing of any real economic substance taking place. Certain kinds of schemes require registration with the IRS, which may decide to label them as “potentially abusive,” warning taxpayers that they may be subject to audit and assessment of back taxes, interest and penalties for using them. In recent years, the IRS has turned its attention toward tax shelter promoters and has begun issuing summonses against accounting firms, investment bankers and law firms. Underpinning the government’s pursuit of professionals promoting tax shelters is the belief that practitioners must be held accountable and set a positive example, instead of exploiting the complexity of the tax code to generate unintended tax consequences. The IRS also has announced that it will take a closer look at “opinion letters” by lawyers that are used to avoid penalties in tax shelter cases. The letters would no longer provide a near-automatic defense in cases where the shelter is found to be abusive, especially in cases where the attorney is involved in promoting the shelter. As IRS Commissioner Mark W. Everson noted at a meeting of the Taxation Section of the Washington, D.C. Bar, giving advice on abusive transactions has gone “from clever lawyering to theft from the government.” “But there’s also the question of whether the complexity of the tax laws doesn’t invite ingenious people to come up with ingenious ways to pay less tax,” Luscombe said. “It can be difficult to draw a sharp line between legitimate and illegitimate practices, and if the legality of a shelter isn’t immediately obvious to IRS lawyers, how can anyone else tell a valid tax-saving mechanism from outright tax cheating?” Tax Shelter Victories for the IRSIn recent years, the IRS has identified a number of tax shelters as abusive and required that participants in them disclose that fact on their tax returns. It has also offered to settle cases with shelter participants, requiring that they pay back taxes, interest and a penalty, but sparing them additional penalties and litigation costs. One tax shelter, known as “Son of Boss” was marketed to wealthy individuals and some companies from 1997 through 2000. It involved a complicated sequence of financial transactions that rather magically produced losses on participants’ returns. The IRS collected $3.2 billion through a settlement offer. In October of last year, the IRS announced a new settlement initiative for participants in another 21 shelters identified as being abusive. A ‘Compliance Gap’Most worrisome for many observers are not the protestors who flaunt their noncompliance or the well-heeled investors in sophisticated shelters, but average taxpayers who increasingly may ask: “If other people get away with it, why not me?” The IRS Oversight Board, which provides long-term guidance and direction to the IRS, has commissioned a series of surveys showing an increasing willingness of the general public to consider cheating – at least somewhat – on their taxes. The Board has also warned repeatedly that the IRS faces a growing compliance gap, which it estimated at over $311 billion in its annual report for 2005. The Board pointed out that the IRS’s budget authorization contains several restrictions on how the IRS must spend its $10.7 billion appropriation, such as specifying the amount spent on enforcement and limiting the IRS’s ability to reduce taxpayer services. The total amount is less than the Board recommended to begin with. “The IRS is beginning to apply budgeting and management techniques to many categories of abuse, and it may well improve with practice,” Luscombe said. “But if it doesn’t have the wherewithal to go after people who already owe it money, there is a question of how effective its overall compliance effort will be.” About CCH, a Wolters Kluwer businessCCH, a Wolters Kluwer business (tax.cchgroup.com) is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager™ and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. -- ### -- nb-06-10
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