Hoyt Fiasco: $103M Heist + Kevin Brown's
Victim information, evidence, rules of law, IRS viewpoints
|Why did the IRS lead prosecuting attorney in the Hoyt case quit in disgust?|
PROPOSAL TO BROADEN IRS INTEREST
Since 1986, Congress has allowed the IRS to abate interest on tax deficiencies under certain circumstances in which such interest was attributable in whole or in part to "unreasonable errors or delay" by the IRS. Initially, interest could be abated only for so-called "ministerial acts" by IRS personnel that resulted in a delay of a tax assessment after the taxpayer and the IRS completed efforts to resolve the mater.
In 1996, as part of the Taxpayer Bill of Rights, Congress expanded IRS authority to abate interest to include "managerial acts." However, recently issued IRS regulations have construed the term narrowly and have eliminated, in certain cases, the benefit to taxpayers intended by Congress. For example, the regulations state that a managerial act does not include any decision concerning the proper application of federal tax law. See: Treas. Reg. § 301.6404-2(b)(1) (Dec. 17, 1998).
In any case, abatement is limited to errors or delays occurring after the IRS has initially contacted the taxpayer regarding a tax deficiency or payment. No exceptions are provided for the application of the interest abatement rules to partnerships that are subject to the audit rules enacted in 1982 as part of the Tax Equity and Fiscal Responsibility Act ("TEFRA").
In TEFRA partnership cases, the limitation of interest abatement to the time after the taxpayer is contacted by the IRS results in an injustice because partners often are not informed of any potential tax liability until the case is several years old.
Expand the definition of "managerial act" to include specific acts or omissions which contribute to delay in IRS assessment of the tax liabilities of the individual partners in a partnership that is subject to the TEFRA rules. The failure of the IRS to remove a Tax Matters Partner that has a conflict of interest with respect to the resolution of the tax liabilities of the other partners of the partnership shall be deemed to be such a contributing managerial act.
In the case of a TEFRA partnership, abatement will not be limited to errors or delays by the IRS that occur only after the IRS has contacted the taxpayer in writing with respect to a deficiency or payment. Congress intends that the IRS give special consideration to interest abatement in those cases in which innocent investors have been defrauded by a tax shelter promoter and allow abatement from the time that the final partnership administrative adjustment is issued.
The effective date of the proposal shall be interest accruing with respect to any liability for tax arising on or before December 31, 1998 but remaining unpaid as of December 31, 1998. It shall also be effective with respect to any interest accruing with respect to any liability for tax after December 31, 1998.
In the TEFRA partnership audit context, IRS conduct can result in material delays in the resolution of partner-level tax liabilities. The impact of such a delay is exacerbated when it is accompanied by IRS failure to remove a conflicted Tax Matters Partner ("TMP"), such as a TMP who is engaged in fraud. This problem has arisen in at least two published cases involving tax shelters in which innocent investors were adversely affected.
See Transpac Drilling Venture v. Commissioner, 147 F.3d 221 (2d Cir. 1998); see also River City Ranches #4, J.V., Walter J. Hoyt III, Tax Matters Partner, et al., v. Commissioner, T.C. Memo. 1999-209. In the Hoyt cases, the IRS had the TMP under investigation for 10 years before he was finally indicted and removed. The investors were not notified of the criminal investigation. Even in non-fraudulent TEFRA partnerships, the partners may not be aware of tax issues because the law requires the IRS to deal with the TMP. During that time the TMP has the authority to extend deadlines and statutes of limitations without the knowledge of other partners.
In a TEFRA audit, the IRS cannot contact individual partners with respect to a "deficiency" on their individual return prior to completion of the partnership-level proceedings (at most, a notice partner will receive notice of the beginning of the TEFRA audit and the final partnership administrative adjustments). I.R.C. § 6223, 6225.
Moreover, the contact for "payment" will occur at least 5 months to a year after the partnership adjustments are finally determined. I.R.C. §§ 6225, 6229(d). Thus, there is an inherent delay in the TEFRA process before "contact" is made with the individual taxpayer with respect to a deficiency or payment; accordingly, interest charges on any deficiency will necessarily be greater.
In addition, many errors or delays by the IRS can occur prior to contact with the taxpayer. For instance, an IRS failure to give an individual taxpayer sufficient notice and opportunity to participate in a TEFRA proceeding will serve to deny him process and leave him few avenues of relief after "contact" with respect to the resulting deficiency assessment against him. See Wind Energy Technology Associates III v. Commissioner, 94 T.C. 787 (1990).
Also, the IRS may improperly extend the time by which it is otherwise required to contact an individual taxpayer with respect to the deficiency, by obtaining a consent to extend the statute of limitations on assessment from a TMP who is known to be breaching his fiduciary duty to the individual taxpayers.
Moreover, after the partnership matter is final, the IRS may spend considerable time arriving at what is ultimately proved to be erroneous computational adjustments to the individual taxpayer return, but those errors and delays would be excused because they occurred prior to the contact with the taxpayer.
In sum, recently conducted partnership audits have demonstrated that IRS conduct prior to contact with the taxpayer as to a deficiency or payment can involve unreasonable judgment and delay by the IRS for which it would be patently unfair to impose an interest charge against the individual taxpayers. In such cases, individual taxpayers typically face huge liabilities due to the accumulation of interest over several years.
Friday, October 09, 2020
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