The National Institute on Criminal Tax Fraud and the National Institute on Tax Controversy held their annual gathering December 7-9, 2016, in Las Vegas. This conference—now in its thirty-third year as the National Institute on Criminal Tax Fraud, and its sixth year since combining with the National Institute on Tax Controversy—brings together tax practitioners, judges, and representatives from the IRS and the Department of Justice for three days of workshops and programming topics related to tax controversy, tax litigation, and criminal tax prosecution and defense. Programming is presented by the Tax and Criminal Justice sections of the ABA as well as the American Association of Attorney-Certified Public Accountants and the California Society of CPAs. The conference offers two program tracks, one focusing on civil tax controversy and the other focusing on criminal tax controversy. Attendees may choose to attend panels from both tracks. This article highlights a few of the nearly two dozen offerings this year.
Low Income Taxpayer Assistance: Representing the Taxpayer with No Books and Records—Best Practices in Reconstruction and Estimates from Tax Return to Tax Court
The conference opened on Wednesday afternoon with the Low Income Taxpayer Assistance workshop, “Representing the Taxpayer with No Books and Records—Best Practices in Reconstruction and Estimates from Tax Return to Tax Court.” The panelists began with a discussion of the pro bono Calendar Call program,1 relating their own personal experiences providing legal advice and other assistance to unrepresented litigants at the U.S. Tax Court. Roughly 70% of the more than 24,000 petitions filed in the Tax Court each year are filed pro se. Through the Calendar Call program, volunteer attorneys are present at the beginning of the trial session in each of the 74 cities in which the Tax Court sits. The volunteer attorneys are available to assist unrepresented taxpayers, explaining to them what documents they will need to make their cases, helping to organize their arguments, or, where appropriate, providing representation before the IRS or the Tax Court.
The panelists then focused on one of the most common issues that arise in representing low income taxpayers: deficient or nonexistent books and records. Many unsophisticated taxpayers deal primarily in cash and keep poor records of their financial transactions. When subject to IRS examination, they find it difficult to establish their income and deductions. The members of the panel described different methods that may be used to reconstruct these figures as closely as possible for the IRS or the Tax Court. Whenever available, bank and credit card statements, receipts, and other documents can demonstrate that funds were received or expenses incurred. If such documents are unavailable, however, indirect methods may sometimes be used to approximate these amounts. Industry standards, such as those published by the U.S. Bureau of Labor Statistics and certain websites, often allow a taxpayer to make a reasonable estimate of his or her business expenses, taking into account such factors as the type of business operated and the geographic area in which the taxpayer resides.2
If the dispute reaches the Tax Court, the taxpayer generally bears the burden of proving an entitlement to deductions.3 In some circumstances, however, a taxpayer can establish that a deductible expense was incurred but is unable to substantiate the exact amount. In those cases the Tax Court may apply the “Cohan Rule” to permit a reasonable estimate of the deductible amount.4
The panel also delved into other issues affecting low income taxpayers, including tips on how to navigate the ongoing ITIN renewal process, Earned Income Tax Credit audits, and recent IRS trends in reconstructing income.
Civil Tax Workshop
The Civil Tax Workshop, also held on the first day of the conference, featured a panel of judges and experienced tax attorneys discussing strategies for effectively preparing and presenting a civil tax controversy in each of the different forums in which federal tax cases may be heard. The panelists covered the full lifecycle of a tax controversy, beginning with issues that arise the moment the client walks into a tax lawyer’s office. Vetting the client, gathering information, assessing the case, and managing client expectations are all important elements in taking on a new case. The panelists discussed factors to be weighed in determining whether to file a case in court at all, and if so, in which court to file. Although all options are not necessarily available in every case, the courts that may hear tax cases are the U.S. Tax Court, U.S. District Court, Court of Federal Claims, or, under certain circumstances, U.S. Bankruptcy Court.
The panelists spoke at length about the major stages of a tax case, from the initial filing to motions to trial and finally to brief-writing and judgment. The discussion highlighted key differences between the various courts, particularly between the Tax Court and the district courts, and practical considerations in choosing one court over another. Key differences include that (i) the Tax Court is a prepayment forum, while the district courts handle refund claims, and (ii) district courts operate in accordance with the Federal Rules of Civil Procedure, while the Tax Court has its own Rules of Practice and Procedure.
A major topic in this discussion was the use of expert testimony. Experts may be called upon as witnesses to assist the court in reaching a factual finding on an issue requiring technical or specialized knowledge. The judges on the panel described what they typically look for when an expert witness is called upon to testify. They expressed a general reservation toward having experts, but noted that they find experts more persuasive when they are able to offer an effective cross-examination or rebuttal to an opposing expert.
The panelists also discussed settlement procedures (including the requirements associated with qualified offers under section 7430), offered advice on effective brief-and pretrial-memorandum-writing, and explained the considerations an attorney should make when deciding whether to appeal an adverse decision and the steps involved in doing so.
Offshore Enforcement: How Will They Prove It?
On the criminal side, the panel “Offshore Enforcement: How Will They Prove It?” featured a panel of government and defense attorneys that explored the many issues that arise in the context of preparing a foreign bank account report (FBAR) case for trial. A significant portion of the discussion focused on the willfulness requirement. Federal law requires taxpayers to report annually any financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country.5 An individual who willfully fails to report such an interest may be subject to substantial civil penalties or criminal fines or imprisonment.6
What it means for a taxpayer to act “willfully” in this civil context has generated much debate and confusion. In the criminal context, the Sixth Circuit has held that the “test for willfulness is voluntary, intentional violation of a known legal duty.”7 In the civil context, however, the test is less clear. The panelists considered two prominent judicial decisions on the subject, United States v. Williams8 and United States v. McBride.9 They suggested that the courts had adopted seemingly broader definitions that include instances in which a taxpayer fails to file an FBAR when not actually aware of the requirement to file the FBAR, based on concepts of recklessness or constructive knowledge of a legal duty.
The panelists also discussed the government’s burden of proof in such cases, examined methods for the collection and use of evidence in offshore cases, and offered initial responses to the recently decided United States v. Bohanec, in which the government successfully brought civil FBAR penalties against a non-filer.
A complete listing of the programs for the Institute is available here. And the course materials can be purchased here. The 34th Annual National Institute on Criminal Tax Fraud and the Seventh Annual National Institute on Tax Controversy will be held December 6-8, 2017, in Las Vegas. ■
2 See, e.g., I.R.M 4.10.1.6 (05-27-2011).
4 Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). But see section 274(d), imposing heightened substantiation requirements on certain deductible expenses.
5 See 31 U.S.C. sec. 5314(a).
6 See 31 U.S.C. secs. 5321(a)(5)(C) and 5322(a).
7 United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991). See also Ratzlaf v. United States, 510 U.S. 135, 141 (1994).
8 489 Fed. Appx. 655 (2012) (unpublished).