On February 4, 2010, Mary Gorman, IRS Assistant Division Counsel, announced that the IRS National Research Program study on employment taxes is scheduled to begin by the end of March of this year.  The IRS will randomly select 2,000 taxpayers for comprehensive, random employment tax examinations each year for the next three years.

Igor S. Drabkin, J.D., Former IRS Attorney

Although the IRS may look at any line on an employment tax return during the audits, the examinations will primarily focus on the following issues:

(1) worker classification (employee vs. independent contractor),

(2) fringe benefits,

(3) officer’s compensation, and

(4) review of 1099s with either no taxpayer identification number (TIN), or TIN/name mismatches.

The IRS is currently training its agents on the procedures to follow during the audits. The bulk of the exams will be conducted by the IRS Small Business/Self-Employed Division. The IRS is hoping that the study will help it improve its examination techniques and close the employment tax gap (i.e., the difference between what is paid in taxes and what should be paid).

Igor S. Drabkin, J.D., Former IRS Attorney

Over 14,700 voluntary disclosures were made under IRS’s special offshore voluntary compliance program that ended on October 15, 2009. The IRS Commissioner stated that it will be mining these disclosures for information to identify “financial institutions, advisors, and others who promoted or otherwise facilitated US persons hiding assets and income offshore and attempted to shirk their tax responsibilities at home.”

On December 2, 2009, the Department of Justice announced that it has filed papers seeking a federal court order authorizing the IRS to serve a “John Doe summons” on the Stanford Group Company (SGC) and related entities to provide documents identifying those U.S. taxpayers holding foreign accounts at or through SGC from 2002 through 2009. SGC, a Texas corporation, is a securities broker dealer that is part of the Stanford Financial Group, a privately held global network of independent, affiliated financial services companies that is run by Robert Allen Stanford. One service provided by SCG was the placement of funds in accounts at Stanford International Bank (SIB), an offshore private bank in Antigua.

The government asked the U.S. District Court for the Northern District of Texas in Dallas to let it serve the John Doe summons on Ralph Janvey, the court-appointed receiver for Stanford and related entities.  Based on a declaration of IRS Revenue Agent Daniel Reeves, filed with the court in support of the petition, the IRS has evidence volunteered from a U.S. taxpayer that account statements and Form 1099s from Stanford-controlled entities did not include interest or income generated from SIB accounts or certificates of deposits. The information sought in the John Doe summons will allow the government to review each taxpayer’s income to determine if there are any understatements or misstatements of income as well as to verify if Stanford’s U.S. clients properly filed Reports of Foreign Bank and Financial Accounts (FBARs).  The bank’s financial papers show total deposits of $8 billion in 2008.  The government wants information from Janvey on any U.S. clients who had accounts through Stanford units from 2002 through 2008.

This new “John Doe” summons case indicates that the government’s enforcement action against UBS was not a one-hit wonder, but rather a first step in the government’s effort to eradicate opportunities for U.S. taxpayers to hide assets offshore. The Stanford case is the next step in the offshore enforcement process.

As further evidence of government’s intent, the IRS announced that its newly set up unit to catch rich tax cheats hiding their wealth in complex business entities is rapidly taking shape with the hiring of hundreds of employees. The IRS declared that “hundreds” of people have already been hired to staff the new unit. The high-wealth unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by rich individuals. Tax authorities in Japan, Germany and the United Kingdom have also created similar units and they may cooperate with the IRS.   The IRS is also opening new criminal offices in Beijing, Panama City and Sydney to focus on funds flowing out of Europe and into Asia, in part because of a heightened focus on international enforcement in Europe. The IRS goal is to get those up and running before September 30, 2010.

Former IRS Attorneys of Holtz, Slavett & Drabkin can assist you with resolving your tax problems, including offshore financial accounts, and compliance with the IRS requirements. You can reach us at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2009 Igor S. Drabkin.  All Rights Reserved.

Gary M. Slavett, J.D., LL.M., Former IRS Attorney

Under a recently proposed treasury regulation, the director of the IRS Exempt Organizations Division would be the official responsible for approving tax inquiries of churches.  Internal Revenue Code Section 7611 imposes special limitations on how and when the IRS may conduct civil tax inquiries and examination of churches.  The IRS may only initiate a church tax inquiry if a high-level Treasury official reasonably believes, based on a written statement of facts and circumstances, that the organization: (a) may not qualify for tax-exempt status, or (b) may not be paying taxes on unrelated business or other taxable activity. 

The proposed regulation provides that the director of the IRS Exempt Organization Division will be that high-level Treasury official charged with the reasonable belief determination and approving church tax inquiries.  The director also would be responsible for signing off on a church tax inquiry when a church ignores routine requests from the IRS and would be the official who provides a written notice to a church that an inquiry has been started, according to the proposed regulations.

This proposed regulation follows a recent IRS loss in United States v. Living Word Christian Center, 103 AFTR 2d 2009-714 (D. Minn. 2009).  The case involved a Minnesota Church in which the District Court held that the IRS director of exempt organizations examinations is not an appropriate high-level Treasury official under I.R.C. § 7611.  The Court concluded that the examinations director did not have the breadth of responsibility of the regional commissioner, the official authorized to approve church tax inquires before the IRS was reorganized in 1998.

If you have any questions regarding IRS examinations of churches and other exempt organizations please contact an attorney at Holtz, Slavett & Drabkin at 310-550-6200.

Author:  Gary M. Slavett J.D., LL.M., Former IRS Attorney