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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
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THE NUMBER OF PENALTY
PROVISIONS IN THE INTERNAL REVENUE
CODE IN 1955
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What is . . .
• 1955 Penalty Provisions:
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THE NUMBER OF PENALTY
PROVISIONS IN THE INTERNAL REVENUE
CODE TODAY
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What is . . .
OVER
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2013 IRS DATA BOOK
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Number of Civil Penalties Assessed in 2013 According to 2013 IRS Data Book:
37,942,652
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The Pendulum
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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.
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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.
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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)
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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.”
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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."
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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).
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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).
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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
PRIVILEGED AND CONFIDENTIAL
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.
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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).”
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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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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?”
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IRM 20.1.1.3.2.2.5 (11-25-2011)
Erroneous Advice or RelianceCan you have your cake and eat it too?
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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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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?”
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IRM 20.1.1.3.2.2.6 (11-25-2011)
Ignorance of Law?
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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.”
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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?”
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IRM 20.1.1.3.2.2.2 (08-05-2014)
Fire, Casualty, Natural Disaster, Other Disturbance
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IRM 20.1.1.32.2.3 (12-11-2009)
Unable to Obtain Records
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Toby
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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.”
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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?”
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IRM 20.1.1.3.2.2.1 (11-25-11)
Death, Serious Illness or Unavoidable Absence of the
Taxpayer
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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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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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
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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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”).
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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?”
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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.”
PRIVILEGED AND CONFIDENTIAL
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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?”
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ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
18. Ernest and Julio Defense:
“We file no return before its time.”
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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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
PRIVILEGED AND CONFIDENTIAL
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?”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
PRIVILEGED AND CONFIDENTIAL
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
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?”
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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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
PRIVILEGED AND CONFIDENTIAL
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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
PRIVILEGED AND CONFIDENTIAL
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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
PRIVILEGED AND CONFIDENTIAL
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.”
ALMOST EVERY CONCEIVABLE FACTUAL DEFENSE
PRIVILEGED AND CONFIDENTIAL
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