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Taxpayer Representation IRS Private Debt Collection Initiative Partnership vs. Partner SOLs Casualty Losses during a National Disaster Editor: Mr. Ely is the former chair of the AICPA Tax Divisions IRS Practice and Procedures Committee. Ms. Michnay and Messrs. Yuskewich, Keenan and Parker are members of that committee.
Representing Taxpayers and Withdrawing from Representation The regulations to represent or practice before the IRS are published in Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service (31 CFR Part 10) and the Statement of Procedural Rules (Sections 601.501601.509). Any CPA who is not currently under suspension or disbarment from practice before the IRS and who is duly qualified to practice as a CPA in any state, possession, territory, commonwealth, or in the District of Columbia may practice before the IRS; see Pub. 947, Practice Before the IRS and Power of Attorney. The CPA must be designated as the taxpayers representative or power of attorney (POA) and file Form 2848, Power of Attorney and Declaration of Representative, or a written declaration with the IRS, stating that he or she is authorized and qualified to represent a particular taxpayer.
To Represent To discuss or to correspond with the IRS on a taxpayers behalf, a CPA has four options to submit Form 2848. 1. Mail or fax a signed form to the IRS Centralized Authorization File (CAF) at the address or fax number in Pub. 947 (both the taxpayer and tax representative must sign and date the form). The IRS will process the authorization within two to seven days. Once the information is entered in the CAF system, the CPA will be able to have discussions and correspond with the IRS. 2. Telephone the IRS Practitioners Hotline ((866) 860-4259) to discuss an account related item. Before any discussion ensues, however, the CPA enters the taxpayers Social Security number via a touchtone telephone keypad. On connecting to an IRS agent, a fax number will be given to submit Form 2848. The CPA stays on the line while the IRS agent receives the fax and prepares to discuss the taxpayer. At the completion of the call, the CPA may request to have Form 2848 submitted to the CAF system. Note: This may not al-ways get accomplished, and the CPA will have to use another method to have the form processed. 3. Call the telephone number listed on the taxpayers correspondence and fax Form 2848 immediately. This option is not always available, however, because certain IRS centers do not have this capability. An agent will ask the representative to fax the form to the CAF system and to call the same telephone number in a few days. 4. Use E-Services. A CPA must be an authorized E-services provider to assess this option. Information from the taxpayers prior tax return is needed to enter the POA information. As E-Services is new, processing may take hours or days, and not all options on Form 2848 are available. (For information about becoming an authorized E-Services user, see Maida, Tax Practice Management, IRS Launches Enhanced E-Services, TTA, June 2005.)
Review of Representation Each CPA should review his or her CAF listing. A computerized listing of the taxpayers authorizations under the CAF number may be obtained through the Freedom of Information Act (FOIA); for a sample letter to request a computerized listing, see Exhibit 1. (Note: fees will be waived for requesters in areas affected by Hurricane Katrina. Practitioners so affected must state in the letter that they have been affected, indicate their home and/or business address and request a waiver.)
The IRS processing time is four to eight weeks. The CAF Representative Listing packet, which is mailed to the CPA, will include:
The computerized document will list one tax matter, form and year per line. One taxpayer may have several lines on the list. The packet does not include an explanation of the columns. Most of the information is self-explanatory, per Form 2848. Briefly, the main columns from left to right are:
Not to Represent (Withdrawal of the Authorization) To withdraw from representation, a CPA must write a letter and mail or fax it to the CAF at the state address or fax number listed in Pub. 947; see Exhibit 2 for a sample letter. The letter must state the taxpayers name, Social Security number or Federal TIN, the tax matter, tax form and the year as listed on Form 2848. Attaching Form 2848 is beneficial, but not required. The CAF Representation Listing will provide the information needed to withdraw the representation.
Once the CPA processes the withdrawal letter, no IRS correspondence should be accepted on the taxpayers behalf. Such correspondence should be unopened and returned to the IRS with an explanationrepresentation has been withdrawn. If the Service continues to send notices, the withdrawal letter should be refaxed, with a new cover letter stating the problem. Note: The IRS will send a confirmation of the withdrawal letter within two to four weeks to both the CPA and the taxpayer. The return address will be the CAF location. The CPA should retain this letter in the taxpayers permanent file. From Ruth Ann Michnay, CPA, MBT, EA, Ruth Ann Michnay, P.A., Oakdale, MN
IRS Initiative for Private Debt Collection The American Jobs Creation Act of 2004 (AJCA), Section 881(a)(1), created Sec. 6306, permitting private collection agencies (PCAs) to collect Federal tax debts. On Nov. 2, 2005, at the AICPA National CPA/IRS Tax Issues Meeting in Washington, DC, the IRS announced it expects to award the first three contracts for private debt collection in February 2006 and begin implementation in June 2006. The IRS will enter into qualified tax collection contracts (QTCCs) (as defined in Sec. 6306(b)) with PCAs that will locate and contact taxpayers owing outstanding tax liabilities and arrange payment from them. For there to be an outstanding tax liability, there must first be an assessment under Sec. 6201. The new legislation generally allows PCAs to collect any type of tax imposed under the Code. It is anticipated, however, that implementation will focus on taxpayers who have (1) filed a return showing a balance due, but failed to pay it in full; and (2) been assessed additional tax by the IRS and made several voluntary payments toward satisfying their obligation, but have not paid in full.
Collection Process According to the AJCA Conference Report, in the first step in the collection process, the PCA contacts the taxpayer by letter; see Conf. Rept No. 108-755, 108th Cong., 2d Sess. (2004). If the taxpayers last known address is incorrect, the PCA will search for a correct one. Next, the PCA will call the taxpayer to request full payment. The PCA cannot accept payment directly; rather, payments have to be processed by IRS employees. If taxpayers cannot pay in full immediately, the PCA will offer them an installment agreement providing for full payment of the taxes over as much as five years. If the taxpayer is unable to pay the outstanding tax liability in full over five years, the PCA will obtain financial information from the taxpayer and provide it to the IRS for further processing and action. Taxpayer protection: Use of subcontractors by PCAs will be limited. Subcontractors will not be allowed to contact taxpayers, provide quality assurance services or compose collection notices. These provisions will lessen the burden on the Service employees charged with oversight activities. Also, taxpayers are further protected, because direct contact with taxpayers and access to taxpayer-sensitive information will be afforded only to PCAs that have accepted all the obligations imposed by the contracts. There are several specific procedural conditions under which the PCAs have to operate. First, the Fair Debt Collection Practices Act applies to them. Second, taxpayer protections statutorily applicable to the IRS are also made statutorily applicable to PCAs. Third, PCAs are required to inform taxpayers of the availability of assistance from the IRS National Taxpayer Advocate. No liability: Under Sec. 6306(d), the IRS will be exempt from liability for acts committed by PCAs. AJCA Section 881(b) added Sec. 7433A, making remedies available to taxpayers for acts or omissions committed by PCAs performing services under QTCCs. This will ensure that PCAs appropriately train their employees and take steps to prevent them from violating taxpayers rights. PCAs will not be permitted to perform work under a QTCC for willful retaliation against or harassment of taxpayers, to the same extent that IRS employees are subject to termination for such activities. In addition, the Privacy Act of 1974 and Sec. 6103, which prevent unlawful disclosure of taxpayer information, al-ready apply to PCAs. Both of these provisions subject PCA employees to civil and criminal liability.
PCA Eligibility The Service will conduct a competitive bidding process in choosing PCAs. It will evaluate each agencys work on not only how much in unpaid tax is recovered, but also on quality factors, such as responsiveness to taxpayers. The privacy of taxpayers returns will be protected; PCAs will only receive a taxpayers name, phone number, address, the tax year in question and the amount due. PCA employees will have access only to cases assigned to them. PCA managers will have access only to cases and information assigned to their employees. Appropriate PCA managers and employees must successfully pass a personal screening and an investigation and be trained on IRS security and privacy policies and awareness, including the consequences for the violations identified above. PCAs will be required to submit to the Service verification of a successful personnel screening and an investigation and nondisclosure forms, before they will be given access to taxpayer data. PCA managers and employees must complete IRS-certified privacy safeguard and disclosure awareness training and must certify in writing that they have successfully completed such training before they can work on a delinquent taxpayer account. The Service has said it plans to phase-in PCAs, by hiring three companies to handle the initial work and eventually expand to 10 PCAs through a competitive bidding process. A revolving fund will be generated from amounts collected by PCAs. They will be paid out of this fund for their services, which could be up to 25% of the amount collected under a QTCC.
Conclusion The outsourcing of debt collection was previously implemented unsuccessfully in 1996. The current effort differs in many respects, including compensating PCAs on a percentage, rather than a fee, basis. Also, the assignment of simple cases affords IRS employees additional time to pursue more complex, larger ones. From J. Matthew Yuskewich, CPA, Winterset CPA Group, Inc., Columbus, OH
Managing the Interplay between a Partnership and Its Partners Statutes of Limitations Managing the statute of limitations (SOL) on assessment can be complicated, particularly for partnerships and partners. The SOLs on partnership and partner assessments are found in Secs. 6501(a) and 6229(a). The difficulty is determining which statute applies. A recent court case examined this issue. In AD Global Fund, LLC, 67 Fed. Cl. 657 (2005), op. modified, 11/8/05, the plaintiff filed a motion for summary judgment, asserting that the IRS failed to issue a Notice of Final Partnership Administrative Adjustment (FPAA) within the Sec. 6229(a) limitation period, thereby barring the Service from assessing additional tax on partnership items. The IRS contended that it may assess tax attributable to partnership items within the assessment period set forth in Sec. 6501(a) after the Sec. 6229(a) period has expired. The Court of Federal Claims analyzed the interaction between Secs. 6501(a) and 6229(a) and agreed with the IRSs interpretation of the interplay of these sections; thus, it denied the plaintiffs motion for summary judgment.
Background AD Global Fund (the plaintiff) is a limited liability company treated as a partnership for Federal income tax purposes and subject to the Unified Partnership Procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA); see Secs. 62216234. The plaintiffs 1999 Form 1065, U.S. Return of Partnership Income, was filed on April 17, 2000. On or about May 27, 2003, the IRS issued a Notice of Beginning of Partnership Administrative Proceeding (NBAP) to the plaintiff regarding the 1999 return. On Oct. 9, 2003, the IRS mailed an FPAA to the plaintiffs tax matters partner (TMP) with respect to the 1999 return. The plaintiff timely filed a complaint in the Court of Federal Claims, challenging the IRSs ability to assess additional tax on the proposed partnership adjustments contained in the FPAA. It asserted that the IRSs failure to issue an FPAA within the three-year period under Sec. 6229(a) precluded the IRS from assessing any additional tax relating to any partnership items. The complaint initiating this lawsuit was filed by North Hills Holding, Inc. (NHH), a partner other than the plaintiffs TMP. The courts opinion does not specifically state the date on which NHH filed its 1999 Federal income tax return. For an assessment of additional tax against NHH to be timely made under Sec. 6501(a), the entitys 1999 return would have had to have been filed after Oct. 8, 2000.
Tax Treatment of Partnerships and Partners Partnerships are generally not separate taxpaying entities; rather, they are tax reporting entities. This means that the tax effects of a partnerships activities are passed through to its partners; see Secs. 701 and 702. The partnership files Form 1065, on which it reports its annual Federal income tax activities, as well as each partners distributive share (on Schedule K-1) of the partnerships taxable income or its losses and credits; see Sec. 6031(a). The Schedule K-1 information is provided by the partnership to the partners for inclusion on their returns; see Secs. 702 and 6031(b). TEFRA: In 1982, Congress enacted unified partnership audit examination and litigation provisions (now contained in Secs. 62216234) as part of the TEFRA. Prior to the TEFRAs passage, the IRS did not conduct an examination at the partnership level; rather, it had to audit each partners return that contained a partnership item. This forced the IRS to audit and litigate the same partnership items multiple times, which at times resulted in conflicting judicial decisions on the tax treatment of the same partnership item and, thus, inconsistent treatment of the partners. As complex multi-tiered partnerships were set up to create tax shelters, it became very difficult for the IRS to audit each partner within the assessment SOL to assess tax. The TEFRA provisions were enacted to allow all issues on the tax treatment of partnership items to be resolved in a single administrative or judicial proceeding at the partnership level, eliminating multiple proceedings at the partner level; see Sec. 6221; H Rept No. 97-760, 97th Cong., 2d Sess. (1982) p. 599, 1982-2 CB 600, 662; and Maxwell, 87 TC 783 (1986). The IRS begins the process by sending an NBAP to any partner entitled to notice; see Sec. 6223(a)(1). If the audit of the partnerships return results in the adjustment of any partnership item, it then has to send the partners an FPAA; see Sec. 6223(a)(2). The partnerships TMP has 90 days to file a petition for a readjustment of the partnership items; see Sec. 6226(a). This can be accomplished in the Tax Court, Claims Court or U.S. District Court in which the partnerships principal place of business is located; see Sec. 6226(a). If the TMP does not file a petition for readjustment within 90 days, then other partners have 60 days after the close of the 90-day period in which to file a petition; see Sec. 6226(b)(1). Once the partnership adjustments are final, the IRS has one year to assess any additional tax liability against the partners; see Sec. 6229(d).
Secs. 6501(a) and 6229(a) Sec. 6501(a), Limitations on assessment and collection, contains the general rule limiting the period in which the IRS can assess tax to three years from the date a return is filed. Specifically, it provides:
The competing statute is Sec. 6229(a), Period of limitations for making assessments. It guides the timely issuance of an FPAA, providing:
Taxpayers Argument As discussed above, the plaintiff advanced the position that the time period in Sec. 6229(a) is a separate SOL distinct from that set forth in Sec. 6501(a). The IRS argued that Sec. 6229(a) does not supersede Sec. 6501(a) but, rather, sets forth a minimum period for assessments attributable to partnership items that may, on occasion, extend the Sec. 6501(a) SOL. Thus, the issue for the court was whether Sec. 6229(a) is independent of Sec. 6501(a), or whether Sec. 6229(a) extends Sec. 6501(a). The plaintiff cited early Tax Court cases interpreting the TEFRA as support for its argument that Sec. 6229(a) was intended to create a separate and distinct SOL for assessing partners for partnership items. In Maxwell, the issue before the Tax Court was whether the IRS could issue a deficiency notice to a partner for a partnership item before the issue was resolved at the partnership level. The court concluded that the IRS could not issue such notice until after resolution at the partnership level. In reaching its decision, it relied on the fact that special rules, including special SOLs, apply to partnership items. In Roberts, 94 TC 853 (1990), one of the issues before the court was whether a partnership proceeding was barred by the SOL. This issue was relevant because the SOL for assessment against a partner had not yet expired. The Tax Court concluded that the IRS would be time-barred from initiating a partnership proceeding. Although the court cited Sec. 6229(a), it did not mention Sec. 6501. The plaintiff argued that the Tax Courts failure to reference Sec. 6501 supported its argument that Sec. 6229(a) is a separate and distinct rule.
IRSs Stance The IRS also had an arsenal of case law to support its argument that Sec. 6229(a) was an extension of Sec. 6501(a) and was not meant to be a separate rule. In Rhone-Poulenc Surfactants and Specialties, L.P., 114 TC 533 (2000), one of the primary issues before the Tax Court was the interplay between Secs. 6229(a) and 6501. The majority of judges concluded that Sec. 6229(a) was a complement to Sec. 6501. In reaching its decision, the court noted that Sec. 6501(a) does not contain any exceptions for deficiencies attributable to partnership items. The D.C. Circuit affirmed the Tax Courts interpretation of the relationship between Secs. 6501 and 6229 in Andantech, 331 F3d 972 (DC Cir. 2003). It concluded that Sec. 6229 was intended to serve as an extension to the general period of limitations set forth in Sec. 6501. In reaching its decision, the court noted that Sec. 6501 specifically refers to all taxes.
Courts Decision In AD Global Fund, LLC, the court concluded that Sec. 6229(a) was ambiguous, because it could be read either as a separate limitation from Sec. 6501 or as an extension of Sec. 6501, and neither interpretation would lead to absurd results. The court found support for this ambiguity in the unsettled case law relied on by the parties. Because the court concluded that Sec. 6229(a) was an ambiguous statute, the linchpin of its decision was whether Sec. 6229(a) should be construed in favor of or against the government. The plaintiff argued that Gould vs. Gould, 245 US 151 (1917), should apply. The Gould rule generally provides that ambiguities in tax statutes should be construed against the government in favor of taxpayers. The IRS, on the other hand, cited Badaracco, Sr., 464 US 386 (1984), for the proposition that an SOL barring tax collection should be construed in the governments favor. The court, thus, was faced with two conflicting statutory interpretation rules: the Gould rule, which applies generally to tax statutes, and Badaracco, which applies to SOLs involving tax revenues. The court concluded that Badaracco was the controlling precedent, because it was issued after Gould and was more directly on point, as it involved a tax statute that was also an SOL. As a result, the court ruled that Sec. 6229 did not constitute a separate SOL but, rather, contained an extension to assess partnership items.
Conclusion AD Global Fund, LLC, is a valuable reminder to partners of TEFRA partnerships and their tax advisers to keep apprised of the tax compliance of any TEFRA partnership in which they have invested. Unsuspecting taxpayers may find the IRS assessing additional taxes resulting from adjustments to partnership items well after they believed the SOL had expired. From John R. Keenan, Firm Director, and Chastity Wilson, Manager, Deloitte Tax LLP, Washington, DC
Accounting for Casualty Losses during a National Disaster Recently, accounting for disasters seems to be an annual event, with all the hurricanes, tornadoes and floods. The President has had to declare disaster areas numerous times, thus allowing for specialized accounting and exceptions to the rules.
General Tax Relief During a national disaster, the IRS may postpone tax deadlines, under which the following are eligible for relief under the rules: 1. Any individual whose main home is located in the disaster area; see, e.g., IR News Release 2005-96. 2. Any business entity whose principal place of business is located in a covered disaster area; see id. 3. Any individual who is a relief worker affiliated with a recognized government or philanthropic organization and who is assisting in a covered disaster area; see, e.g., IR News Release 2005-103. 4. Any individual, business entity or sole proprietor whose tax records needed to meet a postponed deadline are maintained in a covered disaster area; see, e.g., IR News Release 2004-118. The main home or principal place of business does not have to be located in the covered disaster area. 5. Any estate or trust whose tax records needed to meet a postponed tax deadline are maintained in a covered disaster area; see, e.g., Notice 2005-82. 6. The spouse on a joint return with a taxpayer who is eligible for postponements; see id. 7. Any other person determined by the IRS to be affected by a Presidentially declared disaster; see id. Under Sec. 7508A, the IRS may postpone for up to one year certain tax deadlines for taxpayers affected by a Presidentially declared disaster. The deadlines the IRS may postpone include those for filing income and employment tax re-turns, paying income and employment taxes and making contributions to traditional and Roth IRAs; see Sec. 7508(a)(1). If deadlines are postponed, the IRS will publicize the postponement in the relevant area and publish a news release, revenue ruling or other guidance in the Internal Revenue Bulletin. Generally, such guidance will also be set forth on the IRSs website, at www.irs.gov. The extension to file and pay does not apply to information returns, such as Forms W-2; 1098, Mortgage Interest Statement; 1099; 5498, IRA Contribution Information; 1042-S, Foreign Persons U.S. Source Income Subject to Withholding; or 8027, Employers Annual Information Return on Tip Income and Allocated Tips, or to employment and excise tax deposits; see, e.g., IR News Release 2005-128. Taxpayers whose specific disaster-related circumstances prevent them from making timely tax deposits may seek penalty abatements on a case-by-case basis. To qualify, affected taxpayers should write the assigned disaster designation in red ink at the top of their returns. Individuals or businesses located in a disaster area and directly affected by the disaster should contact the IRS if they receive penalties for filing returns or for paying or depositing taxes late.
Relief for Homeowners Homes made unsafe by a disaster must be located in a Presidentially declared disaster area to qualify their owners for relief. State and local governments may order homeowners to tear down their homes or move them, due to unsafe living conditions in the area. Under this circumstance, an order must be issued within 120 days of the disaster area declaration to either demolish or move the home; see IRS Pub. 547, Casualties, Disasters, and Thefts, under Disaster Area Losses, p. 1112. Homes would be considered unsafe if (1) they are substantially more dangerous after the disaster than before; and (2) the danger substantially increases the risk of future destruction from the disaster. Homeowners can file for casualty losses in the same manner as they would file for a personal-use casualty loss. Note: there is no casualty loss if a home is unsafe due to dangerous conditions existing before a disaster. This is true even for homes already condemned (e.g., the home is located in an area known for severe storms). The time to decide when to file for casualty losses is limited. A claim can be made on the return for the previous year, or for the year of the disaster, whichever result is better. The decision must be made by the following dates: 1. The due date (without extensions) for filing an income tax return for the tax year in which the disaster actually occurred. 2. The due date (with extensions) for filing the return for the preceding tax year. For example, calendar-year taxpayers will ordinarily have until April 15, 2006 to amend their 2004 returns to claim a casualty loss that occurred in 2005. They can revoke their choice within 90 days of making it, by returning refunds or credits received. However, if they revoke the choice before receiving a refund, they must return the refund within 30 days after receiving it, for the revocation to be effective. They must figure the loss under the usual rules for casualty losses, as if the loss occurred in the year preceding the disaster. The IRS will offer other relief to affected taxpayers. It will waive the usual fees and expedite requests for copies of previously filed tax returns for taxpayers who need them to apply for benefits or to file amended returns claiming casualty losses. Such taxpayers should write the assigned disaster designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS. Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster has affected them, so that it can appropriately consider their cases. From Kenneth M. Parker, CPA, Parker & Associates, CPAs, PLLC, Jackson, MS |
