Be Aware – The Venue for IRS Appeals Conferences Has Changed

Changes Road SignEffective October 1, 2016, the Internal Revenue Service (“IRS”) changed its approach to conducting appeals conferences. The changes were likely adopted by the government under the guise of efficiency and cost savings. With that said, the changes probably will result in increased negative taxpayer perception of the IRS administrative process, and a significant reduction in prompt and fair resolution of matters at the conference level.

In a nutshell, the major change adopted by the IRS, subject to limited exceptions, is that the government will conduct all appeals conferences by telephone (or a virtual conference, if available). IRM § An in-person conference generally will only be allowed if the appeals conferee (i.e., the “Appeals Technical Employee” or “ATE”) and the Appeals Team Manager (“ATM”) concur that it is appropriate and reasonable. As such, they must agree:

  • Either the taxpayer or an ATE requests an in‑person conference;
  • There exist substantial books and records to review that cannot easily be referenced by page numbers or indices;
  • The ATE requires in‑person oral testimony of the taxpayer in order to judge his or her credibility;
  • There will be numerous conference participants;
  • An alternative procedure will be used in the appeal (e.g., mediation or the rapid appeals process); or
  • Another section of the Internal Revenue Manual expressly requires an in‑person conference.

Hand Gesture - Palm UpOn one hand, this departure from the government’s historic practice of conducting in‑person appeals conferences will: (i) presumably reduce the government’s need for office and conference space, thereby decreasing the cost of administration; (ii) allow ATE’s to telecommute and/or handle cases throughout the country; and (iii) possibly reduce the number of ATE’s required to carry out the IRS appeals process.

Hand Gesture - Palm UpOn the other hand, it will: (i) likely reduce the ability of taxpayers and their representatives to adequately and clearly communicate with the government; (ii) likely reduce prompt and fair resolution of appeals; (iii) hinder the ability of the ATE to measure the risk of litigation given he or she will not be able to properly judge the appearance and credibility of the taxpayer; and (iv) likely increase the perception of unfairness and bias.

For decades, I have handled IRS appeals, and with limited exception, the conferences have been conducted in‑person. I found the forum to be fair and the process to be effective for resolving contested cases. Not allowing the taxpayer representative to meet with the ATE in person will undoubtedly be a detriment to the fair administration of our federal tax system. Rather than moving the ball forward, this change to the IRS appeals process is a significant setback for taxpayers and tax practitioners.

Tax advisors need to be aware of this change in the IRS appeals process and must be prepared to expressly request an in‑person conference in the appeal request. In addition, practitioners should explain in reasonable detail the reasons why an in‑person conference is necessary for both the government and the taxpayer to reasonably and adequately present their cases, and to provide the greatest opportunity for prompt and efficient resolution.

The degree to which this change in procedure hurts the administration of our federal tax system likely will not be known for some time to come. Regardless of this change, however, taxpayers and their advisors still should, unless the case dictates otherwise, request an in‑person conference. If in‑person conferences are not routinely granted going-forward, I suspect petitions to the U.S. Tax Court will be on the rise.

Former Tax Court Judge Kroupa Is Back in the News

ChalkboardAs reported in my April 2016 blog post, former U.S. Tax Court judge Diane Kroupa and her husband, Robert E. Fackler, were indicted on charges of conspiracy to defraud the United States, tax evasion, making and subscribing a false tax return, and obstruction of an Internal Revenue Service audit. The indictment resulted from an investigation conducted by the Criminal Investigation Division of the Internal Revenue Service and the United States Postal Inspection Service.

At the time of indictment, U.S. Attorney Andrew M. Luger made the following statement:

“The allegations in this indictment are deeply disturbing. The tax laws of this country apply to everyone and those of us appointed to federal positions must hold ourselves to an even higher standard.”

It does not appear things are getting better for former judge Kroupa. On September 23, 2016, Ms. Kroupa’s husband pleaded guilty to attempting to evade more than $400,000 in federal taxes. He also signed a plea agreement wherein he basically maintains his wife made him file false tax returns. In addition, he appears to lay out in some detail a long-term (i.e., eight years) scheme that was allegedly masterminded by Ms. Kroupa to evade taxes.

I can only surmise the indictment did not facilitate harmony among Mr. Fackler and Ms. Kroupa. Mr. Fackler’s plea agreement and his allegations against Ms. Kroupa certainly did not ease the likely tension existing between the two of them. One can only imagine what would be heard if you were a “fly on the wall” during mealtime at the Kroupa/Fackler home. In fact, about two months following the indictment and almost four months prior to Mr. Fackler’s plea agreement, Ms. Kroupa commenced formal divorce proceedings against Mr. Fackler.

barbed wired roseUnless resolved, the tax case, which is currently scheduled for trial on December 5, 2016, in the U.S. District Court for the District of Minnesota, could turn into a “War of the Roses.” It will be interesting to see whether Ms. Kroupa proceeds to trial and how she will respond to her estranged husband’s plea agreement and allegations. This new development certainly creates an obstacle in the defense of Ms. Kroupa.

Stay tuned!

The Qualified Subchapter S Subsidiary Election – A Primer and Beyond

Open book in library or bookstoreMy article about Qualified Subchapter S Subsidiaries was published in the September 2016 issue of the Journal of Taxation, a Thomson Reuters publication.  The article offers an in-depth discussion of the QSub qualification requirements, the election, late filing relief, termination and inadvertent termination relief.  It also provides a broad discussion of various QSub planning opportunities as well as potential pitfalls.  I hope it is informative and offers you some useful information for application in your tax practices.

A copy of the article is available for download on the GSB website.

You’re Invited – NYU’s 75th Institute on Federal Taxation

New York and San DiegoPlease join me at the NYU 75th Institute on Federal Taxation (IFT) taking place in New York City on October 23-28, 2016, and in San Diego, California on November 13-18, 2016.

The IFT is one of the leading tax conferences in the country, geared specifically for CPAs and attorneys who regularly are involved in federal tax matters.  Now in my fourth year as an IFT presenter, I am pleased to once again speak on the closely-held business panel on October 27 (NYC) and November 17 (San Diego).  My presentation this year will focus on entity classification under the Check-the-Box regulations.  I plan to provide an in-depth view of the regulations, including planning opportunities, traps that exist for the unwary and practical tax practitioner guidance.

As in previous years, the IFT will cover a wide range of fascinating topics, including tax controversies, executive compensation and employee benefits, international taxation, corporate taxation, real estate taxation, partnership taxation, taxation of closely-held businesses, trusts and estates, and ethics.

I look forward to seeing you at IFT in either New York or San Diego!

View the complete agenda and register at the NYU 75th IFT website.

Measure 97 (Formerly Known as Initiative Petition 28) Will Be Presented to Oregon Voters on November 8, 2016: What You Need to Know

C Corporations with Oregon annual revenues greater than $25 million may face a new minimum tax obligation – 2.5 percent of the excess – if Measure 97 passes. If a business falls within this category, there may be ways to mitigate its impact. The time to start planning, however, is now.


Danger areaOregon taxes corporations under an excise tax regime.  The Oregon corporate excise tax regime was adopted in 1929.  The original legislation included what is commonly called a “minimum tax” provision.  In accordance with this provision, corporations subject to the Oregon excise tax are required to pay the greater of the tax computed under the regular corporate excise tax provision or the tax computed under the “minimum tax” provision.  Accordingly, the “minimum tax” is an “alternative” tax; it is not an “additional” tax as many commentators have recently asserted.

Originally, the Oregon corporate “minimum tax” was a fixed amount – $25.  As a result of the lobbying efforts of Oregon businesses, the “minimum tax” was eventually reduced to $10, where it remained for almost 80 years.

In 2010, Oregon voters dramatically changed the corporate “minimum tax” landscape with the passage of Measure 67.  The corporate “minimum tax” (beginning with the 2009 tax year), is no longer a fixed amount.  Rather, it is now based on Oregon sales (gross revenues).  The “minimum tax” is now:

Oregon Sales Minimum Tax
< $500,000 $150
$500,000 to $1 million $500
$1 million to $2 million $1,000
$2 million to $3 million $1,500
$3 million to $5 million $2,000
$5 million to $7 million $4,000
$7 million to $10 million $7,500
$10 million to $25 million $15,000
$25 million to $50 million $30,000
$50 million to $75 million $50,000
$75 million to $100 million $75,000
$100 million or more $100,000

S corporations are exempt from the alternative graduated tax system.  Instead, they are still subject to a fixed amount “minimum tax,” which is currently $150.

As an example, under the current corporate “minimum tax” provision, a corporation with Oregon gross sales of $150 million, but which, after allowable deductions, has a net operating loss of $25,000, would be subject to a minimum tax of $100,000.  Many corporations operating in Oregon, which traditionally have small profit margins (i.e., high gross sales, but low net income), found themselves (after Measure 67 was passed) with large tax bills and little or no money to pay the taxes.  Three possible solutions for these businesses exist:

  1. Make an S corporation election (if eligible);
  2. Change the entity to a LLC taxed as a partnership (if the tax cost of conversion is palatable); or
  3. Move all business operations and sales outside of Oregon to a more tax-friendly jurisdiction.

Several corporations in this predicament have adopted one of these solutions.

Initiative Petition 28/ Measure 97

Measure 97 will be presented to Oregon voters this November.  If it receives voter approval, it will amend the “minimum tax” in two major ways:

  1. The “minimum tax” will remain the same for corporations with Oregon sales of $25 million or less.  For corporations with Oregon sales above $25 million, however, the “minimum tax” (rather than being fixed) will be $30,001, PLUS 2.5 percent of the excess over $25 million.
  2. The petition specifically provides that “legally formed and registered benefit companies” as defined in ORS 60.750 will not be subject to the higher “minimum tax.”  Rather, they will continue to be subject to the pre-Measure 97 “minimum tax” regime (as discussed above).  Caveat: The exception, as drafted, appears to only apply to Oregon benefit companies; it does not extend to foreign benefit companies authorized to do business in Oregon.

Measure 97 expressly provides that all increased tax revenues attributable to the new law will be used to fund education, healthcare and senior citizen programs.  As a result, many commentators believe the initiative has great voter appeal and will likely be approved by voters.  If Measure 97 is passed, it is slated to raise over $6 billion in additional tax revenue per biennium.

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