HB 2087 Legislative Update: Expanding and Improving Oregon’s Taxpayer Bill of Rights

House Bill 2087, introduced to the House Committee on Revenue in January, includes several important provisions that would give Oregon Taxpayers greater protections when dealing with the Department of Revenue’s collection unit. If passed, the bill would clarify and expand the existing Taxpayer Bill Of Rights by requiring the Department to provide taxpayers with a written and oral explanation of their rights and appeal procedures during the collection process. HB 2087 would also prohibit Department of Revenue collections personnel from contacting taxpayers who have a valid Power of Attorney for representation on file (except mailed notices).

Among the bill’s more transformative changes, the Department would be required to cancel any tax debt that has not been collected within 20 years of assessment. Although this is still double the IRS’s 10-year statute of limitations on collection, the new law would bring Oregon more in line with other states, such as California and Illinois, that have 20-year collection statutes. Another provision would obligate the Department to draft administrative rules setting forth the procedures used by the Department for reviewing and analyzing financial statements. Under the new standards, the Department would be required to consider the IRS collection financial standards when establishing payment agreements for past-due tax liabilities.

The first draft of HB 2087 includes some provisions that will likely be cut due to concerns about the state’s ongoing budget difficulties. For example, the bill calls for the creation of an administrative appeals office and a state taxpayer advocate, which would help prevent and resolve taxpayer hardships resulting from the Department’s collection activities, but with significant fiscal impact. Even without these provisions, the bill represents a huge step towards updating and improving the Taxpayer Bill of Rights.

The House Committee on Revenue held a hearing on the bill in early April, and a second version of the bill is expected soon. You can find the text of HB 2087 and track the bill’s progress on the legislature’s website’s HB 2087 page.

By |May 16, 2017|Categories: Uncategorized|Tags: |

Judicial Conference Increases Dollar Amounts in Bankruptcy Cases

The Bankruptcy Code is full of specific dollar limitations and allowances. These figures include dollar limits on eligibility for use of Chapter 13 and many other amounts, such as the value of exemptions permitted to bankruptcy debtors under 11 USC §522. All of these dollar amounts are adjusted by the amount of change in the Consumer Price Index for All Urban Consumers in the manner set out in 11 USC §104(a), a part of the bankruptcy code. The adjustment occurs every three years on April 1st and is based on the amount of change that has occurred over the previous three years ending December 31 the year before the adjustment. Dollar amounts are rounded to the nearest $25 and the adjustment applies to other limits set forth in the bankruptcy code.

Well, it is that time of year for an announcement of the change and 2016 is a year when the changes are made as of April 1st. The Judicial Conference of the United States has just released a notice of the changes proposed to come into effect for cases filed after March 31, 2016. It looks like Chapter 13 cases will now be permitted for individuals with unsecured debts of no more than $394,725 and secured debts of no more than $1,184,200 for cases filed April 1, 2016, and later. This is an increase of more than $11,000, only about half the increase announced in 2013 for unsecured debt.   Secured debt increased by about $35,000 over the Chapter 13 limit imposed April 1, 2013.

In states where federal exemptions are allowed, such as Oregon, the federal homestead exemption will be increased from $22,975 to $23,675 per person. The federal exemption for a car will rise from $3,675 to $3,775. Under the statute, if the amount is increased it will go up by at least $25. While many states have opted out of federal exemptions and limit bankruptcy exemptions to those provided in state statute, many other dollar amounts apply to all cases filed in bankruptcy court. Federal exemptions were allowed in Oregon as of July 1, 2013. These new dollar figures will only come into play for filings after the effective date, but they may allow filings that were previously impermissible.

By |Feb 29, 2016|Categories: Bankruptcy|Tags: , |

Tax Relief in Bankruptcy?

The 9th Circuit Bankruptcy Appellate Panel decided a case recently with important consequences for delinquent taxpayers. On December 17, 2015, the Bankruptcy Appellate Panel handed down a decision in United States v. Martin that may advance a thorny problem toward resolution by the U.S. Supreme Court. The ruling, although of an interim nature, stated that a document filed by the taxpayer, intended as a tax return, should be considered a tax return and thus a dischargeable debt in bankruptcy. Bankruptcy lawyers and their clients with late tax returns should be well pleased.

The facts of the case are fairly common. Kevin and Susan Martin only got around to filing some missing tax returns after the IRS began collection on some involuntary tax assessments. The late-filed tax returns increased the Martins’ tax liability in some years, and decreased it in at least one tax year. After waiting the two years required by 11 U.S.C. §523(a)(1)(B)(ii) before a tax debt from a late-filed return can be discharged, the Martins filed bankruptcy.

A dispute arose when the IRS did not agree that the Martins’ tax debt had been discharged in the bankruptcy proceeding. To resolve the matter, the Martins filed an adversary proceeding in the bankruptcy court against the IRS. They took this action without the benefit of counsel, on a pro se basis. Bankruptcy Judge Richard Lee, sitting in the Eastern District of California, agreed with the Martins and ruled the tax was dischargeable. It was a well-reasoned opinion by the bankruptcy court that harmonizes the statutory language with the legislative intent of Congress. The reasoning carefully balances the “fresh start” of the debtors against the financial interests of the government.

The IRS did not share my enthusiasm for Judge Lee’s determination and appealed to the Bankruptcy Appellate Panel for the 9th Circuit. With the full weight of the federal government and the U.S. Attorney’s office arrayed against them, one would think the Martins would hire counsel to represent them in the Appellate Court. However, their win in the Bankruptcy Court encouraged them to go it on their own. Their briefs are just that, brief, and verify the pro se nature of this case. In fact, the Martins orally argued the case themselves before the Appellate Panel. The Martins won another round and the Bankruptcy Appellate Panel came back with a wonderful 28 page opinion, mostly in their favor. On the most important issue, the dischargeability of tax on late filed returns, this was an important win for bankruptcy debtors with outstanding tax liability.

Three circuits previously reached the opposite conclusion, holding that late-filed tax returns are no longer considered tax returns for bankruptcy discharge purposes. In the first of these decisions, McCoy v. Mississippi State Tax Commission, the 5th Circuit Appellate Court determined a late-filed state tax return to be disqualified from discharge by the 2005 amendment to 11 U.S.C §523(a)—specifically, the language included as part of a hanging paragraph appended to that section stating:

For the purposes of this subsection, the term ‘return’ means a return that satisfies the requirements of applicable non-bankruptcy law (including applicable filing requirements).

The 5th Circuit in McCoy found a timely filing requirement in the Mississippi state law and disqualified the McCoys’ late-filed tax return from discharge using this language.

I have discussed McCoy and two subsequent cases, Fahey and Mallo, from the 1st and 10th Circuits respectively, in another article “Trouble With Tax Debt in Bankruptcy.”  With these three Circuit Court opinions, the trend has not been looking good for delinquent taxpayers. Only the 8th Circuit, with the Colsen case decided based on pre-2005 amendment law, holds that a late return can be discharged if it otherwise meets bankruptcy discharge criteria.

The Martin opinion, containing a comprehensive analysis of just why the McCoy, Fahey, and Mallo decisions are wrong, is only a Bankruptcy Appellate opinion[i].  As such, it does not carry the weight of an opinion from the 9th Circuit Court of Appeals.  Bankruptcy judges in the 9th Circuit generally follow Bankruptcy Appellate Panel opinions, and will likely enter discharges in accord with the Martin decision unless and until it is overturned.  That may be a long time in coming[ii].

The Martin opinion is interesting because the Bankruptcy Appellate Panel, after 28 pages of discussion, actually returned the case to the Bankruptcy Court for further findings[iii]. This is based on a prior 9th Circuit case, In Re: Hatton, that held the debtor’s behavior must be taken into consideration when determining if the papers filed constitute a tax return for discharge purposes. In that earlier case, the 9th Circuit decided that in the case of a late tax return, there was a good faith requirement.  Thus, in the 9th Circuit, the definition of a tax return includes a requirement that the document filed by the debtor be a reasonable attempt to comply with tax laws.

The Martins are not yet home free. Some of the delinquent tax returns were not filed until months after they were prepared, signed, and delivered by their accountant. To meet the good faith requirement, as expressed in Hatton, the debtors must convince the bankruptcy judge they had good reason for their delay in filing tax returns or, at least, had no improper motive.

More interesting than the remand issue is the fact that the decision of the Bankruptcy Appellate Panel is not yet appealable, because the remand order is not technically a final order. The ultimate decision on dischargeability will depend on findings of the bankruptcy court if the case is returned to the Bankruptcy Appellate Panel. Doubtless, this frustrates the Internal Revenue Service and may provide a window of opportunity for delinquent taxpayers to discharge their tax debts in the 9th Circuit.

[i] The Bankruptcy Appellate Panel (BAP) is composed of three bankruptcy judges. It is an optional avenue of appeal from a bankruptcy court decision and must be agreed upon by all parties to the appeal.  While persuasive, a BAP opinion is only clear binding authority in the specific case for which a decision is made.  The Court of Appeals is superior to the Bankruptcy court and its opinions are binding authority on all district courts and bankruptcy courts in the circuit.

[ii] The 9th Circuit Court of Appeals is currently considering a case with very similar facts. The euphoria over United States v. Martin could be short-lived if the 9th Circuit see the issue differently.

[iii] The BAP remanded the case to the bankruptcy judge for further findings. The record before the court on appeal contained no evidence on something the court considered an important issue.

Oregon Department of Revenue to begin “naming and shaming” delinquent taxpayers

blacklistThe Oregon Department of Revenue recently held a hearing on a proposed rule that would authorize the Department to post a list of delinquent taxpayers online. Although the IRS is prohibited from publishing the information of delinquent taxpayers, almost half of the states in the U.S. use “naming and shaming” to improve tax compliance. Studies suggest that this practice can facilitate the collection of taxes if done properly. However, there is reason to believe that the use of a delinquent taxpayer list can backfire if taxpayers view an agency’s collection procedures as unfair or coercive.

As part of its public disclosure pilot program, the Department of Revenue will publish a list of the “largest tax delinquencies” for which a warrant has been recorded in any Oregon county clerk’s office. The rule provides no indication as to exactly how many delinquencies will be included on the list, but a previous draft of the rule limited the list to the 25 largest delinquencies. The removal of that limitation in the current draft could be a bad omen for Oregon taxpayers with outstanding balances.

On December 1, the Department rolled out its new computer system, which includes an automated warrant system. Previously, revenue agents had to manually review each account to decide when a delinquent liability should be subject to a recorded warrant. Now, any liability over $2500 not paid within 60 days of assessment will be subject to an automatic, recorded warrant. The new automated warrant system streamlines the process and greatly expands the pool of delinquent taxpayers potentially eligible for public disclosure. Before a taxpayer is placed on the public delinquency list, the Department must send a written notice giving the taxpayer 30 days to correct the delinquency, either by paying in full or entering into an approved payment plan. Taxpayers can also stay off the list by initiating a bankruptcy proceeding or by convincing the Department that the delinquency is uncollectible due to financial hardship (an unlikely prospect).

Is “naming and shaming” good policy? Will it promote compliance with Oregon’s tax laws? I recently attended the inaugural International Conference on Taxpayer Rights in Washington, D.C., where government initiatives to promote voluntary compliance were heavily discussed.

The keynote address by Eric Kirchler, Professor of Economic Psychology at the University of Vienna, looked at the ways in which taxpayers’ attitudes towards tax agencies affect voluntary compliance. Mr. Kirchler distinquished an agency’s use of legitimate power (based on the agency’s professionalism, expertise, and legal authority) from the agency’s use of coercive power (such as asset seizure, penalties, and public shaming). If an agency exercises too much coercive power in relation to its exercise of legitimate power, the agency’s use of that power will be viewed as unfair and oppressive. As a result, taxpayer trust in the agency will suffer and overall levels of compliance will decrease. To be effective in promoting compliance, Kirchler said, coercive power should be used only in limited circumstances.

Lennart Wittberg, a strategist with the Swedish Tax Agency, discussed the application of these ideas in Sweden, which has one of the world’s highest voluntary compliance rates. In 2006, Sweden changed its approach to audits and tax enforcement, recognizing that if taxpayers perceive the tax system as fair and just, they are more willing to accept decisions of the taxing agency that negatively affect them. Wittberg noted that most Swedish taxpayers feel that they are treated with fairness and respect during the audit process. Because they are given a meaningful chance to present their case to the auditor, taxpayers tend to view the agency’s final decision as an exercise of legitimate power. As a result, Swedish taxpayers are highly likely to comply with the tax laws following an audit, regardless of the audit outcome.

In order to promote voluntary compliance, the Oregon Department of Revenue should apply these principles to its tax collection policies. Publicly disclosing the names and addresses of delinquent taxpayers is a coercive power which must be used with caution. If the collection process is viewed as unfair and unjust, taxpayer compliance will likely decrease. For example, the proposed rules provide that Oregon taxpayers may avoid the disclosure list by entering into a payment agreement for satisfaction of their liabilities. But if taxpayers are not offered a meaningful opportunity to enter into a payment agreement based on an amount they can reasonably afford to pay, public shaming will likely build resentment towards the Department. Shaming should be strictly reserved for taxpayers who are able to pay and have been offered an opportunity to pay, but who choose not to. The power to destroy the reputations of businesses and individual taxpayers should not be taken lightly.

If you are being pursued by the Oregon Department of Revenue for past-due tax liabilities, you know what the collections process is like. Many taxpayers seek the assistance of an attorney because they feel that they are being treated unfairly by revenue agents who don’t give them the opportunity to make reasonable payment arrangements. Whether or not the Department of Revenue’s collection policies are fair and just (or even legal, in some cases) is a complicated question that will be the subject of future discussions. In the meantime, as the Department of Revenue ramps up collections efforts, policymakers would be well advised to keep in mind that when it comes to promoting voluntary compliance, winning the trust and respect of taxpayers is vital to success.

Navigating Self-Directed IRAs: Steer Clear of Tax Penalties

Two men in a boat on a stormy sea. 1803 etching. Courtesy Wellcome Library, London. Wellcome Images images@wellcome.ac.uk http://wellcomeimages.org

Two men in a boat on a stormy sea. 1803 etching. Courtesy Wellcome Library, London. Wellcome Images.

Truth and Consequences
Do an internet search for self-directed IRA and you’ll find a number of promoters promising to give you complete control over your retirement accounts. Those promises may contain a grain of truth, but don’t let exaggerated claims capsize your retirement plan. It is true that by rolling over an existing IRA or 401(k) into a self-directed IRA, you can invest in assets not offered by most IRA providers. With a self-directed IRA, you can buy almost any type of asset: an interest in a start-up, a parcel of real estate, a patent, or precious metals. It’s also true that you can continue to defer tax on gains within the IRA. However, the rules governing self-directed IRAs contain important restrictions that you should understand before you set one up—make one wrong move and you could be looking at some serious tax consequences.

The Qualified Custodian
In order to establish a self-directed IRA, a qualified custodian must be used to hold the IRA assets, maintain records, file reports, and process transactions. The custodian must be a bank or an IRS approved non-bank trustee. (The IRS publishes a list of approved non-bank trustees on its website, available at http://www.irs.gov/Retirement-Plans/Approved-Nonbank-Trustees-and-Custodians). The role of the self-directed IRA custodian differs substantially from the role of conventional IRA custodians. The self-directed IRA custodian generally will not provide investment or tax advice, will not sell or recommend investment products, and will not perform due diligence to determine the suitability of any investments. The self-directed IRA account owner chooses where to invest and directs the custodian to execute each transaction.

Given the limited role of IRA custodians, the burden to maintain compliance with the laws and regulations that are applicable to all IRAs falls on the self-directed IRA account holder. Some of the most important requirements are found in Internal Revenue Code section 4975, which states that the IRA will lose its tax exempt status if the IRA engages in any prohibited transactions between the IRA and certain disqualified persons.

Disqualified Persons and Prohibited Transactions
The definition of disqualified person includes any fiduciary (such as the self-directed IRA account holder), certain members of the account holder’s family (including his spouse, ancestors, his descendants and their spouses), and business entities of which the IRA account holder owns 50 percent or more (either directly or indirectly). The IRA is prohibited from:

  • selling, exchanging, or leasing any property to a disqualified person;
  • lending money or extending credit to a disqualified person;
  • providing goods or services to a disqualified person;
  • allowing a disqualified person to use any income or assets of the IRA.

If it’s determined that a transaction is in fact prohibited, the account will cease to be a retirement account, resulting in a deemed distribution of the IRA funds, subject to taxation at ordinary rates, and possibly a 10 percent early withdrawal penalty as well. These provisions are designed to prevent any transaction that is not at arm’s length or that otherwise has the potential to harm the plan. In other words, the IRA account holder is not allowed to obtain any benefit from the IRA assets without first paying income tax. As a matter of policy, the tax favored status of IRAs is meant to encourage retirement savings and promote investment. Once any account assets are converted to personal use, the IRA is no longer a retirement account, and the IRS will expect taxes to be paid.

In some cases it won’t be entirely clear if a prohibited transaction has taken place, and the IRS may or may not decide to challenge the tax-deferred status of your IRA. The law in this area is unsettled and leaves some room for interpretation. This gives the IRS broad discretion to go after “suspicious” transactions. For example, a transaction may be prohibited even if disqualified persons are not directly involved. In one case, the United States Tax Court found that a prohibited transaction occurred when the taxpayer caused his retirement plan to lend money to three entities in which he owned a minority interest. Even though none of these entities were “disqualified persons,” the court found that the benefit to the account holder was substantial enough to violate the provisions of section 4975. See Rollins v. Comm’r, T.C. Memo 2004-260 (T.C. 2004). If you plan on using your self-directed IRA to transact business with any entity that you or any related person has an interest in, a careful analysis of the arrangement is required to ensure that it does not involve a prohibited transaction.

The Account Holder’s Burden and the Siren Song of Checkbook Control
Self-directed IRA owners must be aware of the prohibited transaction rules and other restrictions; the account custodian usually will not offer guidance as to whether a transaction is prohibited. From the perspective of the IRS, there is great potential for abuse built in to the structure of self-directed IRAs. Because taxpayers have greater control over the IRA assets and little oversight from IRA custodians, there is more opportunity for a taxpayer to benefit from the use of IRA assets without removing them from the account as part of a taxable distribution.

A relatively recent development involves the use of LLCs to give an IRA account holder checkbook control over the account assets. In order to do this, the IRA purchases a majority interest in the stock of an LLC for which the IRA account holder serves as general manager and has full authority to act on behalf of the company. The Tax Court has held that because the company does not have any membership interests when the investment is made, the company cannot be a “disqualified person” with respect to that transaction. However, if the IRA account holder receives any money or other assets from the company—whether it be a salary, loan, gift, or commission—that will be considered a prohibited transaction. See Ellis v. Comm’r, T.C. Memo 2013-245 (T.C. 2013), affirmed by Ellis v. Comm’r, 787 F.3d 1213, 1215 n.4 (8th Cir. 2015).

The idea of checkbook control is appealing to many investors, since it provides direct access to the IRA funds without having to go through the account custodian to execute transactions. In theory, the IRA account holder can do as he pleases and manage the day-to-day operations of a company that is wholly owned by his self-directed IRA. In practice, an IRA LLC can be extremely risky, even for sophisticated investors. There is little case law discussing the use of IRA LLCs, so investors must be wary of engaging in activities that could fall under the category of prohibited transactions. Though many online promoters will tell you that an IRA LLC provides you with unlimited investment opportunities, you’ll be hard pressed to find one that can offer a sound legal opinion to confirm that your investment plan meets the requirements of the Internal Revenue Code. These types of arrangements are on the IRS’s watch list, and more vigorous enforcement efforts could be lurking just beyond the horizon.

For the more adventurous investor with sufficient time, energy, and know-how, a self-directed IRA can be a good idea. If you are interested in setting one up, or already have one in place, consult with a tax attorney who knows how to avoid prohibited transactions. As you start researching assets, your attorney can also help you evaluate the legitimacy of investments that aren’t regulated by the SEC or state securities agencies. As the captain of your self-directed IRA, you are ultimately responsible for its success or failure. If you decide to take the helm without a skilled navigator at your side, be prepared to go down with your ship.

Food Trucks in a Denver Park

The Quiero Arepas  food truck , one of thirty food trucks and carts at a downtown Denver park.

The Quiero Arepas food truck , one of thirty food trucks and carts at a downtown Denver park.

While in Denver to attend the IRS Nationwide Tax Forum, I went out for lunch. The hotel concierge told me of an event held in a local park with 30 different food trucks. This fit my interest in the unique and unusual.The trucks were at the downtown park on Tuesday and Thursday; I went by myself on Tuesday, and came back with my wife, Nicole, on Thursday. We didn’t have time to sample food from all the trucks, so we probably missed some terrific offerings. That said, here is a list of favorites from our two visits.

food-truck_01_225x300

Queiro Arepas.

Queiro Arepas
This widely recommended food truck serves Venezuelan food based on arepas.
The arepa is a flat “bread” made from ground corn. Made from scratch in the truck, the aprepa dough is formed into a patty that is grilled, baked, split open and stuffed with a variety of ingredients. I had one filled with plantain black beans, cabbage, avocado, salsa and braised beef. It was called Pabellon and was delicious.

food-truck_03_cropStill Smokin Fusion BBQ
This truck served pulled pork sandwiches and various home-smoked pork dishes. I had a taco with peach and sweet cabbage slaw, and mojo marinated pulled pork with a peach chipotle barbecue sauce. Nice sauce with a little bite. Good flavor in the pork.

food-truck_04Pavlo’s Taste of Ukraine
This was a truck featuring Ukrainian food. I overheard him tell people that his ninety-one-year-old grandmother taught him how to cook. I chose a dish of potato and cheese vareniki (also called pierogi) with cooked onions on top. Again, this was very tasty.

food-truck_06
Aiko Pops Popsicle
Coconut curry Popsicle. Spicy coconut; yummy and refreshing.

The Rolling Italian
Place provolone, mozzarella, Monterey jack, cheddar, and Parmesan cheeses together on a grill at a special temperature for a fabulous grilled cheese pizza. Top the pizza with your choice of with sausage, peppers, onion, ham, and eggplant. The business is a food truck called The Rolling Italian. Their tiny cannoli were also delightful.

Ba-Nom-a-Nom
Vegan frozen soft-serve type treats, made to order from frozen fruit. No sugar added to these delightful cold deserts. Nicole and I sampled the blackberry, banana, pineapple and the mango pineapple flavors.