Tax Attorney Claims that the IRS is Capricious in Determining Whether Unfiled Tax Returns Result in Civil Penalties, Civil Fraud Penalties or a Criminal Act

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Alvin Brown, a tax attorney, has identified uneven treatment by the IRS for taxpayers who have not filed tax returns. Unfiled tax returns will arbitrarily result in a civil penalty, a civil fraud penalty or prosecution by the Department of Justice as a crime with jail time.

The IRS is inconsistent in its treatment of taxpayers with unfiled tax returns.

For unfiled tax returns, the IRS sometimes assesses the taxpayer with civil penalties of 25% under the authority of section 6651(a)(1) of the IRS Code. There is a “reasonable cause” exception to the civil penalty. To establish reasonable cause for failure to file a tax return on time so as to avoid the failure-to-file penalty, taxpayers must show they used ordinary business care and prudence in IRS Reg. section 301.6651-1(c)(1). There is a great deal of litigation on what is or is not “reasonable cause." One example of justified “reasonable cause” is reliance on the erroneous advice of counsel if it is demonstrated that the advisor was competent in tax matters and that the advisor acted with full knowledge of all essential facts.

In other cases, the IRS will attempt to assess the 75% civil fraud penalty for failure to file under section 6651(f) of the Code. In other cases, the IRS will refer the taxpayer to the Department of Justice for prosecution for the “willful failure to file” a tax return under section 7203. In a recent case, the Department of Justice prosecuted a taxpayer for an unfiled tax return for just one year.

The burden of proof in each instance is different. For the civil fraud penalty, the IRS has the burden to prove civil fraud by clear and convincing evidence and for any criminal tax liability, the IRS must prove tax “beyond a reasonable doubt.”

Many of these cases with different assessments have nearly identical facts. There is no IRS consistency on when a “failure to file” a tax return will be subject to a civil penalty of 25%, a civil fraud penalty of 75% or treated as a crime that is prosecuted by the Department of Justice, resulting in fines and jail. Indeed, the decision of the IRS in how to proceed in these cases is unstructured. There is no present Congressional oversight of the IRS and there are no pending IRS oversight hearings. The last time Congress held IRS hearings dealing with IRS abuses was in 1997, held by the Senate Finance Committee.

Although there is unanimous consensus within Congress and the Administration to support tax reform, there has been no call or interest in IRS reform. The unstructured divergence on the IRS on dealing with unfiled tax returns is merely one example intended to make the point that there is a need for IRS Reform along with the need for comprehensive tax reform.

Tax attorney Brown is a member of the tax law firm of Alvin Brown & Associates, a tax law firm specializing in IRS controversies on all tax issues including civil and criminal examinations, offers in compromise, and any other matter complex tax matter pending before the IRS requiring the skill of an experienced tax attorney.

575 Madison Ave., 8th Floor
New York, NY 10022-8511

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Alvin Brown
Alvin Brown & Associates, LLC.
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