IRS Fails to Recover a Large Erroneous Refund | Litigation Tax Attorney

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In a recent case, the IRS failed to recover a large erroneous refund of $21 million that it gave to a company called Starr International Co. Inc. (“Starr”). The opinion was released on January 31, 2018 by the District Judge Christopher R. Cooper (U.S. District Court for the District of Columbia) who granted Starr’s summary judgment motion. Let’s delve deeper into why the IRS was not able to recover this erroneous refund.

The Starr Case: Initial 2007 Request for Erroneous Refund

The story that led to a such a large erroneous refund is very interesting and related to the US-Swiss tax treaty. In 2007, as a shareholder of AIG stocks, Starr received dividends from AIG. In December of 2007, Starr filed a request with the US Competent Authority (“CA”) to claim a reduced withholding tax rate on the AIG dividends.

Then, without waiting for the CA response, Starr filed a refund claim with the IRS for the tax year 2007, seeking a refund in the amount it would have been entitled to had the CA granted the request for treaty benefits. It should be pointed out that Starr indicated on its Form 1120-F that this was a protective refund claim (to avoid the later Statute of Limitations problems) and informed the CA of the claim.

Once it was informed about the Starr’s protective refund claim, the CA instructed the Ogden Service Center not to issue a refund for 2007. Moreover, in October of 2010, the CA denied Starr’s request for treaty benefits for 2007.

The Starr Case: Request for 2008 Large Erroneous Refund Granted

This denial did not have the intended effect. On the contrary, Starr filed another refund request with the IRS for $21 million for 2008 and amended its refund claim for 2007. Starr also did it in a very clean and honest manner – on its 2008 Form 1120-F (next to the line indicating the refund amount), Starr wrote “see statement 1”. Statement 1 disclosed that CA did not grant treaty benefits to Starr and presented its counter-arguments arguing that CA’s decision was erroneous.

In 2011 the IRS erroneously granted Starr’s refund request for 2008 and issued a refund for $21,151,745.75. At the same time, the IRS did not issue any refund for the amended 2007 claim.

The Starr Case: Erroneous Refund for 2008 Leads to Lawsuit to Recovery Refund for 2007 and IRS Lawsuit to recover the 2008 Erroneous Refund

Emboldened by its 2008 erroneous refund, Starr decided to file a lawsuit in the D.C. District court to claim a refund for 2007. The lawsuit was filed in 2014 after Starr must have believed that the Statute of Limitations for the IRS to recover the 2008 erroneous refund had expired. It appears that this part of the case still continues as Starr has appealed the recent ruling in the government’s favor.

In the meantime, in response to Starr’s ever expanding appetite for refunds, the IRS decided to attempt to curb the Starr’s ambitions by recovering the 2008 erroneous refund. In 2015, the government amended its answer to Starr’s 2014 lawsuit and added a counterclaim seeking to recover the 2008 refund. Here, the most interesting part of the case begins.

The Starr Case: the IRS Arguments for the IRS Statute of Limitations to Recover 2008 Erroneous Refund

Generally, the IRS has only two years to initiate a lawsuit to recover a refund. There is, however, an exception. If a taxpayer obtains any part of the refund through fraud or misrepresentation, the Statute of Limitations may be extended to five years. The government bears the burden of proof to show that an extension of the statute of limitations is justified.

The IRS based its claim for the extension of the Statute of Limitations on three different arguments. First, the IRS stated that Starr made a misrepresentation when it indicated on line 9 of Form 1120-F that Starr was entitled to a $21 million refund; the IRS argued that it should have put “0″ on it.

Additionally, the IRS also made a second variation on the same argument, relying on Rev. Proc. 2006-54, which sets forth the procedures for requesting treaty benefits from the CA. Section 12.04 expressly states that denials of requests for discretionary treaty benefits are final and not subject to administrative review. Based on this section, the government asserted that Starr, in contradiction to the established procedure, sought an administrative review of the CA’s denial of its refund claim by not making it clear that it was not entitled to a refund claim.

Second, the IRS argued that the Starr’s failure to inform the CA about it 2008 refund claim was another misrepresentation. Here, the IRS again relied on Rev.Proc. 2006-54, which states that a taxpayer must update the CA on all material changes regarding issues under consideration.

Finally, the government argued that Starr made the third misrepresentation when it failed to notify the Ogden Service Center (where the Starr’s claim for 2008 erroneous refund was filed), that it lacked the jurisdiction to issue the 2008 refund.

The Starr Case: the Court Refuted All IRS Arguments and Denied the IRS Request to Recover 2008 Erroneous Refund

The district court judge disagreed with all of the three IRS arguments. With respect to the first argument, the court disagreed with the government’s position, because had Starr requested $0 on its refund claim and then litigated the merits of the claim in court, it would have been entitled only to $0 even if it won. The court noted that this has been the government’s position in the past. Moreover, Treas. Reg. §301.6402-3(a)(5) requires that refund claims contain a statement of the amount overpaid.

In this context, the court addressed the government’s argument that, by filing a refund claim, Starr was looking for a back-door administrative review of the CA’s denial of its claim. The court noted that a refund claim is not a request for administrative review, but a normal way for a taxpayer to obtain a refund that the IRS already withheld.

Moreover, the refund claim was an absolute jurisdictional requirement for seeking a judicial review of CA’s denial of Starr’s claim for refund. Had Starr failed to file a refund claim before going to court, the court would have lacked the subject matter jurisdiction to hear the case.

With respect to the government’s second argument, the court stated that it is irrelevant because Starr filed its 2008 refund claim when CA already made the final decision to deny the refund claim. In other words, there were no issues under CA’s consideration at the time when Starr filed its refund claim.

Finally, the court completely disagreed with the government’s argument that Starr should have informed the Ogden Service Center that it lacked jurisdiction to issue the refund. The court stated that there is simply no regulation, statute or an IRS instruction that would require the taxpayers to inform the IRS of what falls and what does not fall within its jurisdiction.

Since the government failed its burden of proof that Starr obtained its refund through misrepresentations, the court granted Starr’s motion for summary judgment and found that the IRS was not entitled to extend the Statute of Limitations to five years.

Contact Sherayzen Law Office for Help With Tax Litigation

If you or your business are being sued by the IRS, contact Sherayzen Law Office for professional help with tax litigation.

2017 FBAR Deadline | FinCEN Form 114 FBAR Lawyer & Attorney

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FinCEN recently confirmed the 2017 FBAR deadline and the automatic extension option.

2017 FBAR Deadline: FBAR Background

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, is commonly known as FBAR.  US taxpayers should use this form to report their financial interest in or signatory authority over foreign financial accounts. Failure to timely file the FBAR may result in the imposition of draconian FBAR penalties.

2017 FBAR Deadline: Traditional FBAR Deadline

Prior to 2016 FBAR, the taxpayers had to file their FBARs for each relevant calendar year by June 30 of the following year. No filings extensions were allowed. The last FBAR that followed this deadline was 2015 FBAR (its due date was June 30, 2016).

2017 FBAR Deadline: Changes to FBAR Deadline Starting 2016 FBAR

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”) changed the FBAR deadline starting with 2016 FBAR.  Section 2006(b)(11) of the Act requires the FBARs to be filed by the due date of that year’s tax return (i.e. usually April 15), not June 30.

Furthermore, during the transition period, the IRS granted to US taxpayers an automatic extension of the FBAR filing deadline to October 15. The taxpayers do not need to make any specific requests in order for extension to be granted.

In other words, starting 2016 FBAR, the Act adjusted the FBAR due date to coincide with the federal income tax filing deadlines. Moreover, the new FBAR filing deadline will follow to the letter the federal income tax due date guidance. The federal income tax due date guidance states that, in situations where the tax return due date falls on a Saturday, Sunday, or legal holiday, the IRS must delay the due date until the next business day.

2017 FBAR Deadline

Based on the new law, the 2017 FBAR deadline will be April 17, 2018 (same as 2017 income tax return due date). If a taxpayer does not file his 2017 FBAR by April 17, 2018, then the IRS will automatically grant an extension until October 15, 2018. Failure to file 2017 FBAR by October 15, 2018, may result in the imposition of FBAR civil and criminal penalties.

Section 1041 Definition of Divorce | Divorce Tax Attorney & Lawyer

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26 U.S.C. §1041(a)(2) states that transfers of property between former spouses are not taxable as long as they are “incident to divorce”. The question is what is the definition of divorce for Section 1041 purposes?

Section 1041 Definition of Divorce: 26 U.S.C. §71(b)(2)

The Treasury regulations specifically refer to 26 U.S.C. §71(b)(2) for the definition of divorce or separation instrument (see Treas Reg §1.1041-1T(b), Q&A-7). 26 U.S.C. §71(b)(2) lays out three definitions of divorce or separation instrument:

“(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,
(B) a written separation agreement, or
(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.”

The regulations specifically states that the definition of divorce or separation instrument under 26 U.S.C. §71(b)(2)(A) also includes a modification or amendment to such decree or instrument. Treas Reg §1.1041-1T(b), Q&A-7.

Section 1041 Definition of Divorce: Void Ab Initio Annulments

Additionally, for the purposes of 26 U.S.C. §1041, the definition “divorce” is expanded to include divorce annulments and the cessations of marriage that are deemed void ab initio due to violations of state law. Treas Reg §1.1041-1T(b), Q&A-8.

Void ab initio annulments dissolve a marriage retroactively from its very beginning. In other words, the legal outcome of such an annulment is to treat the annulled marriage as if it never happened. While the state law differs from state to state, there are generally four grounds under which a marriage is voided ab initio: bigamy, related parties (i.e. spouses are related within a certain degree of consanguinity or affinity), incompetence and situations where one of the spouses is less than sixteen years old.

Contact Sherayzen Law Office for Help with Tax Issues Concerning a Section 1041 Transfer of Property

If you need help with tax issues concerning a divorce or a transfer of property pursuant to a divorce, contact Sherayzen Law Office for professional legal help.

Sherayzen Law Office Ltd | US International Tax Law Firm

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Sherayzen Law Office PLLC hereby gives notice that, as of January 1, 2018, its official owner is Sherayzen Law Office, Ltd (“Sherayzen Law Office Ltd”). Sherayzen Law Office Ltd will continue to utilize “Sherayzen Law Office” as its trade name. Furthermore, Sherayzen Law Office Ltd will continue to maintain the disregarded entity (for tax purposes) Sherayzen Law Office PLLC for an indefinite period of time.

This means that Sherayzen Law Office Ltd is the official name of our international tax law firm as of January 1, 2018. Sherayzen Law Office Ltd has assumed all assets, liabilities, rights and duties of Sherayzen Law Office PLLC as of January 1, 2018.

The change in the corporate structure of Sherayzen Law Office occurred for marketing purposes. “PLLC” is a highly specified form of doing business which is not recognized outside of the United States, whereas “Ltd” is a very common form of doing business worldwide.

Sherayzen Law Office Ltd is an international tax law firm owned by attorney Eugene Sherayzen, Esq., who specializes in US international tax law. In particular, Mr. Sherayzen is a leading expert in the area of offshore voluntary disclosures (IRS Offshore Voluntary Disclosure Program (“OVDP”), Streamlined Domestic Offshore Procedures, Streamlined Foreign Offshore Procedures, Delinquent International Information Return Submission Procedures, Delinquent FBAR Submission Procedures, Reasonable Cause Disclosures, et cetera), FATCA compliance (including Form 8938, W8-BEN-E, et cetera), FBAR compliance, international tax compliance (including information returns for the ownership of a foreign business – Forms 5471, 8865, 8858, 926, et cetera), foreign trust US tax compliance (Forms 3520 and 3520-A), foreign inheritance reporting, foreign gift reporting, PFIC compliance (Form 8621), international tax planning and others.

Additionally, Sherayzen Law Office Ltd is helping its clients with domestic tax compliance, IRS audits, appeals to the IRS Office of Appeals and tax litigation.

Sherayzen Law Office Ltd operates worldwide. In fact, since 2005, Sherayzen Law Office has helped hundreds clients from close to 70 countries from every continent: Australia, North America (Canada, Mexico and the United States), South America (Argentina, Brazil, Chile and Colombia), including Central American countries like Barbados, Belize, Costa Rica, Nicaragua and Panama, Africa (Ethiopia, Ivory Coast, Nigeria), the Middle East region of Asia (Egypt, Iraq, Iran, Israel, Kuwait, Lebanon, United Emirates and so on), Southeast Asian countries (China, India, Thailand, et cetera), Far Eastern region of Asia (Japan) and the great majority of European countries (Western, Eastern, Northern and Southern Europe) including Great Britain and Ireland as well as Russia.

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Overcoming Late IRC Section 1041 Transfer Presumption | IRS Lawyer & Attorney

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In a previous article, I discussed that a late IRC Section 1041 transfer between former spouses is presumed to be unrelated to the cessation of the marriage. This means that such a transfer may not be considered tax-free for US tax purposes. In this article, I would like to explain what a late IRC Section 1041 transfer is and how to overcome the presumption that it is not related to the cessation of the marriage.

What is a Late IRC Section 1041 Transfer?

A transfer of property between ex-spouses is not taxable as long as it is “incident to divorce”. 26 U.S.C. §1041(a)(2). Temporary regulations state that such a transfer of property will be considered as incident to divorce as long as it occurs within one year of the date of the cessation of marriage or if this transfer is related to the cessation of marriage. Treas Reg §1.1041-1T(b), Q&A-6.

As I indicated in a previous article, a transfer of property is related to the cessation of marriage if it is done pursuant to a divorce or separation instrument and “occurs not more than 6 years after the date on which the marriage ceases”. Treas Reg §1.1041-1T(b), Q&A-7. If the transfer of property between ex-spouses occurs after six years of the cessation of marriage, then it is considered a late IRC Section 1041 transfer. Id.

Late IRC Section 1041 Transfer: Presumption that the Transfer if Not Related to Marriage

A late IRC Section 1041 transfer gives rise to a presumption that the transfer is not related to the cessation of marriage. Id. In other words, if an ex-spouse transfers a property to another ex-spouse more than six years after the cessation of their marriage, then the IRS will assume that the transfer is not related to the marriage.

Late IRC Section 1041 Transfer: Rebuttal of the Presumption

Luckily for US taxpayers, this presumption is not absolute and can be rebutted. “This presumption may be rebutted only by showing that the transfer was made to effect the division of property owned by the former spouses at the time of the cessation of the marriage.” Id.

The temporary Treasury regulations emphasize that the presumption can be rebutted by establishing two facts. First, the transfer was made late “because of factors which hampered an earlier transfer of the property, such as legal or business impediments to transfer or disputes concerning the value of the property owned at the time of the cessation of the marriage”. Id. Second, “the transfer is effected promptly after the impediment to transfer is removed.” Id.

Late IRC Section 1041 Transfer: PLRs Indicate Anticipation of Transfer in a Divorce Decree as the Crucial Factor

The IRS has issued a number of Private Letter Rulings (“PLRs”) on the issue of a late IRC Section 1041 transfer. Overall, the PLRs seem to follow an important trend in determining whether a taxpayer is successful in his rebuttal of the aforementioned presumption.

The key factor that appears in these PLRs seems to be whether a transfer of property (or an option to transfer a property) was part of the divorce decree. In other words, the most important question is whether this transfer of property was anticipated by the terms of the divorce decree. If it was and there is a good justification for the delay of the transfer of property, then the IRS is likely to rule that Section 1041 applies and the transfer would be deemed tax-free for federal income tax purposes.

Of course, it is highly important that a tax attorney review the situation to determine the likelihood that the IRS will agree on both points: anticipation of transfer in the divorce decree and the good reason for the delay of the transfer.

Contact Sherayzen Law Office for Professional Help Concerning Late IRC Section 1041 Transfers

If you are engaged in a divorce or you are an attorney representing a person who is engaged in a divorce, contact Sherayzen Law Office for experienced help with respect to taxation of transfers of property to an ex-spouse as well as other tax consequences of a divorce proceeding.