Feb 10, 2011

So the IRS Always Wins?

Another Good Reason To Hate The IRS

You don’t have to be a supporter of the Tea Party to hold a dim view of the Internal Revenue Service. Still, we’re going to tell you about a case that will make your blood boil.
The agency told Robert Colman of Santa Monica, Calif. he had no claim to a 15% informant’s reward after reporting his 90-year-old mother was embezzled of $1 million by a Los Angeles accountant not paying taxes on his ill-gotten loot. But the feds told Colman–in writing–he could appeal the whistleblower bounty denial by suing in the U.S. Court of Federal Claims. Yet when Colman did just that–after the accountant pleaded guilty to a tax felony involving non-reporting of the very same money–the government said Colman had no right to sue.
Astonishingly, the IRS won.
The same court, which is based in Washington, D.C., just ruled that Colman was given very bad advice but that the federal laws establishing the tribunal did not give it jurisdiction over this kind of claim when Colman sought his reward in 2003.  Judge Thomas C.  Wheeler wrote he was “troubled” by the IRS written assertion that Colman could sue followed by the later denial but that a party cannot confer jurisdiction upon a limited-jurisdiction federal court simply by writing that it exists. “The public rightly should expect better from its federal agencies,” he wrote. But “the parties are powerless to create jurisdiction by consent.”
According to court records, the accountant in the case, Steven Krell, who was also a lawyer, later pleaded guilty to state grand theft charges involving Colman’s mother and one other person. Besides making what was described as “significant” restitution, he served some jail time, giving up his law and accounting licenses.
Prosecutors in the federal criminal tax case did not press for additional time in the slammer; Krell was sentenced to  three years of probation.  He originally was ordered to pay the IRS $900,000 in taxes in penalties–pretty much the full amount of Colman’s tip–but an amended judgment reduced that to $388,000, all payable to his victims, presumably including Colman’s mother.
In a section of his nine-page opinion entitled, “The Court’s Inquiry into the Erroneous IRS Form Letter,” Judge Wheeler recounted with evident frustration his unsuccessful attempts to learn how and why the IRS  originally told Colman he could sue in his court.  “This effort did not produced [sic] a clear answer,” he wrote.
Wheeler issued two formal orders seeking answers. The first asked for “a sworn statement from an authorized representative of the IRS informing the Court why the IRS wrote Colman, ‘You must bring suit in the U.S. Court of Federal Claims if you wish to pursue the matter further .’” All Wheeler got back was a letter from an IRS official in Buffalo, N.Y., saying it was the agency’s “understanding” at the time there was jurisdiction.
Any back-up paperwork at the IRS about this? Couldn’t find any, said the IRS’s lawyer from the U.S. Justice Department.  Remember that the next time the IRS asks you to document your tax position.
Calling the responses “insufficient,” Wheeler issued a second order demanding, in effect, a new answer to his first order, as well as specific names of “individuals with personal knowledge” about the letter to Colman.   Last month, the IRS coughed up 309 pages of documents–but apparently not much in the way of names.
It gets worse.
The IRS production to Wheeler included pages from a 2001 edition of the Internal Revenue Manual noting that unsuccessful whistleblower claimants long ago had sued in the claims court–but had never won. The implication is that the IRS knowingly gave Colman bad information that would lead to his failure. Wrote Wheeler, “It remains unclear how this information could support the IRS’s advice … It is unfortunate that the IRS’s erroneous form letter may have induced Mr. Colman to waste time and effort by filing suit in this court.”
In a statement quoted by the data service Tax Analysts, the IRS said it no longer mentions appeal rights in letters denying whistleblower claims.
Upset by the IRS’s tight-wad approach to whistleblowers, Congress in 2006 passed new legislation mandating a 15% bounty for tipsters in big cases. Last year, a Tennessee lawyer denied a tipster reward in a case involving the fortune of legendary financier Clarence Dillon won a court ruling that a denial could be appealed to the U.S. Tax Court.  However, Colman’s case appears to be too small to fall under the 2006 law.

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Forbes (@Forbes)
2/2/11 5:59 PM
In case you needed one, here's another good reason to hate the IRS http://bit.ly/eZmmq5

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