SALA v. U.S., Cite as 106 AFTR 2d 2010-XXXX, 07/23/2010 ________________________________________ CARLOS E. SALA; TINA ZANOLINI-SALA, Plaintiffs - Appellees, v. UNITED STATES OF AMERICA, Defendant - Appellant. Case Information: Code Sec(s): Court Name: UNITED STATES COURT OF APPEALS TENTH CIRCUIT, Docket No.: No. 08-1333, Date Decided: 07/23/2010. Disposition: UNITED STATES COURT OF APPEALS TENTH CIRCUIT, APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO (D.C. NO. 1:05-cv-00636-LTB-KLM) DISCUSSION The Government's primary argument is that the transaction giving rise to Sala's claimed tax loss had no economic substance. When considering a district court's economic substance determination, this court reviews findings of fact for clear error and any legal determinations de novo. See Keeler v. Comm'r, 243 F.3d 1212, 1217 [87 AFTR 2d 2001-1224] (10th Cir. 2001). The ultimate determination of whether a transaction lacks economic substance is a question of law. James v. Comm'r, 899 F.2d 905, 909 [65 AFTR 2d 90-1045] (10th Cir. 1990) (“[W]e review de novo the ultimate characterization of the transactions as shams.”);see also Frank Lyon Co. v. United States , 435 U.S. 561, 581 [41 AFTR 2d 78-1142] n.16 (1978) (“The general characterization of a transaction for tax purposes is a question of law ....”).But see Nicole Rose Corp. v. Comm'r , 320 F.3d 282, 284 [90 AFTR 2d 2002-7702] (2d Cir. 2003) (treating the ultimate determination of whether a transaction lacks economic substance as a question of fact). * ``````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````````` “we consider both the taxpayers' subjective business motivation and the objective economic substance of the transactions.” Jackson v. Comm'r, 966 F.2d 598, 601 [70 AFTR 2d 92-5024] (10th Cir. 1992) (quotation and alteration omitted). A taxpayer is not permitted to deduct losses resulting from a transaction that lacks economic substance. Keeler, 243 F.3d at 1217. “[T]ransactions lacking an appreciable effect, other than tax reduction, on a taxpayer's beneficial interest will not be recognized for tax purposes.”James , 899 F.2d at 908. That a transaction has some profit potential does not necessarily compel the conclusion the transaction has economic substance. Keeler, 243 F.3d at 1219. Rather, “tax advantages must be linked to actual losses.” Id. at 1218; Coltec Indus., Inc., 454 F.3d at 1352 (explaining the economic substance doctrine requires “disregarding, for tax purposes, transactions that comply with the literal terms of the tax code but lack economic reality”); Rogers v. United States, 281 F.3d 1108, 1116 [89 AFTR 2d 2002-1115] (10th Cir. 2002) (explaining the economic substance doctrine applies where “the transaction lacks economic reality”). We have also recognized “correlation of losses to tax needs coupled with a general indifference to, or absence of, economic profits may reflect a lack of economic substance.” Keeler, 243 F.3d at 1218. In light of these well-established standards, this court concludes Sala's participation in Deerhurst GP lacked economic substance. Most compelling is that the claimed loss generated by the program was structured from the outset to be a complete fiction. It is clear the transaction was designed primarily to create a reportable tax loss that would almost entirely offset Sala's 2000 income with little actual economic risk. By acquiring a series of long and short options that largely offset one another, contributing them to Deerhurst GP in exchange for a partnership interest, and then almost immediately liquidating the partnership, Krieger was able to ensure that a tax loss nearly equivalent to Sala's income would be achieved in just a few weeks. This is because, if the rule in Helmer controlled, the short options would not be treated as liabilities when calculating Solid's partnership basis. 34 T.C.M. (CCH) 727 [¶75,160 PH Memo TC] (1975). Through this mechanism, the generated loss was designed to be entirely artificial. Indeed, rather than suffering any actual financial loss through Deerhurst GP, Sala actually profited from the transaction. Sala does not contest that the loss is fictional, but rather protests that the rule fromHelmer should control. This argument does not, however, address the claimed loss's absence of economic reality. The absence of economic reality is the hallmark of a transaction lacking economic substance. See Keeler, 243 F.3d at 1218–19; Coltec Indus., Inc., 454 F.3d at 1352; Rogers, 281 F.3d at 1116. The pre-determined nature of the Deerhurst GP stage further highlights the transaction was structured mainly to create a tax loss. The district court noted Sala's participation in Deerhurst GP involved a $728,000 investment, which it found had the potential to produce a 45% profit, net of fees, over the course of the year. Before Sala invested, however, he was aware Deerhurst GP would exist for only a short time and would have to be liquidated before the end of the 2000 tax year in order to generate a tax loss large enough to offset his income. Consequently, liquidation was set to occur irrespective of any profits or losses, and would have happened even if market conditions indicated it would be more profitable not to dispose of the long and short options at that point. Though a taxpayer is permitted to structure a transaction in a way that minimizes his tax liability, the transaction must nevertheless have economic substance. Keeler, 243 F.3d at 1218. The pre-determined nature of the liquidation indicates a lack of economic substance. Additionally, while the district court found the long and short options had a potential to earn profits of $550,000 over the course of one year, 3 the expected tax benefit was nearly $24 million. That expected tax benefit dwarfs any potential gain from his participation in Deerhurst GP such that “the economic realties of [the] transaction are insignificant in relation to the tax benefits of the transaction.” Rogers, 281 F.3d at 1116. The existence of some potential profit is “insufficient to impute substance into an otherwise sham transaction” where a “common-sense examination of the evidence as a whole” indicates the transaction lacked economic substance.Keeler , 243 F.3d at 1219 (quotation omitted). The district court also found Sala provided plausible business explanations for various components of the Deerhurst GP stage, including his use of an S Corporation, the creation and almost immediate liquidation of the Deerhurst GP partnership, and the selection of the particular foreign currency options he acquired. Any anticipated economic benefit from participating in Deerhurst GP for a few weeks, and then quickly liquidating the partnership before year's end, however, is negligible in comparison to the $24 million tax benefit which would not have been achieved but for this pre-determined course of action. Likewise, the district court's finding that Sala entered into the Deerhurst Program primarily for profit does not alter our conclusion. “[W]e have never held that the mere presence of an individual's profit objective will require us to recognize for tax purposes a transaction which lacks economic substance.”Jackson , 966 F.2d at 601 (quotation omitted). More importantly, the district court's findings on this issue were based on its consideration of the five-year Deerhurst Program as a whole. As noted above, only the Deerhurst GP phase is relevant to the economic substance analysis. 4 Presented with a transaction specifically designed to produce a massive tax loss devoid of economic reality, we hold Sala's participation in Deerhurst GP lacks objective economic substance. As a result, the district court's decision must be reversed. As this conclusion resolves the Government's appeal, we need not reach any of the other issues it presented. IV. CONCLUSION For the foregoing reasons, this court REVERSES and REMANDS to the district court with instructions to vacate its judgment and enter judgment in favor of the United States. ________________________________________ * Honorable M. Christina Armijo, U.S. District Judge, District of New Mexico, sitting by designation. ________________________________________ 1 Because Carlos Sala and his wife, Tina Zanolini-Sala, jointly filed their tax return and refund claims, Zanolini-Sala is also a party to this lawsuit. For ease of reference, this opinion refers only to Carlos Sala. ________________________________________ 2 In Helmer v. Comm'r, the Tax Court ruled that a contingent obligation should not be treated as a liability when calculating a partner's basis in his partnership interest. 34 T.C.M. (CCH) 727 [¶75,160 PH Memo TC] (1975). This is because no liability arises until the obligation becomes fixed, which might never occur. Id. The short options purchased by Sala and contributed to Deerhurst GP are contingent obligations. Though Sala argues the Helmer rule should control the tax treatment of the Deerhurst GP transaction, it should be noted that prior to Sala's participation in the Deerhurst Program, the IRS challenged the sort of offsetting-options structure employed by Deerhurst GP. On August 13, 2000, the IRS released Notice 2000-44 explaining its position that transactions involving the transfer of property and offsetting contingent liabilities to a partnership, followed by the taxpayer's exit from the partnership to achieve a non-economic loss, do not give rise to an allowable tax deduction. I.R.S. Notice 2000-44, 2000-2 C.B. 255. The Notice states that “purported losses resulting from ... [such] transactions ... do not represent bona fide losses reflecting actual economic consequences as required for purposes of [26 U.S.C. § 165].”Id. It also informed taxpayers that the IRS would challenge such transactions and seek penalties.Id. ________________________________________ 3 The district court found the transaction had a $550,000 profit potential over one year. As noted, however, it was pre-determined that Deerhurst GP would only exist for approximately one month. ________________________________________ 4 It should also be noted the district court's finding that Sala entered into the Deerhurst Program primarily for profit was not part of its economic substance analysis. Rather, this finding was made in the district court's analysis of whether the claimed tax loss was deductible under 26 U.S.C. § 165(c)(2), which limits deductibility of an individual's losses to those “incurred in any transaction entered into for profit.” © 2010 Thomson Reuters/RIA. All rights reserved.

.S. v. MIDKIFF, Cite as 106 AFTR 2d 2010-XXXX, 07/16/2010 -------------------------------------------------------------------------------- UNITED STATES of America, Appellee, v. Neulan Dae Midkiff, Appellant. Case Information: Code Sec(s): Court Name: United States Court of Appeals FOR THE EIGHTH CIRCUIT, Docket No.: No. 08-3493, Date Decided: 07/16/2010Submitted: February 12, 2010. Disposition: HEADNOTE . Reference(s): OPINION United States Court of Appeals FOR THE EIGHTH CIRCUIT, Appeal from the United States District Court for the District of Minnesota. Before WOLLMAN, BYE, and MELLOY, Circuit Judges. Judge: WOLLMAN, Circuit Judge. Following a nineteen-day trial, Neulan Dae Midkiff was convicted of conspiracy, mail and wire fraud, and failure to file tax returns. He appeals, contending that the district court 1 improperly joined the failure-to-file charges with the other charges and abused its discretion in denying his motion for relief from prejudicial joinder. Midkiff also challenges the admission of certain evidence and contends that his 180-month sentence is unreasonable. We affirm. I. Background A. Midkiff Meets Travis Correll and Invests in Horizon Establishment In 2001, Travis Correll founded Horizon Establishment (Horizon), a purported investment company. He collected approximately $175,000 from his friends and family to invest with a New Zealand businessman who offered an opportunity to invest in a high-yield international banking program. The program allowed investors to pool funds, which were supposedly leveraged to make multiple loans and generate significant income. Correll invested $100,000, and the businessman absconded with the money. Correll did not report the theft to law enforcement officials and did not inform his investors that their money had been stolen. Instead, he began a Ponzi scheme, using the remaining investment funds to pay dividends and enticing new investors with the promise of substantial returns. Midkiff was selling insurance products and operating the Shiloh Church in Forest Lake, Minnesota, in 2001. He had heard about Correll and the Horizon investment program through an acquaintance. Midkiff contacted Correll in August 2001, and they met to discuss the high-yield international investment opportunity that Correll was offering. Shortly thereafter, Midkiff met with Correll for a second time and invested $20,000. Midkiff anticipated monthly returns of $1,800. Matt Goers, a pastor at Shiloh Church, accompanied Midkiff to the second meeting and decided to invest $100,000 with Correll. For bringing Goers into the Horizon program, Correll paid Midkiff a $1,000 monthly finder's fee, which Midkiff could expect to receive for the life of Goers's investment. Midkiff began referring investors to Horizon in April 2002. He received a finder's fee for every investor he brought into the program and also for investors who came to the program through investors linked to Midkiff. The finder's fee was typically one percent of the investment placed with Horizon, paid monthly. Members of the Shiloh Church, Midkiff's relatives and neighbors, people within the Forest Lake community, and others heard about the investment program. Some early investors had seen Goers's monthly interest checks. When potential investors approached Midkiff, he explained the investment program and encouraged them to ask current investors about Horizon's monthly interest payments. B. Midkiff Establishes Via Comp Financial In the spring of 2002, Midkiff established Via Comp Financial (Via Comp) and billed himself as a financial consultant. With Correll's financial assistance, Midkiff secured office space in Blaine, Minnesota, where he met with potential investors. Midkiff generally described the Horizon investment as an international banking program in which an individual's investment would be pooled with funds from other investors until the pool reached $1 million. The pooled money would then be sent overseas to the World Bank. World Bank, in turn, would leverage the investment to lend that amount several times over, thereby generating a high monthly rate of return. Investors were promised monthly interest payments from Horizon at a rate of six to eight percent of their investment. Investors placed funds with Horizon based on the regular interest payments, Midkiff's explanation of the investment, his purported background as a financial consultant, and his status within Shiloh Church. They entered into one-year contracts with Horizon. At the end of the year, most investors chose to renew their contracts and continue receiving interest payments from Horizon. Although they were allowed to withdraw their principal investment at the end of the contract's term, Midkiff cautioned some investors that they would be barred from further investments with Horizon if they withdrew the funds. C. Department of Commerce Investigates Via Comp In the fall of 2003, the Minnesota Department of Commerce received a complaint regarding Midkiff and Via Comp. Jerry Watkins, Midkiff's business associate, had used Via Comp letterhead to send information about the Horizon investment to potential investors. In October 2003, investigator Deborah Knooihuizen requested information about the investment, the offering, and the investors. The investigator included a copy of a consumer alert detailing signs of fraud schemes. Warning signs included excessive guaranteed returns and references to fake financial instruments and the World Bank. After some initial correspondence, Midkiff responded through his attorney, stating that the investment was his personal investment and that he was not selling any investment products. Midkiff's attorney declined Knooihuizen's request for further information. The Department of Commerce closed its investigation. D. Watkins and Midkiff Solicit Investors for West Wing Investment In April 2004, Watkins formed Central Financial Services (CFS). Although Midkiff's name was not on the corporate formation documents or the CFS bank account, Midkiff told investors that CFS was his company, and investors believed that Watkins was Midkiff's assistant. Watkins had learned that Wade West of West Wing Financial (West Wing) was offering an investment program similar to Horizon's. The West Wing offering involved overseas banking and an eight percent monthly rate of return on a $1 million investment. Midkiff and Watkins began soliciting investors for the West Wing investment in May 2004, planning to split two percent of the monthly return and pay investors the remaining six percent. They told the investors that the West Wing investment was separate from the Horizon investment and offered a better rate of return. Midkiff explained that the $1 million investment principal would be “leveraged against,” meaning that investors could not lose their principal because it would remain in the bank. After Midkiff and Watkins had secured $1 million from CFS investors, Watkins wire transferred the funds from the CFS bank account to West Wing. Shortly after completing the wire transfer, Midkiff learned that the Federal Bureau of Investigation (FBI) had visited the Wyoming State Bank and inquired about the CFS wire transfer. According to Midkiff, the FBI was concerned about certain expenditures being made by the wire recipient. Watkins asked West Wing to confirm that the $1 million remained intact, and he received a letter stating that the funds were secure. Midkiff and Watkins began collecting funds for a second investment program with West Wing. CFS did not receive an interest payment from West Wing when it was due in June 2004. Rather than informing investors, Midkiff and Watkins made supposed interest payments from the funds they had collected for the second program. West Wing made its first interest payment at the end of June and its second payment in August. The August payment was a second-party check payable to Wade West and signed over to CFS. Midkiff and Watkins paid themselves $27,500 each from the second payment. By the end of August, Midkiff and Watkins knew that the $1 million investment had been stolen. Instead of reporting the theft, Midkiff contacted Correll for advice. Correll agreed to enter $1 million in a standard Horizon contract on behalf of the Joshua Tree Group (JTG), Midkiff's new business entity. Under this scheme, JTG received monthly interest payments from Horizon and Horizon deducted a portion of JTG's monthly return for payment on the $1 million it owed to Horizon. JTG received approximately $134,000 in interest each month, from which it paid interest to the West Wing investors. Midkiff and Watkins replaced the West Wing investor contracts with JTG contracts and placed the funds they had collected for the second West Wing program with Horizon. E. Department of Commerce Investigates Central Financial Services Adding to CFS's problems, the Minnesota Department of Commerce issued an order for written statement, production of documents and report of sales to Watkins in August 2004. The department had received a written complaint that Midkiff and Watkins were selling securities through CFS. Accordingly, the department sought information related to the investors participating in the CFS investment and the details of the investment. Watkins provided a copy of the order to Midkiff, and they discussed their response. Watkins responded to the order through an attorney, who advised the department that CFS was no longer operating. CFS agreed to enter into a consent order to cease and desist their operations in Minnesota. Two weeks after the Department of Commerce sent its order to Watkins, Midkiff began forming JTG in the state of Nevada. F. Horizon Stops Making Interest Payments In mid-2004, Correll decided that Horizon would no longer accept individual investments, but rather would require intermediaries to pool funds for investment in amounts no less than $1 million. Interest payments would be made from Horizon to the intermediary, who would then disburse the funds to the individual investors. Midkiff utilized an entity called the Padanaram Trust as the intermediary for the first two pooled investment contracts with Horizon. Thereafter, JTG served as the intermediary and pooled funds for investment in Horizon. Midkiff and Watkins told investors that JTG investments were separate from Horizon investments, despite the fact that JTG placed funds only in Horizon. Midkiff set the rate of return for the JTG contracts, paying JTG investors less than Horizon paid JTG. Midkiff kept the difference to pay for business expenses, his personal income and expenses, and Watkins's income. Beginning in late October 2004 and continuing for the next few months, checks from Horizon to JTG were not honored because there were insufficient funds in Horizon's accounts. Horizon made some interest payments during this time period, but did not meet its full payment obligations to JTG. JTG continued to meet its obligations to individual investors by paying them from the principal provided by new investments. Horizon stopped making payments to JTG in March 2005. Midkiff continued to solicit new investors and new investments from current investors, using the new investments to pay interest to JTG's individual investors. Midkiff and Watkins never told JTG investors that the Horizon interest payments had stopped or that there was any problem with JTG's investments. They also did not explain that JTG was using funds that were supposed to be invested to make purported interest payments on the previous programs. Watkins left JTG in May 2005. He contacted a few JTG investors and advised them to forego making further investments with JTG, although he did not divulge the problems JTG was experiencing. Midkiff called Watkins after learning that he had contacted investors and said that Correll had sent JTG investor interest payments. Midkiff offered to pay Watkins on the investor contracts that he had generated. Watkins received more than $1 million dollars after he left JTG. Midkiff maintained that he was fulfilling his contractual obligation to Watkins, but Watkins believed he was paid to keep quiet. From March 2005 until the collapse of Horizon and JTG in December 2005, the companies operated on a “reconciliation” basis. Under this system, JTG tracked how much investment money it acquired for placement with Horizon. Horizon calculated how much interest JTG investors were owed and subtracted that amount from the new investment dollars. The difference was the amount due to Horizon. Midkiff had inquired whether “reconciliation” was a legitimate way to conduct business, and Correll assured him that Horizon's lawyers had approved it. Amie Black, JTG's bookkeeper, tracked the companies' mutual obligations, but no reconciliation ever took place. Of the $20 million in new investments JTG had acquired from March to December 2005, approximately $4 million was sent to Horizon and $8 million was paid to JTG investors as purported interest on their investments. Between May 2004 and December 2005, Midkiff and Watkins secured investors for sixteen Horizon programs in addition to the two CFS programs that were transferred to Horizon contracts. With the eighteen programs combined, 519 individuals invested $30 million with Padanaram Trust and JTG. G. Securities and Exchange Commission Freezes JTG's Assets On December 7, 2005, the Securities and Exchange Commission (SEC) froze the assets of Horizon and JTG. Horizon, Correll, JTG, Midkiff, and others were named as defendants in an SEC civil enforcement action issued that day. After federal agents went to the JTG office in Blaine, Midkiff instructed Black, who worked from JTG's apartment office in Forest Lake, to move the business records from the office to a vacant apartment within the building. H. Tax Consequences Midkiff did not file tax returns or report his income to the Internal Revenue Service (IRS), despite earning significant income from the Horizon, CFS, and JTG schemes. According to Midkiff, he was attempting to get his taxes in order when JTG's assets were seized and he no longer had access to any funds. In January 2005, Midkiff hired IMF Decoders to assist in resolving his tax issues. For a fee, IMF Decoders “decoded” the individual master file (IMF) that he had requested and received from the IRS. Midkiff's IMF supposedly revealed that he was considered a citizen of the Virgin Islands and a manufacturer of automobile chassis. Throughout 2005 and 2006, Midkiff filed extensive tax protestor documents, including some that had been prepared by IMF Decoders. The IRS classified the documents as frivolous correspondence. According to Midkiff, he believed that he was resolving his tax issues. I. Midkiff Indicted on Charges Related to CFS and JTG On December 12, 2006, Midkiff was indicted in the District of Minnesota on charges of mail fraud, wire fraud, promotional money laundering, conspiracy to commit mail fraud, and conspiracy to commit promotional money laundering. The charges related to the Horizon, JTG, and West Wing schemes for the time period of April 2004 through December 2005. Midkiff was also charged with four counts of failure to file income tax returns, in violation of 26 U.S.C. § 7203. The indictment alleged that Midkiff willfully failed to file tax returns for calendar years 2002 through 2005, despite the fact that he had received gross income in excess of $150,000 in 2002; $375,000 in 2003; $444,000 in 2004; and $1.5 million in 2005. Midkiff moved for severance under Federal Rule of Criminal Procedure 8(a), contending that the tax counts were misjoined with the remaining counts in the indictment. Midkiff argued that there was no connection between the 2002 and 2003 failure-to-file charges and the fraud alleged in the indictment. With respect to the 2004 and 2005 tax counts, Midkiff acknowledged that the fraud scheme may have been a source of income for those years, but claimed that the offenses did not arise from the same transactions or acts and were not part of a common scheme or plan. In the alternative, Midkiff argued for relief from prejudicial joinder under Federal Rule of Criminal Procedure 14. In his report and recommendation, the magistrate judge 2 determined that the counts were properly joined and that there was no basis for Rule 14 relief. The district court adopted the report and recommendation and denied Midkiff's motion. Before trial, the government moved to dismiss the money laundering charges, and trial proceeded on the remaining twenty-one counts. II. Discussion A. Joinder of Tax Charges with Fraud Charges Midkiff contends that the charges for failing to file tax returns were improperly joined with the fraud and conspiracy charges under Federal Rule of Criminal Procedure 8(a). Alternatively, he contends that the tax charges should have been severed from the fraud charges under Federal Rule of Criminal Procedure 14 because joinder resulted in severe or compelling prejudice. We review de novo a decision to join counts together into a single indictment. United States v. McCarther, 596 F.3d 438, 441 (8th Cir. 2010). Rule 8(a) allows a single indictment to charge a defendant with multiple offenses if the offenses “are of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan.” Fed. R. Crim. P. 8(a). “The rule is broadly construed in favor of joinder to promote judicial efficiency.” McCarther, 596 F.3d at 441–42. Tax charges may be joined with fraud charges if the unreported income arises solely and directly out of the fraudulent scheme. United States v. Bibby, 752 F.2d 1116, 1121 (6th Cir. 1985); United States v. Kopituk, 690 F.2d 1289, 1313 (11th Cir. 1982); United States v. Kenny, 645 F.2d 1323, 1344 (9th Cir. 1981). When the unreported income is derived from the charged conduct, the tax offense is based on the same act or transaction as the other offenses. See Bibby, 752 F.2d at 1121; Kopituk, 690 F.2d at 1313; Kenny, 645 F.2d at 1344. Moreover, failure to file tax returns may have a logical and temporal relationship with the other offenses charged in the indictment such that the tax offenses are connected with or constitute parts of a common scheme or plan. See United States v. Johnson, 462 F.3d 815, 822 (8th Cir. 2006) (no error in joining drug and firearm offenses that were temporally and logically connected). The 2004 and 2005 tax counts were based on the same act or transaction as the fraud counts. The indictment alleged that the fraud occurred from April 2004 to December 2005, that Midkiff derived income from the scheme underlying the fraud charges, and that he failed to report income for those calendar years. Because his unreported income was derived from the charged conduct, the 2004 and 2005 tax counts were properly joined with the fraud counts. The 2002 and 2003 tax counts were connected to the remaining counts under a common scheme. The indictment detailed Midkiff's relationship with Horizon and Correll from 2002 to 2004, explaining that Midkiff had recruited investors and received $560,000 from Horizon. Although the indictment did not charge Midkiff with criminal counts of fraud or conspiracy for the 2002 to April 2004 time period, Midkiff's relationship with Horizon and the income he garnered from that relationship were the logical precursors to the fraud and conspiracy counts alleged in the indictment. The 2002 and 2003 tax counts thus were properly joined with the remaining charges. The cases Midkiff cites for reversal are inapposite. Joinder was improper in those cases because the government failed to establish a nexus between the tax and non-tax offenses. See United States v. Diaz-Munoz, 632 F.2d 1330, 1335–36 (5th Cir. 1980) (misjoinder of tax counts with insurance fraud and embezzlement counts because the government failed to prove the illegally obtained proceeds were unreported on tax returns); United States v. Halper, 590 F.2d 422, 428–31 [42 AFTR 2d 78-6371] (2d Cir. 1978) (misjoinder of tax counts with Medicaid fraud counts because the income derived from the fraud did not constitute the unreported income); see also United States v. Randazzo, 80 F.3d 623, 627–28 (1st Cir. 1996) (misjoinder of tax counts with ninety-seven counts related to illegalities in the production of shrimp because the conduct underlying the offenses “was not part of the same “scheme or plan” in any sense of the phrase”). We are satisfied that the government alleged and introduced proof sufficient to establish a nexus between the fraud, conspiracy, and Midkiff's failure to file tax returns, and thus we conclude that joinder of the offenses was proper. Once the counts have been properly joined, the district court may order separate trials on individual counts if it appears that a defendant is prejudiced by joinder of the offenses. Fed. R. Crim. P. 14(a). “The decision of whether to sever a trial is left to the district court's sound discretion, and we will not reverse unless the defendant shows an abuse of discretion resulting in severe prejudice.” United States v. Steele, 550 F.3d 693, 702 (8th Cir. 2008) (internal quotations and citations omitted). [P]rejudice may result from a possibility that the jury might use evidence of one crime to infer guilt on the other or that the jury might cumulate the evidence to find guilt on all crimes when it would not have found guilt if the crimes were considered separately. On the other hand, a defendant does not suffer any undue prejudice by a joint trial if the evidence is such that one crime would be probative and admissible at the defendant's separate trial of the other crime. United States v. Boyd, 180 F.3d 967, 981–82 (quoting United States v. Davis, 103 F.3d 660, 676 (8th Cir. 1996)). If the district court had severed the charges, evidence of Midkiff's fraud crimes would have been probative and admissible at his tax trial, and evidence of his failure to file returns would have been probative and admissible in his fraud trial. To sustain a conviction of 26 U.S.C. § 7203, the government was required to prove that Midkiff willfully failed to file a tax return, despite an obligation to do so. See Cheek v. United States, 498 U.S. 192, 201 [67 AFTR 2d 91-344] (1991) (“Willfulness, as construed by our prior decisions in criminal tax cases, requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty.”); United States v. Gleason, 726 F.2d 385, 388 [53 AFTR 2d 84-550] (8th Cir. 1984) (per curiam) (“The elements of violation of § 7203 are proof of failure to file the returns and willfulness in doing so.”). Evidence of the income derived from the fraudulent scheme established Midkiff's obligation to pay taxes, and evidence of the fraud was relevant to show that Midkiff's failure to file was willful. Midkiff contends that such evidence was unnecessary because Horizon had been reporting investment income to the IRS sufficient to trigger his obligation to file tax returns and because the government could have proved willfulness without evidence of the fraud. Although the government might have proved its case in the manner Midkiff suggests, it would not have been foreclosed from meeting its proof with evidence of the fraud and the income it generated. Similarly, evidence that Midkiff had failed to file taxes for 2002 through 2005 would have been admissible in a trial on the fraud and conspiracy charges as evidence of Midkiff's knowledge that his income was illegally derived or as evidence of his intent to conceal the fraud. See Fed. R. Evid. 404(b) (evidence of other crimes, wrongs, or acts admissible as proof of knowledge or intent). Our review of the record satisfies us that the district court did not abuse its discretion in denying Midkiff's motion for severance. The evidence that Midkiff submitted tax protestor documents and engaged IMF Decoders to assist in dealing with his tax issues did not result in severe prejudice. Moreover, the district court instructed the jury that each crime should be considered separately and that its verdict of guilty on one count should not control its verdict on any other count. Accordingly, we affirm the district court's denial of relief from prejudicial joinder. B. Evidentiary Issues Midkiff argues that it was reversible error for the district court to admit evidence that federal and state regulators had closed several companies that had previously employed Midkiff. He further contends that certain testimony unrelated to the charged conduct was erroneously admitted and that its cumulative effect amounted to prejudicial error. We review the district court's admission of evidence for abuse of discretion. United States v. Beason, 220 F.3d 964, 968 (8th Cir. 2000). If we conclude that the district court has abused its discretion with respect to an evidentiary ruling, “we will not reverse the conviction if the error was harmless.” United States v. Lupino, 301 F.3d 642, 645 (8th Cir. 2002). 1. Evidence of Companies That Had Been Shut Down by Regulators The government provided pretrial notice of intent to offer evidence under Federal Rule of Evidence 404(b). Specifically, the government sought to introduce evidence that Midkiff had been employed by companies that were later shut down for fraudulent practices. The government maintained that the evidence wasres gestae and stated that it had submitted the notice out of an abundance of caution. The district court granted Midkiff's motion to exclude the evidence in part, but ruled that evidence that witnesses had purchased the companies' securities or viaticals from Midkiff would be admitted. Before Midkiff took the stand, the government notified the district court that if Midkiff portrayed himself as an unsophisticated person, the government would request permission to cross-examine him about his previous employment with companies that had been shut down by state and federal regulators. Midkiff objected to that line of questioning on the basis of Federal Rules of Evidence 403 and 404(b). The district court reserved its ruling and instructed counsel to request a sidebar conference before delving into the topic. Midkiff's defense to the fraud and conspiracy charges was that he did not have the requisite intent or knowledge to commit fraud. Midkiff claimed that he had trusted Correll, who had conned him. During direct examination, he testified, “I have to confess to you I'm not a businessman.” He also testified that he did not know what a receiver was and that he thought that the SEC agents were trying to steal his business when they entered his office in December 2005. During cross-examination, the government renewed its request to inquire about the companies that the SEC had placed into receivership because of their fraudulent activities. Midkiff reiterated his objection, arguing that the evidence was inadmissible character evidence and would not be relevant to Midkiff's knowledge during the time period relevant to the charged fraud and conspiracy. After the government represented that it had evidence that Midkiff knew the companies were shut down for fraudulent practices during the time period relevant to the case, the district court overruled the objection and admitted the evidence. On cross-examination, Midkiff testified that he had sold products for Alpha Telecom, Mutual Benefits Corporation, Lifetime Capital, Accelerated Benefits Corporation, and ABC Viaticals, from 1995 until 2001. With respect to Alpha Telecom, Midkiff explained that he sold ownership interests in pay phones to investors, for which he received a commission. Midkiff stated that Alpha Telecom was shut down “in the 90s, 2000 maybe.” Midkiff admitted that an action was filed against him for disgorgement of profits from the pay phone business. Midkiff testified that he understood in April 2005 that Alpha Telecom was placed in receivership and that he had filed suit against the Alpha Telecom receiver. Midkiff testified that the SEC had shut down Mutual Benefits Corporation and Lifetime Capital after he left their employment. In the case of Accelerated Benefits, he stated that he did not know it had been closed, although he knew the company had changed its name to ABC Viaticals and had transferred its corporate residence. Midkiff testified that he had learned only recently that ABC Viaticals had been shut down by the SEC. The government contends that Midkiff opened the door to its cross-examination when he testified that he is not a businessman and that he did not know what a receiver was in December 2005. “The doctrine of opening the door allows a party to explore otherwise inadmissible evidence on cross-examination when the opposing party has made unfair prejudicial use of related evidence on direct examination.” United States v. Durham, 868 F.2d 1010, 1012 (8th Cir. 1989) (internal quotations and citations omitted). If the defendant has “opened the door” to objectionable evidence, there can be no reversible error. Beason, 220 F.3d at 968 (citing United States v. Finch, 16 F.3d 228, 233 (8th Cir. 1994) (under “opening the door” theory, evidence introduced must rebut something that has been elicited by defense counsel), and United States v. Womochil, 778 F.2d 1311, 1315 (8th Cir. 1985) (no abuse of discretion in allowing the government to clarify a false impression created on cross-examination)); see also Durham, 868 F.2d at 1012 (finding no abuse of discretion in allowing the government to clarify a false impression made by defense counsel's direct examination). Midkiff opened the door to questions regarding his employment with Alpha Telecom by claiming he did not know what a receiver was. Midkiff's cross-examination testimony regarding Alpha Telecom directly controverted his previous testimony. Midkiff admitted that he had worked for Alpha Telecom, that the company was closed for its fraudulent practices in the late 1990s or early 2000s, that he was sued for disgorgement of profits, and that he filed suit against the receiver in April 2005. The disputed testimony thus established that Midkiff knew what a receiver was before the SEC agents came to JTG's office and before he instructed the bookkeeper to move JTG's records. The government's line of questioning regarding the remaining companies was limited to whether Midkiff had worked for the companies, what his position was, and whether the companies were closed for fraudulent practices. Midkiff's passing directexamination testimony that he's “not a businessman” did not open the door so wide as to allow the testimony that Mutual Benefits Corporation, Lifetime Capital, Accelerated Benefits, and ABC Viaticals were shut down by regulators. Midkiff's testimony, however, was relevant to the knowledge and intent issues raised by his defense that he was not a part of the fraud but was conned by Correll. See Fed. R. Evid. 404(b) (Evidence of prior bad acts is admissible to establish “proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident.”). The problem with the government's cross-examination was that there was no evidence linking Midkiff to the fraudulent schemes that resulted in the companies' closures. Proof connecting the defendant to the prior bad act is required for the evidence to be relevant. United States v. Mihm, 13 F.3d 1200, 1205 (8th Cir. 1994); see also Huddleston v. United States, 485 U.S. 681, 689 (1988) (concluding that the government may not “parade past the jury a litany of potentially prejudicial similar acts that have been established or connected to the defendant only by unsubstantiated innuendo”). We have noted that in situations such as this, “the district court would have been better advised to conditionally receive this evidence subject to the government providing sufficient linkage to [the defendant].” Mihm, 13 F.3d at 1205. We conclude that although Midkiff's testimony about Mutual Benefits Corporation, Lifetime Capital, Accelerated Benefits Corporation, and ABC Viaticals should not have been admitted, the error was harmless. “The test for harmless error is whether the erroneous evidentiary ruling had a substantial influence on the jury's verdict.” Lupino, 301 F.3d at 645 (internal quotations and citations omitted). In light of the abundant evidence to sustain Midkiff's convictions, we conclude that any error in admitting the challenged evidence did not affect Midkiff's substantial rights and thus does not merit reversal. See United States v. Smith, 573 F.3d 639, 656 (8th Cir. 2009) (concluding that any evidentiary error was harmless in light of the extensive testimony and documentary evidence that the government presented over the course of more than twenty days of trial). 2. Disputed Investor Testimony During the course of the trial, numerous investors testified about their investments with Midkiff. Their testimony typically focused on how they came to invest with Midkiff, the representations Midkiff had made about the investment programs, the amount of money they invested, and the amount they lost. According to the investors, Midkiff encouraged them to seek out different sources of investment capital. Investors used home sale proceeds, took out home equity loans, and utilized credit card advances to invest with Midkiff. Investors understood that the investment programs were open only for a limited time, and Midkiff encouraged them to submit their investment principal quickly. Midkiff told investors that their principal was safe and that they could withdraw their principal after completion of their investment contract. One investor testified that Midkiff had given him information on a method to avoid a mortgage obligation. A different investor mentioned that he had lost a significant amount of money in a failed deepwater port investment that he had made with Midkiff that was unrelated to the Horizon, West Wing, or JTG schemes. A third investor testified that Midkiff had been investigated for “some problems he had had in the past in Texas.” There was also testimony that Midkiff had engaged in what one witness thought was a tax scam and that Midkiff had referred an investor to a tax consultant who the investor thought was trying to circumvent the tax system. Any error in admitting the investors' testimony regarding the mortgage avoidance scheme, the deepwater port investment, the problems Midkiff had in Texas, and the tax referral and scheme was harmless. Viewing the evidentiary record as a whole, the investors' testimony about the disputed topics was minimal and the strength of the government's case against Midkiff was overwhelming. C. Sentence Midkiff contends that his 180-month sentence is unreasonable because the district court did not properly evaluate the 18 U.S.C. § 3553(a) factors and did not give sufficient weight to his unique, personal circumstances, including the positive role he had played in the lives of many people. The Presentence Investigation Report (PSR) concluded that Midkiff's total offense level was forty-seven and that he was subject to life imprisonment. The district court disagreed with a number of the enhancements applied in the PSR and determined that Midkiff's total offense level was forty-one and his criminal history category was I, resulting in a guideline sentence of 324 to 405 months' imprisonment. Midkiff asked for a sentence of substantially less than twelve years, in part because Correll had been sentenced to 144 months' imprisonment. Midkiff also argued that a sentence below guidelines range would be appropriate because he had performed numerous good works. The district court engaged in a lengthy discussion with counsel and Midkiff about Midkiff's offense conduct and the effect of the guidelines, concluding that under the guidelines, “you could have ended up with a life sentence and that would have been totally inappropriate.” Throughout the sentencing proceedings, the district court expressed its concern that a guidelines-range sentence would result in a term of imprisonment longer than the sentences imposed on the individuals behind much larger fraud schemes. In its written statement of reasons for imposing sentence, the district court explained that Midkiff's abuse of position of trust and his obstructive behavior warranted a sentence longer than that imposed on Correll, but that the guideline sentence of at least 324 months “is excessive and is not necessary to meet the statutory goals of sentencing.” The district court “thus sentenced the Defendant so as to avoid sentencing disparities while taking into consideration the Defendant's specific offense conduct.” After taking into consideration the factors outlined in § 3553(a), the district court sentenced Midkiff to 180 months' imprisonment. Our review of Midkiff's sentence is limited to determining whether it is reasonable. United States v. Gall, 552 U.S. 38, 46 (2007). We review the reasonableness of a defendant's sentence under a “deferential abuse-of-discretion standard,” ensuring that the district court committed no significant procedural error and that the sentence is substantively reasonable. Id. at 41, 51. Procedural error occurs when the district court fails to calculate (or improperly calculates) the guidelines range, treats the guidelines as mandatory, fails to consider the § 3553(a) factors, selects a sentence based on clearly erroneous facts, or fails to adequately explain the defendant's sentence. Id. at 51. The district court committed no procedural error in sentencing Midkiff. It properly calculated the guidelines range and recognized that the guidelines were advisory. The sentencing transcript reflects the district court's intimate knowledge and careful consideration of the circumstances of this case. Moreover, the district court's written statement of reasons reviewed the 3553(a) factors and further explained their application to Midkiff's sentence. Although Midkiff disagrees with the district court's evaluation of the relevant facts, the district court did not rely on any clearly erroneous facts that would justify reversal. Midkiff's sentence was also substantively reasonable. Although Midkiff believed that his charitable deeds should have been given greater weight, the district court did not find his arguments for leniency sufficiently compelling to warrant a greater variance and did not abuse its discretion in determining the extent of the variance. See United States v. Price, 542 F.3d 617, 622 (8th Cir. 2008) (holding that a below-guidelines-range sentence was substantively reasonable and within the district court's discretion). III. Conclusion The judgment is affirmed. -------------------------------------------------------------------------------- 1 The Honorable Michael J. Davis, Chief Judge, United States District Court for the District of Minnesota. -------------------------------------------------------------------------------- 2 The Honorable Arthur J. Boylan, United States Magistrate Judge for the District of Minnesota.

Five Tax Scams to Avoid this Summer The Internal Revenue Service issues a list of the top 12 tax scams each year – known as the Dirty Dozen. The scams are illegal and can lead to problems for taxpayers including significant penalties, interest and possible criminal prosecution. These scams don’t just happen during the tax filing season, they can happen anytime during the year. Here are five scams from the 2010 Dirty Dozen list every taxpayer should be aware of this summer. Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the form of e-mails, tweets or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at phishing@irs.gov. You can also visit IRS.gov and enter the keyword phishing for additional information. Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients’ refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education. Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid on IRS.gov. These arguments are false and have been thrown out of court. Beware of IRS’ 2010 “Dirty Dozen” Tax Scams Videos Dirty Dozen: English Message for Tax Preparers: English | ASL Choosing a Tax Preparer: English | Spanish | ASL For this and other videos: YouTube/IRSVideos IR-2010-32, March 16, 2010 WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing. “Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.” Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams. The IRS urges taxpayers to avoid these common schemes: Return Preparer Fraud Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court. To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of steps for future filing seasons. These include a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN), as well as both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents. Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in the IRS Return Preparer Review issued in December 2009. Hiding Income Offshore The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year. While special civil-penalty provisions for those with undisclosed offshore accounts expired in 2009, the IRS continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters. By making a voluntary disclosure, taxpayers may mitigate their risk of criminal prosecution. Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes flourish during the filing season and can take the form of e-mails, tweets or phony Web sites. Scammers may also use phones and faxes to reach their victims. Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. Taxpayers who receive suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with http://www.irs.gov should be forwarded to the IRS mailbox: phishing@irs.gov. Filing False or Misleading Forms The IRS is seeing various instances where scam artists file false or misleading returns to claim refunds that they are not entitled to. Under the scheme, taxpayers fabricate an information return and falsely claim the corresponding amount as withholding as a way to seek a tax refund. Phony information returns, such as a Form 1099 Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS. Nontaxable Social Security Benefits with Exaggerated Withholding Credit The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance. Abusive Retirement Plans The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited. Disguised Corporate Ownership Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law. Zero Wages Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and to hide assets from creditors, including the IRS. The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement. Fuel Tax Credit Scams The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects those who improperly claim the credit to a $5,000 penalty. How to Report Suspected Tax Fraud Activity Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential. Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

SCA 200346006 -------------------------------------------------------------------------------- UIL No. 09.15.07-00 Suspension of running of period of limitation—bankruptcy filings. Headnote: In case of back-to-back bankruptcy filings, running of IRC Sec(s). 6503(h)(2) isn't suspended by unused portion of 6-month period and shouldn't be “tacked on” to collection statute expiration date. Reference(s): IRC Sec(s). 6503 FULL TEXT: Number: 200346006 Release Date: 11/14/2003 UILC: 09.15.07-00 date: to: Associate Area Counsel Small Business/Self-Employed CC:SB:1 from: Senior Technician Reviewer, Branch 2 (Collection, Bankruptcy & Summonses) Procedure and Administration subject: Significant Service Center Advice This Chief Counsel Advice responds to your memorandum dated [Month DD, YYYY]. In accordance with I.R.C. 6110(k)(3), Chief Counsel Advice may not be used or cited as precedent. ISSUE You have requested advice on an issue pertaining to the determination of the collection statute expiration date (CSED) in cases of back-to-back bankruptcy filings. The issue presented is whether any time should be added to the CSED in a situation where a second bankruptcy petition is filed less than six months after the automatic stay terminated in the first bankruptcy. Under I.R.C. § 6503(h)(2), the running of the collection statute is suspended during bankruptcy and for six months after termination of the automatic stay. You ask whether the Service, in addition to being entitled to the six- month suspension arising from the second bankruptcy, is entitled to a suspension representing the “unused” portion of the six-month period attributable to the first bankruptcy. CONCLUSION The statute is not suspended by the unused portion of the six-month period. Thus, this period should not be “tacked on” to the CSED. LAW AND ANALYSIS The issue presented may be illustrated by the following example. A taxpayer files a bankruptcy petition on September 2, 2003. At that time 100 days remain on the collection statute. The automatic stay imposed by the bankruptcy terminates on October 2, 2003, when the bankruptcy is dismissed. On December 16, 2003, 75 days later, the taxpayer files a second bankruptcy petition. The second bankruptcy is dismissed, and the automatic stay in the second bankruptcy terminates, on January 15, 2004. The running of the collection statute continues to be suspended for an additional six months, until July 15, 2004, pursuant to I.R.C. § 6503(h)(2). We conclude that the 100 days remaining on the collection statute begins running at that time. No additional suspension is afforded the Service because the second bankruptcy petition was filed only 75 days after the first case was dismissed and approximately 105 (180 - 75) days of the six-month suspension period was “unused.” If the Service were to receive the benefit of the unused suspension period, the running of the statute would be suspended for approximately 105 days after July 15, 2004, or until October 28, 2004. At that point, the 100 days remaining on the CSED would begin to run. Your request for advice indicates that a Service employee was instructed on one occasion to routinely add four months to the CSED if a second bankruptcy is filed within six months of the termination of the automatic stay in the first, and on another occasion to add no time to the CSED. We reject the notion that four months should routinely be tacked on to the CSED in this type of back-to-back bankruptcy situation. The amount of the unused portion of the section 6503(h)(2) six-month period, and thus any period potentially “tacked on” to the CSED, differs from case to case, in that it is dependent on the exact number of days between the termination of the automatic stay in one bankruptcy and the imposition of the stay in a subsequent bankruptcy. Accordingly, even if we agreed that the unused portion of the section 6503(h)(2) period should be tacked on to the CSED, we would reject the notion of categorically deeming this unused period to be four months. The Service normally is afforded ten years to collect a tax liability by levy or court proceeding once the liability has been properly assessed. I.R.C. § 6502(a). The filing of a bankruptcy petition by a taxpayer, pursuant to Title 11 of the United States Code, gives rise to an automatic stay of collection activity, which is generally in effect until the earliest of the time the bankruptcy case is closed, the time the case is dismissed, or the time a discharge is granted or denied. B.C. , § 362(a)(6), (c)(2). I.R.C. § 6503(h) provides: CASES UNDER TITLE 11 OF THE UNITED STATES CODE - The running of the period of limitations provided in section 6501 or 6502 on the making of assessments or collection shall, in a case under title 11 of the United States Code, be suspended for the period during which the Secretary is prohibited by reason of such case from making the assessment or from collecting and - (1) for assessment, 60 days thereafter, and (2) for collection, 6 months thereafter. Thus, when the Service is prohibited from engaging in collection activity in a bankruptcy case by reason of the automatic stay, the running of the statute of limitations on collection is suspended. Further, upon the termination of the automatic stay, the running of the collection statute remains suspended for an additional six months. The apparent purpose of the additional six months is to afford the Service time to become aware of the termination of the stay and to initiate collection action. As stated in In re Dodson, 191 B.R. 869, 874 (Bankr. Ore. 1998), “Legislative history identifies that the purpose of the government's additional six month tolling period after bankruptcy is to provide it adequate time to pursue collection of the tax debt.” As we have previously stated, it is our opinion that the unused portion of the six-month suspension period resulting from the first bankruptcy should not be tacked on to the CSED. The primary rationale for reaching this result is that this situation involves suspension periods that overlap, rather than suspension periods that run consecutively. The periods overlap in that the suspension period resulting from the second bankruptcy starts to run before the suspension period resulting from the first bankruptcy has stopped running. The time during which the periods overlap should operate to suspend the running of the statute only once. This rationale is employed in case law addressing an analogous issue involving overlapping suspension periods, how to determine the CSED where successive offers in compromise are submitted and successive suspensions of the running of the collection statute are effected. In United States v. Morgan, 213 F. Supp. 137 (S.D. Tex. 1962), each offer in compromise form submitted by the taxpayer included an agreement to suspend the running of the collection statute for the period during which the offer was pending, the period during which any installment remained unpaid, and for one year thereafter. 1 The taxpayer in Morgan submitted an offer in compromise for the Service's consideration in April 1954. In June 1955, before the Service acted on the offer, the taxpayer submitted an amended offer. Both offers were rejected by the Service in August 1955. In January 1956, less than one year after the rejection, the taxpayer submitted a second offer, which was amended in May 1956. This offer was accepted in September 1956. The Government maintained that the suspension of the running of the collection statute contained in each offer should be read as extending the limitations period for the number of days the Service held each offer under consideration, as well as for an additional 365 days for each offer. The district court observed that “... the net effect of the Government's contention is to calculate separately each period of the statute's interruption; and to tack one on to the other, thus treating them as though they were consecutive.” 213 F. Supp. at 139-140. In rejecting this construction of the waivers, the court stated: It seems sufficient answer to this argument to point out that this is not the way the waiver reads; and that it fails to distinguish between an agreement to extend the statutory period for a given number of days, on the one hand, and an agreement that the operation of the statute may be suspended or interrupted during an uncertain interval, on the other. Id. at 140. In a later case presenting the same legal issue, United States v. Newman, 405 F.2d 189 (5th Cir. 1968), the United States Court of Appeals for the Fifth Circuit recognized, albeit in a footnote, that the Government had abandoned the position it had taken in Morgan, and again distinguished between a suspension of the running of the collection statute and an extension of the CSED. 405 F.2d at 194 n.6. See also United States v. Malkin, 317 F.Supp. 612, 614 n.4. (E.D.N.Y. 1970) (period of overlap of suspension periods resulting from multiple offers in compromise counted only once). The reasoning of Morgan applies to the issue presented here. When the running of the collection statute is suspended on multiple occasions, either by agreement or by statute, the suspension periods normally run in full, provided that they do not overlap. For example, assume a taxpayer files a bankruptcy petition on September 2, 2003, and that waiver suspending the collection statute for the period an offer in compromise was under consideration, while any term of an accepted offer was not completed, and for one additional year. See Treas. Reg. 301.7122-1(f)(1960). Pursuant to RRA 98, collection waivers generally may no longer be accepted by the Service. See I.R.C. § 6502(a)(2003). In addition, under RRA 98 suspensions of the running of the collection statute in the offer in compromise context ar e governed by statute, specifically by I.R.C. § 6331(k)(1) and (3). Under these provisions, the Service is prohibited from levying, and the collection statute is suspended, while an offer is pending with the Service, for 30 days immediately following rejection of the offer, and for any period while a timely filed appeal from the rejection is being considered by Appeals after rejection. See Treas. Reg. § 301.7122-1(g)(1) and (i)(2003). the bankruptcy case is dismissed on October 2, 2003, as in our previous example. In this example, however, assume that a second bankruptcy is filed 10 months later, on August 2, 2004. The collection period would be suspended from September 2, 2003, until six months after October 2, 2003, and would again be suspended from August 2, 2004, until six months after the termination of the automatic stay in the second bankruptcy. In the situation presented, however, the suspension periods overlap, in that the suspension imposed by section 6503(h)(2) in the first bankruptcy has not yet fully run before the suspension imposed by section 6503(h)(2) in the second bankruptcy is in effect. As was the case of the suspensions in Morgan, the section 6503(h)(2) suspensions under consideration do not have the effect of extending the CSED for a set number of days and, as in Morgan, any period of overlap of the suspension periods should be counted only once. Accordingly, the unused portion of the six-month suspension period from the first bankruptcy is not tacked on to the CSED. Our conclusion is consistent with the purpose of section 6503(h)(2) in that, even without the tacking, the Service is afforded a full six-month suspension of the collection statute after the termination of the stay in the second bankruptcy, thus providing adequate time for Service employees to learn of the terminati on of the stay and to ready themselves to take collection action. Thank you for soliciting our advice on this matter. Please call [redacted text] if you have any further questions. cc: [redacted text] -------------------------------------------------------------------------------- 1 Prior to the enactment of the IRS Restructuring and Reform Act of 1998 (RRA 98), Pub. L. 105-206, the Internal Revenue Code permitted the Service to enter into agreements with taxpayers (collection waivers) whereby the taxpayer agreed to extend the collection period beyond the last date otherwise permitted for collection, namely, 10 years from the date of assessment. See I.R.C. § 6502(a)(2) (1997); Treas. Reg. § 301.6502-1(a)(2)(i) (1992). Moreover, it was the Service's practice to condition consideration of an offer in compromise on th e execution by the taxpayer of a collection

Fees for Return Preparers News Release 2010-86, 07/22/2010, IRC Sec(s). ________________________________________ Headnote: Reference(s): Full Text: IRS Releases Proposed Regulations Related to Fees for Preparer Tax Identification Numbers The Internal Revenue Service today released proposed regulations that would establish a fee for individuals who apply for a preparer tax identification number (PTIN). Proposed regulations that were issued in March would require certain tax return preparers to obtain a PTIN. The IRS is working to finalize those proposed regulations, which are the first of a series of steps planned to increase oversight of federal tax return preparation. The proposed regulations (REG-139343-08) would establish a fee of $50, payable to the IRS, to cover technology costs, as well as compliance and outreach efforts associated with the new PTIN program. The proposed regulations would also provide for an additional fee (expected to be substantially lower than $50) to be charged by the third-party vendor chosen to operate the new online system. That fee amount is expected to be announced soon, as well as additional details about the launch of a new online application system. These fees could change in future years as program costs are reevaluated. Agencies are directed by the Office of Management and Budget (OMB) to charge user fees to recover the cost of services that convey special benefits beyond those available to the general public, such as the authority to prepare federal tax returns for compensation. Tax professionals and other interested parties have until Aug. 23, 2010, to submit comments regarding the proposed regulations. The official publication date of these proposed regulations is July 23. In January, IRS Commissioner Doug Shulman announced the results of a comprehensive six-month study of the tax return preparer industry, which proposed new registration, testing, and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax return preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. How to Learn More The IRS recently broadcast the topic “New Requirements for Tax Return Preparers - Learn the Who, What, When and How” on the webinar IRS Live, an educational program for tax professionals. View the archive on IRS.gov. Tax professionals can also learn more by attending one of six tax forums this summer around the country hosted by the IRS. The IRS Nationwide Tax Forums are three-day events that provide tax professionals with the most up-to-date information on federal and state tax issues. REG-139343-08. User Fees Relating to Enrollment and Preparer Tax Identification Numbers AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed amendments to the regulations relating to the imposition of certain user fees on certain tax practitioners. The proposed regulations establish a new user fee for individuals who apply for or renew a preparer tax identification number (PTIN). The proposed regulations affect individuals who apply for or renew a PTIN. The charging of user fees is authorized by the Independent Offices Appropriations Act of 1952. DATES: Written or electronic comments must be received by [INSERT DATE 30 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. Outlines of topics to be discussed at the public hearing scheduled for Tuesday, August 24, 2010, at 10 a.m. must be received by Monday, August 23, 2010. ADDRESSES: Send submissions to: CC:PA:LPD:PR (), room 5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, D.C., or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS ). The public hearing will be held in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, D.C. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Emily M. Lesniak at (202) 622-4940; concerning cost methodology, Eva J. Williams at (202) 435-5514; concerning submission of comments, the public hearing, or to be placed on the building access list to attend the public hearing, Richard A. Hurst at Richard.A.Hurst@irscounsel.treas.gov or (202) 622-7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background Section 330 of title 31 of the United States Code authorizes the Secretary of the Treasury to regulate the practice of representatives before the Treasury Department. Pursuant to section 330 of title 31, the Secretary has published regulations governing practice before the IRS in 31 CFR part 10 and reprinted the regulations as Treasury Department Circular No. 230 (Circular 230). Circular 230 is administered by the IRS Office of Professional Responsibility (OPR). User Fee for PTINs (Code) authorizes the Secretary to prescribe regulations for the inclusion of a tax return preparer's identifying number on a return, statement, or other document required to be filed with the IRS. Section 6109(c) further authorizes the Secretary “to require such information as may be necessary to assign an identifying number to any person.” As currently prescribed in regulations, the identifying number of a tax return preparer who is an individual is the tax return preparer's social security number (SSN) or alternative number as prescribed by the IRS. Proposed regulations under section 6109 () were published in the Federal Register (75 FR 14539) on March 26, 2010, and provide that, for returns or claims for refund filed after December 31, 2010, the identifying number of a tax return preparer is the individual's PTIN or such other number prescribed by the IRS in forms, instructions, or other appropriate guidance. The proposed regulations under section 6109 require a tax return preparer who prepares all or substantially all of a return or claim for refund of tax after December 31, 2010 to have a PTIN. The proposed regulations also state that the IRS will provide through other guidance (including forms and instructions) guidance regarding how to apply for a PTIN or other prescribed preparer identifying number, for the regular renewal of a PTIN or other prescribed preparer identifying number, and for the payment of a user fee. Only attorneys, certified public accountants, enrolled agents, and registered tax return preparers will be eligible to apply for a PTIN. The requirements to become a registered tax return preparer will be provided in future Circular 230 guidance. A third party vendor will administer the PTIN application and renewal process and will charge a reasonable fee that is independent of the user fee charged by the government. The vendor will develop a web-based database that individuals will use to apply for or renew a PTIN and will process paper PTIN applications. The database also will be used for applications to become registered tax return preparers, to renew the registered tax return preparers' status, to self-certify continuing professional education credits for registered tax return preparers, and to pay applicable user fees. Proposed §300.9 establishes a $50 user fee to apply for or renew a PTIN. The $50 user fee is based on an annual PTIN renewal period, and the procedures for renewing a PTIN will be provided in other guidance, including forms and instructions. The user fee is nonrefundable regardless of whether the applicant receives a PTIN. PTINs were previously issued to tax return preparers solely for the convenience of the tax return preparers, providing an alternative to using the tax return preparers' social security numbers. Requiring registration through the use of PTINs will enable the IRS to better collect and track data on tax return preparers. This data will allow the IRS to track the number of persons who prepare returns, track the qualifications of those who prepare returns, track the number of returns each person prepares, and more easily locate and review returns prepared by a tax return preparer when instances of misconduct are detected. The user fee to apply for or renew a PTIN recovers the costs that the government incurs to administer the PTIN application process. These costs include the development and maintenance of the IRS information technology system that interfaces with the vendor and the development and maintenance of internal applications that will have the capacity to process and administer the anticipated increase in applications for a PTIN. It is anticipated that the number of individuals requesting PTINs will increase to as many as 1.2 million individuals, and all individuals who receive PTINs will be required to renew their PTINs. The anticipated increase in demand for PTINs will require the IRS to expend more resources. The user fee will recover the cost of IRS customer service support activities, which include website development and maintenance and call center staffing to respond to questions regarding PTIN usage and renewal. The user fee also will recover costs for personnel, administrative, and management support needed to evaluate and address tax compliance issues of individuals applying for and renewing a PTIN, to investigate and address conduct and suitability issues, and otherwise support and enforce the programs that require an individual to apply for and renew a PTIN. The IRS currently issues PTINs to tax return preparers without charging a user fee. The PTIN application, issuance, and renewal process, however, will become significantly more expansive and intricate with the implementation of the registered tax return preparer program. Federal tax compliance checks will be performed on all individuals who apply for or renew a PTIN. Suitability checks will be performed. The IRS will further investigate individuals when the compliance or suitability check suggests that the individual may be unfit to practice before the IRS. These checks were not previously performed as a prerequisite to obtaining a PTIN. Additionally, the IRS will establish and implement a reconsideration process for individuals who apply to become a registered tax return preparer and are denied a PTIN upon initial application or renewal. The IRS will incur costs to apply existing Circular 230 procedures when those individuals who are certified public accountants, attorneys, enrolled agents, or registered tax return preparers are denied renewal of a PTIN. Coordination With Other User Fees Aditional user fees related to the programs for regulating enrolled agen, enrolled retirement plan agents, and registered tax return preparers will be established in future regulations as those programs are implemented. These future regulations will address user fees associated with taking the registered tax return preparer examination and providing continuing education programs. The user fee for taking a registered tax return preparer examination will recover the costs to the government for creating, administering, and reviewing the examination. The user fee for providing continuing education programs will recover the costs to the government for the review, approval, and oversight of continuing education providers to ensure their compliance with program requirements for continuing education programs. The vendor also will charge a reasonable fee to take the registered tax return preparer examination. Future regulations also will coordinate the enrollment and renewal user fees imposed on enrolled agents and enrolled retirement plan agents with the PTIN user fees because the costs to the government to process an enrollment application are substantially the same as the costs to the government to process a PTIN application. For example, the IRS generally may conduct only a single background check and compliance check for an individual who applies to become an enrolled agent and applies to obtain a PTIN, and therefore the enrollment application fee and the PTIN application fee must be coordinated to prevent the collection of excessive fees. It is currently anticipated that future regulations will require enrolled agents to obtain a PTIN and pay the associated application or renewal fee, in which case the enrollment and renewal fees for enrolled agents will be substantially reduced. Effective/Applicability Dates These regulation reorganize the effective dates for the user fees found in Treasury Regulations part 300. Currently, all of the user fee effective dates are contained in §300.0 paragraph (c). This reorganization relocates the effective date sections to the appropriate regulation implementing each user fee. This relocation will simplify the process for updating the effective dates as the user fee regulations are revised. Authority The charging of user fees is authorized by the Independent Offices Appropriations Act (IOAA) of 1952, which is codified at 31 U.S.C. 9701. The IOAA authorizes agencies to prescribe regulations that establish charges for services provided by the agency. The charges must be fair and must be based on the costs to the government, the value of the service to the recipient, the public policy or interest served, and other relevant facts. The IOAA provides that regulations implementing user fees are subject to policies prescribed by the President; these policies are currently set forth in the Office of Management and Budget Circular A-25, 58 FR 38142 (July 15, 1993) (the OMB Circular). The OMB Circular encourages user fees for government-provided services that confer benefits on identifiable recipients over and above those benefits received by the general public. Under the OMB Circular, an agency that seeks to impose a user fee for government-provided services must calculate the full cost of providing those services. In general, a user fee should be set at an amount that allows the agency to recover the full cost of providing the special service, unless the Office of Management and Budget grants an exception. Pursuant to the guidelines in the OMB Circular, the IRS has calculated its cost of providing services under the PTIN application and renewal process. The government will charge the full cost of administering these programs and will implement the proposed user fees under the authority of the IOAA and the OMB Circular. Proposed Effective/Applicability Date The Administrative Procedure Act provides that substantive rules will not be effective until thirty days after the final regulations are published in the Federal Register (5 U.S.C. 553(d)). Final regulations may be effective prior to thirty days after publication if the publishing agency finds that there is good cause for an earlier effective date. The IRS is implementing the recommendations in Publication 4832, “Return Preparer Review”, which was published on January 4, 2010, to be effective for the 2011 Federal tax filing season (January-April 2011). The IRS and the Treasury Department find that there is good cause for these regulations to be effective upon the publication of a Treasury decisionadopting these rules as final regulations in the Federal Register. Special Analyses It has been determined that this notice of proposed rulemaking is a significant regulatory action as defined in Executive Order 12866. It has been determined that an initial regulatory flexibility analysis is required for this notice of proposed rulemaking under 5 U.S.C. 603. This analysis is set forth under the heading “Initial Regulatory Flexibility Analysis.” Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Initial Regulatory Flexibility Analysis When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency “to prepare and make available for public comment an initial regulatory flexibility analysis” that will “describe the impact of the proposed rule on small entities.” See 5 U.S.C. 603(a). Section 605 of the RFA provides an exception to this requirement if the agency certifies that the proposed rulemaking will not have a significant economic impact on a substantial number of small entities. A small entity is defined as a small business, small nonprofit organization, or small governmental jurisdiction. See 5 U.S.C. 601(3) through (6). The IRS and the Treasury Department conclude that the proposed rule, if promulgated, will have a significant economic impact on a substantial number of small entities. As a result, an initial regulatory flexibility analysis is required. Description of the reasons why action by the agency is being considered The IRS and the Treasury Department are implementing regulatory changes that increase the oversight of the tax return preparer industry based upon findings and recommendations made by the IRS in Publication 4832, “Return Preparer Review,” which was published on January 4, 2010. These regulatory changes include implementing a registered tax return preparer program and requiring all individuals who prepare all or substantially all of a tax return or claim for refund to use a PTIN as an identifying number. Except as provided in any transitional period, only attorneys, certified public accountants, enrolled agents, or registered tax return preparers may apply for a PTIN. Thus, only attorneys, certified public accountants, enrolled agents, and registered tax return preparers will be eligible to prepare all or substantially all of a tax return or claim for refund. By limiting the individuals who may prepare all or substantially all of a tax return or claim for refund to individuals who have a PTIN, the IRS is providing a special benefit to the individuals who obtain a PTIN. There are costs to the IRS that are associated with processing a PTIN application and providing the special benefits associated with the PTIN. Future regulations will establish additional user fees related to the enrolled agent and enrolled retirement plan agent program, and registered tax return preparer program. The additional user fees will recover the costs to the government that result from providing the special benefits associated with taking the registered tax return preparer examination and providing continuing education programs. The cost to the government for administering and reviewing the registered tax return preparer examination will be recovered in a user fee for taking the registered tax return preparer examination. The cost to the government to verify compliance with requirements for continuing education programs will be recovered in a user fee for qualifying continuing education programs. Each continuing education provider may charge a fee to attend a qualified continuing education program. The third party vendor also will charge a reasonable fee to take a registered tax return preparer examination. A succinct statement of the objectives of, and legal basis for, the proposed rule The objective of the proposed regulations is to recover the costs to the government associated with providing the special benefits that an individual receives upon applying for or renewing a PTIN. These costs include the development and maintenance of the IRS information technology system that interfaces with the vendor; the development and maintenance of internal applications; IRS customer service support activities, which include development and maintenance of an IRS website and call center staffing; and personnel, administrative, and management support needed to evaluate and address tax compliance issues, investigate and address conduct and suitability issues, and otherwise support and enforce the programs that require individuals to apply for or renew a PTIN. The OMB Circular encourages user fees when special benefits are conferred on identifiable recipients. Individuals who obtain a PTIN receive the ability to prepare all or substantially all of a tax return or claim for refund. The ability to prepare all or substantially all of a tax return or claim for refund is a special benefit. The legal basis for these requirements is contained in section 9701 of title 31. A description of and, where feasible, an estimate of the number of small entities to which the proposed rule will apply The proposed regulations affect all individuals who want to become a registered tax return preparer under the new oversight rules in Circular 230. Only individuals, not businesses, can practice before the IRS or become a registered tax return preparer. Thus, the economic impact of these regulations on any small entity generally will be a result of applicants and registered tax return preparers owning a small business or a small entity employing applicants or registered tax return preparers. The proposed regulations further affect all individual tax return preparers who are required to apply for or renew a PTIN. Only individuals, not businesses, can apply for or renew a PTIN. Thus, the economic impact of these regulations on any small entity generally will be a result of an individual tax return preparer who is required to apply for or renew a PTIN owning a small business or a small business otherwise employing an individual tax return preparer who is required to apply for or renew a PTIN to prepare all or substantially all of a tax return or claim for refund. The appropriate NAICS codes for the registered tax return preparer program and PTINs are those that relate to tax preparation services (NAICS code 541213), other accounting services (NAICS code 541219), offices of lawyers (NAICS code 541110), and offices of certified public accountants (NAICS code 541211). Entities identified as tax preparation services and offices of lawyers are considered small under the Small Business Administration size standards (13 CFR 121.201) if their annual revenue is less than $7 million. Entities identified as other accounting services and offices of certified public accountants are considered small under the Small Business Administration size standards if their annual revenue is less than $8.5 million. The IRS estimates that approximately 70 to 80 percent of the individuals subject to these proposed regulations are tax return preparers operating as or employed by small entities. A description of the projected reporting, recordkeeping and other compliance requirements of the proposed rule, including an estimate of the classes of small entities which will be subject to the requirement and the type of professional skills necessary for preparation of the report or record No reporting or recordkeeping requirements are projected to be associated with this proposed regulation. An identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap, or conflict with the proposed rule The IRS is not aware of any Federal rules that duplicate, overlap, or conflict with the proposed rule. A description of any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities The IOAA authorizes the charging of user fees for agency services, subject to policies designated by the President. The OMB Circular implements presidential policies regarding user fees and encourages user fees when a government agency provides a special benefit to a member of the public. As Congress has not appropriated funds to the registered tax return preparer program or PTIN application process, there are no viable alternatives to the imposition of user fees. While the IRS previously issued PTINs to tax return preparers without charging a user fee, the registered tax return preparer program and the issuance of the new regulations under section 6109 will increase the number of PTIN applications to as many as 1.2 million applications and significantly increase the intricacy of the application process. Additionally, PTINs were previously issued solely for the convenience of tax return preparers to provide an alternative to using the tax return preparers' social security numbers as an identifying number on prepared returns. PTINs will now be used to collect and track data on tax return preparers. This data will provide important benefits to the IRS, such as allowing the IRS to track the number of persons who prepare returns, track the qualifications of those persons who prepare returns, track the number of returns each person prepares, and, when instances of misconduct are detected, locate and review returns prepared by a specific tax return preparer. This anticipated increase in PTIN applications and the revised purpose of a PTIN will require the IRS to develop and maintain a website and train call center staff to respond to PTIN-related questions. Further, the IRS will now perform Federal tax compliance checks and perform suitability checks prior to the issuance of a PTIN. Previously, neither of these checks was performed before a PTIN was issued. When the initial compliance and suitability checks suggest that the individual applying for a PTIN may not be fit to practice before the IRS, the IRS will conduct an investigation. For individuals who are found unfit to receive a PTIN, the IRS will develop and implement a reconsideration process. Similarly, the IRS will provide due process procedures for those individuals who are certified public accountants, attorneys, enrolled agents, or registered tax return preparers and are denied renewal of their PTIN. Thus, due to the increased costs to the government to process the application for a PTIN, the anticipated increase in PTIN applications, and the lack of appropriated funds, there is no viable alternative to imposing a user fee. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed regulations and how they can be made easier to understand. All comments that are submitted by the public will be made available for public inspection and copying. A public hearing has been scheduled for Tuesday, August 24, 2010, beginning at 10:00 a.m. in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, D.C. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. All visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble. The rules of apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments and an outline of the topics to be discussed and the time to be devoted to each topic by Monday, August 23, 2010. A period of 10 minutes will be allocated to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information T he principal author of these regulations is Emily M. Lesniak, Office of the Associate Chief Counsel (Procedure and Administration). List of Subjects in Reporting and recordkeeping requirements, User fees. Proposed Amendments to the Regulations PART 300—USER FEES Paragraph 1. The authority citation for part 300 continues to read in part as follows: Authority: 31 U.S.C. 9701. Accordingly, is proposed to be amended as follows: Par. 2. Section 300.0 is amended by 1. Adding paragraph (b)(9). 2. Removing paragraph (c). The addition reads as follows: Proposed Amendment 300.0. §300.0 User fees; in general. ***** (b) *** (9) Applying for a preparer tax identification number. Par. 3. Section 300.1 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.1. §300.1 Installment agreement fee. ***** (d) Effective/applicability date. This section is applicable beginning March 16, 1995, except that the user fee for entering into installment agreements on or after January 1, 2007, is applicable beginning January 1, 2007. Par. 4. Section 300.2 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.2. §300.2 Restructuring or reinstatement of installment agreement fee. ***** (d) Effective/applicability date. This section is applicable beginning March 16, 1995, except that the user fee for restructuring or reinstatement of an installment agreement on or after January 1, 2007, is applicable beginning January 1, 2007. Par. 5. Section 300.3 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.3. §300.3 Offer to compromise fee. ***** (d) Effective/applicability date. This section is applicable beginning November 1, 2003. Par. 6. Section 300.4 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.4. §300.4 Special enrollment examination fee. ***** (d) Effective/applicability date. This section is applicable beginning November 6, 2006. Par. 7. Section 300.5 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.5. §300.5 Enrollment of enrolled agent fee. ***** (d) Effective/applicability date. This section is applicable beginning November 6, 2006. Par. 8. Section 300.6 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.6. §300.6 Renewal of enrollment of enrolled agent fee. ***** (d) Effective/applicability date. This section is applicable beginning November 6, 2006. Par. 9. Section 300.7 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.7. §300.7 Enrollment of enrolled actuary fee. ***** (d) Effective/applicability date. This section is applicable beginning January 22, 2008. Par. 10. Section 300.8 is amended by adding paragraph (d) to read as follows: Proposed Amendment 300.8. §300.8 Renewal of enrollment of enrolled actuary fee. ***** (d) Effective/applicability date. This section is applicable beginning January 22, 2008. Par. 11. Section 300.9 is added to read as follows: Proposed Amendment 300.9. §300.9 Fee for obtaining a preparer tax identification number. (a) Applicability. This section applies to the application for and renewal of a preparer tax identification number pursuant to . (b) Fee. The fee to apply for or renew a preparer tax identification number is $50 per year, which is the cost to the government for processing the application for a preparer tax identification number and does not include any fees charged by the vendor. (c) Person liable for the fee. The individual liable for the application or renewal fee is the individual applying for and renewing a preparer tax identification number from the IRS. (d) Effective/applicability date. This section will be applicable on the date of publication of a Treasury decisionadopting these rules as final regulations in the Federal Register. Steven T. Miller Deputy Commissioner for Services and E nforcement. [FR Doc. 2010-18198 Filed 07/21/2010 at 4:15 pm; Publication Date: 07/26/2010] © 2010 Thomson Reuters/RIA. All rights reserved