Jul 30, 2008

Q & A: Filing a Return for Deceased Spouse

QUESTION: My husband passed away October 6, 2003. We were married for 8 years and always filed our taxes individually. He had used an accountant who is now deceased. After my husband passed away, I contacted and paid another firm to assess my husband's IRS account. They had power of attorney and I thought they filed his 2003 tax return. But they did not and have since purged their files. This year I was named executrix for my husband's estate by the court because we had to probate an estate that has no assets due to unreasonable actions taken by an ex-wife.

The IRS is asking me to file his 2003 tax return by the end of this month. From looking at former returns, I can ascertain that my husband was fully disabled and had income from a trust. No taxes were taken from this trust because of its nature and the fact that he had lost body functions that prohibited him from working. How should I file this return? Are there special forms? I'm at a total loss since I'm not a CPA or tax lawyer. My late husband's accountant also had power of attorney, and was alive when my husband passed away to receive all of my husband's financial correspondence. He was the one who signed my husband's tax returns. I have no idea of where any records are. Thank you for any help or ideas that you can furnish me with.

ANSWER: First of all, I am sorry to hear that you have been put into such a difficult predicament. As executrix of your late husband's estate, you can file his 2003 Form 1040 return using the married filing separately status. You should write "DECEASED" across the top of the first page of the return and sign your name on the signature line as executrix. If you need to obtain copies of tax information needed to complete the return, such as income related documents, you can call the IRS at 800-829-1040, follow the prompts and request the documents to be mailed or faxed to you. When you finish the return, you may either mail it to the same IRS service center that you have mailed your return to or take it in person to a local IRS office, if one is available. May I also make the suggestion that you consult with a professional tax preparation firm in your area to assist you with completing the return.


Jul 28, 2008

Q & A: More About Offers In Compromise

QUESTION: Kudos on a well-written blog.
My question is: If I submit an OIC, can the revenue officer deem it Currently Not Collectible? If deemed CNC, will the collection statute clock start ticking again? Or does time stand still because it is considered still in the OIC department or an OIC matter?
If it is placed in CNC, would I have to submit an OIC again later? If so, when? My circumstances aren't about the change.
Thanks for the active blog and information!

ANSWER: Thanks for the question. The CNC and the OIC are different negotiations. Filing an OIC will take you out of collections (technically- if this is a "multiple offer" then the IRS may continue collections- i.e. levies, etc.). Revenue Officers do not consider OICs- they have to send it to a Centralized OIC Unit in Holtsville, NY or Memphis, TN who can send it out to a Field Office (Not your RO though) to make an independent determination (they do this if you have a business or have trust fund tax liabilities).

You will need to negotiate the CNC if the OIC is not successful- the RO will not put you into CNC until he/she has made an independent determination that they cannot collect on your monthly disposable income and/or asset liquidation. This is an independent decision of the OIC. If the OIC is not successful, it will not determine the status of your collectibility--the RO will make a determination by investigation into your finances.


Q & A: Statute of Limitations

QUESTION: I was in a failed business with a partner whom I thought was taking care of our taxes (it's a long story). Lo and behold he took care of his taxes but not mine…..In 1998 I had taxes of $16,000, met with the IRS and completed the work sheet showing expenditures and allowances. IRS deemed me unable to pay taxes…2 years ago I called the IRS for the yearly sit down and was told I was no longer on the collections list…I know for a fact the balance is $4,200 dollars (not including penalties and interest)…… I obviously have not collected a refund of any sort since 1998….. My question: No tax lien has ever been placed against me, nothing shows up in my credit report, it has been over 10 years since the tax assessment, statute of limitations is 10 years. I was just curious that if I have passed the 10 years for collections on back taxes and the IRS is not attempting to collect, what would happen if I were to purchase a home? Should I attempt an offer in compromise of the $4,200?

ANSWER: Great questions. First, you should not try an Offer in Compromise as it will extend the collection statute of limitations (10 year statute) and, if unsuccessful (and most are)- it would put you back into enforced collections. It appears that your statute has expired (although the date is real close- I would want to make sure by getting an official IRS transcript- use a professional to do this as to not raise the ire of the IRS).

For $16,000, the IRS has some discretion on filing a tax lien. Normally, if you were considered noncollectable, they would file a tax lien- however, since this was years ago (1998-the IRS procedures were sporadic until 2005) they probably did not file a lien. The key question is whether the statute has expired.

For your sake, I hope it has...then your refunds will come to you each year....I hope you filed an extension for 2007 so that the refund would be later in the year- after the collection statute has expired- and you will get your refund.


Jul 27, 2008

The IRS And Alimony Payments

If there is one tax area that I have had clients to exhibit a high degree of knowledge about, it has to be IRS law pertaining to alimony payments. The reason behind this awareness by clients is that, if someone is paying alimony to a ex-spouse always knows that payments are deductible on the first page of the Form 1040. Conversely, someone who is receiving alimony payments must report those payments as income on the same first page of the 1040.
Regardless of which side of the fence a taxpayer is on, there are (of course) IRS guidelines as to what constitutes alimony payments. These payments are generally made under a divorce or separate maintenance agreement. The amounts are deductible by the payer and includable as income to the recipient if the following requirements are met:
1) The payment is in cash or its equivalent.
2) The payment is not designated as not includable in the recipient's gross income or not allowable as a deduction of the payer.
3) The spouses who are legally separated are not members of the same household at the time payments are made.
4) The spouses do not file joint tax returns with each other.
5) There is no liability to make any payment after the death of the alimony recipient.

In order to deduct payments or include payments as income, the year that payments are made dictates when they can be used on a tax return. Be aware that terms pertaining to child support payments are not treated the same as alimony. Child support payments are not deductible to the payer and, therefore, not treated as income to the recipient. Consult IRS Publication 504, Divorced or Separated Individuals, for greater detail regarding alimony payments. This document can be found on the IRS web site at http://www.irs.gov/.


Q & A: Stimulus Rebate Problem Case

QUESTION: I was given your email by a friend. I'm having some trouble with my father in-law's return and stimulus check. There seems to have been some error in filing originally. He may have incorrectly written his name or Social Security Number. Now the IRS has sent him a letter informing him his SSN is invalid. But the next step is unclear. Should he resend his tax return form? Or is there a different form to deal with this?

ANSWER: Thanks for your question. The best solution for your dilemma is to make a photocopy of your father-in-law's Social Security card and call the IRS at the telephone number listed on the letter that he received. The IRS representative that you reach should give you instructions on how to either 1) fax the copy of the card or 2) mail the copy to the IRS. Tax returns containing taxpayer names or SSN's that do not match Social Security Administration records are typically delayed in processing until the error is corrected.
You may also call the general IRS customer service line at 800-829-1040 for assistance if you wish.


Q & A: Capital Loss Deductibility

QUESTION: I am the single owner of an LLC (rental properties). In 2006 I was in a partnership and filed what I think was a Schedule K. I bought out my partners' share at the beginning of 2007. So for my 2007 tax return my accountant said I should forgo the schedule K and just file the schedule E. As I remember, the Schedule K data went on a capital gains schedule. I have recently taken a bath on some stock sales and will have a big (for me) capital loss this year. I don't currently have anything to offset that loss against. I have no intention of risking further losses and thereby am sure that for this year I will have a capital loss of around $20K.
Is filing a K or E optional for a single owner LLC? If I can file K then I can offset some or all of my loss, right?

ANSWER: First of all, for tax year 2006 the LLC should have filed Form 1065 which would have generated Schedule K-1's for all of the partners. This form represents each partner's share of the business's profit or loss which is recorded on the partners' individual tax return. With the buyout at the beginning of 2007, your LLC became classified as a single-member LLC. For 2007, your rental property income and expense information was indeed eligible to be shown on Schedule E of your individual return.
Regarding the capital losses from sales of your stock holdings, net ordinary income from your LLC will not affect the ability to offset the losses from stock sales. The rule for capital losses is that they may be offset only by capital gains without distinction between long-term and short-term gains or losses. Additionally, the deduction for capital losses is limited to a maximum of $3,000 for any year that they exceed capital gains. Unused capital losses may be carried forward to future tax years until the entire loss is used. In your case, it appears that your capital loss deduction for 2008 will be $3,000 with the balance of your losses carried forward for use in future years.


Q & A: Graduating Student As Dependent Child

QUESTION: Our daughter is a full time student and will graduate at the end of July. She will be able to pick up a pool position in August that will pay her an hourly wage when she is needed to work. This is a part time position with no benefits. We have paid for all her support and schooling for the first seven months of the year. She will continue to live with us through the end of the year. Can we claim her as a dependent for 2008 and can we calm the cost for her college for the year?

ANSWER: Yours tax questions are common ones during this time of year. There are dependency tests to consider in answering your questions.
1) Age test -- If your daughter was a full-time student for at least 5 calendar months of the year and does not attain 24 years of age by the end of this year, this test is satisfied.
2) Principal Place of Abode test -- If she lives with you for at least one-half of the calendar year, this test is satisfied.
3) Support test -- You must provide at least 50% of your daughter's total financial support for the tax year. Be aware that the income from her job must be included in the support calculation. If your calculation shows that you exceeded the 50% threshold, this test will also be satisfied.
So, given that your daughter satisfies the age test, you should be able to claim her as a dependent on this year's return. As for claiming the college education credit, this also should be available to you because your daughter will be a dependent on your return. You will most likely be eligible for the Lifetime Learning Credit. Go to the IRS web site at http://irs.gov for more information regarding the deduction of college education costs.


Jul 24, 2008

Payroll taxes....The wrong question....

I am often perplexed by business tax liability questions and clients who want to get a "free lunch"- i.e. get out of paying the liability. They often are looking for an Offer in Compromise and stay in business or for a partial pay installment agreement. In both instances, it means the IRS is getting less then full payment of the tax liability- i.e. the taxpayer is getting a free lunch.

First, if this is payroll tax liablity, i.e. unpaid trust fund taxes, then public policy prohibits the IRS from putting a business at a competitive advantage v. other businesses, i.e. allowing them lower costs by not paying taxes. Second, the IRS incurs a double loss in the loss of trust fund taxes coupled with the refunds they are paying taxpayers who get refunds on the federal income tax withheld that is not paid to the government.

Opportunistic questions of the free lunch and other unrealistic requests- i.e. not filing a federal tax lien, is quite simply the wrong question to ask. If your business has payroll tax liabilities, you will be assigned a Revenue Officer, the highest level of the IRS Collection food chain. This person will do an effective, thorough financial investigation. If your business will not be able to pay the taxes, guess what? The IRS will assess the trust fund portion of the taxes against the responsible individuals and collect on them to the fullest extent allowed by law.

Hence, what are the right questions:

1. Can I keep my business open?
2. Can the business resolve the unpaid liabilities so that the individuals will not have to satisfy the obligations of the business?

The answers to the above better be "yes" or the IRS will exhaust all efforts to collect. And, because it is assigned to a Revenue Officer, the IRS will collect to the extent that there is funds available by the business and the responsible individuals.

If you can look into the mirror and ask the right questions and have the right answer, then you are on your way to resolving your problem. Clients, who are looking for a free lunch, will ultimately be disappointed, as the IRS will collect from the individuals involved. If you are asking the right questions and the answer is yes, I can work with you and resolve your problem with a realistic. livable solution.


JK Harris- willing to accept no customer value....

In a follow-up to last week's blog on the tax whores, I was perplexed by the Wall Street Journal interview of companies, in the tax resolution space, that are willing to provide services to people that the customer perceives having no value.

To quote John Harris, the President of JK Harris, the "largest tax resolution firm in the industry," - "You are going to have (customer) complaints in this industry." This statement has a basic flaw in its premise: you will have complaints if you are stating you are going to provide something that you cannot provide.

I want to assure everyone that there is no such thing as a "free lunch." Hence, if you are inquiring to me about a "free lunch," you are not asking the right question. If you are in tax debt trouble, you probably need assistance to know your options. However, the solution will not be easy, nor will it be painless. Any such promises are purely false advertising.

Tax debts can last for 10 years or more. Tax liens can exist for this time period also. If you owe tax debt, the IRS is the creditor- and they are a creditor that does not need a "judgement" to collect on you- they have the power of levy (seizure) and lien filing.

The premise that is most disturbing is the popular solution: the Offer in Compromise. This solution is available to very few (the WSJ article points this out). Furthermore, it is only one of many options you need to consider of which the OIC may not be the best. However, it has seemed to get the most press and appears to have preyed on people who can be easily victimized. As there are no get rich schemes, there is no free lunch in resolving your tax matters.

So, let the buyer beware- such promises will lead you astray. Talk with someone who will provide a solution. And , be prepared to participate in resolving the problem with them (this is called "discovery" in legal proceedings).


Jul 18, 2008

Foreign Bank Accounts- The Lichtenstein Bank Scandal

This is going to be an interesting story to follow over the next several months, but let me give you a little bit of back ground first before I explain why this will be interesting to follow.

Heinrick Kieber, a former computer technician for the Bank of Liechtenstein has come forward with the names of US citizens who had set up secret accounts there. Yesterday he testified via video, from an undisclosed location, before the Senate's Permanent Subcommittee on Investigations, during which he likely disclosed the names of the account holders. Thus exposing them to the scrutinizing of the IRS and the banks alleged efforts to help the wealthy Americans to hide their money from the IRS.

"Liechtenstein's veil of secrecy was pierced five years ago when the disgruntled technician, Kieber, downloaded the names of foreign citizens connected to the secret
accounts. Kieber reportedly sold three CD's full of names and data to tax
authorities to 12 countries including Germany, Great Britain, France, Italy and
the United States. "
(Day of Reckoning? Super Rich Tax Cheats Outed by Bank
Clerk; By BRIAN ROSS and RHONDA SCHWARTZJuly 15, 2008 )

According to the IRS,
" If you own a foreign bank account, brokerage account, mutual fund, unit trust, or other financial account, then you may be required to report the account yearly to the
Internal Revenue Service. Under the Bank Secrecy Act, each United States person
must file a Report of Foreign Bank and Financial Accounts (FBAR), if
The person has financial interest in, signature authority or other authority over
one or more accounts in a foreign country, and The value of the account
exceeds $10,000 at any time during the calendar year.
A United States person is not prohibited from owning foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial
accounts to circumvent United States law. Investigators use FBARs to help
identify or trace funds used for illicit purposes or to identify unreported
income maintained or generated abroad.

Congress passed the Bank Secrecy Act in 1970 to fight money laundering in the US and to help prevent the wealthy from using foreign banks as tax havens. The IRS can impose heavy penalties for those who fail to disclose these accounts and transactions, which can be up to 50% of the account balance at the time of the violation and penalties can be assessed as high as $10,000 per each violation.

What the most interesting thing about this story is going to be who is on this list and what the IRS will do to those people. I am sure that those who know they are on the list are currently using every bit of leverage, power and political favors to minimise their exposure not only to the public but the prying eyes of the IRS auditors. It will be interesting to see the outcome of this one over the next coming months!


Jul 16, 2008

Tax whores....they are ruining the neighborhood...

I am often puzzled by the prostitution that is now predominant in the Tax Resolution Industry. A prostitute or someone that engages in general prostitution sells themselves for an unworthy use. In this industry there are many who do.

This is a disgrace considering that there are many ethical players in this industry. The whores are ruining the neighborhood and removing the ability for ethical players who are very proficient in resolution.

You have three choices in dealing with your tax debt problems:

1. Represent yourself before the IRS and negotiate a resolution
2. Do nothing and let the IRS take enforcement
3. Hire a professional to resolve your problems

There are pros and cons to each except choice #2- doing nothing will only cause you to look over your shoulder forever. Also, the IRS will eventually take your money without asking. Choice # 1 - resolving your problems on your own- may be penny wise but dollar foolish if you do not know all of your options and how to apply them to your personal financial situation.

Choice and option #3- if you are considering hiring a professional- and I believe this is a wise idea- requires that you look at all of the following factors at a minimum:

1. What is the firm's experience in resolving tax debt issues? (is there ex-IRS personnel that can get through the bureaucratic mess of the IRS)
2. How long do they take in doing their resolution? (you will need specifics)
3. Is the firm that you hire going to consider all of your options?? (not just the popular ones that the "whores" are pimping- i.e. the "Pennies on the Dollar" abuses)
4. Do they hold themselves to any industry standards of excellence? (what are their affiliations?)
5. Are they making unrealistic, long shot promises?? (are they promising something that sounds too good to be true)

If the firm you are considering is giving you a conclusion without doing all of the due diligence- look out....because resolving your tax problems requires extensive discovery (yes, similar to an attorney), analysis, and a consideration of every option.

I am all for kicking the whores out of the neighborhood....so that the ethical providers can do what they do best: resolve their client's tax problems and provide them peace of mind for their financial future.


Jul 14, 2008

Levy on Independent Contracts

I recently received this question from a potential client ...

"I've received an IRS levy for one of my 1099 Independent Contractors. There is no money due the contractor today, but there will most likely be a commission due in 30 days. How do I treat future commissions?"

This is a great question and the IRS's Internal Revenue Manual is
a bit vague on this topic, however what the IRM does state is this...

Accounts receivable, notes receivable, and other debts owed to a taxpayer may be levied upon. Accounts receivable are assets representing money due to a taxpayer for products and services provided on credit.

Example: monies owed to the taxpayer by clients, customers,
patients, insurance companies, rental income, funds processed by credit card companies

Consider issuing a summons to the taxpayer's bank for deposited items to obtain information on possible accounts receivable on which to levy.
A note receivable is a certain amount loaned to another that is owed and payable at a certain time to the holder of the promissory note.

Example:money loaned to a customer, employee, or officer of the
company. A notice of levy reaches future payments, only if the taxpayer
already has a right to them.

If receivables can be sold, consider seizing and selling them.

This doesn't give a very good answer to the question, however what is typically assumed is that the levy only affects funds that are due to the taxpayer at the time the levy is received. If the taxpayer is not currently due any funds then the levy does not attach to anything and can be returned to the service with an acknowledgment that the taxpayer is not currently due any funds.

This however is not always the case as the levy could be a continuous levy. If the levy is continuous then it attaches to any current and future funds due to the tax payer. The only way to tell is to review the form 668 (Notice of Levy) and if in the top left corner of the form has a (c) next to the 668, then the levy is continuous and the taxpayer needs to seek immediate representation.


Jul 10, 2008

What does an IRS Collections person return on investment?

It is increasing more and more...according to the latest Report to Congress by the IRS' Taxpayer Advocate Office. In prior reports, the ROI on an Automated Collection System ("ACS") employee was estimated at 13:1 - now it is estimated at 20:1!!

To supplement the Tax Fabian's blog entry on how many IRS Collection personnel would it take to recoup $42 million, I offer these statistics from the IRS that will return the $42 million of ill-spending:

The average annual ACS employee compensation package: $75,000 (on average)
With a 20:1 ROI- the ACS Representative would annually collect (gross): $1,500,000
Number of ACS Representatives to recoup the $42 million in one year: exactly 28

The IRS put in its budget for the past year, funding for 175 additional ACS representatives. By my math, that is a little over 5 more of those idiotic and reduntant letters.

In fairness to the IRS, it was Congress and its politicos (the Treasury Secretary) that mandated the letter. The IRS is a superb collector of tax as it has superpowers of collection: the right to seize property (i.e. a levy) without a judgement. The only requirement is the due process set forth in the Internal Revenue Code. With powers like that, no wonder they have a 20:1 ROI.

If you feel comfortable about going up against this Goliath of a collector, find a David that knows where to aim.


Jul 7, 2008

The $42 Million Dollar "Heads Up"

One thing is for sure, our government is consistent in its brilliance or lack there of.

On July 1st of last week I received a letter from the IRS informing me that my Economic Stimulus check would arrive no later than July 5th. While I was relieved to know that the check was now on it's way, I was a bit dumbfounded that the IRS would send me a letter just to inform me of this, especially this late and especially since there was already an abundant amount of information available to the public to inform someone like me of when to expect the check.

What is even more shocking, is what this "heads up" cost the US taxpayer. I bet $42 Million didn't come to mind! That's right, according to the Associated Press article "Dear Taxpayer: This Letter Cost you $42 Million" , the IRS shelled out $42 million dollars to send out letters informing people they would receive their stimulus check in the next few days. Brilliant!
I wonder how many Revenue Officers or Revenue Agents could have been hired with $42,000,000?

There is at least one senator who shares the same view according to the articles.

"There are countless better uses for $42 million than a self-congratulatory mailer that gives the president a pat on the back for an idea that wasn't even his," Sen. Charles Schumer said Friday, arguing the IRS could more effectively spend the money to catch tax cheats."


Jul 3, 2008

The Truth on E-filing and the IRS: A mandate to come??

In 2007, there were over 235 million tax returns filed. Obviously, for cost measures and efficiency, the IRS wants as many of them to be e-filed as possible. The target set by the IRS is to have 80% of all Forms 1040 e-filed before 2007. At 59.7%, the IRS has clearly not met the expectations of Congress.

Hence, what are the proposals that are on the table: mandates for e-filing

The IRS' Electronic Tax Administration Advisory Committee ("ETAAC") has recently come out with its 2008 Annual Report to Congress that suggests and re-suggests some mandates that may be forthcoming:

1. A requirement that all tax preparers file taxpayer returns electronically if they have more than 50 returns prepared each year (e-filing is not currently a requirement for a tax preparer)
2. Increasing the number of employers that need to file Forms W-2 in an electronic manner to the IRS (currently the requirement to file electronically is for businesses with more than 250 employees)
3. Testing and licensing all Tax Preparers who are not essentially CPAs, attorneys, or enrolled agents to insure that electronic filings are done by competent professionals (presently anyone can be a paid preparer without qualification or training)

The emphasis on mandates on the practitioner is consistent with the IRS "deputizing" the tax professional for compliance risks. Congress has mandated that the tax preparer disclose "questionable positions" on a tax return or face stiff penalties.

All of these items are pushing to a modernized IRS. The "Modern IRS" has the taxpayer doing its adminstrative work Because more than half of all returns are filed by tax professionals, the work will be done by these preparers. To take this a step further, the errors will be owned by the preparer also.

The IRS wants to bury its archaic computer systems for a more modern system that can consolidate all information into a centralized source: The Customer Account Data Engine ("CADE"). This new system will allow the IRS to look across its traditional lines of communciation with one contact. It will consolidate individual and business accounts, notices, examination and collection efforts. In fact, 30 million accounts have been processed into CADE this year.

In short, the legacy system that the IRS uses is proposed to be off-line by 2012 according to the ETAAC. The IRS cannot do this without mandates- 60% compliance is about all they can get voluntarily. The IRS realizes that this will be done by tax professional.

This tax professional must meet their standards. This standard is simple: an honest, trained preparer who will stand by their returns. Choose this person wisely for years to come for the IRS sees this person as the key to scaling their e-file and compliance risks for the future.


More on the Economic Stimulus Rebate

The time period for mailing the 2008 Stimulus Rebate to eligible taxpayers who filed 2007 tax returns by April 15 is soon to come to an end. The IRS schedule for mailing the final rebates is mid-July. If you have filed your 2007 return since 4/15, you will receive your rebate check some time after the tax return has been processed. Also, as long as you file a return by the October 15 filing deadline for extensions, you should receive the rebate check by December 31.

If you are wondering (and crossing your fingers) when your check is scheduled to be mailed by the IRS, go to the IRS web site http://www.irs.gov. There you will see the link to the Stimulus Rebate Payment Center. At that page, you will find an underlined link for Where's My Stimulus Payment? Click this link and go to the Where's My Stimulus Payment? page. On this page, click a similarly named underlined link. At this page, simply enter the required information from your 2007 tax return and, voila!, the scheduled date for receipt of your check should be given. If there is a problem with your rebate, there should be telephone number referenced that you call to resolve the problem issue.


Jul 2, 2008

Capital Gains Tax Rates.....Still Attractive

Capital gains tax rates have really been very attractive since 2001. For example, the maximum capital gains rate is normally 15% unless you are in the 15% income tax bracket. If your tax bracket is 15% or less, the maximum capital gains rate is 5%. For tax year 2008, the 5% rate actually decreases to 0%! This reduced rate will continue through tax year 2010. If you have flexible income, now may be the time to choose to sell appreciated property to take advantage of this very special rate.
As the tax law now stands, after 2010 the capital gains rates are scheduled to return to the 20%/10% rates that were in effect before 2001. Remember also that dividend income will be taxed at ordinary income rates rather than capital gains rates after 2010. So now is the time to for proper planning to achieve the maximum benefit from property sales utilizing these lower rates.


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