Tax Problems: Type of Tax Problems and how to resolve them

Tax Problem Solver – Why You Need Professional Help

Tax problems come in different forms; IRS tax problems, State tax problems, and Sales tax problems. Tax authorities are constantly increasing their tax enforcement efforts through tax collection and tax audit.

When taxpayers receive the dreaded tax notice that their tax return or their business is going to be audited and examined, the first thing they should do is seek professional tax advice. Same thing when taxpayers receive collection letters threatening levying and garnishing their wages or paychecks, or the tax levy letter for their bank account, taxpayers should seek professional tax advice to resolve their tax problems.

The most common options to resolve your tax problems are:

• Full Payment: paying the amount on the tax notice and avoiding the confrontation with the taxing authority. Most of the time, this option is not the best option for the taxpayer to resolve their tax problem, as often the tax bill is inaccurate.
• Pay The Correct Tax Only: paying the actual amount of taxes if you can afford it is usually a good solution to your tax problem. This will entail working with the taxing authority to abate the penalty assessed. The success of penalty abatement is based on reasonable cause and not willful neglect.
• Installment Agreement: paying the tax amount through an installment agreement is a common way to resolve your tax problem. You should seek professional tax advice, as the taxing authority will usually request a large monthly payment, while professional tax representatives will work on attaining an installment agreement that is reasonable and you can live with without causing a financial and economic hardship on you and your family.
• Offer In Compromise: an offer in compromise, OIC, will usually be accepted by the taxing authority to resolve your tax problem if the amount offered to settle your tax problem is equal or exceed the taxpayer’s Reasonable Collection Potential, RCP. The IRS, or the State, or the Sales Tax Agency determines RCP by using the financial analysis tools like the 433-A for individuals and 433-B for business entities.

No matter which option is correct to resolve your tax problems, usually there are more than one viable option, it is essential that the taxpayer comply with the tax law going forward. That is, all tax returns are filed timely; all estimated income taxes and payroll deposits must be paid timely.

An experienced tax professional who specializes in tax representation would be the best person to have in your corner when the IRS, the State, or the Sales Tax Agency contacts you.

The most surprising fact of all after plumbing the depths of what to do when the IRS contacts you regarding a tax problem is how shallow the well really is. With the lull in activity on the IRS tax audit and collection front, there are relatively few pronounced tax-experts. The $345 billion dollar tax gap remains fascinating to the US Congress and the IRS. It is a high profile item!

The IRS released tax records on their most famous tax problem cases that imprisoned Al Capone, they inadvertently nabbed the Governor of New York allegedly spending tens of thousands of dollars for what they least expected. From Will Smith, to Wesley Snipes to Nicolas Cage IRS audits and collection are on the rise, and is expected to continue for many years to come!

So, do you have a tax problem yourself? Do yourself a favor and contact us today to assist you in resolving your tax problem. We resolve IRS tax collection and or audit problems, we resolve State tax audit and collection problems, and we resolve Sales tax problems.

Audits of S Corporations are on the rise

TIGTA study finds modest audit rate increase for C corps but marked increase for passthroughs ( S Corps)

Trends in Compliance Activities Through Fiscal Year 2007, TIGTA Reference Number 2008–30–095

A recently released TIGTA (Treasury Inspector General for Tax Administration) report reveals that despite a slight uptick in FY 2007, IRS audits of corporations have declined dramatically over the last ten years. However, audits of S corporation and partnership returns increased substantially over the same period.

TIGTA's findings for business entities. The new TIGTA report examined IRS statistical data and found the following audit trends for business:

• The number of corporate income tax returns examined (excluding returns for foreign corporations and S corporations) increased by just over 4% in FY 2007, after dropping by 1% in FY 2006. However, the number of examinations dropped by almost 45% since FY 1998, from 53,648 (1 of every 48 returns filed) to 29,664 (1 of every 75 returns filed). TIGTA notes that the 13% drop in the number of corporate income tax returns filed during the same 10-year period may have impacted the exam coverage rate. For FY 2007, the number of corporate tax returns examined with assets of less than $10 million grew by slightly over 12%, the number of corporate tax returns examined with assets of $10 million and greater decreased by almost 9%, and exams of those with assets of $250 million and greater decreased by almost 20%. Overall, however, the exam rate is much higher for large corporations than for those with assets of less than $10 million.
• The number of S corporation exams declined by 75% from FYs 1998 to 2004, but increased by almost 176% from FYs 2004 to 2007; the increase in FY 2007 alone was slightly over 26%. Since FY 2004, however, the number of S corporation returns filed has increased by 16%. TIGTA notes that the increase in exam coverage can be partly attributed to an IRS research project studying the compliance of S corporations.
• The number of partnership returns examined increased by 25% in FY 2007 and has increased by almost 141% since the 10-year low experienced in FY 2001. The number of returns filed increased by about 42% between FYs 2001 and 2007. About 1 of every 408 returns filed was examined in FY 2001. This increased to 1 of every 241 for FY 2008.

For more details on TIGTA's Report on audit rates and related IRS activities, click on this link: Trends in Compliance Activities Through Fiscal Year 2007, TIGTA Reference Number 2008–30–095.

For S Corp and C Corp audit representation CLICK HERE

IRS tax levy wage garnishment bank levy

TIGTA issues statutory review of IRS compliance with legal guidelines when issuing levies [ Audit Report No. 2008-30-097 ]:

During the process of issuing levies, IRS has been complying with legal guidelines regarding proper notification and the protection of taxpayer rights, the Treasury Inspector General for Tax Administration (TIGTA) reported in a recent audit.

The agency is required to notify taxpayers a minimum of 30 calendar days before initiating any levy action to give taxpayers the chance to appeal the proposed levy. Since prior audits found that IRS had implemented tighter controls related to systemically generated levies, the latest annual audit on the subject focused on the issuance of manual levies.

Auditors looked at 30 Integrated Collection System and 30 Automated Collection System manual levies issued between July 1, 2006, and June 30, 2007. Analysis of these levies “showed revenue officers and customer service representatives continued to properly inform taxpayers of their rights at least 30 calendar days prior to issuing the levies,” TIGTA said.

The audit can be found at http://treas.gov/tigta/auditreports/2008reports/200830097fr.pdf

Offshore payroll tax problems

Houses passes legislation that would make sure certain government contractors pay employment taxes - Foreign shell companies payroll tax problems

Mike Habib, EA
myIRSTaxRelief.com

The House of Representatives has passed legislation [H.R. 5719, Sec. 18, 4/15/08] proposed by Representatives Brad Ellsworth (D-Ind.) and Rahm Emanuel (D-Ill.) that seeks to end the practice of U.S. government contractors setting up shell companies in foreign jurisdictions to avoid paying payroll taxes. Under current law, US companies are required to pay Social Security and Medicare taxes for their American workers overseas. But some firms have been able to get around that requirement by hiring workers through offshore shell companies or foreign subsidiaries.

The legislation would amend the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under contract with the U.S. government as American employers for Social Security and Medicare tax purposes. The legislation would require any foreign company that is at least 50% owned by a U.S. federal contractor to pay payroll taxes for its American employees.

The bill was inspired by recent news that defense contractor KBR Inc. had avoided paying Social Security and Medicare taxes by creating shell companies in the Cayman Islands. A similar provision is being sponsored in the Senate by Senators John Kerry (D-Mass.) and Barack Obama (D-Ill.).

Tax shelter tax problem resolution

District court allows $60 million of income to be offset by Son-of-Boss shelter

Sala v. U.S. (DC Co 4/22/08) 101 AFTR 2d ¶ 2008–720

Mike Habib, EA
myIRSTaxRelief.com

A district court has allowed an individual to offset $60 million of compensation income with losses from a Son-of-Boss transaction.

Facts. Carlos E. Sala had income in 2000 of more than $60 million. However, he claimed a tax loss that essentially nullified his tax burden. Sala achieved the loss through his involvement in a foreign currency options investment transaction known as Deerhurst. He claimed that the $60 million loss resulted from a series of steps that made use of an S corporation (Solid Currencies, Inc.) and an investment in a partnership (Deerhurst Investors, GP). These steps were orchestrated under a then-existing tax rule that disregarded short options as liabilities for purposes of establishing partnership basis. Under this rule, liabilities created by short options were considered too contingent to affect a partner's basis in the partnership.

IRS challenged this transaction, which is commonly known as a Son-of-Boss shelter, on various grounds. The district court faced these key issues:

(1) whether the transactions creating Sala's 2000 tax loss were sham transactions;
(2) whether Sala had a profit motive for entering into the transactions creating his 2000 tax loss;
(3) whether the transactions creating Sala's 2000 tax loss, as executed, allowed the tax loss; and
(4) whether any allowable tax loss was rendered retroactively disallowed by Reg. § 1.752-6.

Background. On June 24, 2003, IRS issued temporary and proposed regs which expanded the definition of liability under Code Sec. 752 to include “any fixed or contingent obligation to make payment without regard to whether the obligation is otherwise taken into account for purposes of the Internal Revenue Code.” This particular change, which was a part of broader regulatory changes in this area, was adopted as final Reg. § 1.752-1(a)(4)(ii) in May 2005. However, IRS made the reg retroactively effective for all assumptions of “liabilities” (as newly defined) by partnerships occurring after Oct. 18, '99, and before June 24, 2003. It did so through Reg. § 1.752-6 (also issued as a temporary reg), which requires a partner to reduce his basis in his partnership interest by the amount of any contingent obligation, assumed by the partnership between Oct. 18, '99, and June 24, 2003.

When it issued the temporary reg on June 24, 2003, IRS noted in an accompanying Treasury release that it had previously said in Notice 2000-44, 2000-2 CB 255, that Son of Boss transactions don't work.

District court sustains the shelter. The district court reached these pro-taxpayer conclusions:

(1) Sala's participation in the Deerhurst Program possessed a reasonable possibility of profits beyond the tax benefits, was entered into for a business purpose other than tax avoidance, and was motivated by a desire for profits above and beyond the tax benefits sought.

(2) Sala's basis in Solid Currencies was approximately $69 million—the value of the long options contributed plus the cash contributed—and Solid Currencies' basis in Deerhurst GP was an identical amount;

Observation: Sala transferred 24 foreign currency options to Solid Currencies and then to Deerhurst GP. The court said Solid Currencies' basis in Deerhurst GP was increased by the value of the long options, $60,987,867, but was not offset by the $60,259,569 cost of the short options. Accordingly, Solid Currencies' claimed basis in Deerhurst GP was approximately $69 million—the value of the cash plus the long options.

(3) the 24 options contracts contributed by Sala to Solid Currencies and by Solid Currencies to Deerhurst GP were separate financial instruments.

(4) Solid Currencies received property upon the liquidation of Deerhurst GP.

Observation: Upon liquidation of Deerhurst GP, Solid Currencies received a portion of Deerhurst GP's liquidated assets equal to the proportionate size of Solid Currencies' basis. Solid Currencies received approximately $8 million in cash and two foreign currency contracts. The foreign currency contracts were considered to be “property.” The value of the foreign exchange contracts distributed to Solid Currencies, therefore, was approximately $61 million—$69 million (Solid Currencies' original basis in Deerhurst GP) less the $8 million in cash. When Solid Currencies sold the foreign currency contracts, its loss was equal to the $61 million dollar value of the contracts, offset by any profit received from their sale.

(5) IRS exceeded its authority when issuing Reg. § 1.752-6(b)(2); and
(6) IRS exceeded its authority when making that reg retroactive.

Accordingly, Sala prevailed in using the Son-of-Boss transaction to offset about $60 million of income.

Observation: It remains to be seen whether IRS will appeal this case. But it has previously won a number of Son-of-Boss cases. In one winning case for IRS, the Seventh Circuit upheld the retroactive reg (see Cemco Investors, LLC v. U.S., CA 7, 101 AFTR 2d ¶2008-452).

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Retailer tax problem resolution

Payments made by retailer in connection with sales promotion weren't taxable - PLR 200816027

Mike Habib, EA

myIRSTaxRelief.com

The IRS has privately ruled that payments made by a retailer in connection with a sales promotion were nontaxable purchase price adjustments and they weren't subject to reporting or withholding.

Facts. Taxpayer, which owns retail stores, advertised Promotion on Date 1. Under its terms and conditions, customers would be entitled to a payment of Amount if:

• they purchased qualifying merchandise from Taxpayer during the period beginning Date 1 and ending Date 2,
• they took delivery of the merchandise on or before Date 3,
• Event occurred, and
• they submitted claims for the payment on or before Date 4.

Amount could not be greater than the price that the customers paid to purchase the qualifying merchandise.
There was no fee to participate in Promotion. The prices charged by Taxpayer for all items of qualifying merchandise sold during the promotional period were Taxpayer's customary retail prices, which were subject to any generally applicable coupons, discounts, or special pricing arrangements. Taxpayer did not specially increase or decrease the prices of any items of qualifying merchandise for the promotional period.

On Date 5, Event occurred, and customers who satisfied Promotion's terms and conditions became entitled to a payment of Amount.

Payments are nontaxable. Subject to exceptions, gross income includes all income from whatever source derived. (Code Sec. 61) The concept of gross income encompasses accessions to wealth, clearly realized, over which taxpayers have complete dominion.

Purchase price adjustments are one exception to the broad definition of gross income. Generally, when a payment is made by a seller to a customer as an inducement to purchase property, the payment does not constitute income but instead is an adjustment to the cost or purchase price of acquiring the property. (Rev Rul 76-96, 1976-1 CB 23) The payment is, in effect, a means by which the buyer and seller reach an agreed upon price.

The IRS noted that Promotion was intended to induce customers to purchase qualifying merchandise during the period beginning Date 1 and ending Date 2. Taxpayer allowed only the customers who purchased qualifying merchandise and satisfied Promotion's terms and conditions to receive a payment of the Amount. The Amount could not be greater than the price that the customers paid to purchase the qualifying merchandise. Accordingly, IRS concluded that each payment represented a reduction in the purchase price that the customer paid for the qualifying merchandise with respect to which the payment was made, and was not includible in the recipient's gross income.

No reporting or withholding. Code Sec. 6041(a) provides generally that all persons engaged in a trade or business that pay another person $600 or more in any tax year of fixed or determinable income in the course of that trade or business must file an information return setting forth the amount of the payment and the recipient of the payment.

A payor is generally not required to make a return under Code Sec. 6041 for payments that are not includible in the recipient's income, and a payor is not required to make a return if the payor does not have a basis to determine the amount of a payment that is required to be included in the recipient's gross income.

Thus, IRS concluded that Taxpayer didn't have a reporting requirement under Code Sec. 6041 as to the recipients for the Promotion payments made by it.

For like reasons, IRS also concluded that Taxpayer did not have any withholding obligation under Code Sec. 1441(a), Code Sec. 1442(a) or Code Sec. 3406(a) with respect to the payments made in connection with Promotion.

To resolve your tax problem CLICK HERE.

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Business auto tax write off opportunity

Enhanced tax breaks make it an especially good time to buy business autos

Mike Habib, EA
myIRSTaxRelief.com

Thanks to economic woes in general and financial trouble for auto manufacturers in particular, it's a good time to shop for a new vehicle, if you can afford to do so. Thanks to bonus first year depreciation deductions under the Economic Stimulus Act of 2008, it's an even better time to buy if the vehicle is going to be used for business. This Practice Alert takes a close look at the enhanced first year write-offs that are available to new business autos, light trucks or vans that are placed in service this year.

Bonus depreciation basics. In general, for property placed in service after Dec. 31, 2007, in tax years ending after that date, taxpayers get an additional depreciation deduction in the placed-in-service year equal to 50% of the adjusted basis of “qualified property.” (Code Sec. 168(k)(1)) This is property that meets all of these conditions:

• It is property falling within one of four statutory categories, the most important of which is property to which MACRS applies with a recovery period of 20 years or less. (Code Sec. 168(k)(2)(A))
• The original use of the property commences with the taxpayer after Dec. 31, 2007. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property. (Code Sec. 168(k)(2)(A))
• The property is acquired by the taxpayer (a) after Dec. 31, 2007, and before Jan. 1, 2009, but only if no binding written contract for the acquisition is in effect before Jan. 1, 2008, or (b) pursuant to a binding written contract which was entered into after Dec. 31, 2007, and before Jan. 1, 2009. (Code Sec. 168(k)(2)(A)(iii))
• The property is placed in service after Dec. 31, 2007, and before Jan. 1, 2009 (the placed-in-service date is extended for one year for certain property with a recovery period of ten years or longer and certain transportation property). (Code Sec. 168(k)(2)(B), Code Sec. 168(k)(2)(C))

If all of the Code Sec. 168(k) requirements are met, bonus first-year depreciation automatically applies to qualified property, unless the taxpayer “elects out” under Code Sec. 168(k)(2)(C)(iii).

Under pre-Stimulus Act regs that taxpayers may rely on pending further guidance, the bonus depreciation allowance is found by multiplying the qualifying property's unadjusted depreciable basis by 50%. (Reg. § 1.168(k)-1(d)(1)(A)) The unadjusted depreciable basis is basis for gain or loss purposes, before depreciation, amortization, or depletion, less a number of adjustments, including a reduction in basis for personal use (i.e., use other than for trade or business or investment purposes), and a reduction for any portion of the property expensed under Code Sec. 179. (Reg. § 1.168(k)-1(a)(2)(iii))

To calculate regular depreciation allowances for qualifying property, the taxpayer first subtracts the bonus first year depreciation amount from the unadjusted depreciable basis of the asset. (Code Sec. 168(k)(1)(B), Reg. § 1.168(k)-1(d)(2))

Depreciating luxury autos. Purchased autos and other vehicles used in a trade or business normally are depreciated over five years using 200% declining balance depreciation, with a built-in switch to straight line. (Code Sec. 168(b)(1); Code Sec. 168(e)(3)(B)) Because the depreciation rules generally treat property as placed in service in the midpoint of the placed-in-service year (Code Sec. 168(d)(1)), yielding only half of the otherwise allowable depreciation for the placed-in-service year, the actual depreciation period is six years. The regular depreciation percentages (if the half-year convention applies) are:

• 20% for the first year;
• 32% for the second;
• 19.2% for the third year;
• 11.52% for each of the fourth and fifth years; and
• 5.76% for the sixth year.

However, the deduction normally obtained by applying the above depreciation rules (and the Code Sec. 179 expensing rules) to autos, light trucks and vans, is limited by the so-called “luxury auto dollar caps” of Code Sec. 280F. Thus, the maximum annual depreciation/expensing deduction for a business auto is the lesser of the otherwise allowable depreciation/expensing allowance or the applicable luxury-auto dollar cap.

For vehicles acquired and placed in service in 2008 that are not eligible for bonus depreciation (e.g., they are bought used, or the taxpayer elects out of bonus depreciation for five-year property), the dollar caps for: (1) autos (not trucks or vans) are $2,960 for the placed in service year, $4,800 for the second tax year, $2,850 for the third tax year; and $1,775 for each succeeding year; and (2) for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis) are: $3,160 for the placed in service year, $5,100 for the second tax year, $3,050 for the third tax year; and $1,875 for each succeeding year.

Boosted write-off for business autos, and light trucks or vans. Under the Stimulus Act, for vehicles that otherwise are qualified property under Code Sec. 168(k) (assuming the taxpayer doesn't elect out of bonus depreciation for 5-year property), the regular first-year luxury auto caps are boosted by $8,000 to $10,960 for autos, and to $11,160 for light trucks or vans.

Calculating first-year depreciation deduction. Where expensing isn't claimed, the first-year dollar-cap for a new passenger auto, truck or van that is qualified property under Code Sec. 168(k) and is acquired and placed in service in 2008, is determined as follows:

(1) Multiply the vehicle's depreciable basis by its business/investment use in the placed-in-service year.
(2) Multiply Line (1) result by 50%.
(3) Subtract Line (2) from Line (1).
(4) Multiply Line (3) result by 20% (assuming the half-year convention applies).
(5) Add Line (4) result to Line (2) result.
(6) Multiply the appropriate first-year dollar cap ($10,960 for autos, $11,160 for light trucks or vans) by the business/investment use percentage.

(7) The lesser of Line (5) or Line (6) is the total first-year depreciation allowance for the vehicle.
Illustration 1: On Jan. 10, 2008, a business bought and placed in service a new $35,000 auto and uses it 100% for business. It does not expense any part of the auto's cost, and the half-year depreciation convention applies. The 2008 depreciation deduction for the auto is computed as follows:

(1) $35,000 × 100% business use = $35,000.
(2) $35,000 × .50 = $17,500 bonus depreciation.
(3) $35,000 − $17,500 = $17,500 remaining basis.
(4) $17,500 × .20 first year depreciation allowance = $3,500.
(5) $17,500 + $3,500 = $21,000.
(6) $10,960 × 1.0 = $10,960.
(7) Lesser of $21,000 or $10,960 = $10,960 regular first year depreciation.

Caution: The combined special depreciation allowance and regular first-year depreciation deduction for lower-priced vehicles may be less than the maximum first-year depreciation allowance.

Illustration 2: The facts are the same as in the first illustration, except that the new auto costs $18,000. The 2008 depreciation deduction for the auto is computed as follows:

(1) $18,000 × 100% business use = $18,000.
(2) $18,000 × .50 = $9,000 bonus depreciation.
(3) $18,000 − $9,000 = $9,000 remaining basis.
(4) $9,000 × .20 first-year depreciation allowance = $1,800.
(5) $9,000 + $1,800 = $10,800.
(6) $10,960 × 1.0 = $10,960.
(7) Lesser of $10,800 or $10,960 = $10,800 regular first year depreciation.

Hidden danger for company owned vehicles. A vehicle is qualified property eligible for bonus first year depreciation only if it is used more than 50% in a qualified business use. (Reg. § 1.168(k)-1(b)(2)(ii)(A)(2)) In general, this isn't a problem for company owned autos so long as employee personal use is properly treated as compensation income under the fringe benefit rules. In this case, personal use is treated as qualified business use. ( Reg. § 1.280F-6(d)(2) ; Instructions for Form 4562 (2007), p. 9) However, a vehicle bought new in 2008 and provided to a 5% company owner (or a related person) will not be eligible for bonus first year depreciation unless it is actually used more than 50% for business driving. (Code Sec. 280F(d)(6)(C)) Thus, companies tempted by the prospect of larger first year writeoffs to buy new vehicles this year for their 5% owners should do so only if their business mileage on the car will exceed 50% of total mileage. Keep in mind, too, that depreciation recapture applies if qualified business use in the placed in service year exceeds 50% of total use but declines below that level in subsequent years. The 50% bonus first-year depreciation allowance for a passenger auto that qualifies under Code Sec. 168(k) is taken into account in computing recaptured depreciation. (Code Sec. 168(k)(2)(F)(ii))

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Innocent spouse tax relief and tax problem resolution

Tax Court properly denied separate filer equitable innocent spouse relief - Christensen, (CA 9 4/21/2008) 101 AFTR 2d ¶ 2008-705

Mike Habib, EA

MyIRSTaxRelief.com

The Ninth Circuit has affirmed the Tax Court's dismissal of a taxpayer's claim for equitable innocent spouse relief under Code Sec. 6015(f). The Ninth Circuit agreed with the Tax Court's finding that relief under Code Sec. 6015(f) is available only to spouses who file a joint return. In this case, the taxpayer filed separately and thus was not entitled to innocent spouse relief.

Background. Each spouse is jointly and severally liable for the tax, interest, and penalties (other than the civil fraud penalty) arising from a joint return. Relief from joint and several liability is available: (1) under the regular innocent spouse rules; (2) in the case of spouses who are no longer married, are legally separated, or live apart, under the separate liability election rules; and (3) where relief is not available under (1) or (2), under IRS's power to grant equitable relief. (Code Sec. 6015)

On Sept. 14, 2004, Christensen filed a request with IRS for relief from tax liabilities assessed against him for tax years '89 through '92. He did not file jointly for those years but said that the tax deficiencies resulted from improper income reporting within his wife's check-cashing business. Christensen argued that the deficiencies should not be attributed to him, given his lack of involvement in the business. He sought relief from the liabilities as an innocent spouse under Code Sec. 6015 , or, alternatively, for relief under community property laws.

IRS denied his request for innocent spouse relief and for relief under Code Sec. 66, which relieves community property liability under some circumstances. Christensen petitioned for review before the Tax Court, which granted summary judgment for IRS on the Code Sec. 6015 claim after finding that such relief is available only to joint filers. The Tax Court dismissed Christensen's claims under Code Sec. 66(c) and the predecessor innocent spouse provision of former Code Sec. 6013(e) for lack of jurisdiction. Christensen filed a timely appeal seeking review of his request for equitable relief under Code Sec. 6015(f) for tax years '89 and '90.

Jurisdictional question. While IRS didn't question the Tax Court's jurisdiction, the Ninth Circuit said it had to consider the issue, which it felt was murky in this case. The Tax Relief and Health Care Act of 2006 amended Code Sec. 6015 to provide that the Tax Court may review claims for equitable innocent spouse relief and to suspend the running of the period of limitations while such claims are pending. This change was effective for requests for equitable relief with respect to liability for taxes that were unpaid or after the enactment date (Dec. 20, 2006).

The Ninth Circuit noted that, under the change, the Tax Court would have had express jurisdiction over Christensen's Code Sec. 6015(f) claim as of Dec. 20, 2006. However, the Tax Court entered its order on Jan. 10, 2006. The Appeals Court said that where a new statutory provision confers jurisdiction while an action is pending, it normally applies the new rule regardless of whether the court below had jurisdiction when the suit was filed or judgment was entered. Accordingly, it concluded that the Tax Court had jurisdiction to review the Code Sec. 6015(f) claim.

Joint return required for relief. Christensen argued that Code Sec. 6015(f) is available to spouses who face joint liability under community property laws but do not file a joint return. The Ninth Circuit agreed that, unlike Code Sec. 6015(b) and Code Sec. 6015(c), the language of Code Sec. 6015(f) does not explicitly require the filing of a joint tax return as a procedural requirement for relief. However, it stressed that the language in Code Sec. 6015(e) and Code Sec. 6015(h) implies a joint return requirement for Code Sec. 6015(f). For example, Code Sec. 6015(e) directs the Tax Court to “establish rules which provide the individual filing a joint return but not making the election under subsection (b) or (c) or the request for equitable relief under subsection (f) with adequate notice and an opportunity to become a party...” (Code Sec. 6015(e)(4)) Similarly, Code Sec. 6015(h) refers to the non-petitioning spouse in a Code Sec. 6015(f) claim, to whom notice must be sent, as “the other individual filing the joint return.” The Ninth Circuit said that this language indicates that Congress anticipated a joint return where a spouse petitions for relief under Code Sec. 6015(f). Accordingly, the Appeals Court sustained the Tax Court's dismissal of the case.

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Joint Venture Self-employment tax matters

Qualified joint venture's rental real estate income isn't subject to self-employment tax - Chief Counsel Advice 200816030

Mike Habib, EA
myIRSTaxRelief.com

In Chief Counsel Advice (CCA), IRS has concluded that the qualified joint venture election under Code Sec. 761(f) doesn't cause self-employment tax to be imposed on income from a rental real estate business that would otherwise be excluded. Dividends and capital gains are similarly excluded. The qualified joint venture election, which was recently added by the Small Business and Work Opportunity Act of 2007 (Small Business Act), allows eligible married co-owners to avoid filing partnership returns and both spouses to receive credit for social security and Medicare coverage purposes.

Background on qualified joint ventures. The Small Business Act provision generally allows a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. (Code Sec. 761(f)) A qualified joint venture is a joint venture involving the conduct of a trade or business, if:

(1) the only members of the joint venture are a husband and wife,
(2) both spouses materially participate in the trade or business, and
(3) both spouses elect to have the provision apply. (Code Sec. 761(f)(2))

The meaning of material participation is the same as under the passive activity loss rules in Code Sec. 469(h) and its regs.

Where the election is made, all items of income, gain, loss, deduction, and credit are divided between the spouses according to their respective interests in the venture, and each spouse takes into account his or her respective share of these items as if they were attributable to a trade or business conducted by the spouse as a sole proprietor.

Background on self-employment tax. A tax is generally imposed on an individual's self-employment income (i.e., on his net earnings from self-employment) with certain adjustments. (Code Sec. 1401, Code Sec. 1402(b)) Net earnings from self-employment generally includes an individual's gross income from a trade or business, plus his distributive share of income or loss from a partnership in which he is a member. An exception provides that rental income from real estate is excluded from net earnings from self-employment, unless the rental income is received in the course of a trade or business as a real estate dealer. (Code Sec. 1402(a)(1)) Similarly, dividend income and gain or loss from sale or exchange of a capital asset are excluded from net earnings from self-employment. (Code Sec. 1402(a)(2), Code Sec. 1402(a)(3))

Code Sec. 1402(a)(17), added by the Small Business Act, provides that “notwithstanding the preceding provisions of this subsection,”—i.e., notwithstanding other self-employment rules—each spouse's share of income or loss from a qualified joint venture is taken into account under the Code Sec. 761(f) qualified joint venture rules in determining the spouse's net earnings from self-employment. IRS has indicated that an electing husband and wife must each file with their joint income tax return a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or Schedule F (Form 1040), Profit of Loss From Farming, and a separate Schedule SE (Form 1040), Self- Employment Tax, as applicable (see Newsstand e-mail 3/21/08 or Federal Taxes Weekly Alert 03/27/2008). While the general instructions for the 2007 Form 1040 don't address the issue, the instructions for the 2007 Schedule E informs electing spouses that for a rental real estate business each spouse must report his or her share of this income on their respective Schedules C and not on Schedules E.

IRS examiners have questioned whether the spouses' qualified joint venture election for a rental real estate business doesn't convert income derived from business, which would otherwise be excluded, into net earnings from self-employment.

Effect of spousal joint venture election on self-employment tax. The CCA concludes that in the case of a husband and wife who make the qualified joint venture election for a rental real estate business, each spouse has a share of the qualified joint venture income, and each spouse may exclude his or her respective share of the qualified joint venture income from net earnings from self-employment under the Code Sec. 1402(a)(1) exclusion.

Generally, an individual who has income from a rental real estate business won't be subject to self-employment tax on the income because it's excluded from net earnings from self-employment under Code Sec. 1402(a)(1). He'll report the income on a Schedule E (Form 1040) and carry over the amounts to his individual return (e.g., Form 1040), but not include the amounts on Schedule SE (Form 1040) in calculating self-employment tax.

The CCA reasons that the legislative history of Code Sec. 761(f) suggests that any income earned by a qualified joint venture is reported for all federal tax purposes using the same forms as if each spouse were a sole proprietor who earns that income. The phrase “not withstanding the preceding provisions of this subsection,” in Code Sec. 1402(a)(17) taken together with the rest of Code Sec. 1402 and Code Sec. 761(f) 's legislative history directs that none of the preceding subsections in Code Sec. 1402 are to alter that allocation between spouses. To read this phrase as nullifying the application of all the exclusions from net earnings from self-employment would trigger dramatic changes in the application of the self-employment tax to spouses electing qualified joint venture treatment. This was clearly not intended. The purpose of Code Sec. 761(f) wasn't to convert income that would otherwise be excluded from net earnings from self-employment altogether into income that is subject to self-employment tax.

Dividends and capital gain aren't subject to self-employment tax. The CCA similarly concludes that its reasoning applies to dividends and capital gains earned by a qualified joint venture. This income, otherwise excluded from net earnings from self-employment, is also excluded from self-employment tax for a qualified joint venture.

Contact our office today to resolve any joint venture tax matter.

Heavy Highway Vehicle Use Tax Collection

TIGTA audit reviews effectiveness of IRS processing of Heavy Highway Vehicle Use Tax Return [Audit Report No. 2008-40-089]:

The IRS should encourage more states to participate in its Alternative Proof of Payment Program for the collection of the Heavy Highway Vehicle Use Tax (also known as the Heavy Vehicle Use Tax), the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit.

The tax is a federal highway use tax paid annually on vehicles with a taxable gross weight of 55,000 or more pounds, designed to carry a load over public highways, and expected to be used more than 5,000 miles (more than 7,500 miles for agricultural uses). Typically, after a taxpayer files Form 2290 (Heavy Highway Vehicle Use Tax Return) and pays the tax, IRS stamps the Schedule of Heavy Highway Vehicles (Schedule I) of the form to show payment was received and returns it to the taxpayer for use as proof of payment for vehicle registration.

The Alternative Proof of Payment Program is based on an agreement between IRS and a state department of motor vehicles that allows taxpayers to simultaneously file Form 2290, pay the tax, and register their vehicles.

The program has been in place for 10 years but only 11 states participate, TIGTA noted. “Although guidelines for the program authorize a state department of motor vehicles to accept Forms 2290 with related payments to register vehicles, the IRS has not regularly pursued expansion of this program,” TIGTA said. The audit is located at http://treas.gov/tigta/auditreports/2008reports/200840089fr.pdf

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Intellectual property payment deferral tax problem resolution

The IRS OKs deferral of income from intellectual property payments

Mike Habib, EA

myIRSTaxRelief.com

The IRS has privately ruled that a taxpayer could defer reporting income from intellectual property payments until the tax year following the tax year of receipt of the payments under a revenue procedure governing advance payments.

Background. Under the accrual basis method of accounting, income is reported when: (1) all events have occurred which establish the right of the taxpayer to receive the income; and (2) the amount can be determined with reasonable accuracy. (Reg. § 1.451-1(a)) All the events that fix the right to receive income occur when the first of the following events happens:

• the required performance takes place;
• payment is due; or
• payment is made. (Rev Rul 84-31, 1984-1 CB 127)

Certain taxpayers may use the deferral method described in Rev Proc 2004-34, 2004-22 IRB 991, Sec. 5.02(1)(a). A taxpayer using the deferral method must include an advance payment in gross income in the tax year of receipt to the extent recognized in revenues in its applicable financial statement in that year, and include the remaining amount of the advance payment in gross income in the next succeeding tax year.

A payment received by a taxpayer for the use (including by license or lease) of intellectual property, such as patents and similar intangible property rights, is an advance payment if including the payment in gross income for the tax year of receipt is a permissible method of accounting for federal income tax purposes (without regard to Rev Proc 2004-34) and the payment is recognized by the taxpayer (in whole or in part) in revenues in its applicable financial statement for a subsequent tax year. (Rev Proc 2004-34, Sec. 4.01(3))

A taxpayer may adopt any permissible method of accounting for advance payments for the first tax year in which the taxpayer receives advance payments. (Rev Proc 2004-34, Sec. 8.01)

Facts. Taxpayer is engaged in Business. Before Date 1, Taxpayer owned or controlled certain intellectual property (the IP), including patents and know-how, related to Product. Taxpayer and Company entered into an agreement as of Date 1 (the Agreement), under which Taxpayer granted Company an exclusive license to develop, use, offer for sale, sell, sublicense and otherwise commercialize any products for human use containing Product that are made by a process covered by the IP (licensed products). The license granted to Company was co-exclusive with Taxpayer so that Taxpayer could exercise its rights and perform its obligations under the Agreement. Under the Agreement, Taxpayer and Company will collaborate in developing, marketing, and obtaining regulatory approval for, licensed products. They agreed how they would share the costs of development of the initial licensed product for Indication X and Indication Y.

In consideration for entering into the Agreement Company is obligated to: (1) pay Taxpayer a nonrefundable initial license fee (the Fee) in Year I; (2) make payments to Taxpayer if and when certain milestones in the development of the IP are met (the Milestone Payments); and (3) if licensed products are commercialized, make payments of royalties to Taxpayer based on the level of sales of the product (the royalty payments).

The Milestone Payments are solely for the use of the IP and compensate Taxpayer for the increased value of the IP as it progresses through each stage of development, testing, and regulation. No part of the Milestone Payments is compensation for services.

Taxpayer has a certified audited financial statement, accompanied by the report of an independent CPA, which is used for credit purposes, reporting to shareholders, and other substantial non-tax purposes, and is an applicable financial statement as defined in Rev Proc 2004-34, Sec. 4.06(2). Taxpayer anticipates that it will recognize the Fee in revenues in the applicable financial statement over Period 1, rather than in the year of receipt. Taxpayer received no advance payments, as defined in Rev Proc 2004-34, Sec. 4.01, before Year 1. Taxpayer anticipates that current financial reporting rules will require it to recognize the Milestone Payments in income in the tax year of receipt, but will include the Milestone Payments in income in its applicable financial statement in a subsequent tax year to the extent financial reporting rules permit.

Deferral OK'd. Based on the language of the Agreement and Taxpayer's representations, IRS concluded that the Fee and the Milestone Payments are payments for the use of intellectual property and are advance payments within the meaning of Rev Proc 2004-34, Sec. 4.01, to the extent the Taxpayer recognizes the payments in its applicable financial statement for a tax year following the tax year of receipt. Therefore, IRS concluded that, under Rev Proc 2004-34, Sec. 5.02, it is a proper method of accounting for Taxpayer to defer to the next succeeding tax year following the year of receipt the inclusion in gross income of the Fee and each Milestone Payment to the extent that they are recognized by Taxpayer (in whole or in part) in revenues in its applicable financial statement for a tax year subsequent to the tax year of receipt. Because Year 1 is the first tax year in which Taxpayer receives an advance payment, Taxpayer may adopt the deferral method of Rev Proc 2004-34, Sec. 5.02 in Year 1, under Rev Proc 2004-34, Sec. 8.01.

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Fiduciary Estate Trust Tax Resolution - Irrevocable Grantor Trust

Grantor's power to substitute trust property didn't trigger inclusion in estate - Rev Rul 2008-22, 2008-16 IRB 796

Mike Habib, EA
myIRSTaxRelief.com

A new revenue ruling concludes that the corpus of an irrevocable trust that a grantor created during life is not includible in his gross estate under Code Sec. 2036 or Code Sec. 2038 on account of the grantor having retained the power, exercisable in a nonfiduciary capacity, to acquire property held by the trust by substituting other property of equivalent value.

Observation: This ruling is good news for anyone who wants to set up a defective grantor trust - a trust intentionally structured so that the grantor, rather than the trust or its beneficiaries, will be taxed on the trust's income without the trust being included in the grantor's estate. Under Code Sec. 675(4), a grantor's power to substitute property causes trust income to be taxed to the grantor and is commonly used to create a defective grantor trust. The new ruling gives this technique a big boost by making it clear that such a power of substitution won't cause inclusion in the grantors' estate.

Background. Under Code Sec. 2036, a decedent's gross estate includes transfers under which he retained the possession or enjoyment of, or the right to the income from, the transferred property. The decedent need not have a legally enforceable right, but there must be an agreement, either expressed or implied, that the decedent will retain the benefit. Under Code Sec. 2038 , a decedent's gross estate includes a lifetime transfer if the enjoyment of the transferred property was subject at his death to any change through the exercise by him of a power to alter, amend, revoke or terminate. This includes any power affecting the time or manner of enjoyment of property or its income. Inclusion is not required under Code Sec. 2036 or Code Sec. 2038 if the transfer was a bona fide sale for full and adequate consideration.

Facts. In Year 1, Danny, a U.S. citizen, established and funded an irrevocable inter vivos trust (Trust) for the benefit of his descendants. Danny is barred from serving as Trustee. Danny has the power, exercisable at any time, to acquire any property held in Trust by substituting other property of equivalent value. The power is exercisable by Danny in a nonfiduciary capacity, without the approval or consent of any person acting in a fiduciary capacity. To exercise the power of substitution, he must certify in writing that the substituted property and the trust property for which it is substituted are of equivalent value.

Under local law, Trustee has a fiduciary obligation to ensure that the properties being exchanged are of equivalent value. If a trust has two or more beneficiaries, under local law, the trustee must act impartially in investing and managing the trust assets, taking into account any differing interests of the beneficiaries. Further, under local law and without restriction in the trust instrument, Trustee has the discretionary power to acquire, invest, reinvest, exchange, sell, convey, control, divide, partition, and manage the trust property in accordance with the standards provided by law.

Danny dies in Year 2.
Inclusion not required. IRS noted that, under the posited facts, the trust instrument expressly prohibits Danny from serving as trustee and states that his power to substitute assets of equivalent value is held in a nonfiduciary capacity. IRS thus noted that Danny is not subject to the rigorous standards attendant to a power held in a fiduciary capacity. However, the ruling went on to observe that the assets Danny transfers into the trust must be equivalent in value to the ones he receives in exchange. In addition, Trustee has a fiduciary obligation to ensure that the assets exchanged are of equivalent value. As a result, Danny cannot exercise the power to substitute assets in a manner that will reduce the value of the trust corpus or increase his net worth. Further, in view of Trustee's ability to reinvest the assets and his duty of impartiality regarding the trust beneficiaries, Trustee must prevent any shifting of benefits between or among the beneficiaries that could otherwise result from a substitution of property by Danny. Under these circumstances, the ruling concluded that Danny's retained power will not cause the value of the trust corpus to be included in his gross estate under Code Sec. 2036 or Code Sec. 2038.

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Farmers tax problems - Farmers Tax Relief Help

Offsets in Senate Finance's farm bill include Schedule F loss limits, optional self-employment tax, and information reporting

Mike Habib, EA

MyIRSTaxRelief.com

On April 18, the Senate Finance Committee conferees on the farm bill announced $2.4 billion of reforms/offsets - “double the reforms in the House or Senate bills alone” - that could be used to fully offset the farm bill. These reforms/offsets (along with a slight decrease in the ethanol tax credit) would include:

• Preventing the use of farm losses as a tax shelter. This provision would address the use of complex farming operations to reduce taxable income by limiting the amount of Schedule F (agricultural) losses that can be use to reduce non-agricultural business income. Agricultural losses would be limited to $200,000, if the taxpayer receives any Farm Bill commodity payments. A farmer's or rancher's ability to use agricultural losses against their agricultural gains wouldn't be limited.
• Allowing farmers to pay additional self-employment taxes to qualify for Social Security. This provision would modify the farm optional method so that farmers and ranchers can pay more in optional self-employment taxes (and so be eligible for Social Security benefits). Qualifying for Social Security benefits can be difficult for self-employed farmers and ranchers because they don't always have a steady stream of income. When there are no earnings, no Social Security taxes are paid and no quarters are accrued. The payment thresholds in the farm optional methods, in which farmers and ranchers can voluntarily pay Social Security taxes in order to earn quarters (and so receive Social Security benefits), are outdated and no longer allow farmers and ranchers to earn enough Social Security credits per year.

Ensuring that farmers know their tax obligations. The provision would requires the Commodity Credit Corporation (CCC) to always provide IRS and the farmer with information returns showing the amount of market gain the farmer realizes when he repays a CCC market assistance loan. As a result, income that is subject to information reporting would be less likely to be underreported to IRS.

In addition to the above, Senate conferees are committed to $600 million more in agriculture tax-related reforms to complete the package.

In response to word that House conferees would score any temporary tax provision as if it were permanent, Senate Finance Committee Ranking Member Chuck Grassley (R-IA) complained that this imposed a double standard because none of the 5-year spending proposals were considered as if they were permanent. In particular, Grassley noted that this approach overlooked that the largest agricultural tax revenue raiser, a reduction in the ethanol credit, is temporary, expiring at the end of 2010 (roughly the same period as some of the temporary tax relief provisions in the bill). Grassley objected that if the House was going to look at the agricultural tax package over ten years, then the same test should be applied on the spending side.

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Federal tax lien - IRS proposed priority

IRS proposed regs would update federal tax lien priority provisions for holders of security interests

Preamble to Prop Reg 04/16/2008, Prop Reg § 301.6323(b)-1, Prop Reg § 301.6323(c)-2, Prop Reg § 301.6323(f)-1, Prop Reg § 301.6323(g)-1

Mike Habib, EA

myIRSTaxRelief.com

IRS has issued proposed regs on the priority of federal tax liens against certain persons under Code Sec. 6323 - purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. The proposed regs, which would be effective when finalized, would incorporate changes made in the IRS Restructuring and Reform Act of '98 (RRA) and make various other updates. They would also reflect that a notice of federal tax lien (NFTL) would be extinguished if it contains a certificate of release and isn't timely refiled. The proposed regs would also clarify IRS's authority to file NFTLs electronically.

Background. The holder of a security interest (including a mortgagee or pledgee) is protected against a general tax lien if, before IRS files notice of lien, the security interest is in existence, even if it came into existence after the tax lien arose. For this purpose, the holder of a security interest, is protected against the tax lien even if the holder had actual knowledge of the tax lien before acquiring the interest. (Code Sec. 6323(a))

Since '76, there have been numerous amendments to Code Sec. 6323 that have not been reflected in the existing regs, including changes made by the RRA and the Revenue Act of '78. In addition, there have also been several changes to IRS practice that aren't reflected in the existing regs.

Proposed regs. The proposed regs would update the existing regs to indicate that:

• a purchaser of property in a casual sale is protected against a filed tax lien if the sale price is less than $1,000 (i.e., reflecting the Code Sec. 6323(b)(4) limit). For 2008, this $1,000 limit, as indexed for inflation, is $1,320. (Prop Reg § 301.6323(b)-1(d)(1))
• a holder of a mechanic lien is protected against a filed tax lien with respect to residential property in an amount not more than $5,000 (i.e., reflecting the Code Sec. 6323(b)(7) limit). For 2008, this $5,000 limit, as indexed for inflation, is $6,600. (Prop Reg § 301.6323(b)-1(g)(1))
• household goods (fuel, provisions, furniture and personal effects in a taxpayer's household, etc.) are exempt from levy to the extent they don't exceed $6,250 in value (i.e., reflecting the Code Sec. 6334(a)(2) limit). For 2008, this $6,250 limit, as indexed for inflation, is $7,900. (Prop Reg § 301.6323(b)-1(d)(3))

The proposed regs would clarify that a NFTL (Form 668) may be filed either in paper form or electronically, and specifically define transmission by fax and e-mail as electronic, as opposed to paper, filings. The proposed regs would reflect the IRS's authority to file NFTLs electronically in all situations and would allow IRS to work with local jurisdictions to receive electronically-filed NFTLs if they have the capacity to do so without obtaining the state's permission. (Prop Reg § 301.6323(f)-1(d)(2))

The proposed regs would provide that, with regard to an NFTL that includes a certificate of release, failure to timely refile the NFTL in any jurisdiction where it was originally filed would extinguish the lien, and that when an NFTL is filed in more than one jurisdiction, certificates of revocation as well as new NFTLs would have to be filed in all the jurisdictions for the lien to be reinstated. (Prop Reg § 301.6323(g)-1(a))

The proposed regs would indicate that there is generally a 10-year period (reflecting the period in Code Sec. 6502) for instituting a proceeding in court or serving a levy to collect a properly assessed tax. (Prop Reg § 301.6323(g)-1)

The proposed regs would also amend the examples in the existing regs under Code Sec. 6323(c), Code Sec. 6323(g), and Code Sec. 6323(h) to reflect that a notice of federal tax lien isn't treated as meeting the filing requirements until it is both filed and indexed in the office designated by the state (in the case of real property located in a state where a deed is not valid against a purchaser until the filing of such deed has been entered and recorded in the public index). (Prop Reg § 301.6323(c)-2(d), Ex. 1, Ex. 4)

The proposed regs would also remove Reg. § 301.6323(b)-1(j) because it is misleading and unnecessary in light of changes to Code Sec. 6323(b)(10) which made the reference to “passbook accounts” obsolete. Code Sec. 6323(b)(10) currently protects from a federal tax lien certain institutions holding deposit-secured loans, to the extent of any loan made without actual notice or knowledge of the federal tax lien.

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IRS enforcement in tax collection and tax audit activity is on the rise

IRS Oversight Board Annual Report 2007 is now available - see more details below

Mike Habib, EA
myIRSTaxRelief.com

As you can see from the report below, the IRS places "enforcement" as their TOP priority, that will involve enforcement of their collection activity of back taxes owed, and enforcement of their tax audit activity.

The IRS must strive to achieve the standard of “great” performance and settle for nothing less, the IRS Oversight Board said in its latest annual report. The board called for “breakthrough” agency performances in four areas - taxpayer service, enforcement, human capital and information technology. For example, to enhance customer service, IRS must continually assess taxpayer needs and implement education and outreach services tailored to the needs of specific taxpayer groups, the board said. IRS also must apply the results of its research efforts to improve its enforcement activity.

In addition, the agency must address the loss of unique skills and institutional knowledge that results from the normal retirement rate of some 4,000 employees annually. “The board has challenged the IRS to rise to an unprecedented level of performance in all parts of its mission,” said Paul Cherecwich, chairman of the board. “It will not be easy and there are no givens. But the board firmly believes that today's IRS is up to the task and the end results will be worth the journey and the hard work.”

The annual report can be found at http://www.ustreas.gov/irsob/reports/2008/IRSOB_Annual-Report_2007.pdf

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If You Missed the Tax Filing Deadline, There is Help Available

You missed the tax deadline April 15th, so now what?

Mike Habib, EA

myIRSTaxRelief.com

Although the IRS has received a record number of returns this year, there are still thousands of people who did not file tax returns on April 15^th. The reasons for this are numerous, but the IRS research shows that often people do not file in years that their status changes, for instance the death of a spouse or a divorce. Emotional or financial hardship reasons may also cause a person not to file. And then there are some folks who have simply procrastinated. Whatever your reason is, if you did not file your taxes by April 15th, you should stop putting it off and file your tax returns as soon as possible - even if you are late.

Sure, if you file late, you might be missing out on the economic stimulus tax refund check, but the reasons for filing are more compelling, and often less painful than ignoring your obligation.

Here are some things you should consider:

1. You could lose your refund. There is no penalty for failure to file if you are due a refund; however, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. In cases where a return is not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund.
2. You won’t receive your Earned Income Tax Credit (EITC). Even if you are not otherwise required to file a tax return, you must file in order to receive this credit. The Earned Income Tax Credit (EITC) sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return. The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.
3. A statute of limitations applies to refunds and credits. After the expiration of the refund statute, not only does the law prevent the issuance of a refund check, it also prevents the application of any credits, including overpayment of estimated or withholding taxes, to other tax years that are underpaid. It is also worth noting that the statute of limitations for the IRS to assess and collect any outstanding balance does not begin until a return has been filed. Or put another way, there is no statute of limitations for assessing and collecting the tax if no return has been filed.
4. A “Failure to File” penalty may be assessed when you miss the tax filing deadline; the sooner you file, the more likely you are to be able to negotiate or decrease this penalty.

Regardless of your reason for not filing, file your tax return as soon as possible. You can contact a tax professional or the IRS for help with filing delinquent returns.

I personally specialize in helping individuals and businesses who are unable to fully pay their taxes, either back taxes, or due to current or late filing. If you can not pay your taxes, do not let this prevent you from filing as tax settlement options may be available. For more details contact us as quick as possible.

For more information on how to file a tax return for a prior year, visit our website at http://www.myirstaxrelief.com/irs-tax-help-services.html

If you are experiencing tax collection issues, CLICK HERE FOR HELP.

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Protective refund claim - possible tax recovery

No refund suit is allowed in the absence of a timely claim filed with IRS

U.S. v. Clintwood Elkorn Mining Co., (S Ct 4/15/2008) 101 AFTR 2d ¶ 2008–696

Mike Habib, EA
myIRSTaxRelief.com

The Supreme Court, reversing the Court of Appeals for the Federal Circuit, has held that the plain language of Code Sec. 7422(a) and Code Sec. 6511 requires a taxpayer seeking a refund of a tax assessed in violation of the Export Clause of the U.S. Constitution, just as for any other unlawfully assessed tax, to file a timely administrative refund claim with IRS before bringing suit against the Government.

Background. A manufacturers excise tax is imposed on coal mined from underground or surface mines located in the U.S. and sold or used by the producer. (Code Sec. 4121) In '98, a district court (Ranger Fuel Corp v. U.S., (DC VA 1998) 83 AFTR 2d 99-375) held that the coal excise tax is unconstitutional to the extent it applies to exported coal based on the blanket prohibition imposed by the Export Clause of the U.S. Constitution and IRS acquiesced, in effect, in that decision by issuing guidance (Notice 2000-28, 2000-1 CB 1116) on how to claim a refund for coal excise tax imposed on exported coal.

A taxpayer must file a refund claim with IRS before starting a suit for refund (or credit). (Code Sec. 7422(a))
A taxpayer must file a claim for credit or refund of an overpayment within three years from the time the relevant return is filed, or two years from the time the tax is paid, whichever period expires later. (Code Sec. 6511(a)) No credit or refund is allowed if a claim is not filed within these time limits. (Code Sec. 6511(b))

Facts. The taxpayers, three coal companies, had all paid taxes on coal exports under Code Sec. 4121 since as early as '78. After Code Sec. 4121 was held unconstitutional as applied to coal exports, the companies timely filed administrative claims for refund of coal taxes they had paid in '97 through '99. IRS refunded those taxes, with interest.

The companies also filed suit in the Court of Federal Claims seeking a refund of $1,065,936 in taxes paid between '94 and '96. They did not file any claim for those taxes with IRS. The Supreme Court noted that any such claim would of course have been denied, given the limits set forth in Code Sec. 6511. Notwithstanding the failure of the companies to file timely administrative refund claims, the Court of Federal Claims allowed the companies to pursue their suit directly under the Export Clause. Jurisdiction rested on the Tucker Act, 28 USCS 1491(a)(1), and the companies limited their claim to taxes paid within that statute's 6-year limitations period. The Court of Federal Claims did not, however, allow the companies to recover interest on the taxes. (Andalex Resources, Inc. v. U.S., (2002 Ct Fed C) 90 AFTR 2d 2002-7393) The Court of Appeals for the Federal Circuit allowed the refund and also allowed interest. (Clintwood Elkhorn Mining Co v. U.S., (2007, CA Fed Cir) 99 AFTR 2d 2007-613)

Supreme Court reverses. The Supreme Court observed that the Code provides that taxpayers seeking a refund of taxes unlawfully assessed must comply with its tax refund procedures. Under those procedures, a taxpayer must file an administrative claim with IRS before filing suit against the Government. Such a claim must be filed within three years of the filing of a return or two years of payment of the tax, whichever is later.

The Supreme Court noted that the Tucker Act is more forgiving—it allows claims to be brought against the U.S. within six years of the challenged conduct.

The question before the Court was whether a taxpayer suing for a refund of taxes collected in violation of the Export Clause of the Constitution could proceed under the Tucker Act, when the suit does not meet the time limits for refund actions in the Code. In a unanimous opinion, the Court said the answer is no.

The Court based its decision on the plain language of the pertinent Code provisions. The Court stressed that Code Sec. 7422(a) provides that no suit shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected until a claim for refund or credit has been duly filed with IRS. The Court said that the companies did not file a refund claim with IRS for the '94 through '96 taxes. Thus, they may bring no suit in any court to recover the taxes.

The Supreme Court further noted that the time limits for administrative refund claims apply to any tax imposed by the Code (Code Sec. 6511(a)) and that the Code provides that no refund shall be allowed after the expiration of those time limits. (Code Sec. 6511(b)) This language clearly covered the companies' claim for refund of taxes imposed by Code Sec. 4121.

The companies nonetheless argued that their claims were exempt from the Code provisions' broad sweep because the claims derived from the Export Clause of the Constitution. The Supreme Court said that there is no basis for treating taxes collected in violation of that Clause differently from taxes challenged on other grounds. Because the companies acknowledged that their claims were subject to the Tucker Act's time bar, the question was not whether their refund claim could be limited, but rather which limitation applied. Their argument that, despite explicit and expansive statutory language, the Code's refund scheme did not apply to their case as a matter of statutory interpretation was without merit. Accordingly, the Supreme Court reversed the Federal Circuit and denied the claim.

Observation: If a taxpayer believes that a tax is unlawful, it should file a refund claim. If IRS denies the claim, the taxpayer can then challenge the tax in court. A taxpayer who does not intend to challenge a tax that it feels is unlawful should nonetheless file a protective refund claim if it is aware that another taxpayer is challenging the tax. The protective claim may serve to allow the taxpayer to recover the tax if the other taxpayer subsequently prevails in its suit against IRS.

Truck Drivers - Trucking Company Tax Problem Resolution

IRS acquiesces to TLC Leasing - explains meals deduction limit in employee leasing setting Rev Rul 2008-23, 2008-18 IRB

TRUCKER TAX RELIEF & TRUCKER TAX PROBLEM RESOLUTION

Mike Habib, EA

myIRSTaxRelief.com

IRS has acquiesced to the Eighth Circuit's holding in Transport Labor/Contract Leasing (TLC Leasing) that a company leasing truck drivers to client companies wasn't subject to the Code Sec. 274(n) deduction limit on meal reimbursements it made to drivers because it substantiated these expenses to the clients. Instead, the Eight Circuit said the client companies were subject to the limitation because they ultimately bore the expenses. The ruling clarifies IRS's stance on reimbursed meal expenses involving leasing companies by way of three examples.

Observation: The new ruling isn't limited to leased truckers. Its conclusions may be applied to any situation where leased employees are reimbursed for expenses subject to the Code Sec. 274(n) deduction limit.

Background. Business-related meals such as those incurred while away from home overnight on business generally are subject to the Code Sec. 274(n) 50% deduction limit for meal and entertainment expenses. Under Code Sec. 274(n)(3), for tax years beginning in 2008 or thereafter, an 80% deduction limit applies to certain transportation workers, such as interstate truck operators and interstate bus drivers under Department of Transportation regulations. Under Code Sec. 274(e)(3)(B) and Code Sec. 274(n)(2)(A), the Code Sec. 274(n) deduction limit doesn't apply to a taxpayer who incurs an expense on behalf of a person other than an employer under a reimbursement or other expense allowance arrangement with the other person, if the taxpayer accounts for the expense to the other person, and the payment is not treated as compensation. This requires the taxpayer to substantiate each element of the expense to the person for whom he incurs the expense (time, place, business purpose and amount). Here, the Code Sec. 274(n) limit applies to the person for whom the expense was incurred.

Reg. § 1.274-2(f)(2)(iv)(a) provides that for Code Sec. 274 purposes, a reimbursement or other expense allowance arrangement is defined as it is under Code Sec. 62(a)(2)(A), i.e., an arrangement that shows the business connection of the expense, substantiates it, and provides for a return of excess reimbursements.

M&IE (meals and incidental expenses) incurred while traveling away from home on business are treated as an expense for food and beverages and are subject to the Code Sec. 274(n) limit. An employee who is reimbursed for M&IE may follow simplified substantiation procedures (time, place and business purpose).

In 2004, the Tax Court held in TLC Leasing that a company that leased truck drivers to independent trucking companies was the common-law employer of each driver-employee and, as a result, per diems paid by the leasing company to cover amounts spent by the drivers for food and beverages while traveling away from home were subject to the Code Sec. 274(n) deduction limit on meals. In the decision, client trucking companies submitted reports to TLC for each payroll period showing the gross wages and per diem amounts for each driver-employee. TLC made the appropriate payments to each driver-employee and sent the client company an invoice showing total expenses for all the driver-employees leased to the client.

The Tax Court's holding reached the result IRS had urged (but did so for different reasons).
In 2006, the Eighth Circuit reversed the Tax Court and held on the facts that the Code Sec. 274(n) limit did not apply to TLC because it was not the party that ultimately bore the per diem expenses. [See Federal Taxes Weekly Alert 08/31/2006] Instead, the limit applied to the client companies, who actually bore the per diem expense under the reimbursement arrangement between the parties. The appellate court concluded that status as a common law employer is not dispositive in the Code Sec. 274(n) analysis, but did not explicitly reject that status as a relevant factor.

IRS acquiescence. In Rev Rul 2008-23, IRS acquiesces in the result in TLC and agrees with the Eighth Circuit's opinion that the Code Sec. 274(n) deduction limit should apply to the party that ultimately bears the per diem expenses. However, IRS says it does not agree with the opinion to the extent that it could be read to imply that status as a common law employer is relevant to the Code Sec. 274(n) analysis.

Observation: The new ruling is much more than an unconventional vehicle for an acquiescence. It also formulates IRS's approach to situations where a reimbursed expense is substantiated and submitted to one party who in turn passes on the cost to someone else. The ruling also clarifies when IRS will and will not treat an M&IE (or a meals expense only) as substantiated to a third party. In TLC, there was no formal substantiation of the truckers' meal expenses in the generally accepted sense.

Substantiating to third party. The ruling establishes IRS's position where (1) an employee (or independent contractor) adequately substantiates a M&IE expense to an initial payor (i.e., a company like TLC) that initially makes the reimbursement, and (2) the initial payor in connection with its performance of services for a third party, is reimbursed under a reimbursement or other expense allowance arrangement with a third party. In this instance, IRS rules that if the initial payor accounts to the third party in the same manner that the employee (or independent contractor) accounted for the expenses to the initial payor, then the initial payor satisfies Code Sec. 274(e)(3)(B) and the third party bears the expenses and is subject to the Code Sec. 274(n) deduction limit on the expenses.

IRS illustrates this principle, and what it will treat as adequate substantiation to the third party, with three examples, all dealing with these common facts:

• Leasing Company (LC) leases its employee truck drivers to Client under a contract that provides that LC will calculate Client's periodic payments to cover LC's expenses (driver wages, payments of M&IE to drivers under a reimbursement arrangement between LC and the drivers, and other expenses) plus a profit. The M&IE are incurred while drivers travel overnight away from home on business. All reimbursements paid to Driver are paid under a “reimbursement or other expense allowance arrangement,” within the meaning of Code Sec. 274(e)(3) between LC and each driver. Neither LC nor Client deducts the M&IE amounts as compensation on its originally filed income tax return, and neither of them treat the M&IE amounts as wages for withholding purposes.
• The employee leasing contract does not address which party reimburses the drivers' M&IE for purposes of applying the Code Sec. 274(n) deduction limit.
• Driver adequately accounts for his M&IE expenses to LC.
• Either LC or Client may be Driver's employer under the usual common law rules.

Illustration1: After Driver accounts to LC for M&IE, LC calculates his wages and any M&IE payments that may be due, and sends Client a billing invoice for a periodic payment due. The invoice does not itemize the M&IE reimbursement, but immediately after LC pays Driver, it sends Client a statement indicating the amount paid to Driver as a M&IE reimbursement. LC also accounts for the M&IE amount by delivering to Client a copy of the substantiation that Driver had originally submitted to LC. Client accepts the substantiation and acknowledges that the portion of its periodic payment equal to the amount that LC paid to reimburse Driver's M&IE is paid under a reimbursement arrangement with LC and is subject to the Code Sec. 274(n) deduction limit.

Illustration2: The facts are the same as in the first illustration except that Driver accounts for his M&IE to Client who in turn sends the paperwork to LC, which (a) calculates Driver's wages and any M&IE reimbursements that may be due, and (b) sends Client a lump-sum, non-itemized billing invoice for a periodic payment due. After Client makes the invoice payment, LC pays both Driver's wages and M&IE reimbursement, and sends Client a statement indicating the amount paid to Driver as an M&IE reimbursement, and referring to the substantiation Client had received from Driver and had submitted (via a copy) to LC.

Results. In both illustrations (1) and (2), IRS concludes that LC meets the requirements of Code Sec. 274(e)(3) because (1) LC can prove that it has established a reimbursement or other expense allowance arrangement with Client, and (2) LC accounts to Client by (in the first illustration) delivering a copy of the substantiation that Driver had provided to LC or (in the second illustration) referring to the substantiation Driver originally submitted to Client. LC is not subject to Code Sec. 274(n) deduction limit and, instead, Client bears the expense of the M&IE, and is subject to the Code Sec. 274(n) for the M&IE, regardless of whether LC or Client is Driver's employer under the usual common law rules.

If the initial payor does not properly substantiate the M&IE expenses to the third party payor, then the initial payor will be treated as bearing the expenses and will be subject to the Code Sec. 274(n) deduction limit.

Illustration3: After calculating Driver's wages and any M&IE payments that may be due, LC sends Client a lump-sum, non-itemized billing invoice for a periodic payment due. Client pays LC the lump-sum periodic payment, and then LC pays both Driver's wages and M&IE reimbursement.

Result. Because LC provides Client with only a lump-sum, non-itemized billing invoice, and does not account to Client or have a reimbursement or other expense allowance arrangement with Client, LC bears the expense of the M&IE and it is subject to the Code Sec. 274(n) deduction limit on Driver's M&IE, regardless of whether LC or Client is Driver's employer under the usual common law rules. Even if LC had provided an itemized invoice to Client designating part of the payment as an M&IE reimbursement. LC still does not satisfy Code Sec. 274(e)(3)(B) because it didn't adequately account to Client and didn't have a reimbursement or other expense allowance arrangement with Client.

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