Trump on Estate Taxes

The state of New Jersey has recently decided to begin giving up on the idea of an estate tax. Legislation was passed on October 7, 2016 to increase the tax on gasoline by $.23 a gallon. As part of the state’s plan increasing the gas tax would allow the estate tax to be eliminated over the next 15 months. In 2017 the exemption from the New Jersey estate tax would be increased to $2 million. For years it had been stuck at the one time federal estate tax exemption of $675,000.In 2018 the tax will be eliminated completely.  New Jersey still maintains an inheritance tax the rates of which are based upon the relationship of beneficiaries to the decedent and the amount of money or property received by them. Spouses and children are exempt from the extraction. Other relations are taxed accordingly.  New Jersey has seen the light. By making taxpayers pay at the pump the state may be able to afford to eliminate whole sections of its division of taxation and cut out a huge section of its tax law. Additionally those responsible to collect the tax at the pump now become unpaid agents of the tax agency with personal responsibility should the tax not be paid over to the authorities. Everyone makes out. Now enter the dark horse candidate that no one thought had a chance to become president. As Donald Trump becomes comfy with the office of president one of his campaign platforms has been to eliminate the federal estate tax. It could be said that for the most part only the negligent paid that tax to begin with. The use of all manner of trusts and other estate planning tools too often may have resulted in only the poorly advised finding themselves subject to tax liability. With their current estate tax exemption of more than $5 million the middle class was practically insulated from the estate tax anyway. It seems the American government runs on the proceeds of income taxes paid by individuals and businesses of one sort or another. The federal estate tax in contrast raises only nickels and dimes.  Eliminating the estate tax in its entirety will free up IRS resources to pay more attention to where the golden egg is laid… the income tax. It could also be argued that it levels the playing field among the negligent and poorly advised. Eliminating the estate tax also allows taxpayers to make decisions with regard to their estates based on family need without tax considerations. It also conveniently lops off a big section of the unloved Internal Revenue Code. Lawyers who make their living creating elaborate estate tax plans should be somewhat concerned. There are also many connections to the income tax like carry over basis should both the estate and the gift tax be repealed. And talk of taxing gain at death won’t get a lot of fans. But there is a big difference between campaign promises and real legislation. Certainly the elimination of the estate tax and its sister gift tax may leave a bad taste in the mouths of ordinary Americans who may have voted Trump into office as it looks like catering to the rich. Trump’s plan for the income tax also calls for reductions in rates for individuals and corporations. Is it possible that the country will wake up one day without an estate tax, a gift tax or an income tax but with a VAT tax which is a kind of modified sales tax on consumption similar to the way it is collected in Europe?… Sort of like paying at the pump.

The Messy IRA rollover

   Folks tend to botch the IRA rollover which can result in a great deal of tax and pain pleading with IRS to kindly look the other way. IRS overburdened as it is with other matters has created a get out of the rollover jam solution that taxpayers can self-certify. The late rollover must be for one of 11 reasons. These include:  the financial institution making the distribution or contribution makes an error; the distribution check was misplaced and not cashed: the taxpayer deposited a check into what he believed was an eligible retirement plan; the taxpayer’s principal residence was severely damaged in some type of casualty; a member of the taxpayers family died; the taxpayer was seriously ill; the taxpayer was incarcerated; restrictions were imposed by a foreign country; a postal error occurred; the distribution was levied and returned to the taxpayer after the rollover deadline; or the party making the distribution did not provide adequate information for the receiving plan or IRA to complete the rollover. The IRS provides a letter template which can be used to submit to the custodian of the plan indicating which reasons apply for the late rollover. IRS says the rollover must be placed into the new account as soon as practicable. The rollover must be completed however within 30 days after the reason for failing to timely do it. The easiest solution is for taxpayers to simply make the rollover from trustee to trustee. That is, not get their hot little hands on a distribution from their IRA. Taking a distribution and then sending it to a new IRA as a rollover is where the problems can start. Taxpayers will not need to seek a ruling from the Internal Revenue Service explaining the reasons for missing the rollover and requesting more time if they fit the new procedure.IRS  Rev. Proc 2016-47.

The Tax Return Non Filer

Tax filing season can last all year long and it is a time of real suffering for some people. All the advertisements about getting tax refunds and using the found money for lots of things that one enjoys only makes things worse. For these people it is more sleepless nights, sweaty palms and upset stomachs that can be triggered by the most offhand remark. A coworker or friend mentions having gotten their juicy tax refund early. Dizziness, depression, anxiety follow. These are the hallmarks. This is the plight of the tax return non-filer. Like most of our human problems the non-filer has put himself in a box he can't seem to break out of. His dreams are about being detected and spending hard time in a federal prison in an orange jumpsuit breaking big rocks into small rocks and small rocks into sand. The real shame of all this is that barring a business life which generates illegal income the dream is not even remotely related to the reality. In fact, in the vast majority of cases, IRS is more anxious to have the non-filer join the system then to spend their lives in a restless tax purgatory. Most of the fears that a non-filer harbors are baseless. Of primary concern may be criminal prosecution which is reserved  for the most part to illegal behavior or for those cases IRS had to use its less than abundant resources to detect. Coming forth voluntarily is the best advice to avoid this part of the nightmare. IRS maintains a voluntary disclosure policy that lawyers who advise in this area should follow closely. In most cases no criminal involvement will result. Secondly, can be the actual cost of coming forward. It is true that the IRS code provides for interest and penalties, but no one goes to jail, loses reputation and is held to community scorn for simply owing the IRS money. Do a Google search of celebrities and politicians who have found themselves owing tax bundles. What should come as relief to these non-filers is that the code provides methods for paying back tax liabilities. These methods allow ordinary life to continue while still satisfying IRS tax law compliance. Foremost among these is the installment agreement which simply gives time, in some cases up to 10 years to pay off tax liabilities. Where payments are not possible, the code also allows an Offer in Compromise to be made. This procedure allows taxpayers to offer to pay an amount in exchange for being released from any unpaid balance which can include tax, penalty and interest. Where the client has no current funds or assets, the IRS can suspend collection activity and place the taxpayer in a currently uncollectible status while the statute of limitations on collection continues to run.  In dire cases, if certain other conditions are met, bankruptcy may also discharge income taxes and allow a taxpayer a fresh start.

The point of all this is that any tax filing season need not be torture for the non-filer. Many of their worst nightmares will not materialize. The time to act is now before IRS makes contact. Bringing tax clients back into the filing fold should be a priority for lawyers as well as clients.

IRS on the Warpath for Independent Contractors

IRS has been on to the game employers play by misclassifying workers as independent contractors as well as not paying over withholding taxes from the employees they do admit they have. Being shorthanded has not helped IRS in this area. But the Service says this is going to change as it works with the Department of Justice to seek out payroll tax fraud. This will include misclassifying workers as well as businesses paying their employees in cash and the attendant false tax filings. Criminal prosecution may result. IRS has been working since 2010 on an employment tax audit study in the hope that its analysis will allow it to audit employers more effectively even with fewer agents on board.

IRS Extension Form 872 on Assessment

 Statute of limitations can be tricky things. Many times clients cannot believe that there is actually a limit to when IRS can take action. But we lawyers know, or at least we should know, that various time limitations apply in ordinary tax administration.  For assessment, that is the time during which IRS must send a bill to a taxpayer or at least a statutory notice of its proposed tax bill is limited under three rules. The general rule is that action must be taken within three years from the due date of a return or its actual filing if filed later. That period is extended to six years if there has been a non-fraudulent that is negligent omission of at least 25% of the gross income stated on the return. For those cases where the IRS can prove fraud the statute of limitation is theoretically and legally open forever. That too is the case if no return is filed although practical tax administration does and must enter into the picture. In collection matters the tax world before 1998 permitted IRS revenue officers to keep the otherwise ten year statute of limitations open almost indefinitely by requesting extensions of the collection statute of limitations. Often taxpayers were arm twisted into giving these extensions under threat of immediate levy action. Since 1998 the practice of extending statutes of limitations on collection is limited to specific situations. Also, there may be instances based on the taxpayer’s conduct for example leaving the country or filing a bankruptcy, an offer in compromise or other appeal with the IRS which will have the effect of extending the statute of limitations on collection. But even with the reform legislation of 1998, IRS is still permitted to request an extension of the statute of limitations on assessment. This may be to the mutual benefit of both the taxpayer and IRS examining agent. The agent obtains more time to complete his audit; the taxpayer gets additional opportunity to submit documents and verification. It is within the control of the taxpayer to file an extension and as a matter of fact negotiation is proper to determine to what date the extension will be granted. If a taxpayer refuses to give an extension of the statute of limitations on assessment the IRS agent will be forced to issue a statutory notice in order to protect the right of IRS to assess. In this way some arm twisting may be evident. The taxpayer whose sins may not as yet have been discovered by an agent may stand his ground on refusal hoping to find a way of avoiding as yet an expanding problem as the statutory notice issuance moves the case forward in tax administration. The strategy for extensions take up pages in tax procedure books( as it does in my own) Once that notice is issued a taxpayer can always pay the tax and end further examination or seek redress before payment in the United States Tax Court. Now every then and again an extension Form 872 designed to extend a three-year statute of limitations on assessment contains a critical typographical error. In Kunkel 7^th Cir. the taxpayer and the IRS agreed to an extension of the three-year assessment. But when the form was executed the wrong tax years were entered. The taxpayers claimed that the 872 was invalid and that the time for assessing the tax had lapsed. This form is a contract and the appeals court applying contract rules determined that the parties had intended all along to extend the examination time period. Both had just missed the typographical error. The extension was deemed valid.

Dodging the IRS Tax Audit

The IRS tax audit is not dead despite what you may have read in the newspapers and perhaps on this blog. While the individual tax audit rate was less than one in 119 returns at a measly .84% some groups of taxpayers got to enjoy more contact with their favorite governmental agency. These included sole proprietors where the IRS audited approximately 2.5% of schedule C businesses with gross income over $25,000. The IRS is well aware of the abuse associated with the earned income tax credit and therefore used its resources to audit 1.75% of these people. Taxpayers with income of $200,000 or greater enjoyed an audit rate of 2.61%. Millionaire reporters were the most likely to be subject to audit at 9.55%. How does one draw attention for a tax audit? Travel and entertainment, business use of a personal vehicle, hobby losses of all varieties, and of course the more recent failure to report foreign bank account investment information which has perhaps produced more additional revenue than all the rest.

IRS Levy

         An IRS Levy is a nasty thing. Clients often confuse a lien with a levy. The lien is notice to the world that a tax is due. It can encumber most all of the assets a taxpayer owns. It serves to guarantee IRS will get paid if a sale of those assets occurs. A Levy on the other hand is the physical act of taking and seizing a taxpayer’s assets. In some cases a taxpayer may have a chance to redeem them but in others the asset is gone for good. The road to a Levy is a long one. These days in most cases it is a fork in the road that need not be taken. When a taxpayer owes a tax the computer machinery at the IRS begins grinding out tax notices. Each of them becomes harsher in their language. For the uninitiated visions of loss of life and liberty come to mind. Those notices are highly effective in IRS tax administration as taxpayers begin coughing up almost immediately. Then there are those who use the circular file when they receive them. Lawyers must realize that the last notice received by the client sent certified mail return receipt requested is a Notice of Intent to Levy and a Right to a Hearing. At this point the IRS is no longer kidding. At the end of 30 days the client can begin losing their assets. During that thirty day window lawyers on top of the client’s problem can request an IRS appeals branch hearing and thereby avoid the asset loss until an impartial hearing at IRS has been held. That presumes of course that the client has kept the lawyer in the tax notice loop. The actual levy will be served upon the holder of the taxpayer’s assets. In Huckaby, DC California, a lawyer learned a very expensive lesson about the Levy procedure. In that case the lawyer’s client owed substantial taxes. The client received a substantial lawsuit settlement. The lawyer deposited the proceeds of the settlement into his firm’s trust account. While the funds were sitting in the possession of the lawyer an astute revenue officer who is an IRS collection person served a Levy on him. Apparently the lawyer contrived a way of getting the funds to his client without the payment of the taxes. In this district court matter the lawyer was held personally liable to the IRS for his client’s tax bill and in addition was subject to a 50% penalty for failing to honor the Levy. A lesson in tax administration too late learned.

Clothing Deductions?

    It’s getting harder all the time to stay fashion conscious. The Internal Revenue Code allows a tax deduction for uniforms and clothing required in employment settings. Whether or not clothing is a deductible expense to an individual depends upon whether or not it is suitable to be worn outside of the employment situation. Pity Mr. Beltifa, TC Summ.Op 2016-8,  a hard working bartender. You may remember when only people in mourning and Johnny Cash wore black but these days fashion demands of both men and women a considerable black wardrobe for all types of events. And therein lies the rub for Mr. Belfita. He claimed that his employer required him to wear all black and worse than that the clothing had to be of high quality. The Tax Court Judge perhaps being a fashionista himself and by the way wearing black at the time had no trouble telling the poor taxpayer that such clothing these days is suitable for outside wear and not deductible. Honestly, in our anything goes environment what wouldn't be suitable everyday wear?

When Are Damage Awards Taxable?

Sometimes the Internal Revenue Code has a heart. While the law makes clear that income is taxable from whatever source derived both legal and illegal, Congress in its wisdom created some specific exclusions. It really seems unfair to tax someone who was had physical injuries and receives a legal settlement for them. Those payments are designed to render the injured plaintiff whole again. The thinking may be also that physical injury is preventing them from returning to work. Every year there are numerous tax cases trying to determine whether or not physical injury is involved.  While the code goes easy on physical injury it makes payments for emotional distress taxable. The wisdom here may be a little cloudy but the tax law is not. Of course things can be muddy when one award is made for both physical and emotional injuries or when there is a connection between them. Consider the case of Barbato, TC memo 2016 – 23. In that case a woman suffered actual physical injuries. But the lawsuit that was brought on her behalf claimed that her employer had discriminated against her because she had requested medical accommodation for a prior workplace injury. So the question became was the award for the discrimination sufficiently connected to the physical injury to be excludable? The Tax Court refused to make the connection and held that the payments for the emotional distress were taxable. Litigation lawyers are wise to pay close attention to what they are suing for and alleging in any complaint or petition filed on behalf of their clients as it may dictate the extent that the proceeds will be taxable.

Phony IRS Tax Scam Telephone Calls

         I got home the other night and my old fashion answering machine was blinking. You know it’s the kind you have to push a button to hear the message. Most cold callers when they realize it is an answering machine simply hang up. But this message was a long one and I listened to it several times. It was fun. Maybe we tax lawyers look for a few laughs now and then in odd places. The guy on the line said he was from IRS. He spoke firmly in a non-regional American accent. His message was clear: a warrant had been issued for my arrest for back taxes which were due. He conveniently mentioned no particular years or amounts. The earnestness of his message was impressive. It ended with a phone number and a request that I call immediately to avoid enforcement action, loss of my assets, incarceration and financial penalties. It was perfect. It set the stage for this Bar blurb. I was frankly tempted to call the number and pose as an Assistant US attorney assigned to investigate the caller but realized that may in fact be breaking the law. I considered also playing along with the scam and see how far it would go. I didn’t do that either. I just let it be and relished the fact that someone would call a former IRS agent, IRS tax lawyer, Chairman of the tax committee with 43 years of experience in the tax litigation field and hope to convince me to turn over financial information. How could these phony IRS guys think that anyone would fall victim to their ploy? Well recently IRS Treasury Inspector General for Tax Administration announced that his office had received reports of 896,000 of such contacts since October 2013 and have become aware of over 5000 victims who have collectively paid over $26.5 million as result of the scam. In other words these phone scams work. There are also other varieties of call that claim the taxpayer is entitled to a huge refund and then requests Social Security and other financial information in order to process the gigantic payout. The IRS Commissioner was quoted as saying: “We continue to say, if you are surprised to be hearing from us, then you are not hearing from us.” The IRS has included phone call tax scams on their 2016 dirty dozen list. So let’s be clear about this.  IRS will never call to demand immediate payment or call about taxes owed without first mailing a bill to a taxpayer. They will never demand payment without giving the opportunity to question or appeal the amount they say is owed. In income tax cases an elaborate procedure is provided before IRS can take a valid assessment and bill for taxes owed. Some of these notices must be sent certified mail return receipt requested. IRS would never require use of a specific method of payment such as a prepaid debit card. IRS does not ask for credit or debit card numbers over the phone. And though it sounds silly IRS will not and cannot bring in local police or other law enforcement groups to arrest anyone for not paying taxes. IRS suggests of course not giving out any information and hanging up immediately on the phony call. They would also like taxpayers to report the contact to the Treasury Inspector at 800-366-4484. They also remind taxpayers that that if they do in fact owe taxes they should call IRS at 800-829-1040 or perhaps their favorite tax lawyer. There you go. So any lawyer who receives one of these calls may wish to have some fun with them and let me know how you make out.

IRS Broke?

        The IRS is going bankrupt. Well, almost. The agency requested an increase in budget of $2 billion and got a measly $290 million. A drop in the proverbial bucket. So taxpayers and lawyers alike who deal with these folks can expect more delays and unanswered calls and letters from computers with no knowledge of the issues involved. IRS will also have some of its “we are friendlier” adverts and video productions curtailed as well as awards and bonuses for deserving employees. Not to come to their defense but just to put things in somewhat perspective, the F-35 the newest, sleekest, fastest, radar defying, bomb dropping do all flying war machine has a price tag of about $400 billion and will cost about $1 trillion before the program of about 2500 planes is ever up and running, The pilot’s helmet specially made for the F-35 costs about $250 thousand. Now to Sheridan. That is the New Jersey case that requires judges to forward matters to the IRS when there is a hint of tax goings on. As a practical matter can IRS address all the potential referrals from judges or is there something else going on here? Criminal tax investigations continue to slide as agents retire and IRS is restrained for budget reasons to hire more of them. Only 3,850 such criminal tax investigations were launched in all of 2015. Things have gotten so bad that the criminal division agents want to be moved out of IRS and into the Treasury itself. So how does the administration of the tax law go on with fewer agents to do it? The answer, that may be less than coincidental, is to make we lawyers deputies in the tax compliance business. And frankly that is where Sheridan may come in. No lawyer who is involved in litigation whether it be of the marital variety or an estate dispute or simple business litigation needs to add to his headache the potential for IRS involvement in their clients’ lives. So settlement may look a lot more attractive to the parties when the downside is a long and tortuous journey with IRS. So too may clients be willing to get right with their tax situations with little IRS involvement. Voila the tax administration system is preserved and all within budget.