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.

Tax Debtors to Lose Passports?

  It may be that the Internal Revenue Service feels that taxpayers who have tax liability of $50,000 or more should not be traveling out of the country. There may be a tiny bit of wisdom to that determination. It is a shame that the Constitution may have something to say about this idea. In the highway funding proposal a revenue raiser was included which would allow the State Department to deny or revoke passports if a taxpayer has had a notice of Lien or Levy filed against them. The proposal would exempt taxpayers who have confronted their tax liability and have entered into an installment agreement with the Internal Revenue Service. Anyone who has practiced in this field of IRS dispute work knows this is a disaster about to happen if it should become law. Both Notices of Lien and Notice of Levy are often incorrectly issued by the Internal Revenue Service. A lien is notice to the world that a tax is due and has not been paid. It covers most all of the taxpayer’s assets both real and personal and must be cleared to convey clear title. A Levy is the act of taking property by IRS and is only allowed in most cases with adequate notice to the taxpayer to object and request IRS Appeals Branch review. Having a Lien or Levy removed can present somewhat of a challenge and negotiating an installment agreement with the IRS as to becomes ever more shorthanded can be difficult as well.  It would seem that punishing tax debtors for their tax predicament would be invoking a debtor’s prison of sorts and an unjustified and perhaps unconstitutional extension of IRS power.  

Tax Free Spinoffs and the US Congress

  There is no better music to a tax lawyer’s ears than a business transaction being tax-free. And why not clients love it. A spinoff is a procedure whereby a corporation divides itself into at least two parts and then either sends one part to its old shareholders or creates a relationship of parent and subsidiary. If the rules are followed the new arrangement is tax free to all concerned. The House of Representatives had the nerve to recently consider legislation that would remove the tax free advantages of spinning off corporate real estate into a separate publicly traded real estate investment trust. According to the joint committee on taxation just this move would generate $1.9 billion in additional tax revenue over the next several years. Using spinoffs this way has been a way for companies to unlock cash by separating themselves from their real estate holdings. There have been 15 tax-free real estate spinoffs since 2010 that represented $21.6 billion. In September IRS had announced that it would no longer issue advanced private rulings on this type of tax free spinoff. Tax lawyers in this field are confident that no business would be willing to enter this type of corporate reorganization if the transaction was taxable. Before the ink was applied to the spinoff change however in rode the lobbyists to save the day and their clients at least a billion in potential additional taxes. Now congressmen being bought and paid for by many of the real estate players were quick to stick about 54 words in the 2000 page document to reverse the consequences of the potential taxable change. So the real estate spinoff lives on and another loophole remains in plain sight. Many congressmen in the past have come out and said they just don’t have the time to wade through volumes of tax legislation. Isn't that nice to know.