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?