Tax Advocate on Tax Filings

The Tax Advocate is on the side of tax reform and simplification. The national taxpayer advocate Nina Olson said that the code must be simplified. In her report to Congress her office stated that IRS data shows that individuals and businesses spent about 6 billion hours yearly complying with the tax code’s filing requirements, not including millions of additional hours spent responding to IRS audits or notices. The report says: “If tax compliance were an industry it would be one of the largest in the United States” To consume 6 billion hours the tax industry requires the equivalent of 3 million full-time workers, so says the report.. The current tax code contains more than 200 tax deductions credits, exclusions and similar tax allowances, if all tallied they amount to $1.42 trillion that’s more than Congress pays to run the entire federal government. Olson also requested that IRS change its culture from one that is enforcement oriented, to one that is service oriented and naturally she recommends that Congress give additional funding to the IRS to meet taxpayer needs. Not likely....

Tax Scammers...and the IRS Dirty Dozen

The tax scammers are having a field day. Millions of people are being cajoled and threatened into sending money or revealing damaging personal information to telephone callers and emailers. My professional email is being filled these days by scammers posing as prospective clients. Tags like “urgent- please help” or “I have been referred to you” or just a typically American surname is used as the reference. Opening an email from one of these conmen caused a virus that swallowed my laptop. But it could be worse. The tax scammers are working tax professionals this way. The “client”will seek advice in filing their individual or business tax returns. If the practitioner responds requesting tax data, the scammer forwards an email file for review. Once opened that file contains either a virus or a program designed to infiltrate the practitioner’s computer to obtain identifying and other confidential information. I now simply delete all of these emails as soon as received. If there is in fact a client seeking my services they will have to go about it in the old fashion way. The IRS has listed this scheme as one of the “Dirty Dozen” they publish every year along with many of the usual cast of characters including: Identity Theft, Return Preparer Fraud, Fake Charities (giving out fake news BTW), Padding Tax Deductions( America’s favorite indoor sport), False Credit Claims, Tax Shelter Abuse and Offshore Tax Schemes of all kinds. The list is revised from time to time as the tax season and the year proceeds.  

The Not So "Innocent" Spouse-----in Rhyme

The Not So Innocent Spouse             1/7/17                         

It’s not for love and happiness that married people yearn

It’s for the chance to finally file a joint return;

Accountants often say

They’d have it no other way;

Oh, for once to beat the tax man

And maybe save a couple grand;

Then the troubles begin and fingers point

Why did I ever file that return joint!

The Devil made me do it for I am but an innocent child

He/She’s the monster, She/He knew it all the while;

I studied fine art and basket weaving

He majored in law and minored in deceiving;

Of those deceptions I am green

Thank heaven for Code Section 6015;

My Ex, the skunk, over the coals IRS should rake

I am but an innocent spouse and I deserve a break!

“But of these things you knew well;

Violate your oath and it’s straight to hell”

“But Judge have mercy my ring a fleck, a tiny pill

My clothes no labels and from GoodWill

My car a lease way over due

And this marriage has made me, oh, so blue”

“I sympathize with your tax mess

But that resolution is for the IRS”

And so it goes, how it may burn

Having filed that damn joint return.

When Taxes are Owed to IRS-The Installment Agreement

When a taxpayer falls behind with the Internal Revenue Service whether because a tax return has been filed and tax payment not made or there has been an audit of that filed tax return and the liability to the IRS is then discovered, the taxpayer is in for enforced collection by IRS. Needless to say some taxpayers simply draw the covers over their head and hope the problem will go away. Others of course resort to more elaborate tax dodging by becoming part of the underground economy. As the IRS computers have gotten more sophisticated playing groundhog has gotten more difficult. At the same time IRS has intentionally liberalized some of its rules to welcome taxpayers who owe tax debts back into the fold. Even in the case of the non-filer, IRS is interested in having the taxpayer file delinquent returns and make arrangements for payment. In fact the IRS voluntary compliance program aims at just that. Jail time is reserved for more egregious tax violators. So what to do? Lawyers who represent clients in this area note that the options are several: 1) Try to convince IRS that the client does not have the current ability to pay any amount toward their back tax liability. This is known as code 53 on an IRS transcript. Following this path can result in the statute of limitations on collection running out while the taxpayer’s file sits quietly in uncollectible status. 2) For those taxpayers who are perhaps closest to bankruptcy an offer in compromise may be appropriate. Here the taxpayer basically offers whatever he has in assets and income stream to appease the IRS in exchange for being released from the balance of tax, interest and penalty which may be due. 3) Those who are in fact eligible to file a bankruptcy may find that some or all of their income taxes are dischargeable under the bankruptcy rules as well. While indeed all of these should be discussed with the client who owes back taxes, in reality not many will qualify for any of these procedures. What then? As a practical matter most taxpayers will end up entering into an installment agreement with the Internal Revenue Service. Clients can think of this as Levy insurance. A Levy is the act of IRS taking property from the taxpayer. No Levy can be issued so long as an installment agreement to pay back taxes is in effect. The amount payable to the Internal Revenue Service will depend upon financial Form 433 being filed with the IRS which discloses assets and income the taxpayer has available. IRS will apply its own standards and amounts to come up with a monthly payment schedule. Once entered, while the IRS reserves right to review the financial status of the taxpayer from time to time, for the most part the client’s tax issues have been effectively dealt with. The agreement is a formal contract which both parties are to observe. Taxpayers are precluded from running up any further tax debts or from failing to file any tax return required. Installment agreements can be arranged at the IRS website or by dealing with IRS collection officers in local offices or by contacting IRS regional offices. Section 6159 authorizes IRS to enter into these installment agreements. That can be done whether the tax will be paid in full or partially. Though taxpayers are seeking to pay up under an installment agreement IRS still charges them in order to enter into such an agreement. In general this fee has been $120 or $52 if a direct debit installment agreement is entered. The latter eliminates the IRS worrying that the taxpayer will not send his check. Starting January 1, 2017 these fees will be increased. To enter a regular installment agreement the fee will be $225 and the direct debit installment agreement will be $107. An online payment agreement however will cost $149. To reinstate a defaulted installment agreement the fee will be $89. All things considered the installment agreement for many clients may be the only real alternative to handling their tax liability.

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.