Archive for Abusive Tax Shelter

Lessons From Mitt Romney’s Tax Return

January 30, 2012 Abusive Tax Shelter, Accounting Method, Alternative Minimum Tax (AMT), Asset Classification, Audit Technique Guide, Basis, Business Expense, Business Income, Charitable Contribution, Cost Basis

Check out Mitt Romney’s 2010 tax return and learn how he does it. The most important lesson I learned in perusing his return (besides the significance of sheltering your $$ outside of the USA) is the immediate impact of targeted charitable contributions. In my professional opinion the absolute best way to reduce your tax liability is to make charitable donations of money or property. Also you can try to:

  • Avoid salary, wagesand tips if you can. Instead generate income from long-term capital gains

  • Avoid Muni-bond interest. It triggers Alternative Minimum Tax (AMT) making this investment vehicle laughable at best for the truly wealthy

  • Pursue Qualified dividends.  They are essentially ordinary dividends that meet the requirements to be taxed as net capital gains. Check out Publication 550, Investment Income and Expenses

  • Avoid the home-office deduction. It offers a small tax benefit requiring large tax prep effort (aka $$). Usually not worth the time and effort.

  • Itemizing deductions is probably not worth the personal disclosure required

  • Beware that capital gains and dividends can also trigger the AMT

  • Offshore investments are abusive because they rob the US Treasury of much needed tax revenue. Basically the US Tax Code encourages the wealthy to invest OUTSIDE OF THE UNITED STATES which is so backwards it makes my head spin.

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IRS Audit Guidelines Assessing Asset Dissipation

November 30, 2011 Abusive Tax Shelter

If you are delinquent on taxes you may be considering some IRS payment arrangement whereby your total tax liability will be considered satisfied in exchange for a payment plan that is less then the full amount owed. Two different plans that I have had success with lately are Offers In Compromise and Partial Payment Installment Agreements. Usually these monthly payment plans are based on your ‘reasonable collection potential’ which takes into consideration among other things the value of your assets.

In your planning phase before you request consideration you will be tempted and maybe even perhaps advised by someone you trust to spend down your assets before submitting the forms so as to ‘protect’ yourself. This practice is commonly referred to as dissipating assets. I write to tell you now that the IRS is keenly aware of this type of behavior and that it is counterproductive.

A dissipated asset is any asset sold, transferred or depleted to pay down other debts and is subsequently no longer available to pay a delinquent tax liability. The IRS can and will look for these assets and if found include their value in calculating your reasonable collection potential.  The higher your reasonable collection potential the less likely you are to settle on terms.

I can tell you as a matter of fact that being suspected of dissipating assets is very serious because it calls into question your credibility and once your credibility is scrutinized opportunity is created for further probing. No one wants that.  BELIEVE ME! So be careful in how you move your assets around if you have outstanding tax liabilities. Even if you believe you are behaving prudently its best to understand the guidelines IRS Examiners use to determine if you dissipated assets, intentionally or otherwise. This is what the Internal Revenue Manual generally states in regards to audit guidelines to consider in determining if dissipation occurred.

  • The time frame with which an asset is dissipated in relation to the OIC submission. Generally, the value of assets dissipated more than five years before the OIC submission will not be included in the reasonable collection potential calculation;

  • If an asset was used by the taxpayer to pay existing, ongoing business operating expenses, the funds should not be considered a dissipated asset;

  • When the asset was dissipated in relation to the liability;

  • How the asset was transferred;

  • Whether the taxpayer realized any funds from the asset transfer;

  • How any funds realized from the disposition of assets were used; and

  • The value of the assets and the taxpayer’s interest in them.

The Tax Court has precedent in ruling in favor of the IRS when dissipated asset values are used to calculate a taxpayer’s reasonable collection potential.  For info on that check out T.C. Memo 2011-67 and T.C. Memo. 2011-194

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Abusive Tax Shelters

September 1, 2011 Abusive Tax Shelter

Abusive tax shelters of every nature are what I call scum bag lawyer schemes.  It is difficult to specifically define abusive tax shelters because new ones are constantly emerging.  Essentially they are arrangements usually designed by ‘promoters’ to circumvent tax laws or evade taxes.  They range from being clearly illegal to being carefully constructed to disguise illegality.

A typical characteristic to look for in determining if an investment ‘opportunity’ is actually an abusive tax shelter trust arrangement is the promise of tax benefits with no meaningful change in the control of your assets or benefit from your income. Abusive trust arrangements tend to use trusts to hide true ownership of assets and income or disguise transactions. Frequently more than one trust is involved with each holding different assets.  Some trusts may hold interests in other trusts, claim to be charitable in nature or foreign owned and controlled. Funds flow from one trust to another trust by way of rental agreements, fees for services, purchase agreements and distributions.

As I understand it one scheme in particular, the Family Estate Trust also often referred to as an Equity Trust, Patriot Trust, Contract Trust, Freedom Trust, Common Law Trust Organization, GPG Trust or Complex Trust System is considered by many as possessing the highest likelihood of egregious abusiveness used in estate planning.

In one example, a ‘promoter’ of ‘Trust Arrangements’ may have the trustee be a relative or friend of the owner who simply carries out the directions of the owner, whether or not permitted by the terms of the trust.  Moreover, in most cases, the CPAs and attorneys writing the opinion letters relative to such trust arrangements are not independent of the promoter; rather, they are captive members of the promoter’s team.

With respect to estate planning as I understand it, the IRS and the courts disapprove of the so-called Family Estate Trust. “The Family Estate Trust is an irrevocable inter vivos grantor trust, a listed transaction and classified by the IRS as an abusive trust arrangement.”  To most any tax professional at first glance, understanding why the typical Family Estate Trust will not work is extremely difficult because the paper trail can present itself as appearing legitimate.

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IRA’s Cannot Hold Sub-Chapter ‘S’ Stock: Trusts Can Though

July 29, 2011 Abusive Tax Shelter, Entity Classification, Self Employ, Small Business, Sole Proprietor, Sub-chapter S, Tax Abuse, Tax Court, Tax Fraud, Tax Guidance & Preparation

To be taxed as an S corporation, a C corporation must elect S status by filing IRS Form 2553. Electing S status is fairly simple for a new or existing corporation, but meeting the requirements for S status can be more complex when the C corporation is not owned by an individual. Eligibility is based on §1361, which states only a “small business corporation” can obtain S status to be taxed as an S corporation. Under Reg. §1.1361-1(e) (1) the person for whom stock is held by a nominee, guardian, custodian or an agent is considered to be the shareholder of the corporation.

In Taproot Administrative Services, Inc. v. Commissioner the IRS disallowed the S election on the basis that an IRA is not an eligible shareholder. They based their opinion on Rev. Rul. 92-73, which disallowed an IRA as a shareholder, stating the code does not specifically address an IRA as a shareholder in an S corporation. Rev. Rul. 92-73 was based on the fact that a beneficiary of an IRA or Roth IRA is not taxed on current income for the year, but taxed when the money is distributed. Trusts allowed to own stocks in an S corporation are taxed currently either at the trust level or the beneficiary level, and are therefore eligible shareholders of an S corporation.

Taxation of IRAs are governed under §408 and §408A, which allow the owners or beneficiaries of an IRA to defer any tax or gain until the amounts are distributed. IRAs are taxed on unrelated business income under §511 where income from an S corporation would be unrelated income for the exempt account.

The Court upheld the IRS’ position regarding Rev. Rul. 92-73, stating IRAs cannot be the owners of S corporation stock because the beneficiaries are not currently taxed on the S corporation’s income, and Congress did not include IRAs in §1361 as eligible S corporation shareholders.

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Tax Strategy Patents + Patent Applications

June 17, 2011 Abusive Tax Shelter, Colorado Department of Revenue, Estimated Taxes, IRS Appeal, IRS Audit, IRS Collections, IRS Enforcement, IRS Examination, IRS Levy, IRS Lien, IRS Mediation, IRS Penalties, IRS Penalty and Interest Abatement, Private Letter Ruling, Tax Abuse, Tax Problems & Requests, Tax Relief, Tax Whistle Blower

I am opposed to all tax strategy patents.  They are bad public policy and harmful to taxpayers and their advisers.  No one should have a monopoly on part of the tax code and no taxpayer should be subject to paying royalties or lawsuits for using a legal way to comply with the tax code.

The tax code is already complicated enough. We do not need more of these kinds of bad patents issued, carving up the tax code and making life more difficult for everyday taxpayers.

Congressman Polis’ (Colorado) proposed amendment coming up for a vote in the House of Representatives next week would allow up to  160+ additional tax strategy patents to be issued.  This could potentially more than double the number of these bad patents from the approximately 140 that are already out there.

A pending application is no promise that a patent will ultimately be issued by the PTO so Congress is not doing anything unfair to the patent applicants.  There was no guarantee when they filed their applications that they would ultimately receive a patent.  And, these kinds of patents are simply not in the public interest.

A patent applicant may argue that he or she divulged certain proprietary information or business secrets when he or she applied for the patent and therefore is entitled to continue the process.  But all patent applicants send in their application with the understanding that they may not ultimately receive a patent.

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What is an Abusive Tax Shelter?

June 13, 2011 Abusive Tax Shelter, IRS Appeal, IRS Audit, IRS Collections, IRS Enforcement, IRS Examination, IRS Mediation, IRS Penalty and Interest Abatement, Tax Abuse, Tax Fraud, Tax Guidance & Preparation, Tax Problems & Requests

An abusive tax shelter generally offers inflated tax savings which are disproportionately greater than your actual investment placed at risk. Usually you invest money to generate income or capital appreciation but an abusive tax shelter generates little or no income or capital appreciation, and/or the tax shelter exists primarily to reduce taxes unreasonably for tax avoidance or evasion. This can be deemed abusive by the IRS.

In comparison, a legitimate investment produces income or capital appreciation and involves a risk of loss proportionate to the investment. This type of tax shelter is often marketed in terms of how much you can write off in relation to how much you invest.

A series of tax laws have been designed to halt abusive tax shelters. The IRS has also identified 34 transaction as ‘tax avoidance’ transactions in IRS Notice 2009-59 as well as 4 ‘transactions of interest’ in IRS Notice 2009-55.

If you think it might be to good to be true it probably is.  You should refer to these lists of transactions for further clarification. Also check out IRS Publication 2193 (PDF), Too Good to Be True Trusts.

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IRS Issues Prohibited Tax Shelter Final Regulations

July 9, 2010 Abusive Tax Shelter, IRS Enforcement, Paying Taxes, Tax Abuse, Tax Fraud, Tax Guidance & Preparation

IRS Issues Prohibited Tax Shelter Final Regulations

http://www.irs.gov/pub/irs-tege/4965fregs.pdf

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Abusive Home-Based Business Tax Schemes – Misuse of the Law

March 3, 2010 Abusive Tax Shelter, Back Taxes Owed, Home Office, Self Employ, Small Business

The IRS has uncovered a number of schemes that claim to allow deductions for personal living expenses. Taxpayers should consider these points before investing in a possible abusive scheme:

  • Any investment scheme or promotion that claims to allow a federal income tax deduction for normal personal expenses should be considered highly suspect

  • A business must truly exist prior to claiming expenses

  • In order to be deductible, the expenses must be ordinary and necessary expenses paid or incurred in carrying on a trade or business

  • Personal, family and living expenses are not deductible business expenses

  • Forming an S corporation, partnership, or any other pass-through entity does not cause personal, living and family expenses to become deductible; nor do incorporation, the existence of board minutes, and partnership agreements authorizing personal, living or family expenses cause these expenses to become deductible

Examples of misuse of the law:

  • TRAVEL – Deducting travel, meals, and entertainment under the guise that everyone is a potential client.

  • AUTO – Excessive car and truck expenses when the asset has been used for both business and personal use.

  • PAYMENTS TO FAMILY MEMBERS – Deducting payments to family members for routine household tasks that are not ordinary and necessary to the operation of the business, such as taking out the trash, mowing the lawn, washing the car, answering the telephone, etc. Also payments to family members that are excessive in relation to the services performed.

  • BUSINESS USE OF HOME – Abusive promoters often advise taxpayers to deduct excessive costs associated with the operation of the home. The promoters claim that the “exclusive use” restriction can be avoided by placing business-related items in each room of the house. A deduction for the business use of a home is limited to that area of the home that is used regularly and exclusively for business purposes (Internal Revenue Code Section 280A). For example, merely placing a calendar or file cabinet in a room does not satisfy the “regular and exclusive business use” requirement.

  • EDUCATION EXPENSES – Some schemes advise taxpayers that they may claim up to $5,250 per year in educational expenses for each family member. There are specific requirements that preclude virtually all investors in this scheme from qualifying for this deduction (Internal Revenue Code Section 127).

  • MEDICAL REIMBURSEMENT PLANS – Abusive promoters assert that taxpayers can make their family’s medical expenses 100 percent deductible merely by employing their family member(s). In order for the medical expenses to be deductible under a self-insured medical reimbursement plan, a bona fide employer-employee relationship must exist. In addition, the plan has to meet other requirements (Treasury Regulation Section 1.105-11).

  • RECORD KEEPING – Taxpayers in these schemes are advised to maintain detailed records of all expenses incurred. The existence of such records does not negate the requirement that expenses be “ordinary and necessary” in relation to a legitimate business activity. The expenses must also satisfy any other deductibility requirements (Internal Revenue Code Section 274).

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

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Tax Exemption Questioned for Christian Congressional Man Cave

March 2, 2010 Abusive Tax Shelter, Charitable Contribution, Tax Fraud, Tax Guidance & Preparation, Tax Problems & Requests

New York Times editorial, Render Unto C Street:

It is not unusual for members of Congress to arrange group rentals in Washington to share housing costs and, for some, underline their continuing “outsider” status. What is highly unusual, and unjustifiable, is the tax-exempt status as a religious institution enjoyed by a boarding house called the C Street Center that caters to conservative Christian lawmakers.

The $1.8 million townhouse came to public notice last year when three recent tenants — Senator John Ensign; Mark Sanford, the South Carolina governor and former congressman; and former Representative Charles Pickering Jr. — were embroiled in marital infidelity scandals. Mr. Pickering was accused by his estranged wife of entertaining a mistress at the house.

The center soon lost most of its city tax exemption, after District of Columbia officials decided it was a residence, not a church. And now a coalition of mainline Christian ministers is demanding that the IRS end the center’s federal tax exemption and its shield of nontransparency. The coalition is rightly concerned that the center is exploiting, and thereby cheapening, the constitutional protections guaranteed legitimate religious institutions. …

Family values, human frailty and forgiveness are the stuff of spiritual counseling that evangelical tenants claim goes on privately inside the C Street Center. All well and good, but that does not make a church of a boarding house nor require a tithing of taxpayers.

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