Archive for Tax Relief
In 2013, the IRS will focus the significant majority of their enforcement budget and subsequent activity in my opinion on three specific areas:
1. Abusive transactions and under reported income on partnership returns (IRS Form 1065).
2. Officer compensation as well as losses taken in excess of basis in Sub-chapter S Corporations (IRS Form 1120-S).
3. Under reported income via Automated Under Reporter Inventory Strategy Database (AUR-ISD)
In 2012, the IRS started a business information-matching program and a Form 1099-K matching program. The IRS sent new notices in late 2012 questioning businesses on the accuracy of their returns, based on information statements filed under business employer identification numbers (EINs). The IRS also matched Forms 1099-K to business returns and sent inquiries to taxpayers with potential discrepancies, requesting explanations for possible unreported income. I have been informed by reliable sources inside the Service that in 2013, the IRS will expand this effort to address small business under reporting vastly beyond its reaches in 2012.
Most anniversaries are celebrated with joy and jubilation. But on February 3rd, 2013, I doubt that anyone will be celebrating this anniversary or should I say centennial – after all, it is the 100th anniversary of the 16th Amendment to the US Constitution, the amendment that gave the federal government the right to impose the dreaded income tax and it was ratified on February 3, 1913.
In 1913, the collection of income tax was not intended to be collected from the masses, only from the rich, only those making $20,000 or more. How much did the average American family make in 1913? I would suspect that, just as today, it would depend upon where in the country you live. Some resources claim average salaries as low as $750/year and some as high as around $3,000/ yr. In either case, back in 1913 the average family in the United States was living far, far below the threat of paying income tax. And that was the intent of the government back then. The government was very concerned that the ‘little people’ be able to feed their families, pay their bills and save for their retirement.
The Internal Revenue Service now processes more than 145 million tax returns each year. The Internal Revenue Code is now more than 3.4 million words. If printed 60 lines to a page, it would fill more than 7,500 letter size pages.
So perhaps while we fill out our tax returns this year, we should fill our glass with our favorite drink and ponder what it will take to get back to the intent of the 16th amendment
Act now! According to the IRS IRA owners age 70½ or older have until Thursday, Jan. 31 2013 to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.
The American Taxpayer Relief Act of 2012, extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs)—otherwise taxable distributions from an IRA owned by someone, 70½ or older, paid directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs.
The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is available for the transfer. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.
For tax-year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners who received IRA distributions during December 2012 can contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 QCDs.
QCDs are reported on Form 1040 Line 15. The full amount of the QCD is shown on Line 15a. Do not enter any of these amounts on Line 15b but write “QCD” next to that line.
Form 1040 – IRA owners must report 2012 QCDs made in January 2013 on their 2012 Form 1040 by:
including the full amount of the 2012 QCD (even if in excess of $100,000) on line 15a; and
not including any amount on line 15b, but writing “QCD” next to line 15b.
A 2012 QCD made in January 2013 must also be reported on the IRA owner’s 2013 Form 1040. These reporting requirements will be reflected in the 2013 Instructions for Form 1040.
Form 1099-R – IRA trustees must report distributions as follows:
Distributions made in 2012 are reported on a 2012 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc; and
Distributions made in 2013, including any 2012 QCDs made in January 2013, are reported via 2013 Form 1099-R.
IRA owners must file a 2012 Form 8606, Nondeductible IRAs, with their 2012 Form 1040 if:
the 2012 QCD was from a traditional IRA, there was basis in the IRA owner’s traditional IRA(s), and the IRA owner received a distribution from a traditional IRA in 2012, other than the 2012 QCD; or
the 2012 QCD was from a Roth IRA.
If a 2012 Form 8606 must be filed, the instructions to the form will describe how to report any 2012 QCD made in January 2013.
Considering the scope of the reasonable cause language to the Code Sec. 6699 penalty for late filing of an S corporation return, the Tax Court determined that the failure to timely file a 2008 2008 1120-S tax return was due to reasonable cause not subject to penalty in Ensyc Technologies v. Comm’r, T.C. Summary 2012-55 (6/14/12). The following are the facts as I understand:
1. Ensyc Technologies, an S corporation operated entirely by its president who works from his home in Idaho with the assistance of subcontractors, had its tax returns prepared by an accountant in Nevada.
2. Ensyc’s annual tax return for 2008 was due March 16, 2009.
3. On March 10, 2009, Ensyc’s accountant sent Ensyc IRS Form 1120S, U.S. Income Tax Return for an S Corporation, to file with the IRS. The accountant also sent copies of Schedules K-1, Shareholder’s Share of Income, Deductions, Credits.
4. Ensyc’s files contained a copy of a Form 1120S bearing the President’s signature dated March 16, 2009.
5. The IRS has record receiving a Form 1120S from Ensyc on September 11, 2009 postmarked September 8, 2009.
6. The 1120-S form itself was dated February 24, 2009.
7. Code Sec. 6699 basically states that an S corporation not timely filing its annual tax return is liable for a per-shareholder penalty for every month the tax return is late up to 12 months. However the penalty is not imposed if the failure to timely file the return is due to reasonable cause.
8. On the theory that the Form 1120S it received on September 11, 2009, was the only Form 1120S Ensyc had filed for tax year 2008, the IRS assessed a $6,408 late-filing penalty.
9. On February 1, 2010, Ensyc requested a collection-review hearing with the Office of Appeals regarding levy action.
10. The IRS Office of Appeals determined that Ensyc did not timely file a Form 1120S nor did it have reasonable cause for failing to timely file the form and sustained the levy.
11. Ensyc took the case to the Tax Court, arguing that it was not liable for the late-filing penalty because it mailed a Form 1120S on March 16, 2009.
12. The Tax Court examined the possible explanations for why the IRS had no record of receiving the Form 1120S and essentially determined that the tax return was not timely mailed.
13. The Tax Court then considered whether there was reasonable cause for not filing the form on time noting that no judicial opinion had yet considered the scope of the reasonable cause exception to the Code Sec. 6699 penalty.
14. The court applied the ordinary-business-care-and-prudence test from IRC 6651 concluding that Ensyc exercised ordinary business care and prudence in its efforts to timely file its Form 1120S for 2008.
15. The Tax Court specifically noted that the President routinely mailed Ensyc’s tax returns on time. Further he mailed the Schedules K-1 to Ensyc’s shareholders and that an Ensyc shareholder filed an annual individual income-tax return on April 15, 2009 reflecting the shareholder’s pass through loss.
16. The court believed the President’s testimony that he thought he had mailed the 2008 Form 1120S on March 16, 2009. As a result, the court found that Ensyc’s failure to timely file a Form 1120S for the 2008 tax year was due to reasonable cause and, thus, Ensyc was not liable for the Code Sec. 6699 penalty.
17. It was also noted that pursuant to INTERNAL REVENUE CODE SECTION 7463(b), this opinion may not be treated as precedent for any other case.
I think the lesson learned here is to file on time and avoid the penalty.
I’ve worked with many good people inside the IRS on a wide variety of cases. So please do not get me wrong I’m not bashing ALL IRS employees. However like any big bloated bureaucracy I’ve also worked with some real shit heads inside the IRS who take their orders to advocate on behalf of the US government a little too seriously. When indeed government bureaucrats should be focused on getting maters resolved some use their vested authority to wreak havoc on good people’s lives using what I refer to as procedural maneuvers.
One such example is when IRS Revenue Officers can negatively impact the ability of taxpayers to obtain appropriate and effective representation during collection investigations. According to the Treasury Inspector General for Tax Administration (TIGTA) “IRS employees are required to stop an interview if the taxpayer requests to consult with a representative and may not bypass a representative without supervisory approval.” Evidently this is not happening as provided for by law in that “between October 2010 and September 2011, TIGTA’s Office of Investigations closed 19 direct contact complaints involving IRS employees, of which eight were disciplined or counseled for their actions by IRS management officials.” AKA – a slap on the wrist.
The IRS’s compliance with Internal Revenue Code Sections 7521(b)(2) and (c) is in my opinion woefully inadequate. The audit report I reference goes on to state that “in the sample of 73 cases, TIGTA found that 14 revenue officers deviated from procedures by: 1) contacting the taxpayer directly, instead of the authorized representative, on the initial or subsequent contact in the collection investigation, 2) not sending copies of taxpayer correspondence to the authorized representative, or 3) not allowing enough time for the taxpayer to obtain a representative.” The report in question clearly states “IRS personnel are intentionally disregarding the direct contact provisions of the Internal Revenue Code.”
As such if you are under investigation you need to know your rights. You also need to keep in mind that IRS employees are specifically trained to create the perception that they are ‘helping’ you ‘achieve compliance’ when indeed they are compiling evidence to portray you as a delinquent or even a criminal. Check out the report yourself here ->
Quite often people approach me with their tax problems talking in terms of “coming clean” telling dramatic and deeply personal stories, many of which have little or nothing to do with the tax matter at hand. People seem to want to essentially ‘get issues off their chest’ or ‘confess their sins’ as it were which presupposes that I also serve as a pastor, priest, minister, rabbi etc. This has always proven troubling in that I am not formally trained to help people seek relief in these regards.
Having spent years talking to many good friends and fellow tax experts about directing taxpayers when their conversation drifts away from taxes the general conclusion is to redirect and stay focused on the area of expertise, tax. Often taxpayer conversation distills down to the immediate costs associated with correcting mistakes of the past and many people wrestle with whether there is more benefit in ‘doing nothing’ thinking that if they are ‘lucky’ they may ‘get away with it like (friend) or (relative).’ This certainly is one alternative.
My license however requires me to inform taxpayers of their delinquencies as they are reported so ignoring a mistake or problem is not a permanent solution in my reality. That aside there are more important reasons to ‘come clean’ as reflected in these two very true stories that when read together bring an understanding that action (and even inaction) have corresponding consequences reaching far beyond the mechanics of defending or correcting a tax return. I don’t know who authored the following text to give credit but it is worth reading. Let me know what you think…
STORY NUMBER “ONE”
Many years ago, Al Capone virtually owned Chicago . Capone wasn’t famous for anything heroic. He was notorious for enmeshing the windy city in everything from bootlegged booze and prostitution to murder.
Capone had a lawyer nicknamed “Easy Eddie.” He was Capone’s lawyer for a good r eason. Eddie was very good! In fact, Eddie’s skill at legal maneuvering kept Big Al out of jail for a long time.
To show his appreciation, Capone paid him very well. Not only was the money big, but Eddie got special dividends, as well. For instance, he and his family occupied a fenced-in mansion with live-in help and all of the conveniences of the day. The estate was so large that it filled an entire Chicago City block.
Eddie lived the high life of the Chicago mob and gave little consideration to the atrocity that went on around him.
Eddie did have one soft spot, however. He had a son that he loved dearly. Eddie saw to it that his young son had clothes, cars, and a good education. Nothing was withheld. Price was no object.
And, despite his involvement with organized crime, Eddie even tried to teach him right from wrong. Eddie wanted his son to be a better man than he was.
Yet, with all his wealth and influence, there were two things he couldn’t give his son; he couldn’t pass on a good name or a good example.
One day, Easy Eddie reached a difficult decision. Easy Eddie wanted to rectify wrongs he had done.
He decided he would go to the authorities and tell the truth about Al “Scarface” Capone, clean up his tarnished name, and offer his son some semblance of integrity. To do this, he would have to testify against The Mob, and he knew that the cost would be great. So, he testified.
Within the year, Easy Eddie’s life ended in a blaze of gunfire on a lonely Chicago Street .. But in his eyes, he had given his son the greatest gift he had to offer, at the greatest price he could ever pay. Police removed from his pockets a rosary, a crucifix, a religious medallion, and a poem clipped from a magazine.
The poem read:
“The clock of life is wound but once, and no man has the power to tell just when the hands will stop, at late or early hour. Now is the only time you own. Live, love, toil with a will. Place no faith in time. For the clock may soon be still.”
STORY NUMBER “TWO”
World War II produced many heroes. One such man was Lieutenant Commander Butch O’Hare.
He was a fighter pilot assigned to the aircraft carrier Lexington in the South Pacific.
One day his entire squadron was sent on a mission. After he was airborne, he looked at his fuel gauge and realized that someone had forgotten to top off his fuel tank.
He would not have enough fuel to complete his mission and get back to his ship.
His flight leader told him to return to the carrier. Reluctantly, he dropped out of formation and headed back to the fleet.
As he was returning to the mother ship, he saw something that turned his blood cold; a squadron of Japanese aircraft was speeding its way toward the American fleet.
The American fighters were gone on a sortie, and the fleet was all but defenseless. He couldn’t reach his squadron and bring them back in time to save the fleet. Nor could he warn the fleet of the approaching danger. There was only one thing to do. He must somehow divert them from the fleet.
Laying aside all thoughts of personal safety, he dove into the formation of Japanese planes. Wing-mounted 50 caliber’s blazed as he charged in, attacking one surprised enemy plane and then another. Butch wove in and out of the now broken formation and fired at as many planes as possible until all his ammunition was finally spent.
Undaunted, he continued the assault. He dove at the planes, trying to clip a wing or tail in hopes of damaging as many enemy planes as possible, rendering them unfit to fly.
Finally, the exasperated Japanese squadron took off in another direction
Deeply relieved, Butch O’Hare and his tattered fighter limped back to the carrier.
Upon arrival, he reported in and related the event surrounding his return. The film from the gun-camera mounted on his plane told the tale. It showed the extent of Butch’s daring attempt to protect his fleet. He had, in fact, destroyed five enemy aircraft
This took place on February 20, 1942 , and for that action Butch became the Navy’s first Ace of W.W.II, and the first Naval Aviator to win the Medal of Honor.
A year later Butch was killed in aerial combat at the age of 29. His home town would not allow the memory of this WW II hero to fade, and today, O’Hare Airport in Chicago is named in tribute to the courage of this great man.
So, the next time you find yourself at O’Hare International, give some thought to visiting Butch’s memorial displaying his statue and his Medal of Honor. It’s located between Terminals 1 and 2.
SO WHAT DO THESE TWO STORIES HAVE TO DO WITH EACH OTHER? Butch O’Hare was “Easy Eddie’s” son!!!!!
The IRS just posted the following news wire IR 2012-26 which states as follows – “Refunds totaling more than $1 billion may be waiting for one million people who did not file a federal income tax return for 2008, the Internal Revenue Service announced today. However, to collect the money, a return for 2008 must be filed with the IRS no later than Tuesday, April 17, 2012. The IRS estimates that half of these potential 2008 refunds are $637 or more.”
If you want to go after this money do it soon! If you need help getting started holler out at me or shoot me an email.
The news wire goes on to state – “Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury. For 2008 returns, the window closes on April 17, 2012. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.”
The biggest catch however is that you must file tax returns for 2009 and 2010 and the refund will be applied to any amounts still owed or used to offset unpaid child support or past due federal debts such as student loans.
By failing to file a 2008 tax return by this April 17, 2012 the refund is foregone. The News wire also posted the following chart which I found quite eye opening …
Individuals Who Did Not File a 2008 Return with a Potential Refund
District of Columbia