Saturday, July 8, 2017

History of Enrolled Agents

History of Enrolled Agents
  • The following is provided as an overview about how Enrolled Agents fit into the US tax system. Post Civil War - Congress enacted legislation that gave citizens of the US authority to make claims for the value of horses and other property lost during the War. These claims were to be filed with the Treasury Department.
    • It soon became evident that more claims had been submitted than horses lost?
  • July 7, 1884 - Under President Chester Arthur, the General Deficiency Appropriation Bill (HR 2735) signed into law. (known as the Horse Act of 1884 and the Enabling Act.)
  • This law gave the Secretary of the Treasury authority to regulate the admission of attorneys and agents who represented claimants before the Treasury Department and to take appropriate disciplinary action against those who failed to comply with the regulations or who were incompetent.
  • 1966- More revisions to Circular 230 became effective in September 1966.
  • The Treasury Department/IRS agreed to continue the Special Enrollment Exam and provide an official name for these representatives by establishing the “Enrolled Agent” designation.
  • 1994 More revisions to Circular 230 became effective in 1994.
  • Enrolled Agents were approved to use the initials “EA" to denote the Enrolled Agent title.

Saturday, April 29, 2017

White House Proposal

White House proposal
(President President Trump Releases a One Page Plan):
Individual Tax Reform

  • Reduce seven (7) tax brackets into three (3) tax brackets. 
    • The current marginal rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. 
    • Three new proposed rates of 10%, 25%, and 35%. 
      • The administration has yet to identify the tax bracket income levels for these new rates? 
  • Repeal the Affordable Care Act's (ACA) 3.8% net investment income tax imposed upon unearned income and capital gains of high-income taxpayers.
  • Double the standard deduction.
  • Limit itemized deductions to mortgage interest and charitable contributions.
  • Repeal the estate tax.
  • Repeal the Alternative Minimum Tax (AMT).
  • Provide tax relief for families with child and dependent care expenses. 
    • The administration has yet to clarify how this relief will differ from the current expenses under IRC §21.
Business Tax Reform
  • Lower the business tax rate to 15%. While the current corporate tax rate is 35%, many small businesses  (S-Corp's P-Ships)  pass through their income via K-1's to the individual level. 
    • The administration has yet to identify any rules which may be established to prevent individuals from creating pass-through entities to avoid being taxed at a lower business rate, rather than higher individual rate?  But there would be rules established to prevent this practice from taking place?
  • Establish a territorial tax system. 
    • Foreign earned income would generally be excluded from this system.
  • Eliminate tax breaks for special interests. 
  • Establish a "one-time tax" on corporate earnings realized and held overseas (on which tax is deferred).
Source: NAEA E@lert Newsletter April 28, 2017

Saturday, April 8, 2017

Tax Court

Tax Court
  • The US Tax Court generally provides one of three types of opinions, referred to as TC Opinion, TC Memorandum, and TC Summary. Before we discuss how those opinions differ, an overview is helpful. Each opinion is considered the decision of the entire Tax Court, rather than that of the issuing judge alone. In this fashion, the Court acts in a collegiate manner similar to that of an appellate court (though the Tax Court is not truly "en banc" because the judges do not sit together to hear arguments).
  • A draft opinion is prepared after the final reply brief is filed. Usually the judge (or trial judge) who heard the case prepares the draft opinion, but that's not required. Draft opinions do not become opinions of the Tax Court until the Chief Judge reviews them.
  • The Chief Judge may choose within 30 days to ask the entire court to review the opinion, making it a "reviewed opinion." Review by the full court is likely to happen if the draft opinion invalidates a regular opinion or overrules Tax Court precedent. If a case of first impression, the full court may review the opinion. Reviewed opinions may also occur if the issue is likely to come up in another pending case, if the matter overrules a prior Tax Court decision, or if the Tax Court was previously reviewed by a Court of Appeals. The Chief Judge selects a judge to write the reviewed opinion and other judges offer concurring or dissenting opinions that follow the Court opinion. The Chief Judge determines which description an opinion will have.Cutting to the chase (finally), the three types of opinions follow:
    • TC Opinion: Regular opinions are published in the Reports of the Tax Court; they are considered to be binding precedent and are cited as XXX TC XX. These are the highest level rulings and may be cited and appealed.
    • TC Memorandum: Memorandum opinions are published commercially; these usually apply settled law to the facts and circumstances of the case in question. Importantly, memo decisions do not set precedent, but the Court does not easily ignore them and they can become even more important if they were subject to an appellate review. They are cited TC Memo YEAR-NUMBER. These decisions may be cited and appealed.
    • TC Summary: Summary opinions are those issued but not officially published (and usually rendered in small tax cases). A summary opinion does not set precedent and may NOT be cited (although they may still be useful with IRS examination staff). They are referred to as TC Summary YEAR-NUMBER.
  • As an aside, the entry of a decision may be withheld pending a final computation by both parties. Rule 155 computations may be based on valuation issues, or may indicate a split between the taxpayer and IRS on multiple issues. If the parties agree on the amount of deficiency, liability, or overpayment, each submits a computation and a statement of agreement. To be clear, agreement with a calculation does not waive appeals rights. The Court renders a decision when it receives an agreed Rule 155 computation.
  • If the parties cannot agree on computation, either may file with the Court a computation of the amount believed to reflect the Court's findings and conclusions. When parties submit differing computations, they may be allowed the opportunity to be heard in argument, after which the Court will determine the correct amount due.
  • No new issues may be raised during the hearing, which is held strictly on the question of correct computation. No reconsideration may be requested, though pure issues of law may be reconsidered and mechanical or math adjustments are permitted.
  • You'll see below an example of each type of case: a TC Opinion, a TC Memorandum, and a TC Summary.
    • Is compensation for the donation of eggs includable in income? In Perez (144 TC 4 (1/22/15)),
       the taxpayer received $20,000 in exchange for undergoing painful procedures to donate her unfertilized eggs to infertile couples. Under her contracts the sums she received were designated as compensation for pain and suffering, and she did not report these amounts on her 2009 income tax return. Judge Holmes in this instance concluded Donor Source did not exceed the scope of the taxpayer's contractual consent; as such compensation for pain and suffering from the consensual performance of a service contract is not "damages" under §104(a)(2) and must be included in gross income (take note: NAEA included this case in their top-ranked "Is This Income?" course at IRS' 2015 Nationwide Tax Forum).
      • NOTE: Judge Holmes also looked to the possible interpretations that could occur if the Court ruled differently - that a professional boxer could argue that part of his fee was payment for bruises, nosebleeds and cuts, or that a hockey player could argue that a portion of his salary was allocable to chipped teeth, and football players could allocate part of their earnings for brain injuries. The risk is known and is part of what they agree to before beginning their work, which is what makes it taxable income and not excludable.
    • It's not a joint return when it's signed under duress ... in Hiramanek (TC Memo 2016-92 (5/10/16))'s
      ex-wife previously sought relief from joint liability for the 2006 tax year and reached a settlement with the IRS that since she signed under duress, it wasn't a joint tax return and she had no liability for the deficiency (the Tax Court trial came to the same conclusion). While the first case was pending, the taxpayer filed his own request for relief under §6015, which was denied (it isn't possible to have two innocent spouses). Taxpayer appealed the decision in the first case to the 9th Circuit and lost, and attempted to appeal to the Supreme Court, which denied the writ for certiorari. Taxpayer filed Form 8857, Request for Innocent Spouse Relief, for 2006 (the same tax year).
    • How does equitable ownership allow the taxpayer to deduct mortgage interest? In Phan (TC Summary 2015-1 (1/12/15))
      , the taxpayer moved onto a three acre ranch in California to help his mother. In 2010, the legal title was held by Phan's mother, brother and father - the brother and father did not live at the property, and the mother was divorcing the father. Phan could not buy the property himself, but had an oral agreement with his mother and siblings that he would pay the mortgage loan and the property taxes, and those payments would increase his equity interest. His name was added to the title in 2013. In 2010, Phan claimed a $35,880 mortgage interest deduction, which the IRS denied. The taxpayer may become the equitable owner if he or she assumes the benefits and burdens of ownership. Phan resided at the property and made mortgage payments plus property tax and insurance, paid the cable bill, and made improvements to the property. Taxpayer was entitled to the interest deduction as claimed.
  • Please note the cover sheet, which states, "Pursuant to Internal Revenue Code Section 7463(b), this opinion may not be treated as precedent for any other case."

Friday, April 7, 2017

OIC Denial due to Home Equity

Lady Godiva, 1897 by John Collier
Offer-in-Compromise (OIC) Denial due to Home Equity
  • The IRS lien remains, even if you’re in “Currently-Not-Collectible” (CNC) status. At this point, the only way to remove the IRS lien is to pay off the entire amount of tax due. 
  • Here are some options, if lien removal is your primary goal:
    • sell your house, then pay this tax debt out of the proceeds and either buy a cheaper home or live in an apartment
    • find a lender willing to approve a home equity loan for the amount of the tax debt, then pay off the IRS entirely and make monthly payments to the lender
    • set up an installment agreement with the IRS to pay off the entire amount due; this works only if you can do it within six years
  • If none of those options are appealing, and some may not be possible... the alternative is Currently-Not-Collectible (CNC) status. You can qualify for this if your sole source of income is Social Security Disability Insurance payments or if your monthly allowable expenses exceed your monthly income. If you are able to get this status, you don’t have to make any more payments to the IRS, ever, so long as your income doesn’t improve significantly. However, the tax debt remains, the lien remains, and interest continues to accumulate. That’s not a happy solution, either, I’m sure.
  • The one "bright light at the end of the tunnel" is that the IRS has a time limit for collecting on this sort of tax liability. The limit is ten years from the date of assessment, plus whatever time is spent while contesting the debt in any way, such as via an Offer-in-Compromise or a petition to Tax Court. If you filed for bankruptcy, the ten-year clock would pause, too. (Keep in mind that you can sometimes discharge IRS liabilities in bankruptcy, but you can’t remove an IRS lien that way.)
    • For example, if your 2012 tax liability was assessed on December 25, 2013 -- this means the IRS can no longer collect on your 2012 tax liability – and the lien will expire a natural death on December 25, 2023, plus however many days the Offer-in-Compromise (OIC) was in process?

    Good News for OIC and CNC as posted by Keith Fogg in Procedurally Taxing
    On Procedurally Taxing, Keith Fogg discussed in his blog posted February 15, 2017
    • Tax Court Opinion, *Brown v. Commissioner*, Docket No. 20006-13L. [importance of this decision for low-income folks with equity in their home who owe the IRS]
    • This Tax Court Case can now be cited as authority for using assets to “plug the gap” when expenses exceed income. If the asset is needed to help the taxpayer meet reasonable basic living expenses then the asset arguably can be excluded for calculating the reasonable collection potential. While *Brown v. Commissioner* addresses the financial analysis for CNC the same financial analysis can be applied for OIC. In the past our LITC has cited *Porro v. Commissioner,* TC Memo 2014-81 and *Crosswhite v. Commissioner,* TC Memo 2014-79 though they are only TC Memo cases. In all of these cases the financial analysis is similar as discussed in this recent *Brown* decision.
    • In *Porros*, the settlement officer excluded net equity/assets in excess of $200,000 (extrapolating living expenses over ten years)from the taxpayer’s reasonable collection potential calculations. In *Crosswhite*, the Court sent back to the appeals office a case where the appeals officer rejected an OIC and only considered net equity, but failed to determine the taxpayer’s reasonable collection potential by considering future income and monthly deficits.
    • Our LITC and other LITC’s in Ohio have been successful excluding pensions, equity in home (though we usually attach a rejection of a home equity loan) and equity in automobiles (though we also submitted handicapped tags). To complete the financial analysis, our LITC uses the Social Security Administration’s actuary tables to determine life expectancy. The next step is to multiply the taxpayer’s monthly deficit by the remaining months on the actuary table. If the total amount of money needed to "plug the gap" is greater than the actual value of the asset then the asset is excluded.
    In other words, if the asset will be exhausted before the year of death, then the asset is excluded and is not considered when determining the reasonable collection potential. Our LITC and other LITC’s have been successful using this analysis as described in *Brown.*
Source: Barbara G. Heggie, Coordinator & Staff Attorney, NH Low-Income Taxpayer Project

Tuesday, December 20, 2016

Kovel Agreements

  • Because there is NO federal Accountant-Client privilege, Accountant-Client communications are NOT protected from disclosure in federal court. A Kovel Agreement is a key tool to help protect these communications. 
  • In sensitive tax matters, the answer to this dilemna is the Kovel letter, named after United States v. Kovel. Your tax lawyer hires an accountant. In effect, the accountant is doing your tax accounting and return preparation, but reporting as a subcontractor to your lawyer.
  • Properly executed, it imports attorney-client privilege to the accountant’s work and communications. 
  • In recent years, the IRS has won several key decisions in the federal courts that limit the extent of the protections afforded to clients under the Kovel Rule. Recent IRS lawsuits eroding the Kovel Rule are United States v. Richey, the Ninth Circuit refused to protect an appraisal that a taxpayer, lawyer and accountant were trying to keep from the IRS. In United States v. Hatfield, the court forced disclosure of discussions between the lawyer and accountant. 
  • The Kovel Rule takes its name from Louis Kovel, an IRS agent who later joined a law firm specializing in tax cases, lending his expertise in tax accounting. In 1961, Kovel was sentenced to prison for refusing to answer questions in court about discussions with a client, which he believed to be protected by the principle of lawyer-client privilege. His conviction was overturned upon appeal. 
    • In the Kovel case, a law firm specializing in tax law employed an experienced accountant on its own staff. In the course of representing a client that was the target of a grand jury investigation for various income-tax offenses, the taxpayer communicated information to the accountant and the accountant prepared work for the client at the direction of the attorneys. 
    • When the accountant appeared before the grand jury and refused to answer questions, the judge held him in criminal contempt and sentenced him to a year in prison. The accountant challenged that decision to the Second Circuit. The Second Circuit held that the attorney-client privilege extends to communications made by a client to an accountant in the attorney's employ incident to the client's obtaining legal advice from the attorney.The court analogized the accountant's role to that of a translator helping the attorney who is "ignorant of the [client's] foreign language" to give more effective legal advice (Kovel, 296 F.2d at 921-22). 
  • Since Kovel, courts have recognized both a privilege protection that attaches to communications between the accountant and taxpayer client, as well as a work product protection that attaches to the accountant's work papers and file. 
  • Although California state courts have not yet addressed Kovel, under California Evidence Code sec. 954, accountants may be included in the attorney-client privilege if their presence furthers the interest of the client and is reasonably necessary to assist the lawyer in giving the client legal advice. The key is that the accountant's job is to assist the attorney, not the taxpayer, in navigating the accounting complexities that are incident to defending the criminal tax lawsuit. 
  • Two privileges may apply to an accountant’s tax advice to a client: the practitioner-client privilege granted by IRC §7525 and the work product privilege established by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947) and codified in the Federal Rules of Civil Procedure. Fed. R. Civ. P. 26(b)(3). 
  • The application of each privilege is based on specific standards that are carefully weighed by the court when the privilege is claimed. If the practitioner and the client have maintained a defensive posture throughout the communication and documentation process, it is more likely that the privilege will be upheld and IRS access will be denied. 
  • A statutory “tax preparation” privilege was added in 1998 (IRC §7525(a)(1)), but is inapplicable to criminal tax cases, so is of little value. 
  • The federal tax practitioner privilege only applies in civil tax proceedings before the IRS and in federal court brought by or against the United States (see 26 U.S.C. Sec. 7525).
  • In addition, the privilege does not extend to communications about tax return preparation [see United States v. KPMG LLP, 237 F. Supp. 2d 35, 39 (D.D.C. 2002); United States v. Gurtner, 474 F.2d 297, 299 (9th Cir. 1973)]
  • And, the statutory privilege does not protect the accountant's work product from disclosure (see KPMG, 237 F. Supp. 2d at 39).
  • Importantly, although clients may prefer it for efficiency and cost reasons, a CPA should not agree to a Kovel arrangement if he/she has already been acting as the taxpayer client's CPA. If you are the taxpayer client's longtime accountant, the line between your work as an accountant and your work as the attorney's consultant may be blurred.
  • What the CPA knew and when the CPA knew it vis-a-vis the Kovel arrangement will become critical, and possibly difficult to establish. Although the CPA's instinct may be to continue helping his/her longtime client, the CPA may actually be doing the client a disservice by taking on the Kovel engagement. Instead, recommend another qualified accountant to serve as the Kovel accountant and with whom you can work to provide information regarding your pre-Kovel work.
  • If you are the new Kovel accountant, you should advise your client to stop communicating with the longtime CPA directly. Instead, information gathering from the prior CPA should be done by the legal team, including the Kovel accountant. Be aware that the party asserting the attorney-client privilege has the burden of establishing the privileged nature of the communications. A CPA and the Kovel attorney should follow these best practices to ensure that the taxpayer client can meet that burden: 
    • Memorialize the Kovel relationship in writing (with a Kovel letter) before any services are performed. The engagement letter should be on the law firm's letterhead and addressed directly to the Kovel accountant.
    • The letter should state clearly that the law firm is engaging the accountant directly and that the accountant is rendering services to aid the attorney in the provision of legal services (rather than the accountant providing the taxpayer client with tax-related services). Examples of services that typically fall within a Kovel engagement are reviewing tax returns and determining errors; reviewing financial records for unreported income or inappropriate write-offs; advising the attorney on technical tax issues; and computing taxes to assist in criminal sentencing issues.
    • Whereas many standard law firm engagement letters state that any work product generated is the property of the "client," the language should state that the work product generated by the accountant is the property of the law firm. In essence, the law firm becomes your client. 
    • Although the attorney is not required to be involved in every communication between you and the client, the attorney should oversee all those communications, and work you perform under the Kovel arrangement must be done at the direction of the attorney.
    • Make sure you address any letters or memos you prepare to the law firm, not to the taxpayer client or "the file." 
    • While it is acceptable for the taxpayer ultimately to pay your bills as the Kovel accountant, it's a good idea to have the billing run through the attorney first. Or, the attorney may take a bigger retainer at the outset from the taxpayer client and pay you with those funds. 
    • You should prominently label all correspondence "attorney-client privileged" and all work papers "attorney work product." 
    • In the rare case where you, as the existing CPA, are engaged as the Kovel accountant, you should implement an ethical wall in your accounting firm so that professionals who were involved in preparing prior returns will not have access to Kovel privileged communication.
Kovel Agreements

Thursday, November 17, 2016

Proposed Tax Plan from President-Elect Trump

Proposed Tax Plan from President-Elect Trump
  • Tax brackets reduced to three: 12%, 25% and 33%.
  • Elimination of:
    • Alternative Minimum Tax
    • Head of Household filing status
    • Net Investment Income Tax
    • Personal Exemptions
    • Estate Tax
  • Business tax rate lowered to 15%.
  • Cap on itemized deductions at $100,000 for single filers and $200,000 for married filing joint. 
  • Standard deduction $15,000 for single filers and $30,000 for married filing joint. 
  • Low-income families get a credit up to $1,200 a year for child-care costs. 
  • Close the "carried interest" exemption. Essentially, it allows big money managers to count earnings as capital gains instead of ordinary income. 
    • Carried interest would be taxed at ordinary tax rates instead of capital gains rates.

Wednesday, August 24, 2016

Alternative Minimum Tax Adjustments

Alternative Minimum Tax Adjustments
Under regular tax, deductions subtracted from AGI reducing  taxable income, lower the amount of tax, but under AMT specific deductions are not permitted.

Below is a list of deductions allowed under regular tax, but not permitted for AMT:
Standard deduction (for non-Schedule A filers).

• Personal exemption(s)
• Property tax
• State & local income tax
• General sales tax
• Personal excise tax
• Investment advisory fees
• Employee business expenses (Form 2106) itemized on Schedule A

While regular tax allows a deduction for mortgage interest on acquisition indebtedness and home equity indebtedness, AMT allows a deduction only on acquisition indebtedness.

Under AMT, medical & dental expenses are deductible when your expenses are more than 10% of AGI -- 7.5% of AGI for taxpayers 65 years or older.

Charitable donations ARE allowed under the AMT as an itemized deduction.

Lower tax rates that apply to qualified dividends & long-term capital gains for regular tax purposes apply for AMT purposes as well.

Most people's goal to reduce total tax, (the sum of regular tax plus AMT), is spoiled when deductions reducing regular tax are added back for AMT, increasing AMT. 
A plan to reduce or eliminate AMT, by decreasing deductions will cause regular tax to increase, resulting in a "no-win" situation—AMT goes down, but regular tax goes up,"Catch-22"

Sadly, there is little taxpayers can do to reduce their AMT exposure.