Kovel Agreements

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 dilemma 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 §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 USC §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)]. 
• Nor does it apply to communications regarding tax shelters (which the statute defines broadly) or made in furtherance of a crime or fraud [see 26 U.S.C. § 7525(b); United States v. BDO Seidman, LLP, 492 F.3d 806, 819 (7th Cir. 2007) (describing crime-fraud exception)].
• 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.

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.

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.

IRS Streamlined Filing Compliance Procedures explained by Richard S. Leh...

OVDP IRS Streamlined Offshore Voluntary Disclosure Program

IRS Offers New Cash Payment Option

IRS Offers New Cash Payment Option
The Internal Revenue Service recently announced a new payment option for individual taxpayers who need to pay their taxes with cash. In partnership with ACI Worldwide's OfficialPayments.com and the PayNearMe Company, individuals can now make a payment without the need of a bank account or credit card at over 7,000 7-Eleven stores nationwide.

"We continue to look for new ways to provide services for our taxpayers. Taxpayers have many options to pay their tax bills by direct debit, a check or a credit card, but this provides a new way for people who can only pay their taxes in cash without having to travel to an IRS Taxpayer Assistance Center," said IRS Commissioner John Koskinen.

Individuals wishing to take advantage of this payment option should visit the IRS.gov paymentspage, select the cash option in the other ways you can pay section and follow the instructions:

• Taxpayers will receive an email from OfficialPayments.com confirming their information.
• Once the IRS has verified the information, PayNearMe sends the taxpayer an email with a link to the payment code and instructions.
• Individuals may print the payment code provided or send it to their smart phone, along with a list of the closest 7-Eleven stores.
• The retail store provides a receipt after accepting the cash and the payment usually posts to the taxpayer's account within two business days.
• There is a $1,000 payment limit per day and a $3.99 fee per payment.

Because PayNearMe involves a three-step process, the IRS urges taxpayers choosing this option to start the process well ahead of the tax deadline to avoid interest and penalty charges.

The IRS has been partnering with Official Payments since 1999 for taxpayers wanting to use a credit card to pay taxes.

In this new option, PayNearMe is currently available at participating 7-Eleven stores in 34 states. Most stores are open 24 hours a day, seven days a week,. For details about PayNearMe, the IRS offers a list of frequently asked questions on IRS.gov.

The IRS reminds individuals without the need to pay in cash that IRS Direct Pay offers the fastest and easiest way to pay the taxes they owe. Available at IRS.gov/Payments/Direct-Pay, this free, secure online tool allows taxpayers to pay their income tax directly from a checking or savings account without any fees or pre-registration.
Click here for more information about the new IRS payment option.

IRS removes Cuba from list of countries with foreign tax restrictions

IRS removes Cuba from list of countries with foreign tax restrictions
The IRS has removed Cuba from the so-called “IRC §901 blacklist” of foreign countries from which US taxpayers may not be entitled to a foreign tax credit. Removal of Cuba from this list means that US taxpayers are now entitled to the benefit of a foreign tax credit to any income attributable to Cuba. Income earned in Cuba through a controlled foreign corporation will no longer be Subpart F income barred from deferral treatment under IRC §952(a)(5).

The restrictions are lifted as of December 21, 2015, based upon certification by the Secretary of State that Cuba is no longer a country described in IRC §901(j)(2)(A). That section applies to any country with whom the US does not maintain diplomatic relations or that is designated by the State Department as a country that supports international terrorism.

Where Tax Dollars Went in 2015

Premium Tax Credit

Check Out this Graphic to Determine if You Might be Eligible for the Premium Tax Credit

• IRS Health Care Tax Tip 2016-30, March 10, 2016 Español
• The premium tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes. Answer the yes-or-no questions in the following chart – or in this accessible text – and follow the arrows to find out if you may be eligible for the premium tax credit.
• Here are links to information and resources referenced in the graphic:
• Form 8962, Premium Tax Credit (PTC) and Instructions
• Information about the federal poverty line (FPL)
• Publication 974, Premium Tax Credit (PTC)
• Interactive Tax Assistant: Am I Eligible to Claim the Premium Tax Credit

New Minimum Late File Penalty

• The Trade Facilitation and Trade Enforcement Act of 2015, referred to as the "Customs Bill", was signed into law on Feb 24th, 2016.   The Bill originally grabbed tax headlines news for it's ban on local taxation of InterNet access.  
• This law included late-filing penalties. 
• For tax returns filed after Dec 31, 2015, the minimum late-file penalty is the smaller of $205 or 100% of the unpaid tax. 
• The previous minimum late-file penalty was the smaller of $135 or 100% of the unpaid tax. 
• The late-file penalty is assessed on tax returns filed 60 days after the filing deadline, usually April 15th.

IRS Penalties

• Normally, the IRS treats each late filer individually and calculates penalties and interest on a case-by-case basis.
• Once the IRS receives or accepts your return, the penalties are computed (plus interest) and a separate bill is sent to the taxpayer.
• There is no penalty if you're getting a tax refund, provided you file within 3 years of the April 15 deadline (or October 15 deadline if you filed an extension).
• After 3 years, unclaimed tax refunds are forfeited and become the property of the US Treasury.
• There is no late-file penalty if you filed an extension and paid any additional taxes owed by April 15, as long as you file your return by the October 15 deadline.
• A late-file penalty applies if you owe taxes and didn't file your return or extension by April 15.
• This penalty applies if you owe taxes, filed an extension, but didn't file your return by October 15.
• The late-file penalty is 5% of the additional taxes owed amount for every month (or fraction thereof) your return is late, up to a maximum of 25%.
• If you file more than 60 days after the due date, the minimum penalty is $205 or 100% of your unpaid tax, whichever is smaller.
• The late-file penalty is 10 times higher than the late-pay penalty. Even if you can't pay your tax bill, file your return on time, or at least file a 6-month extension. You can file an amendment later.
• A late-pay penalty applies if you didn't pay any balance due owed by April 15, whether you filed an extension or not.
• The late-pay penalty is 0.5% (1/2 of 1%) of any balance due amount for every month (or fraction thereof) the owed tax remains unpaid, up to 25% maximum.
• For any month(s) in which both the late-pay and late-file penalties apply, the 0.5% late-pay penalty is waived.

Case Study:  Let's say you haven't filed your return or an extension by April 15, and you still have a $10,000 balance due the IRS.

• If you file your return on April 29 (2 weeks late) and submit your payment for $10,000, you would likely owe an additional $500 for the late-file penalty ($10,000 x 5% = $500).
• Had an extension been filed by April 15, your late-pay penalty would only be $50 ($10,000 x .05% = $50) and not a late-file penalty of $500. 
• Say instead, you filed your return and submit your payment for $10,000, 5-years late, (past the original due date).  You would owe an additional $5,000 for filing late and paying late ($10,000 X 25%), (5% per month up to 25% for filing late) plus ($10,000 X 25%), (0.5% per month up to 25% for paying late)*, plus possible interest.

* The late-pay penalty is 0.5% of the unpaid taxes, assessed on a monthly basis, up to a maximum of 25%.

Courtesy: IRS Tax Topic 653

Estate and Gift Tax - Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent

Estate and Gift Tax - Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent

Last year’s “Highway Bill”, Regarding Beneficiaries Acquiring Property From a Decedent, requires certain estates to file Form 8971 to ensure consistent basis reporting among estates and their beneficiaries.

On February 29, 2016, the IRS plans to begin accepting basis information with respect to property acquired from decedents as required by H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, signed into law on July 31, 2015.

The law created IRC §6035, which requires the executor of an estate required to file an estate tax return to also provide certain statements to the IRS and to beneficiaries receiving inherited property. This also applies to IRC §6018(b) filers.

The law also adds IRC §1014(f), which requires consistent basis reporting between an estate and the beneficiary receiving property from a decedent.

These changes apply to any estate tax return filed, and to property with respect to which an estate tax return is filed, after July 31, 2015.

The IRS is working steadily to identify and define the policy, procedural, and information system changes necessary to meet the requirements of the new law. Please see Notice 2015-57 for important information.

Source: irs.gov

FBAR Deadlines Changed

FBAR Deadlines Changed

• On July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which modifies the due date for Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114) for any American living abroad and any American with a foreign financial account(s). 
• Any US person holding a financial interest in or having signatory authority over a foreign financial account, must file FBAR, when the aggregate value of their foreign account(s) exceeds $10,000 at any time during the year. FBAR includes any account which a person has signature authority, regardless of ownership interest.
• New due date for the FBAR is April 15th, with a maximum 6-month extension until October 15th. For US citizens living abroad, the deadline is June 15th. New deadlines are effective for 2016 tax returns, due in 2017. 

See FBAR details here: blog post.