Anatomy of a Federal Tax Controversy

Anatomy of a Federal Tax Controversy

Step one: The IRS conducts a tax audit. A tax audit is an examination of your income and expenses to ensure that you correctly reported your tax liability. All types of tax returns are subject to audit, including income, business, estate, and gift tax returns. 

Step two: The 30-day letter.

• If a revenue agent determines that a deficiency exists and the taxpayer does not agree, the agent prepares a "Revenue Agent Report" (RAR). Included with the RAR is a cover letter and a settlement agreement. 
• The cover letter is known as a "30-day letter" because it informs the taxpayer of the right to request a conference with the IRS Appeals Division within 30 days. 
• A taxpayer who receives a 30-day letter faces a strategic decision between requesting a conference with the IRS Appeals Division or doing nothing.

Step three: If a taxpayer requests an Appeals conference but the parties do not come to an agreement, or if the taxpayer simply ignores the 30-day letter, the IRS will send the taxpayer a notice of deficiency (i.e., a "90-day letter").

• The notice of deficiency provides the taxpayer with two options: (1) pay the asserted deficiency and follow the refund procedures or (2) petition the tax court to contest the claimed deficiency within 90 days of the date the notice was mailed. 
• The mailing of the notice of deficiency begins a period during which the IRS is prohibited from assessing tax. If the taxpayer petitions the tax court, the "prohibited period" continues until the tax court's decision is final.

Step four: Taxpayer petitions the Tax Court. 

• Issues that can be raised in Tax Court: The taxpayer can challenge the deficiency claimed by the IRS and any overpayment claimed by the taxpayer. 
• The taxpayer can appeal the resulting decision to the Court of Appeals for the circuit in which the taxpayer resided at the time he filed the petition.

Step five: If the taxpayer does not respond to a notice of deficiency either by petitioning the Tax Court in the time provided or by paying the tax outright, the IRS will make an assessment. 

Once an assessment is made, it becomes a debt of the taxpayer. The IRS must give notice and demand for payment to the taxpayer as soon as practical and within sixty days of making an assessment. If the taxpayer refuses or neglects to pay the tax after notice and demand for payment, the amount of the tax liability becomes a lien on all of the taxpayer's real and personal property until it is paid.
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DeBlis Law | 1012 Broad Street | Bloomfield, NJ 07003 | 973-783-7000 (office) | 973-337-9473 (cell)

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Michael DeBlis III, Esq., LL.M.

Early 2014 IRS Released New Revisions of the Four Most Important Tax Resolution Forms

Early 2014 IRS Released New Revisions of the Four Most Important Tax Resolution Forms 

IRS releases updates to the four fundamental IRS Forms regularly used in resolving delinquent taxpayers’ accounts. These are: Form 433-A (OIC), Form 433-B (OIC), Form 656 and Form 9465.

1. Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, Rev. January 2014:

• For employed individuals it is now required to indicate if taxpayer(s) have an interest in their employers’ business. 
• The form now clearly allows the $1,000 adjustment to the individual bank accounts equity. However, there is no mention of reduction of bank account equity by allowable monthly living expenses.  
• On the form, it is now required to indicate the purchase date and date of final payment for real estate properties. 
• In the Vehicles section, disclosing the creditor's name, purchase date and date of final payment is required. 
• The form now clearly allows a $3,450 deduction from the vehicle value, and if a joint offer is filed, an additional $3,450 for a second vehicle. Vehicles don't have to be used for work, the production of income or the welfare of the taxpayer's family in order to qualify for the deduction. 
• Under the Personal Assets Information, it is now required to include interest in a company or business that is not publicly traded. 
• Self-Employed sections are to be completed not only for Schedule C filers, but for Schedule E and F filers as well. 

2. Form 433-B (OIC), Collection Information Statement for Businesses, Rev. January 2014:

• The Quick Sale Value of 80% is now clearly indicated for business investments, real estate assets and business vehicles. In prior revisions those calculated values were subject to guesswork. 
• The name of creditor and date of final payment are now required for real estate assets and business vehicles. 
• The IRS exemption amount for professional books and tools of trade increased from $4,290 to $4,470. 

3. Form 656, Offer in Compromise, Rev. January 2014

• The application fee for Offer in Compromise increased from $150 to $186, effective January 1, 2014. 
• The form added a question as to whether or not the taxpayer used the Pre-Qualifier tool located on OIC Pre-Qualifier prior to filling out the form. 
• Low Income Certification guidelines have increased slightly for all states and D.C. 
• Offer amount should now be rounded to whole dollars only; no cents please. 
• The loophole for Lump Sum Cash offers has been closed, as it is now clearly states that Lump Sum Cash offers must be paid within 5 or fewer months from the date of acceptance. In prior revisions the verbiage was in 5 or fewer payments, which allowed it to be paid over a period of 24 months. 
• Payment schedule for Lump Sum Cash offers no longer require specifying the ‘day of the month’ payments will be made; just the month suffices. 
• A Correction Agreement has been added to the Offer Terms section which indicates that the taxpayer authorizes the IRS to correct any typographical or clerical errors or make minor modifications to Form 656. 

4. Form 9465, Installment Agreement Request, Rev. December 2013:

• The Installment Agreement fee for non-direct-debit agreements and payroll deduction agreements increased from $105 to $120, effective January 1, 2014. 
• Form 9465 can now be filed by individuals who owe employment or unemployment taxes for businesses that are no longer operating. In such cases the name of business and EIN is required. 
• Foreign address fields have been added for those taxpayers who currently reside outside of the US. 
• The total amount owed is now to be divided by 72 months to see if the proposed installment amount is greater than or equal to this value. If it's less, Form 433-F is required for submission. If the amount is equal or greater, but the total amount owed is between $25,000 and $50,000, then direct debit from checking account or payroll deduction is required, unless submitted with Form 433-F. If the amount owed is over $50,000, then Form 433-F is always required. 
• Part II has been added to the newly revised form which is required to be completed by taxpayers who have either defaulted on an installment agreement within the past 12 months, or who owe (in total IRS debt) more than $25,000 but less than $50,000 and can pay the debt in full within 72 months. Part II questions mimic those on Form 9465-FS, which probably will drop out of circulation with the introduction of this newly revised Form 9465.

Reference: Lawrence M. Lawler, CPA, CTRS, EA - National Director - American Society of Tax Problem Solvers (ASTPS) thanks to PitBullTax Software

2012 - 2013 Key Tax Facts

2012 - 2013 Key Tax Facts
New taxes for top earners
The year 2013 will have several new wrinkles for individuals with incomes above $200,000 for single or $250,000 for couples; specifically, higher Medicare payroll taxes and the new Medicare surtax on net investment income.  People with MAGI greater than $200,000 for single or $250,000 for couples, may be impacted by a new Medicare surtax (3.8%) on net investment income. Taxpayers with earned income above $200,000 for single or $250,000 for couples, will pay a higher Medicare payroll tax (0.9%).

Year	2012	2013
Top marginal long-term capital gains and qualified dividend rate	15%	23.8%*
Top marginal ordinary income tax rate	35%	39.6%
Top rate on short-term capital gains and non-qualified dividends	35%	43.4%*
Personal exemption phaseout (PEP). (MAGI above $250,000 for single or $300,000 for married couple filing jointly)	None	Completely eliminates value of personal exemption for single earners with an AGI over $372,501 and couples filing jointly with an AGI greater than $422,501.
Pease itemized deduction phaseout.	None	All itemized deductions reduced by 3% of MAGI over $300,000 for married couples filing jointly ($250,000 for single filers)  to a maximum reduction of 80% in value.
*includes 3.8% Medicare surtax

Taxable income above $400,000 or $450,000 for couples
In addition to the higher taxes described in the table below, upper-income Americans may be subject to a new 39.6% marginal rate on taxable income over $400,000 for single or $450,000 for married couples filing jointly. Taxpayers may be subject to tax on capital gains and qualified dividends at a rate as high 20% to 23.8% if the Medicare surtax on net investment income applies. 

Source:  A taxpayer's guide to 2013
"The 2013 tax changes you can expect, and what you can do about them."
FIDELITY VIEWPOINTS – 02/27/2013

Internal Controls Review

Internal Controls Review

Companies should start by identifying the weaknesses in their financial processes and structures that make fraud easy, such as a lack of internal controls, loopholes in business processes, or the easy availability of check stock on-site.

Management should consider implementing some or all of the following:

• Separation of duties -- so that no one employee has sole control of the entire process.
• Manual controls -- so that fraud can’t slip by as part of an unmonitored process.
• Limited access to accounts and the ability to make payments -- so that staff can’t manipulate systems they’re not supposed to, and so that you’ll know exactly who could have made potentially fraudulent entries or changes.
• Require double signatures -- so checks can’t go out on the fraudsters say-so alone.
• Get daily check reports -- so that frauds can be caught quickly.
• Securely store check stock.

“Everything someone needs to steal money from your company or a client is right there on the check,” Lacerte noted, before adding that, while securing check stock was important, it would be far better to move beyond paper checks entirely. “Paper is one of the biggest problems when it comes to fraud. You have to go paperless.”

Electronic invoicing and payment solutions like Bill.com and others not only eliminate the weak spot of having check stock in the office -- they also offer many opportunities for limiting access, monitoring payment activity, enforcing payment controls and separation of duties.

Source: accountingTODAY

Rene Lacerte, Las Vegas (November 05, 2013)

Is Social Security Exempt from IRS Levy? No!

Is Social Security Exempt from IRS Levy? No!
IRS can take up to 15% of Social Security Disability payments.  
○ The types of Social Security payments that the IRS levies under the Federal Payment Levy Program (FPLP) include:
   • Retirement, Survivors, and Disability Insurance program payments. 
○ The types of Social Security payments that the IRS does not levy under the FPLP include:
   • Children’s benefits; 
   • Supplemental Security Income payments; and 
   • Lump sum death benefits
See IRS Pub 4418

No Levy is allowed to impose Economic Hardship
Though the statutes permit IRS to take away up to 15% of disability payments, the law does not permit IRS to take anything if doing so would impose an economic hardship. “Economic hardship” is defined as the inability to pay basic living expenses. The United States Tax Court has stated that no levy is permitted to impose economic hardship. See Vinatieri v. Comm., 136 T.C. No. 16 (Dec. 21, 2009).

Treasury and IRS recognize same-sex marriages

Treasury and IRS recognize same-sex marriages

• Washington, D.C. — The Treasury Department and the Internal Revenue Service have ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes, regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage. The ruling implements the federal tax aspects of the June 26, 2013 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act (DOMA). 

• Same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the Earned Income Tax Credit or Child Tax Credit. Same-sex marriages legally entered into in one of the 50 states, the District of Columbia, a US territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law. 

• Married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status. Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations. The statute of limitations for filing a tax refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. Refund claims can still be filed for tax years 2010, 2011 and 2012. In addition, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income. 

Circular 230 Notice

CIRCULAR 230 NOTICE

• Circular 230 notice: To ensure compliance with requirements imposed by the IRS and other taxing authorities, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 
• Plain English: Taxpayers are ultimately responsible for their financial decisions. Invalid tax shelters, tax scams or frivolous tax positions cannot be made valid by a “too-good-to-be-true” attorney opinion letter. Reliance on a “too-good-to-be-true” attorney tax opinion letter is not a valid defense to violations of US tax laws. 
• Please be assured that this notice does not reflect any decrease in the quality of services or the amount of thought we put into our correspondence with you. 
• Please note: Conversations between us are not covered by attorney-client privilege. Therefore, an expectation of confidentiality between me and the IRS cannot be expected, nor exist for that matter. Consequently, the IRS can compel me to reveal anything that you disclose to me.

Tax Dispute Forums

Tax Dispute Forums

When it comes to tax disputes, there are three different forums in which to bring a lawsuit, and sometimes the choice makes a difference in the result.  

• Virtually all taxpayers choose Tax Court because they need not pay the tax to have their day in court. But one problem with Tax Court is that all of the judges are former tax lawyers, and these judges often dismiss technical arguments offered by taxpayers who don’t want to pay the tax.
• In contrast, wealthy taxpayers often choose to pay the tax and then sue in Federal District Court for a refund. Why? They prefer, as a judge, a former federal prosecutor who is less likely to be deferential to the IRS. 
• The third option is taken by a small minority of taxpayers: paying the tax and suing for a refund in the Court of Federal Claims in Washington, DC.  That occurs when that unique court has favorable precedent that sets it apart from the other courts or, at least, lacks unfavorable precedent.

Reference:  Bruce Givner, Esq., is a tax lawyer with the Los Angeles law firm of Givner & Kaye, A Professional Corporation. He can be reached at Bruce@GivnerKaye.com.

20 tax tips for small businesses

20 tax tips for small businesses
The Internal Revenue Service sent letters to thousands of small-business owners recently, questioning whether they underpaid their taxes last year. 

Titled “Notification of Possible Income Under Reporting,” the letters were mailed to small employers this summer requesting that they review and confirm that they accurately reported their income on their 2012 tax returns.

In response to this action by the IRS, American University professors Donald Williamson and David Kautter have created a list of “Tax Best Practices for Small Businesses,” a checklist designed to help small business entrepreneurs stay up to date on all tax-related issues, and away from the scrutiny of 
the IRS. 

Here’s what Williamson & Kautter recommend small-business owners should do: 

1. Keep good records about who is an “employee” and who is an “independent contractor.” 
2. Keep track of places where you may have "nexus" (“physical presence”) (even unknowingly), to properly comply with state rules governing sales and income tax collection. 
3. Invest in a good software accounting system — to track your records and regularly provide updates to new IRS rules. 
4. Hire a tax accountant who has experience in your type of business, whether it’s a coffee shop or a construction business. 
5. Keep good records on how much was paid and the date placed in service, for any equipment, vehicles or other business assets. 
6. Avoid using funds from employee payroll tax withholding (or any taxes, for that matter) as a short-term loan to tide your business over during a shortfall in your cash flow. 
7. One of the biggest traps for small-business taxpayers is estimated taxes — pay quarterlies on time, calculate quarterlies correctly, and know the safe harbors that can protect you against underpayments.  Miscalculating any of these steps can be a major headache, so small-business owners should speak with someone, most likely a tax accountant or enrolled agent, who knows the rules cold. 
8. If you are the owner, and your spouse, child, mother-in-law, or other close relative works in your business, you should make sure your relative abides by the same employment rules as your unrelated employees. When someone pays you in cash, it doesn’t mean that payment is nontaxable.
9. Select a “tax year” for your business that reflects the natural ebb and flow of your business’ receipts and disbursements. This way, you won’t get caught in a cash crunch when tax time comes. 
10. You (or your accountant) should retain all relevant tax records for at least three years, and if your records relate to property and depreciation, you should keep the records until the property is disposed of, plus an additional three years. 
11. Keep detailed records on how you use your personal or business-owned vehicle for business versus personal purposes. 
12. Hire a reputable third-party administrator (such as Fidelity or Vanguard) to manage your 401(k) plan and other tax-favored employee benefits. 
13. Make sure you (and your tax accountant) are familiar with the tax rules, including the favorable tax credits and deductions that are unique to your business. 
14. If it becomes necessary for your small business to open a foreign bank account in order to pay vendors or others in a foreign country, make sure you (and your tax accountant) are vigilant in following the new rules on foreign bank accounts enacted in the Foreign Account Tax Compliance Act, or FATCA. (FBAR reporting)
15. If your hope is that your business will continue after you die, under the leadership of another family member or designated heir, you should take steps to protect the business against a forced sale in order to pay inheritance taxes. 
16. Don’t become foolishly emboldened into thinking the IRS will have to “prove” you have done something contrary to the tax law. The "burden of proof" is always on the taxpayer, not the IRS. 
17. Become familiar with the tax rules surrounding starting, running, selling and shutting down a business. Determine whether you should operate as a Partnership, Corporation, S-Corp, LLC, or Sole Proprietorship. Your tax accountant should be closely familiar with these rules. 
18. Have a one-on-one conversation with your accountant about the Affordable Care Act. 
19. If you can’t pay the taxes you owe the IRS, or other tax agency, you should contact your accountant right away. The situation won’t get any better by ignoring it.
20. When someone pays you in cash, it doesn’t mean that the payment is nontaxable. The IRS has state-of-the-art statistical technology and models based on spending habits and bank accounts to build a case against alleged tax scofflaws.

Courtesy:  accounting today | October 2013 accountingtoday.com

Donald Williamson & David Kautter

Government Shutdown Continues to Affect IRS Operations

Government Shutdown Continues to Affect IRS Operations
According to the IRS website, "all taxpayers should continue to meet their tax obligations." Regular filing deadlines will remain in effect during the shutdown. Individuals and businesses are encouraged to file electronically because those returns will be processed automatically. Paper returns will not be processed until full government operations resume but still must be postmarked by the deadline. On the other hand, tax refunds will not be issued until operations return to normal.

Live telephone customer service agents have been furloughed and the IRS's walk-in taxpayer assistance centers are closed. The Taxpayer Advocate Service is also closed. Tax audits are also not considered essential and are suspended until the shutdown comes to an end.

For more information on the government shutdown click The shutdown, the IRS and your taxes.

In preparation for a possible shutdown, the IRS on September 26 released a shutdown contingency plan that describes agency actions and activities for up to five business days during the shutdown. If the shutdown lasts longer than five business days, the deputy commissioner for operations support will reassess IRS activities and make any needed adjustments to personnel.

According to the IRS, no live telephone customer service assistance will be available; however, most automated toll-free telephone applications will remain operational. IRS walk-in Taxpayer Assistance Centers will be closed.

While federal government offices are closed, people with appointments related to examinations (audits), tax collection, and appeals or Taxpayer Advocate Service cases should assume their meetings are cancelled. IRS personnel will reschedule those meetings at a later date.

During the shutdown, automated IRS notices will continue to be mailed; however, the agency will not be working on any paper correspondence during this period.

How Does Federal Shutdown Affect Taxpayers?
The IRS provided the following basic steps that taxpayers should follow during the shutdown:

• Taxpayers should continue to file and pay taxes as normal. Individuals who requested an extension of time to file should file their returns by October 15, 2013.
• All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships, and employers. The regular payroll tax deadlines also remain in effect.
• Taxpayers can file their tax returns electronically or on paper – although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.
• Tax refunds will not be issued until normal government operations resume.
• Tax software companies, tax practitioners, and Free File will remain available to assist with taxes.

The IRS also provided a list of services that will be available, albeit limited, until the shutdown is over:

• For taxpayers seeking assistance, only the automated applications on the regular (800) 829-1040 telephone line will remain open.
• The IRS website will remain online, although some interactive features may not be available.
• IRS Free File partners as well as tax software companies will continue to accept and file tax returns.

The IRS said in a Web page about the shutdown that it is not sending out levies or liens, either those generated systemically or those manually generated by employees.

References:  

accountingWEB Jason Bramwell
accountingWEB Michael Cohn 
CNN Money