Tax Relief Blog

Widow entitled to equitable spousal relief for some years

Martinez, TC Memo 2008-165

Mike Habib, EA Tax Relief & Tax Problem Resolution

The Tax Court held that a widow was entitled to equitable spousal relief for two of four tax years even though she had knowledge of her and her husband's tax liabilities, because she took steps to address their tax problems and made significant payments under an installment agreement.

The taxpayer married her husband in 1971 and they remained married until his death on 4/2/01. From 1985, the taxpayer's husband struggled with serious health issues; he stopped working in July 1995. The taxpayer was working as a secretary during this time. The couples' bank account was in her name, but her husband decided which bills to pay and when to pay them. The taxpayer did not review monthly banking statements, did not balance the checkbook, and did not pick up or open the mail. The taxpayer's husband would prepare their tax returns, show her a preliminary draft, and have her sign a blank original that he would complete and mail.

In 1988, the taxpayer and her husband had a balance due for their federal income tax that the IRS collected by levy in 1994. In 1992, they earned equivalent wages and had equivalent withholdings, but began drawing money from the taxpayer's retirement account. By 1995, they were experiencing significant problems as the taxpayer's husband stopped working, and the couple began withdrawing larger amounts of money from their retirement plans. Their tax preparer included the withdrawals in their gross income and reported a 10% additional tax for premature distributions from retirement plans.

In 1996, the taxpayer and her family moved from southern to northern California. Shortly after the move, the taxpayer learned that her husband had not filed their 1992 and 1995 tax returns. The couple hired a regional law firm that specialized in taxes to prepare the delinquent returns. By 1998 or 1999, the couple had no financial resources other than the taxpayer's paycheck, as they had exhausted their retirement accounts and emptied their after-tax investments and savings. The taxpayer's salary was in the low- to mid-thirty thousands.

Shortly before her husband's death, the taxpayer discovered shoe boxes filled with unopened letters from the IRS and the tax returns that she signed but her husband had not mailed. The taxpayer re-engaged the law firm that prepared the prior delinquent returns. The firm determined that the couple had outstanding balances for each year during 1992-2000 except for 1996, where a refund was due. The total amount due was $48,684. The firm prepared an offer-in-compromise of $1,000 to settle the entire debt, which was submitted to the IRS during the summer of 2001. The IRS indicated that it was going to reject the offer, so the taxpayer decided to enter into an installment agreement with the IRS, under which she agreed to pay $775 per month to resolve the entire debt.

The taxpayer began making installment payments in May 2002 and continued until November 2005, when she stopped because the IRS stopped sending her monthly payment coupons. In total, the taxpayer paid approximately $35,650 in installment payments. The IRS applied the couple's 1996 refund to the 1993 underpayment, and applied the installment payments in a "seemingly haphazard manner" that resulted in full payment of the balances owing for 1993, 1994, 1997, and 2000, while leaving balances due on 1992, 1995, 1998, and 1999.

The taxpayer retained a national tax preparation firm to help her prepare her 2004 return. After reviewing her records, the firm suggested that she apply for innocent spouse relief. The taxpayer completed an application, including a Form 12510, Questionnaire for Requesting Spouse, which had a worksheet for monthly income and expenses. The taxpayer reported a monthly net income of $2,636 and expenses of $2,480 (including the $775 monthly installment payment), leaving her a surplus of $156 per month. The IRS denied the taxpayer's request for innocent spouse relief.

The taxpayer timely appealed the denial to the IRS' Office of Appeals, where the Appeals officer determined that the taxpayer was in tax compliance and satisfied the threshold requirements for relief on the portion of the liability attributable to her deceased husband. The Appeals officer rejected the taxpayer's request for relief, because:

(1) The taxpayer had reason to know of the underpayment. (2) In 1999 and 2000 nearly all of the underpayments were attributable to her earnings (the officer did not have the 1998 return for review).

(3) Paying the debt would not cause the taxpayer economic hardship, because she reported a monthly surplus on her worksheet.

(4) The taxpayer's husband did not abuse her. (5) The taxpayer had no health problems.

(1) Marital status. The taxpayer's husband died before she requested relief, so this factor favored relief. (2) Economic hardship. The court said that the Appeals officer properly relied on the taxpayer's Form 12510 in determining that she would not suffer economic hardship if denied relief, because her worksheet showed a monthly surplus after paying basic living expenses and the installment payment and the taxpayer corroborated the determination. The court stated that normally its inquiry would stop there, but because Section 6015(f) required that the court take into account "all facts and circumstances," it considered the taxpayer's new Form 12510, which showed a monthly deficit of $322. The court found that the taxpayer, who already had a modest lifestyle, suffered a diminution in her financial circumstances. Considering the combination of age, education, and work situation, the court found that the taxpayer was in a precarious financial circumstance and said that the economic hardship factor was neutral.

(3) Knowledge or reason to know. The relevant standard applied when a couple accurately reported, but did not pay, balances due is whether the taxpayer requesting relief did not know and had no reason to know that her spouse would not pay the income tax liability. The court found that it was improbable that the taxpayer lacked knowledge. Specifically, sometime after the taxpayer's husband became ill, the taxpayer assumed sufficient responsibility over their delinquent tax filings so as to encourage him to seek help from a law firm. Further, the court noted that the main reason for the balances due for 1992 through 2000 was that the taxpayer had her employer withhold too little tax from her paycheck, adding that only the taxpayer, and not her husband, could have filed the withholding certificate with her employer. Because the court found that the taxpayer knew or had reason to, it found that this factor strongly disfavored relief.

(4) Legal obligation. This factor was inapplicable because the taxpayer and her deceased husband did not divorce. (5) Significant benefit. The court found that during and after her marriage, the taxpayer did not receive jewelry, luxury cars, or designer clothes, nor did she receive or otherwise own a home. Instead, the taxpayer drained her savings and retirement assets trying to support her family and help her dying husband. Thus the court found that this factor significantly favored relief.

(6) Compliance with federal tax laws. Since her husband's death, the taxpayer was in compliance with federal tax laws, making this factor neutral or in favor of relief.

(7) Abuse. Because the court found that the taxpayer was not abused, this factor was neutral. (8) Mental health. The court believed that the taxpayer was under great mental strain dealing with her dying husband while supporting her family solely on her modest wages and found that this factor strongly favored relief.

(9) Other factors. First, with respect to the 1995 tax return, the taxpayer's tax preparer included a 10% additional tax on premature retirement plan distributions, but the court believed that the taxpayer's husband was a good candidate for relief under Section 72(t)(2)(A)(iii), which provides an exception to the additional tax if the distribution was attributable to the employee's being disabled. The court added that if the original 1995 balance was reduced by removing the 10% additional tax attributable to the taxpayer's deceased husband, the IRS's application of the taxpayer's payments would have paid the entire remaining liability. Second, the court noted that the taxpayer paid $35,650 or 73% of the entire liability for 1992 through 2000, including a portion attributable to her deceased husband, which was more than her share of the liabilities for the 1992 and 1995 tax years. Third, the court noted that the 1992 and 1995 liabilities were old, particularly the 1992 liability where, oddly, the IRS applied less of the payments. Finally, the court review of the conference report accompanying the enactment of Section 6015 showed that the conferees intended to expand the circumstances in which innocent spouse relief could be made available. The court therefore concluded that the other factors strongly favored relief.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Newly revised 2008 Form 5405, First-Time Homebuyer Credit, reflects Recovery Act IR 2009-14 Mike Habib, EA Tax Relief & Tax Problem Resolution In a news release issued on Feb. 25, 2009, IRS has announced that it has posted a revised version of the 2008 Form 5405, First-Time Homebuyer Credit, to reflect recent improvements to the credit made the American Recovery and Reinvestment Act of 2009 (Recovery Act, P.L. 111-5). Pre-Recovery Act credit. Under pre-Recovery Act law, for qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. Eligible first-time homebuyers who purchase a principal residence after Dec. 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on Dec. 31, 2008. For eligible purchases in 2009, a taxpayer may elect to claim the credit for 2008 or 2009 by attaching Form 5405 to the taxpayer's original or amended 2008 tax return or 2009 tax return. The first-time homebuyer credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. The credit for new homebuyers is recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax amount equal to 6⅔% of the amount of the credit. This repayment obligation may be accelerated or forgiven under certain exceptions.

Observation: In other words, the credit for new homebuyers is the equivalent of a long-term interest-free loan from the government.

• increases the maximum homebuyer credit to $8,000. (Code Sec. 36(b))
• extends the credit so that it applies to purchases before Dec. 1, 2009. (Code Sec. 36(h))
• correspondingly, for purposes of the election to treat the purchase of a principal residence as having been made on Dec. 31, 2008, extends the last date of purchase has until Nov. 30, 2009. (Code Sec. 36(g))
• generally waives the recapture of the credit for qualifying home purchases after Dec. 31, 2008. However, if the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase, the pre-Recovery Act rules for recapture of the credit apply. (Code Sec. 36(f)(4)(D))

Observation: Committee reports indicate that this waiver of the recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on Dec. 31, 2008, which is allowed by Code Sec. 36(g).

Observation: Specifically, Part I C calls for the box to be checked "[i]f you are choosing to claim the credit on your 2008 return for a main home bought after December 31, 2008 and December 1, 2009." Thus, Form 5405 reflects the Recovery Act change making this option available for a main home bought Dec. 31, 2008 and before Dec. 1, 2009.

Observation: The election effectively allows eligible first-time homebuyers who make a timely purchase in 2009 to claim the credit on their 2008 returns rather than on their 2009 returns. Thus, in some cases, an individual or couple may be able to get a refund of the credit shortly after the purchase closes and use the refund to pay off a short-term bridge loan that was obtained to help with closing costs.

Observation: A taxpayer whose 2009 qualifying home purchase will be completed after the Apr. 15, 2009 due date for filing the 2008 return should considering getting an automatic six-month filing extension if he would otherwise have to pay tax by the Apr. 15 due date and he is virtually certain to complete the purchase within the extended due date. The credit will be available to offset the tax he otherwise would have had to pay by the regular due date. If the credit won't be sufficient to completely offset the tax, he will have to pay the shortfall with his extension request. This approach should not be undertaken if the home purchase could fall through.

Observation: The parenthetical language containing the $8,000 figure for 2009 purchases on the revised 2008 Form 5405 thus makes it clear that a qualifying 2009 purchaser who elects to claim the credit on his 2008 return is not limited to a maximum credit of $7,500 but rather can take advantage of the increased maximum credit of $8,000.

Observation: Inclusion of the relaxed recapture rules for 2009 purchases on the 2008 Form 5404 thus makes it clear that IRS agrees that a 2009 purchaser who elects to treat the purchase as occurring on Dec. 31, 2008 gets the benefit of the relaxed recapture rules.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Recovery Act), which was signed into law on Feb. 17, 2009, makes a number of beneficial changes for business. Here's a review of the more widely applicable provisions that could have an impact on you and your enterprise.

Mike Habib, EA Tax Relief & Tax Problem Resolution

Liberal expensing limits continued for another year. The Recovery Act gave a one-year lease on life to enhanced expensing rules, which allow qualifying businesses the option to currently deduct the cost of business machinery and equipment, instead of recovering its cost via depreciation over a number of years. For tax years beginning in 2009, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008. Had the Recovery Act not been passed and signed into law, the dollar limits would have dropped this year to $133,000 and $530,000 respectively.

Bonus first year depreciation extended for another year, too. Bonus depreciation was supposed to go off the books for most assets placed in service after 2008. Fortunately, the Recovery Act extends for another year the ability for businesses to take an extra "bonus" depreciation deduction for the first year new assets are placed in service. The bonus first-year depreciation deduction generally equals 50% of the cost of qualified property (most types of tangible property other than buildings and their structural components, improvements to certain types of leased property, and most software) acquired and placed in service during 2009. Certain types of property with a long life, and certain types of aircraft, may be placed in service before Jan. 1, 2011, and still qualify for the 50% bonus first year depreciation allowance. Also, note that the otherwise allowable first-year depreciation deduction for business autos first placed in service in 2009 is hiked by $8,000 thanks to the Recovery Act.

Extended election to speed up recognition of accumulated AMT and R&D credits instead of claiming bonus depreciation. Many corporations are struggling and can't make good use of the bonus depreciation break. A law enacted last year gave such corporations an alternative tax break. For tax years ending after Mar. 31, 2008, corporations otherwise eligible for bonus depreciation for qualifying assets placed in service in 2008 (or 2009 for certain longer lived assets) could instead elect to accelerate recognition of part of their accumulated pre-2006 research tax credits or certain alternative minimum tax credits. The Recovery Act extends this election so that it is available for property placed in service in 2009 (or 2010 for certain longer lived assets). Please note that this alternative choice is highly specialized and requires a detailed analysis of a corporation's tax situation.

Deferred tax on debt forgiveness income when debt is repurchased. A business generally will wind up with debt discharge income if it repurchases its debt for less than the outstanding amount of the debt. For debt that's repurchased in 2009 or 2010, the Recovery Act permits the tax that's owed on such debt discharge income to be paid over five years, beginning with 2014.

Small businesses may elect longer NOL carryback period. In general, net operating losses (NOLs) may be carried back two years and forward 20 years (different rules apply for certain specialized types of losses). For NOLs arising in a tax year beginning or ending in 2008, the Recovery Act permits small businesses to elect to increase the NOL carryback period from two years to three, four, or five years. A small business for this purpose is a trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts are $15 million or less for the three-tax-year period (or shorter period of existence) ending with the tax year before the year in which the loss arose. The longer NOL carryback period gives small businesses that experienced losses the ability to get refunds of income taxes paid in earlier years. The refunds can be used to fund capital investment or other expenses.

S corporation built-in gain holding period shortened temporarily. An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who pay tax on their pro-rata shares of the S corporation's income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were "built-in" at the time of the election if the gains are recognized during a special holding period. This holding period is the first ten S corporation years. (Similar rules apply if an S corporation receives property from a C corporation in certain nontaxable transfers.) Thanks to the Recovery Act, for tax years beginning in 2009 and 2010, the special holding period is shortened to seven years.

Bigger exclusion for sale of qualified small business stock. Before the Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, a QSBS must meet a number of conditions (e.g., its gross assets can't exceed $50 million and it must meet active business requirements). Under the Recovery Act, the percentage exclusion for QSBS sold by an individual increases to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011.

Reduced estimated taxes in 2009 for individuals with small businesses. To the extent that tax isn't collected through withholding, taxpayers generally must make quarterly estimated payments of the "required annual payment." The required annual payment is the lesser of: (1) 90% of the tax shown on the return or (2) 100% of the tax shown on the preceding year's return (110% if adjusted gross income (AGI) for the preceding year exceeded $150,000). The Recovery Act provides that for a tax year beginning in 2009, the required annual payment for individuals with small businesses is the lesser of (1) 90% of the tax shown on the return for the tax year, or (2) 90% of the tax shown for the preceding tax year. An individual qualifies for this relaxed estimated tax payment rule only if: AGI on preceding year's return is less than $500,000 ($250,000 if married filing separately); and at least 50% of the gross income shown on the previous year's return was from a small trade or business (one that employed no more than 500 people, on average, during the calendar year ending in or with the preceding tax year).

More workers eligible for work opportunity tax credit (WOTC). Employers that hire workers from one or more targeted groups (e.g., long term family assistance recipients) can claim a tax credit that varies with the type of person hired. For individuals beginning work for the employer after Dec. 31, 2008, the Recovery Act creates a new targeted group for the WOTC, consisting of unemployed veterans and disconnected youth who begin work for the employer in 2009 or 2010.

Get tax relief, IRS Tax Help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

President's FY 2010 budget will propose many major tax changes for businesses and individuals

“A New Era of Responsibility: Renewing America's Promise,” the Administration's preview of its FY 2010 budget, is available at http://www.omb.gov

Mike Habib, EA Tax Relief & Tax Problem Resolution

On Feb. 26, 2009, the Obama Administration released a document titled “A New Era of Responsibility: Renewing America's Promise.” It is the Administration's preview of its fiscal policies and planned major budgetary initiatives. In effect, it's an overview of the full FY 2010 budget expected to be released this spring.

The document reveals the major tax initiatives that the Administration will push for. These are a combination of revenue-raising “loophole closers” (most of them aimed at businesses), some favorable tax changes for businesses, higher taxes for “higher income individuals,” and tax cuts for other individuals.

The tax changes the Administration's proposes to push for include the following (in each case, the year in parenthesis indicate when the change is proposed to begin):

Tax Changes For Business

• Make the research tax credit permanent (2010).
• Expand the net operating loss carryback (2011).
• Eliminate capital gains taxation on small business (2014).
• Repeal LIFO (2012).
• Codify the economic substance doctrine (2009).
• Require information reporting for rental payments (2010).
• Tax carried interest as ordinary income (2011).
• Reinstate Superfund Taxes (2011).
• Repeal all of the following oil and gas tax breaks: expensing of intangible drilling costs; deduction for tertiary injectants; passive loss exception for working interests in oil and gas properties; manufacturing deduction for oil and gas companies; and percentage depletion (2011).

Tax Changes for Higher Income Individuals These changes would be proposed to apply to taxpayers earning over $250,000 (married) and $200,000 (single):

• Reinstate the 36% and 39.6% top tax rates (2011).
• Reinstate the personal exemption phaseout and limitation on itemized deductions (2011).
• Impose a 20% tax rate on capital gains and dividends (2010).

The Administration's document separately discusses a proposal to limit the tax rate at which higher-income individuals can take itemized deductions to 28%, with no indication of when this change would take effect. Additionally, the Administration is widely expected to propose keeping the estate tax at some level. Under current law, the estate tax won't apply for 2010, but will be reinstated, at 2001 levels, in 2011.

Other Tax Changes for Individuals

• Make permanent the Recovery Act's refundable $400/$800 “making work pay” tax credit for 2009 and 2010.
• Make permanent the Recovery Act's liberalized child tax credit rules, which under current rules apply for 2009 and 2010 only.
• Make permanent the Recovery Act's “new American opportunity tax credit” for higher education expenses, which under current rules applies for 2009 and 2010 only.
• Eliminate the Advanced Earned Income Tax Credit (2010).
• Expand the saver's credit and automatic enrollment in IRAs and 401(k)s (2011).

The Administration's document also separately discusses a proposal to establish “automatic workplace pensions, on top of and clearly outside Social Security....” Employees would be automatically enrolled in workplace pension plans (unless they opt out). Those employers not offering retirement plans would be required to enroll their employees in a direct-deposit IRA (but employees apparently would be given an opt-out option).

Get tax relief, IRS Tax Help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Energy tax incentives in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution The recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) includes a package of tax incentives to encourage investments in renewable energy projects or more-efficient technologies. I'm writing to give you an overview of these new provisions. Please call our offices for details of how the new changes may affect you, your investments, or your business.

Long-term extension and modification of renewable energy production tax credit. The new legislation extends the placed-in-service date for wind facilities for three years (through December 31, 2012). It also extends the placed-in-service date through December 31, 2013 for certain other qualifying facilities: closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; waste-to-energy; and marine renewable facilities.

Temporary election to claim the investment tax credit in lieu of the production tax credit. Facilities that produce electricity from solar facilities are eligible to take a 30% investment tax credit in the year the facility is placed in service. Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible for a production tax credit, payable over a ten-year period. The Act provides a temporary election to claim the investment tax credit in lieu of the production tax credit.

Business energy credit. The new law enhances the business energy credit by eliminating the cap on small wind property and repealing the basis reduction requirement for subsidized energy financing.

Energy-efficient existing homes. The new law extends the tax credits for improvements to energy-efficient existing homes through 2010. For 2009 and 2010, the amount of the tax credit is increased from 10% to 30% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements during the tax year. The property-by-property dollar caps on the tax credit are also eliminated, and an aggregate $1,500 cap applies to all property qualifying for the credit.

Residential energy property. The new law removes the dollar limitations on certain energy credits, e.g., for qualified small wind energy property ($4,000 cap); for qualified solar water heating property ($2,000 cap); and qualified geothermal heat pumps ($2,000).

Tax credits for alternative fuel pumps. The new law provides an increase for 2009 and 2010 in the 30% alternative refueling property credit for businesses (capped at $30,000) to 50% (capped at $50,000).

Credit for investment in advanced energy facilities. The new law establishes a new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.

Vehicles. The new law provides a tax credit for purchases of plug-in electric drive vehicles ranging from $2,500 to $7,500 depending on battery capacity. The new law also restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit and provides a tax credit for plug-in electric drive conversion kits.

More funding for bonds. The new law authorizes additional funds for new clean renewable energy bonds and qualified energy conservation bonds.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Business tax changes in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution I'm writing to give you an overview of the key tax changes affecting business in the recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act). Please call our offices for details of how the new changes may affect your specific business.

Extension of enhanced small business expensing (Section 179). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expense in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The new law extends these temporary increases for capital expenditures incurred in 2009.

Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, net operating losses (NOLs) may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding twenty years after the year that the loss arises. For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.

Incentives to hire unemployed veterans and disconnected youth. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The new law expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans; and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months.

Extension of monetization of accumulated AMT and R&D credits in lieu of bonus depreciation. The new law extends the provision contained in the Foreclosure Prevention Act of 2008 and allows AMT and loss taxpayers in 2009 to receive 20% of the value of their old AMT or research and development (R&D) credits to the extent such taxpayers invest in assets that qualify for bonus depreciation.

Delayed recognition of certain cancellation of debt income. To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses recognize cancellation of debt income ("CODI") over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five tax years) for specified types of business debt repurchased by the business in 2009 or 2010.

Qualified small business stock. The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50% to 75% for stock issued after the enactment date and before 2011.

S corp holding period. The new law temporarily shortens the holding period of assets subject to the built-in gains tax from 10 years to seven years..

Repeal of IRS's built-in loss rules. The new law provides a prospective repeal of Notice 2008-83, the controversial IRS guidance which provided that if a bank recognizes a loss from the disposition of a loan or takes a bad debt deduction under the specific charge-off or reserve methods of accounting after a change in ownership, that loss or deduction will not be treated as a built in loss attributable to the pre-acquisition period.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Expanded college credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution The recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) includes a measure aimed at making college more affordable for low and moderate-income students. The new provision temporarily enlarges the Hope tax credit (renamed the American Opportunity tax credit) for students from middle-income families and partially extends this tax credit for the first time to students from lower-income families. Here are the details.

• The new law creates a new American Opportunity tax credit for 2009 and 2010, replacing and expanding the Hope tax credit for those years.
• The maximum amount of the American Opportunity tax credit is $2,500 (up from a maximum credit of $1,800 under the Hope credit). The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000, so the maximum credit of $2,500 is reached when a student has qualifying expenses of $4,000 or more.
• While the Hope credit was only available for the first two years of undergraduate education, the American Opportunity tax credit is available for up to four years.
• Under the Hope credit, qualifying expenses were narrowly defined to include just tuition and fees required for the student's enrollment. Textbooks were excluded, despite their escalating cost in recent years. The American Opportunity tax credit expands the list of qualifying expenses to include textbooks.
• The Hope credit was nonrefundable, i.e., it could reduce your regular tax bill to zero but could not result in a refund. This meant that if a family didn't owe any taxes it couldn't benefit from the credit, which prompted critics to argue that the credit was thus denied to the very families most in need of help affording college. The American Opportunity tax credit addresses this criticism to a degree by providing that 40% of the credit is refundable. This means that someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.
• The Hope credit was not available to someone with higher than moderate income. Under the credit's "phaseout" provision, taxpayers with adjusted gross income (AGI) over $50,000 (for 2009) saw their credits reduced, and the credit was completely eliminated for AGIs over $60,000 (twice those amounts for joint filers). Under the American Opportunity tax credit, taxpayers with somewhat higher incomes can qualify, as the phaseout of the credit begins at AGI in excess of $80,000 ($160,000 for joint filers).

Enhanced first-time homebuyer credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution In hopes of spurring the housing industry, the recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) includes an enhanced tax credit for first-time homebuyers. Here are the details.

You may remember that last year's Housing Act included a tax credit giving first-time homebuyers up to a $7,500 (actually, 10% of the purchase price or $7,500, whichever is less) credit for buying a home between April 8, 2008, and July 1, 2009, with single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualifying for the full tax credit. However, despite high hopes that the credit would be effective in getting people to buy homes and thereby reduce the excessive inventory on the market, the credit is widely acknowledged to have failed in its objective. The problem, according to realtors and industry officials, was that buyers were turned off by the odd way the credit worked. While the credit functioned initially like other tax credits, reducing a person's tax liability on a dollar-for-dollar basis, it was unusual in that, unlike other federal tax credits (for example, the child credit), the credit for first-time homebuyers had to be paid back to the government ratably over a period of 15 years (or earlier if the house is sold).

So, as a practical matter, the credit was the equivalent of an interest-free loan from the government. It was the payback requirement that many in the industry felt kept potential buyers on the sidelines. Now, Congress has beefed up the credit in renewed optimism of enticing more first-time homebuyers to take the plunge. First and foremost, the new legislation scuttles the repayment requirement for homes purchased on or after January 1, 2009. The new law also extends the credit through the end of November 2009, and bumps up the maximum credit amount from $7,500 to $8,000. However, the new law retains the recapture provisions if the house is sold within three years of purchase.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

"Making Work Pay" tax credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution

The recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. The centerpiece of the tax package--and at $115 billion its single largest component--is a "Making Work Pay" tax credit of up to $400 per year for individuals, or $800 per year for couples. Here the details of this new credit:

• Eligible individuals will receive an income tax credit for two years (tax years beginning in 2009 and 2010). The new credit, like other tax credits, will reduce a person's tax liability on a dollar-for-dollar basis. Wage earners who don't earn enough to pay income taxes will be able to claim the difference as a tax refund.
• The new credit is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 in the case of a joint return). In other words, for individuals with earned income above roughly $6,451 ($12,902 for couples), the credit maxes out at $400 ($800 for couples). For the last half of 2009, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. That reduction goes down to about $9 per week next year.
• Nonresident aliens do not qualify for this credit. Neither do estates, trusts, or individuals who can be claimed as a dependent on someone else's return.
• The credit is available in full only if AGI (adjusted gross income, with some modifications for highly specialized income) doesn't exceed $75,000 for an individual ($150,000 if you file a joint return). The credit is phased out at a rate of two percent of the eligible individual's AGI above $75,000 ($150,000 in the case of a joint return). So no credit is allowed for individuals with AGI of $100,000 or more, or for joint filers with AGI of $200,000 or more.
• Unlike the $600 per worker lump-sum rebates issued last year, the credit can be received as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return.
• Since the credit is based on taxable wages and thus unavailable to many retired people and other whose income does not come from wages, the new law includes a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit. Similarly, a one-time refundable tax credit of $250 is provided in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable making Work Pay credit.

Tax changes affecting individuals and families in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. I'm writing to give you an overview of the more widely applicable tax changes affecting individuals and families in the new law. Please call our offices for details of how the new changes may affect you and your family.

“Making Work Pay” credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.

Economic recovery payment. The new law provides for a one-time payment of $250 to retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit.

Refundable credit for certain federal and state pensioners. The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit.

Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.

Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).

Expanded and revised higher education tax credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.

Computers as an education expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.

Expanded first-time credit for first-time home buyers. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.

Tax break for new car purchasers. The new law allows taxpayers to deduct State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to nonitemizers. However, the deduction cannot be taken by a taxpayer who elects to deduct State and local sales taxes in lieu of State and local income taxes.

Alternative minimum tax (AMT) patch. To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

Get tax relief, IRS tax help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

IRS LMSB Memorandum targets artificially-generated foreign tax credits

LMSB Tier I Issue Foreign Tax Credit Generator Directive - Revision 1 (LMSB-04-0109-002, February 19)

Mike Habib, EA Tax Relief & Tax Problem Resolution

In a Large & Mid Size Business Division (LMSB) Memorandum, IRS has focused on the problem of foreign tax credit generators, complex arrangements that are intentionally structured to artificially create a foreign tax liability and corresponding foreign tax credit.

Observation: Under IRS's rules of engagement for LMSB examinations, Tier I issues are of high strategic importance to LMSB and have a significant impact on one or more industries. Tier I issues could include areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk or high visibility, where there are established legal positions and/or LMSB direction.

Background. Under Code Sec. 901, taxpayers can claim a credit against their U.S. tax for income taxes paid or accrued during the tax year to any foreign country or U.S. possession. To qualify for the credit, the payment must be a compulsory payment under the authority of a foreign country and the predominant character of the foreign tax must be that of an income tax in the U.S. sense. An amount of payment is not compulsory, and thus not a foreign tax paid, to the extent the amount is more than the liability under foreign law for tax. (Reg. § 1.901-2(a)) Foreign tax credits are intended to prevent the double taxation of foreign income because U.S. taxpayers are subject to U.S. tax on their worldwide income.

IRS's concern. Foreign tax credit generators are highly structured transactions that exploit the foreign tax credit regime. These complex arrangements are intentionally structured to create a foreign tax liability when, removed from the elaborately engineered structure, the basic underlying business transaction generally would result in significantly less, or even no, foreign taxes. The parties use these arrangements to exploit differences between U.S. and foreign law in order to allow a person to claim a foreign tax credit for the purported foreign tax payments while also allowing the counterparty to claim a duplicative foreign tax benefit. The person claiming foreign tax credits and the counterparty share the cost of the purported foreign tax payment through the pricing of the arrangement, e.g., by adjusting interest rates on loans or paying additional fees. Some of these transactions are designed to recover the foreign tax claimed as a foreign tax credit, so that, in substance, the transaction incurs no foreign tax cost. Some of these transactions are structured to eliminate the income that results in the foreign tax credit. Other types of these transactions do both. In either case, the foreign tax credit is inappropriate because the taxpayer claims a foreign tax credit where no double taxation of income occurs. These transactions are particularly offensive because they are designed strictly to generate credits in any amounts desired by the parties.

In its battle against foreign tax credit generator transactions, IRS issued temporary regs in July of 2008 (2008 regs) that treat amounts attributable to a structured passive investment arrangement as noncompulsory payments and, thus, disallow foreign tax credits for those amounts. (Reg. § 1.901-2T(e)(5)(iv), see Federal Taxes Weekly Alert 07/17/2008) IRS has also denied an inappropriate foreign tax credit claim in a lender/borrower generator transaction in PLR 200807015 by asserting various arguments, including ones based on debt/equity, substance over form, regulatory, and lack of economic substance. In Chief Counsel Advice 200826036, IRS denied a credit in an asset parking foreign tax credit generator transaction on the grounds that the transaction lacked economic substance and ran afoul of Code Sec. 269 (which denies tax benefits where acquisitions are made to evade or avoid income tax).

Observation: Lender/borrower transactions result in the duplication of tax benefits through the use of structured transactions designed to exploit inconsistencies between U.S. and foreign tax laws (financing transactions). Coupon stripping transactions, a subset of borrower transactions, have also been identified. Asset parking transactions involve the movement of assets that generate a passive income stream such as interest or dividends into a structure that subjects them to foreign tax.

IRS targets generator transactions. IRS has designated these transactions as a Tier I issue because a strategic approach to address the issue is appropriate due to the significant compliance risk and the extensive commitment of resources needed to resolve these cases. The LMSB Memorandum advises that not only are these transactions difficult to identify on a tax return, including Schedule M-3 (Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More) or Forms 1118 (Foreign Tax Credit--Corporations), they are generally only detected during the course of an audit. Examiners may find a Form 8886 (Reportable Transaction Disclosure Statement) attached to the U.S. tax return, describing the transaction and tax impact, which may be filed by the taxpayer on a protective basis. In particular, this form has been included in some of the asset parking transaction tax returns.

The majority of the known transactions involve taxpayers in the financial services industry, and reporting of these transactions often appear as a part of their general business operations and may be indistinguishable from other financing arrangements/transactions. They are thus more difficult to identify through regular audit inquiries or regulatory disclosure requirements.

The Memorandum directs field examiners to review and challenge arguments by taxpayers that claim foreign tax credits generated through these highly structured transactions. It cautions that the analysis is very fact specific and requires a careful examination of the transaction documentation. Examination teams coming across this issue should contact one of the foreign tax credit Generator Technical Advisors as soon as they identify indicators of the issue.

The Memorandum also includes helpful attachments for examiners auditing foreign tax credit generator transactions: (1) an Appeals Coordinated Issue Designation Memorandum that covers the two principal types of lending/borrowing foreign tax credit generator transactions; (2) language developed to identifying this issue that must be inserted into an examiner's initial Information Document Request (IDR) for all cases with at least $5 million of foreign taxes paid or accrued (or deemed paid) and reported on line 5, Part II, of Schedule B of Form 1118; and (3) additional language to use in a follow up IDR that should be used if the taxpayer's response to the mandatory IDR indicates that it has participated in any transaction that satisfies the conditions identified in the 2008 regs.

The 2008 regs generally apply to foreign payments that, if they were an amount of tax paid, would be considered paid or accrued by a U.S. or foreign entity in tax years ending on or after July 16, 2008. The Memorandum states that while IRS can't challenge the foreign tax credits generated in these arrangements on the basis of the 2008 regs before their effective date, the criteria in the regs are useful in identifying abusive arrangements. Such arrangements entered into before the effective date can be challenged on various grounds, including, but not limited to, the substance over form doctrine, the economic substance doctrine, debt-equity principles, Code Sec. 269, the Reg. § 1.701-2 partnership anti-abuse rules, and the Reg. § 1.704-1 substantial economic effect rules.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Battle over UBS secret accounts is before US court

Associated Press

MIAMI_U.S. tax authorities should quickly gain access to the secret accounts of 52,000 wealthy Americans at Swiss bank UBS AG to stop continuing tax evasion, U.S. lawyers told a federal judge.

"The United States does not believe justice is served by delay," said Justice Department tax attorney Stuart Gibson in court papers. "Delay serves the cause of those U.S. taxpayers who continue to hide behind the actions" of the bank.

U.S. District Judge Alan S. Gold scheduled a hearing Monday to begin sorting through the government lawsuit. UBS claims that turning over the account names _ possibly in a matter of weeks _ would violate Swiss privacy law and jeopardize the bank's license to stay in business. UBS wants Gold to slow down the process.

"Such violations would expose these ( UBS lawyers said in a court filing. "There is simply no reason to have, nor equity in having, such an expedited process here."

Tax officials last week asked Gold to enforce so-called "John Doe summonses" seeking information about the 52,000 accounts that hold an estimated $14.8 billion in assets. The lawsuit was accompanied by dozens of internal UBS e-mails, memos and other material that U.S. tax agency the Internal Revenue Service contends shows a systematic, long-term scheme by bank employees to help wealthy Americans evade U.S. income taxes.

The lawsuit followed by one day an agreement in which the Justice Department would defer criminal prosecution of UBS in exchange for the identities of up to 300 U.S. customers and payment by the bank of $780 million. That deal did not cover the much broader list of 52,000 names now sought by the tax authority, but both sides knew the U.S. would ask for them.

UBS "knew this day was coming, and it knew this day would come sooner, rather than later," Gibson said.

Another Miami federal judge in July 2008 approved the summonses seeking the account information, but UBS never complied. The new lawsuit asks Gold to enforce that earlier ruling, first by issuing an order requiring UBS to "show cause" why it has not done so.

Federal prosecutors in Miami previously charged a senior UBS executive, Raoul Weill, with conspiring to defraud the U.S. by helping American customers conceal some $20 billion from the IRS. Weill is a fugitive living in Switzerland, but his New York-based attorney has said he is innocent.

A former UBS banker, Bradley Birkenfeld, pleaded guilty last year in Fort Lauderdale to similar fraud conspiracy charges and has been cooperating extensively with U.S. investigators. Birkenfeld has not yet been sentenced.

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Resolve your tax matters today by retaining the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at www.myirstaxrelief.com

TIGTA assesses how well IRS Examination function scrutinizes all open tax periods during audits [Audit Report No. 2009-30-034]:

IRS Examination function employees do not always appropriately inspect and examine prior and/or subsequent year tax returns when warranted, the Treasury Inspector General for Tax Administration (TIGTA) said in a new audit.

Auditors reviewed 68 statistical sample cases and found that 13 (or 21%) of the cases warranted scrutiny of additional returns but none were selected for examination. In 26 (or 38%) of the 68 cases, "there was no evidence that examiners inspected either the prior or subsequent year return to identify similar issues to the years under examination or if large, unusual, or questionable items existed that would warrant examination," the audit said. Factors that might be considered include the comparative size of an expense, if the nature of the item is significant, the beneficial effect of the manner in which an item is reported, and missing items on the return.

"When examiners do not make the proper decision to select returns for examination, taxpayers are not provided equitable treatment, and the examination is not as effective for improving taxpayer compliance on future tax returns," TIGTA said.

The audit also found that Compliance function tax examiners are currently unable to assess subsequent year tax returns and select them for audit. As a result, IRS "could be missing an opportunity to conduct examinations more efficiently and consistently from year to year," TIGTA said. This assessment was based on a review of 68 additional cases which revealed that in 31 (or 46%) of those cases the same issues adjusted on the tax year return under examination were present on the subsequent year return.

The audit is available at http://treas.gov/tigta/auditreports/2009reports/200930034fr.pdf.

For IRS tax audit and tax examination expert help, contact Mike Habib, EA at 1-877-78-TAXES or online at www.myirstaxrelief.com

IRS not obligated to accept offer in compromise

Bennett, TC Memo 2008-251

Mike Habib, EA

The Tax Court held that the IRS did not abuse its discretion when it refused to accept the taxpayer's settlement offer, which was higher than the amount it had calculated the taxpayer could pay. Instead the Service could place part of the taxpayer's debt in "currently not collectible" status, which would allow it to collect more if the taxpayer's finances improve.

Facts. The taxpayer failed to file her tax returns from 1997 through 2001. She also failed to pay over the taxes for four quarters during 2000 and 2001 that had been withheld from employees of a company she helped run. In 2003, the IRS began an audit and asked the taxpayer to file the missing returns. She did and also filed her 2002 return, months after it was due. The 2002 return showed she owed $8,000, but she failed to include any payment with the return.

At a collection due process hearing she requested, the taxpayer said she was owed a refund on her 2003 taxes that she would apply to her 2004 taxes. Actually, her 2003 return showed that she owed more than $15,000, which she did not pay. The taxpayer then sent the IRS a "check" for $5,619, which she said was an estimated payment of her 2004 tax liability, along with a $1,500 offer to compromise her 1996, 1999, 2002, and 2003 income tax debts and her 2000-2001 trust fund recovery penalties. The Service promptly rejected the offer and submitted a counteroffer for $31,757.

After the IRS discovered that the taxpayer's $5,619 estimated tax payment was never posted because the taxpayer had sent only a copy of the check, not the check itself. It said the taxpayer could try another offer in compromise, but she had to prove that she had filed her 2004 tax return and paid any tax due. The taxpayer accepted this suggestion in July 2005. She filed her 2004 federal income tax return and fully paid the tax due. She also included proof of a $3,000 estimated tax payment for 2005. The taxpayer now submitted a second compromise offer of $14,908, and the IRS counteroffered with $54,816, which, after negotiations, it lowered to $33,484.

After the taxpayer submitted a financial update that showed her income had dropped below her monthly expenses and that she was dependent on family loans for living expenses, the Service decided to reject her offer of compromise and place her 2002 debt in "currently not collectible" status. The IRS notified the taxpayer that it was suspending collection activities for all years pending an improvement in the taxpayer's finances. The taxpayer filed an appeal of the Service's rejection and its decision to place her 2002 debt in currently-not-collectible status. She argued that because her offer of $14,908 exceeded her $1,468 collection potential, the offer was in the government's best interest, according to an IRS policy statement, and it had no justification for rejecting it.

Tax Court's opinion. The Tax Court pointed out that tax debts typically are settled in one of three ways:

(1) The IRS may allow a taxpayer to pay his or her debt over time through an installment agreement. (2) The IRS may declare the debt "currently not collectible" and take no collection action until the taxpayer's finances improve.

(3) The IRS may accept the taxpayer's offer to compromise for less than the full debt owed.

The parties agreed that the question in the case was whether the Service abused its discretion in rejecting the taxpayer's offer and instead classifying her tax debt as currently not collectible. According to the court, the IRS accepts an offer to compromise on one of three bases: doubt as to liability, doubt as to collectibility, or promotion of efficient tax administration. Because the taxpayer placed her offer in the doubt-as-to-collectibility category, the court examined the rules for such offers.

IRM part 5.8.7.6(5) states that offers in compromise are to be evaluated in terms of what is in the government's best interest as outlined in policy statement P-5-100, which states that the IRS will accept offers when "it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The taxpayer argued that her offer met both of policy statement P-5-100's requirements:

(1) Her full debt was not collectible. (2) Her $14,909 offer greatly exceeded her collection potential of $1,469.

Therefore, she claimed that her offer was in the government's best interest and that the Service's refusal to accept it was an abuse of discretion.

The court pointed out that policy statement P-5-100 did not stand alone, but was part of IRM part 5.8.1.1.3(1), which stated that a doubt-as-to-collectibility offer in compromise must equal or exceed a taxpayer's reasonable collection potential to be considered for acceptance. This language, stated the court, did not require that the IRS accept an offer in compromise whenever the amount exceeds collection potential. Instead, it establishes grounds for winning consideration.

According to the court, even policy statement P-5-100 does not say that the IRS will accept any offer exceeding reasonable collection potential, but only that it will do so when the amount offered reasonably reflects collection potential. It goes on to state that "taxpayers are expected to provide reasonable documentation to verify their ability to pay." IRM part 5.8.7.6 lists, as an example of an offer of compromise that the IRS might reject, an offer from a taxpayer who has "an egregious history of past noncompliance" and who will be highly unlikely to remain in compliance during the offer period.

The court said the Service based its determination in part on its finding that the taxpayer's circumstances might change in the near future (i.e., before the limitations period for collecting her taxes ran out). Because the taxpayer had so delayed filing her returns, the court found no error in the Service's conclusion that there were eight or more years remaining before the limitations period would run out on most of the years in question. The court also found no error in the Service's conclusion that the taxpayer had several more years of earning capability. Even though her public relations business had not been enormously successful, she did have the potential to be more successful in the future.

The taxpayer argued that the Tax Court's decision in Oman, TC Memo 2006-231, which dealt with the same issue as the present case, supported her argument. The court disagreed, pointing out that Oman led only to a remand for a further hearing and came to no firm conclusions resolving the possible conflict between IRM part 5.8.7.6(5) and policy statement P-5-100. Unlike the absent record in that case, the IRS pointed out the present case boasted a full record, which made its reasoning clear. According to the court, because IRM 5.8.7.6(5) and policy statement P-5-100 are both contained in the Service's manual of policies and procedures, they would both seem to carry equal weight. In any case, the court said that both were merely guidelines guiding the Service's consideration of all fact and circumstances. Reg. 301.7122-1(f)(3), which the court said was unquestionably binding, does not compel the IRS to accept any particular offer, but to consider all facts and circumstances of the case. That was what the IRS did in this case, said the court.

For tax relief, IRS tax help, tax problem resolution and tax resolution services please contact Mike Habib, EA at 1-877-78-TAXES or CLICK HERE.

Seventh Circuit classifies computer programmer as an independent contractor

Suskovich v. Anthem Health Plans of Virginia, Inc., (CA 7 1/22/2009) 103 AFTR 2d ¶2009-385

The Court of Appeals for the Seventh Circuit, affirming a district court, has concluded that a computer programmer was an independent contractor and not an employee.

Facts. Anthony Suskovich worked for WellPoint/Anthem (WellPoint) at various times over several years, beginning in '96. While no record exists of any contractual agreement between Suskovich and WellPoint, Suskovich stated on a form he used to access WellPoint's computer system that he was a "contractor." Suskovich billed WellPoint for his time on an invoice form that he had created, stating that he was a "salesperson" who sold "computer consulting" to WellPoint. He was paid at an hourly rate of $60, resulting in an annualized salary of about $200,000, and received no benefits. For tax purposes, his salary was reported on Form 1099 rather than Form W-2. He had a similar relationship with Trasys, Inc., beginning in 2000.

Prior to his death in January of 2006, Suskovich was under investigation by IRS for failure to file tax returns. At the time of his death, he owed $100,000 to IRS and $33,000 to the state of Indiana. His wife requested "innocent spouse" relief, but was denied. The estate then filed a lawsuit, arguing that Suskovich should have been classified as an employee, rather than as an independent contractor, and that the money owed to IRS and the state of Indiana should have been withheld by WellPoint and Trasys. On the other hand, WellPoint and Trasys contended that Suskovich was an independent contractor and that he owed back taxes because of his own failure to file proper tax returns or pay his withholding taxes. A federal district court had granted summary judgment to WellPoint and Trasys. Suskovich's estate appealed the decision.

Appellate court's ruling. The Seventh Circuit upheld the district court's decision based on an analysis of the following factors:

• Degree of control. The Court pointed out that neither WellPoint nor Trasys had control over the details of Suskovich's work. Suskovich was accountable to Trasys and WellPoint only for his final performance on projects. This factor supported a finding that Suskovich was an independent contractor.
• Length of employment. The Court noted that although Suskovich worked for WellPoint and Trasys over an extended period of time, he only worked on short projects, usually lasting six to twelve months. The record demonstrated that he never enjoyed any guarantees that his work would extend beyond this limited duration, and, accordingly, this factor favored independent contractor status.
• Method of payment. The Court had ruled previously that the use of Form 1099 was appropriate for a finding that a worker was an independent contractor. The Court also pointed out that Suskovich was never added to WellPoint's or Trasys' payroll. Instead, he had to invoice his hours in order to be paid. In addition, Suskovich listed his income on his own tax returns as income from a sole proprietorship, and he claimed business deductions related to that proprietorship.
• Belief of the parties. The Court said that the tax returns, resumes, tax forms, and contractual agreements with the defendants overwhelmingly favored the conclusion that Suskovich considered himself to be an independent contractor.
• Other factors. Three other factors, the "distinct occupation or business" factor, the "kind of occupation" factor, and the "skill required" factor, all supported a finding of independent contractor status, as Suskovich had the sort of advanced programming skills that allowed him to contract his work out to a number of companies.

Contact Mike Habib, EA at 1-877-78-TAXES for any payroll tax problem or CLICK HERE.

IRS urged to issue pre-April 15 guidance for Madoff victims

An influential voice in politics, former New York State Governor George Pataki, has asked IRS to issue pre-Apr. 15 guidance for victims of the Ponzi scheme alleged to have been perpetrated by dealer and advisor Bernard Madoff and his firm. Separately, members of the Senate Banking Committee will ask IRS to set up a special unit for Madoff victims.

Guidance sought in three areas. In a Jan. 12, 2009, letter to Eric Solomon, Assistant Secretary for Tax Policy, George E. Pataki, now a partner with Chadbourne & Parke, LLP, asked that IRS issue guidance before Apr. 15, 2009, on the following issues pertaining to Madoff victims:

• Nature of loss. Under Code Sec. 165(c)(2), an individual may deduct a loss incurred in a transaction entered into for profit, though not connected with a trade or business, and under Code Sec. 165(c)(3), a deduction may be claimed for losses of property not connected with a trade or business, or a transaction entered into for profit, if the losses arise from events such as storms, etc., casualties, or theft. Under Code Sec. 165(h)(1) and Code Sec. 165(h)(2), losses claimed under Code Sec. 165(c)(3) may be claimed only as itemized deductions, subject to reduction by 10% of AGI, and the $100 per occurrence floor (for 2008; $500 for 2009 only, returning to $100 after 2009). The letter takes the position that since all Madoff investments were transactions entered into for profit, Code Sec. 165(h)(2) (and not the less advantageous Code Sec. 165(c)(3)) should apply to Madoff-related theft losses. Nevertheless, the letter says that "internal guidance issued by the IRS Chief Counsel has stated that the "official position" of the IRS is that Code Section 165(c)(3) applies to theft losses."

Observation: The letter may be referring to Chief Counsel Advice 200811016, dealing with investors' losses on loans to a company engaged in writing sub-prime loans.

• Safe harbor for reasonable expectation of recovery. It's well established that a theft loss may be claimed in the year it is discovered, but only to the extent that, at the end of such year, there's no reasonable expectation of recovery. The letter points out that investors with direct accounts in the Madoff broker/dealer with no claims against third parties can reasonably expect to receive only a SIPC (Securities Investor Protection Corporation) payment, capped at $500,000, or if more, their pro rata shares of the assets in the Madoff estate ultimately available for distribution to investors. The letter asks IRS to issue guidance stating that Madoff investors with no claims at the end of 2008 other than a possible SIPC claim, and a claim against the Madoff estate, won't be considered to have a reasonable expectation of recovery as of Dec. 31, 2008 in respect of Madoff-related losses in an amount greater than the higher of (a) $500,000 or (b) 10% of the investor's "net investment" in the account (sum of all amounts of cash and FMV of all property transferred into the account, less total of cash and FMV of all property received as distributions from the account).
• Amount of theft loss. The letter asks IRS to rule that the amount of an investor's Madoff-related theft loss for 2008 is equal to (a) his entire unrecovered tax cost basis in the account at December 31, 2008, including all amounts reported as income in years prior to 2008, less (b) his reasonable expectation of recovery as of December 31, 2008 (determined under the approach posited above.

Observation: Another issue to consider relates to whether investors can amend returns and claim refunds for tax paid on phantom earnings that were left to be "reinvested" in the account. Similarly, can an investor who received statements reporting, say, 10% income or gains, and withdrew and paid tax on the earnings, file amended returns treating the withdrawals as a nontaxable return of capital?

Senate Banking Committee will ask for special IRS unit. At a Jan. 27, 2009, hearing into the Madoff scandal, Sen. Menendez (D-NJ), a member of the Senate Committee on Banking, Housing and Urban Affairs, raised the issue of how Madoff victims should handle tax payments that they've made in previous years on phantom income. At the urging of Chairman Dodd (D-CT), he said he would draft a letter to IRS asking that it set up a special unit to handle tax matters relating to Madoff victims.

For IRS tax help, you can contact Mike Habib, EA at 1-877-78-TAXES to resolve your tax matters or you can CLICK HERE.

While the new law tax changes in the Emergency Economic Stabilization Act of 2008 were the most significant developments in the final quarter of 2008, many other tax developments may affect you, your family, and your livelihood. These other key developments in the final quarter of 2008 are summarized below. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

New law waives required minimum distributions (RMDs) for calendar year 2009. A new law enacted in late 2008 provides that retirement plan account participants, IRA owners, and their beneficiaries do not have to take RMDs for 2009. Thus, taxpayers who can take advantage of this change won't be forced to sell stock or mutual fund shares held in retirement accounts when their value is exceptionally depressed. This change helps retired taxpayers who do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from their qualified plan accounts and/or IRAs, they will wind up with less taxable income for 2009, and, possibly, avoid (or mitigate the effect of) AGI-based phaseouts of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries. There's no need to show that a retirement plan account or IRA is "in distress" because of stock market conditions in order to qualify for the 2009 RMD suspension. Thus, for example, the RMD suspension applies equally to IRAs invested entirely in FDIC-insured bank-CDs as well as to IRAs invested in depressed-in-value stocks or mutual funds. The suspension of RMDs for 2009 doesn't help those older taxpayers who must make regular withdrawals (sometimes in excess of the RMD) from their retirement plan accounts and IRAs in order to get by each month.

New law requires qualified plans to offer post-2009 rollover option for nonspouse beneficiaries. A provision in late 2008 legislation requires employer sponsored qualified retirement plans to offer nonspouse beneficiaries the opportunity to roll over an inherited plan account balance to an IRA set up to receive the rollover on the nonspouse beneficiary's behalf. This rule will become effective for plan years beginning after 2009. Until then, under current rules, qualified plans may, but are not required to, offer nonspouse beneficiaries this rollover option. The rollover option will give much-needed flexibility to those who inherit retirement plan accounts from someone other than their spouse, such as a parent, an uncle, or a same-sex partner. For a long time, nonspouse beneficiaries of IRAs have had access to a rollover-type option that IRS has sanctioned. While nonspouse beneficiaries can't treat an inherited IRA as their own, they can make trustee-to-trustee transfers to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA, that is, in the name of the decedent for the benefit of the IRA beneficiary.

Corporations can gain credits by foregoing special depreciation. A corporation may elect to accelerate its use of unused carryforwards of the minimum tax credit and the research credit from tax years beginning before 2006 and obtain a refundable credit instead of claiming the special depreciation allowance on eligible qualified property. If the election is made, the corporation must forego the special depreciation allowance for eligible qualified property acquired (including manufactured, constructed, or produced) after Mar. 31, 2008, and placed in service generally before Jan. 1, 2009, and use the straight-line method of depreciation on such property. The election is subject to a number of conditions and limitations. They are reflected in a worksheet IRS has posted on its web site. Taxpayers can use the worksheet to calculate their refundable credits from making the election.

Standard mileage rates down for 2009. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 55¢ per mile for business travel after 2008. That's 3.5¢ less than the 58.5¢ allowance for business mileage that applied in the last six months of 2008. Further, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 24¢ per mile, down 3¢ from the 27¢ per mile allowance for the last half of 2008.

Simplified per diem rates rise effective Oct. 1. Reimbursements of an employee's business travel costs (lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified substantiation is provided and the daily rate doesn't exceed the federal per diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates vary by travel destination, employers can make reimbursements at the simplified "high-low" per diem rates, which assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas. The IRS has issued the "high-low" simplified per diem rates for post-Sept. 30, 2008, travel. An employer may reimburse up to $256 for high-cost localities ($198 for lodging and $58 for M&IE) and $158 for other localities ($113 for lodging and $45 for M&IE). The list of high-cost areas is also updated.

IRS regulations explain when creditors are owners when a corporation is reorganized. A corporation can be reorganized in any of several ways (for example, a recapitalization or a merger with another corporation) without adverse tax consequences to the parties (including the shareholders) if numerous requirements are met. One such requirement is the continuity of interest (COI) requirement. The IRS has issued regulations explaining when and to what extent creditors of a corporation will be treated as proprietors of the corporation in determining whether the COI requirement is met. They are effective for transactions after Dec. 12, 2008.

Manipulation of charitable remainder trust identified as "transaction of interest." Effective Oct. 31, 2008, the IRS identified a new transaction and substantially similar ones as "transactions of interest" (i.e., subject to special scrutiny by the IRS for possibly inappropriate tax avoidance). They involve a sale of all interests in a charitable remainder trust (after the contribution of appreciated assets to and their reinvestment by the trust), that results in the grantor (the person who set up the trust) or other recipient receiving the value of their trust interest while claiming to recognize little or no taxable gain. Persons entering into these transactions on or after Nov. 2, 2006, must disclose the transaction, and material advisors who make a tax statement on or after Nov. 2, 2006, with respect to transactions entered into on or after that date, have disclosure and list maintenance obligations. Failure to follow the disclosure rules can result in steep penalties.

IRS scrutinizing use of rollovers to fund new business start-ups. The IRS issued guidelines to address potentially abusive retirement plan arrangements called Rollovers as Business Start-ups (ROBS). These are designed to allow individuals to convert their existing retirement accounts into seed money for funding new businesses without first paying taxes on the distributions. Having been made aware that ROBS plans are being actively marketed, the IRS has issued guidelines for its employee plans specialists to follow in examining these plans. Though not stating that ROBS plans do not meet IRS requirements for qualified plans in and of themselves, the guidelines signal that IRS is carefully scrutinizing these transactions, particularly with regard to the following key issues: discrimination in benefits, rights and features; improper stock valuation; and prohibited transaction payments of promoter fees.

Boosted 2008 housing cost allowances for those working abroad in high-cost areas. Guidance from the IRS effectively increased the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. The increases were based on geographic differences in foreign housing costs relative to U.S. housing costs. For example, assume a U.S. taxpayer was posted to Paris, France, for all of 2008. Under the new IRS guidance, his maximum housing cost exclusion is $86,084 ($100,100 full year limit on housing expense in Paris minus $14,016 base amount).

IRS expedites lien process for homeowners trying to sell or refinance. The IRS has announced an expedited process to make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home. Filing a Notice of Federal Tax Lien is a formal process by which the IRS makes a legal claim to property as security or payment for a tax debt. Taxpayers looking to refinance or sell a home where a federal tax lien has been filed, have two options. They or their representatives, such as their lenders, may (1) request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan (subordination), and (2) also request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances. The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but in late 2008 the IRS said it will work to speed those requests in wake of the economic downturn. The IRS urges people to contact the IRS Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests.

Final rules for information reporting of employer-owned life insurance. The IRS issued final regulations providing guidance on the information reporting required on employer-owned life insurance contracts. In general, employers must treat death benefits from such insurance on many employees as taxable income, for contracts issued after Aug. 17, 2006. The final regs provide that applicable policyholders owning one or more employer-owned life insurance contracts issued after Aug. 17, 2006, must provide certain information to the IRS by attaching Form 8925, Report of Employer-Owned Life Insurance Contracts, to the policyholder's income tax return by the due date of that return.

IRS Speeds Lien Relief for Homeowners Trying to Refinance, or Sell their house

Contact Mike Habib, EA to release your IRS Federal Tax lien

The Internal Revenue Service announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

"We don't want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes," said Doug Shulman, IRS commissioner.

"We realize these are difficult times for many Americans," Shulman said. "We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions."

Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution's, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235, Collection Advisory Group Addresses, for address information.

Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

To apply for a tax lien discharge, applicants must follow directions in Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.

The IRS also urges people to contact the agency's Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.

Contact Mike Habib, EA today to release your IRS federal tax lien and resolve your tax problem.