Tax Relief Blog

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.

As you can see from the article below, the IRS tax code is getting more complicated than ever. Further, the IRS‘s reach of audits has no limits.

If you have a tax problem, can not pay your tax bill or is facing an IRS tax audit contact us now.

Tax problem complicates Geithner’s confirmation process

As reported by the Los Angeles Times

Many senators want a better explanation from Obama’s would-be Treasury secretary about past underpayments. His hearing is delayed till after the inauguration.

By Janet Hook and Christi Parsons January 15, 2009

Though he was a prodigy in the world of economics, Timothy F. Geithner underwent an IRS audit in 2006 and ended up paying back taxes for a mistake in two years’ worth of filings. That was embarrassing enough.

But just as he was about to be named to head the Treasury Department, a more awkward fact came to light: Geithner had made the same error in two earlier tax years and failed to fix it even after the audit.

Now the matter is complicating Geithner’s confirmation process as senators wrestle with its meaning. Was it an honest mistake, as Geithner’s supporters maintain? Or does it reveal a character flaw in the man President-elect Barack Obama chose to help solve the nation’s economic problems?

Already, Geithner’s confirmation hearing has been set back a few days, foiling Democrats’ plans to have Obama’s most important Cabinet officials installed on Inauguration Day.

Some of the Senate’s most prominent members, GOP leaders among them, still support Geithner and blame his accountant for the whole mess. Geithner himself has told senators he can’t explain why he didn’t pay all his back taxes after the audit.

But pressure could mount if Geithner’s explanation doesn’t ring true for critics, a handful of whom aren’t satisfied with the story coming out of Obama’s transition team about how the error happened – or how it went unresolved until shortly before Geithner was gearing up for a Senate confirmation.

A lot of us are concerned that the guy who’s going to be overseeing our tax system ignored our tax system,” said Sen. Jim DeMint (R-S.C.). Based on what he knows now, DeMint said, he would vote against Geithner.

The hearings may well be transformed from a big-picture discussion of the crisis-ridden U.S. economy into a minute review of Geithner’s personal finances. Geithner also faces questions about an immigrant household employee whose work papers expired while working for him.

But Geithner doesn’t just have to convince skeptical senators, according to some members.

It is incumbent on him to explain the details in a way that the American public can understand,” said Sen. George V. Voinovich (R-Ohio). “He’s going to have to have a very good explanation.”

After Obama named Geithner to the position in late November, the 47-year-old head of the Federal Reserve Bank of New York appeared to be headed for easy confirmation. A key player in the Bush administration’s response to the economic crisis, Geithner commands wide respect among conservatives. The Dow Jones industrial average rocketed 494 points on news of his possible appointment.

But in the process of vetting Geithner, the presidential transition team discovered that the nominee had not paid Social Security taxes when he worked for the International Monetary Fund from 2001 to 2003, nor in 2004, when he also received compensation from the fund.

The IMF does not withhold those taxes from its employees’ pay, so employees are supposed to pay so-called “self-employment taxes” themselves.

IMF employees receive additional pay to cover those taxes, which they get after filling out paperwork. Geithner filled out, signed and submitted those papers, according to documents prepared by the staff of the Senate Finance Committee, which will hold his confirmation hearing. But he apparently did not use the money to pay the taxes.

In the 2006 IRS audit, auditors found the failure to pay for the 2003 and 2004 tax years, and Geithner shelled out $17,230 in overdue taxes and interest then. But the audit didn’t cover the two earlier years, the transition official said, and Geithner did not go back and amend those tax returns on his own.

As soon as the transition team pointed out the error, Geithner paid the taxes that would have been due in those years, plus interest, according to a transition official.

The payment of nearly $26,000 came in on Nov. 21 – the day Obama named him to head the Treasury Department, which oversees the IRS.

Aides to Obama say Geithner never tried to avoid paying his taxes.

After the audit, said the transition official, “Mr. Geithner was advised that he had no further liability for Social Security taxes on his IMF income.”

All of his taxes have now been paid in full,” the Obama aide said, “and at no time was there any intention on Mr. Geithner’s part to avoid taxes.”

Added Sen. Max Baucus (D-Mont.), the finance committee chairman: “His accountant didn’t serve him well.”

Some Republicans say the Senate should confirm Geithner and set him to work.

I don’t think we could get a better person for that position,” said Sen. Orrin G. Hatch (R-Utah), a finance committee member who said he had been deluged with conservative criticism for saying he would still support Geithner. “I’m getting chewed up by the right. I would caution critics on the right that he’s as good as they are ever going to see from this administration.”

Sen. Judd Gregg (R-N.H.) said time was of the essence.

We need him on board sooner rather than later,” Gregg said.

Obama, speaking to reporters Wednesday, said he believed Geithner’s tax problems were the result of “innocent mistakes” and would not derail the nomination.

My expectation is that Tim Geithner will be confirmed,” he said.

The Senate Finance Committee now plans to hold his confirmation hearing a day after the inauguration.

Sen. Jon Kyl (R-Ariz.) blocked plans to hold the confirmation hearing Friday, saying Senate rules require meetings to be announced a week in advance.

Kyl declined to discuss the allegations against Geithner and said he asked for the delay not because of the controversy but because he and other members had a schedule conflict.

In a private meeting with senators on Tuesday, Geithner pleaded ignorance when asked why he did not initially pay all the back taxes, said Sen. Olympia J. Snowe (R-Maine).

He cannot explain it,” said Snowe, a finance committee member. “He admits that it is a huge oversight on his part.”

Sen. Charles E. Grassley of Iowa, senior Republican on the finance committee, called Geithner’s mistakes “sloppy,” but said that during Tuesday’s closed meeting with committee members Geithner appeared “to be very sincere in his apology. He used the word ‘stupid.’ ”

As you start to organize your records for your 2009 tax preparation, I thought you might find this brief rundown of 2009 tax changes useful.

* ADOPTION TAX CREDIT increases to $12,150 for adoption of an eligible child.

* SECTION 179 maximum deduction decreases to $133,000. Phase-out threshold is $530,000. (It is generally expected that a stimulus law in early 2009 will increase these amounts to the 2008 levels of $250,000 and $800,000.)

* STANDARD MILEAGE RATE for business driving effective January 1, 2009, is 55¢ a mile. Rate for medical and moving mileage is 24¢ a mile. Rate for charitable driving remains at 14¢ a mile.

* ESTATE TAX top rate remains at 45%, but the exemption amount increases to $3.5 million. The ANNUAL GIFT TAX EXCLUSION increases to $13,000.

* 401(k) maximum salary deferral increases to $16,500 ($22,000 for 50 and older).

* SIMPLE maximum salary deferral increases to $11,500 ($14,000 for 50 and older).

* IRA contribution limit remains at $5,000 ($6,000 for 50 and older).

* KIDDIE TAX threshold increases to $1,900 and applies up to age 19 (up to age 24 for full-time students).

* NANNY TAX threshold increases to $1,700.

* TRANSPORTATION FRINGE BENEFIT limit increases to $120 for vehicle/transit passes and to $230 for qualified parking.

* SOCIAL SECURITY taxable wage limit increases to $106,800. Retirees under full retirement age can earn up to $14,160 without losing benefits.

* HOPE CREDIT maximum remains at $1,800.

* HSA CONTRIBUTION limit increases to $3,000 for individuals and to $5,950 for families. An additional $1,000 may be contributed by those 55 or older.

Thanks to the late passage in 2008 of AMT patch legislation, the AMT exemption amounts for 2008 are $69,950 for joint filers, $34,975 for couples filing separately, and $46,200 for single taxpayers and heads of household.

For professional tax preparation or professional tax representation contact Mike Habib, EA directly at 1-877-78-TAXES or CLICK HERE

No More Tax Problems in 2009

Mike Habib, EA

Here is a New Year resolution you can’t afford to ignore… No more tax problems!! Yes, you can get rid of your tax problems in 2009.

You can solve your tax problems and get tax relief through our tax resolution services. You can finally get a fresh start by getting rid of your looming tax problem.

Are you asking yourself … if I have tax problems whom should I contact?

You have many options to settle your tax account and move on with your life. Here are some options that should entice you to get your life in order:

  • Offer In Compromise: an offer in compromise, OIC, will usually be accepted by the taxing authority to resolve your tax problem if the amount offered to settle your tax problem is equal or exceed the taxpayer’s Reasonable Collection Potential, RCP. The IRS, or the State, or the Sales Tax Agency determines RCP by using the financial analysis tools like the 433-A for individuals and 433-B for business entities.

  • Installment Agreement: paying the tax amount through a negotiated installment agreement is a common way to resolve your tax problem. You should seek our professional tax advice, as the taxing authority will usually request a large monthly payment, while our firm will work on attaining an installment agreement that is reasonable and you can live with without causing a financial and economic hardship on you and your family.

  • Currently Non Collectible – CNC Currently Non Collectible – CNC is accomplished when the IRS holds off an individual or business taxpayer’s account from active enforcement collection efforts. There are specific rules and requirements that a taxpayer must meet before a CNC status be accomplished. The IRS would not pursue enforcement collection activity against the taxpayer and possibly the statute of limitations on the entire tax liability will run.

It makes far more sense, and will probably be less costly in the long run, to resolve your tax problem with the IRS now, rather than dealing with the potential embarrassment and financial burden of having your employer garnish and levy your wages / paycheck or the IRS freezes and levy your bank accounts.

The IRS released tax records on their most famous tax problem cases that imprisoned Al Capone, they inadvertently nabbed the Governor of New York allegedly spending tens of thousands of dollars for what they least expected. From Will Smith, to Wesley Snipes to Nicolas Cage IRS audits and collection activities are on the rise, and is expected to continue in 2009 and for many years to come!

Tax problems do not go away by themselves… Take action today by contacting Mike Habib, EA directly at 1-877-78-TAXES or CLICK HERE

As an IRS licensed Enrolled Agent (EA) specializing in Tax Relief and Tax Resolution Services, I can represent individuals and businesses in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington D.C. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

Taxpayer’s failure to timely file breached offer-in-compromise justified renewed collection action Trout, (2008) 131 TC No. 16

Mike Habib, EA

The Tax Court has concluded that IRS didn’t abuse its discretion in finding that a taxpayer had breached his offer-in-compromise (OIC) and deciding to proceed with its collection efforts where the OIC made timely filing and payment of tax an express condition of the agreement.

Observation: This case illustrates the dangers of losing the advantage of a large reduction in a tax liability because of a later failure to comply with an OIC.

Facts. David W. Trout entered into an OIC in ’97 that covered the ’89, ’90, ’91, and ’93 tax years. Among the terms in the OIC was one requiring Trout to timely file and pay his taxes for five years. Trout filed his ’96 tax return late, and then failed to file his ’98 and ’99 returns. He filed his ’98 taxes, showing a refund due, in November 2003, but failed to sign his ’99 return, which showed a liability of $164.

In March 2004, IRS sent Trout a notice of intent to levy and Trout requested a Collection Due Process (CDP) hearing. Trout paid his liability for ’99 but still failed to file a signed return. IRS issued a notice of determination upholding the collection action in March of 2005.

Background. IRS may compromise tax liabilities based on doubt as to collectibility; doubt as to liability; economic hardship; and extraordinary events beyond the taxpayer’s control. (Reg. § 301.7122-1(b))

In Robinette (2004), 123 TC 85, the Tax Court held that IRS‘s determination in a CDP hearing to proceed with collection after declaring taxpayer’s OIC in default was an abuse of discretion. It found that the Appeals Officer’s determination and refusal to consider the taxpayer’s specific circumstances was arbitrary and without sound basis in law. Notably, although the taxpayer filed one year’s return late in breach of the OIC, the breach wasn’t a material matter that caused IRS any, or any significant, monetary damage.

However, the Tax Court’s decision was reversed by the Eighth Circuit. It ruled that the IRS Appeals officer didn’t abuse his discretion in deciding to proceed with collection after the taxpayer failed to timely file a return as required by his OIC. The Eighth Circuit found that timely filing was an express condition in IRS‘s agreement to discharge the taxpayer’s tax liability. Although express conditions may be excused if they are immaterial to the exchange and if enforcing them would cause disproportionate forfeiture, the Eighth Circuit held that the voiding of the OIC and the reinstatement of the taxpayer’s tax liability wasn’t a disproportionate forfeiture, since it just reinstated a prior tax liability. (James M. Robinette v. Com., (2006, CA8) 97 AFTR 2d 2006-1391, revg (2004) 123 TC 85)

Taxpayer’s argument. Trout claims failure to file the ’99 return was not a material breach, relying on the Tax Court’s decision in Robinette, he claimed that IRS abused its discretion in (1) finding that Trout had not timely filed his ’98 and ’99 returns and (2) refusing to reinstate the OIC because the breach of the OIC’s obligation to timely file wasn’t material.

Conclusions. The Tax Court concluded that, applying general principles of the federal common law of contracts, Trout’s OIC agreement made timely filing and payment of tax an express condition of the OIC. IRS could hardly have used plainer language to explain the terms and conditions of the OIC or to express its intent that it would reinstate the original liability for a failure to meet any of the terms and conditions. An express condition is subject to strict performance, thus making the materiality of the breach irrelevant. The Court noted that the Appeals Officer considered reinstatement of the OIC as a collection alternative, but believed that Trout wasn’t entitled to a second chance after looking at his pattern of noncompliance. Trout was not powerless to avoid the breach, and the failure to reinstate his OIC caused no forfeiture, so IRS did not abuse its discretion in finding that Trout had breached the OIC and in determining to proceed with collection.

The Court further held that Trout did not gain the benefit of the exceptions listed in Code Sec. 7502 to the general rule that a tax return is filed when received. Code Sec. 7502 provides exceptions to this general rule for returns received after, but postmarked by the USPS on or before, their due date, and even for returns not received at all if they were sent by registered or certified mail. But under Rule 122, the Court could not make a finding on Trout’s credibility and overwhelming evidence indicated that IRS did not receive either return on time. Accordingly, IRS‘s finding that the ’98 and ’99 tax returns were not timely filed was not an abuse of discretion.

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Capital contributions did not restore or increase shareholders’ tax bases in loans to S corporations Nathel, (2008) 131 TC No. 17

Mike Habib, EA

The Tax Court has held that taxpayers’ capital contributions to S corporations did not constitute income to the S corporations and that the contributions did not restore or increase their tax bases in their loans to the S corporations.

Background. Generally, under Code Sec. 1367 a shareholder’s tax bases in the stock in, and in the loans to, an S corporation are adjusted to reflect the shareholder’s share of income, losses, deductions, and credits of the S corporation as calculated under Code Sec. 1366(a)(1). Under Code Sec. 1367(a)(1), a shareholder’s tax basis in his S corporation stock is increased by, among other things, the shareholder’s share of the S corporation’s income items (including tax-exempt income). Under Code Sec. 1367(a)(2), a shareholder’s tax basis in his S corporation stock is decreased (but not below zero) by, among other things, the shareholder’s share of losses and deductions. If a shareholder’s tax basis in his stock in an S corporation is reduced to zero by his share of the losses of the S corporation, any further share of the S corporation’s losses decreases, but not below zero, the shareholder’s tax basis in outstanding loans the shareholder has made to the S corporation. (Code Sec. 1367(b)(2)(A), Reg. § 1.1367-2(b)(1)) Thus, a shareholder’s tax basis in loans the shareholder has made to an S corporation may be lower than their face amount or zero because of downward adjustments in such basis caused by losses of the S corporation that are passed through to the shareholder. (Code Sec. 1367(b)(2)(A))

Facts. In calculating ordinary income relating to $1,622,050 in loan payments received from two S corporations, for purposes of Code Sec. 1366(a)(1), brothers Ira and Sheldon Nathel treated $1,437,248 in capital contributions they made to the S corporations as income to the S corporations and as restoring or increasing under Code Sec. 1367(b)(2)(B), their tax bases in loans that they previously had made to the S corporations. Ira and Sheldon then used the restored or increased tax bases in the loans they made to the S corporations to offset ordinary income that otherwise would have been reportable by them on their receipt from the S corporations of the $1,622,050 loan payments.

On audit, IRS determined that Ira’s and Sheldon’s $1,437,248 capital contributions were not to be treated as restoring or increasing their tax bases in their loans to the S corporations but as increasing their tax bases in their stock in the S corporations, resulting in additional ordinary income being charged to them on receipt of the S corporation loan payments.

Court’s conclusion. The Tax Court held that for purposes of Code Sec. 1366(a)(1), Ira and Sheldon’s $1,437,248 capital contributions to the S corporations did not constitute income to the S corporations and that under Code Sec. 1367(b)(2)(B), Ira and Sheldon’s capital contributions did not restore or increase their tax bases in their loans to the S corporations.

The Court reasoned that by attempting to treat their capital contributions to the S corporations as income to the S corporations, Ira and Sheldon in effect sought to undermine three cardinal and longstanding principles of the tax law: (1) that a shareholder’s contributions to the capital of a corporation increase the basis of the shareholder’s stock in the corporation; (2) that equity (i.e., a shareholder’s contribution to the capital of a corporation) and debt (i.e., a shareholder’s loan to the corporation) are distinguishable and are treated differently by both the Code and the courts; and (3) that contributions to the capital of a corporation do not constitute income to the corporation.

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IRS reminds taxpayers to make use of recent tax law changes before December 31st [Fact Sheet 2008-26]:

Mike Habib, EA

With the end of tax year 2008 just weeks away, IRS has issued a number of tax tips that taxpayers should consider.

Among the tips are the following–first-time homebuyers (those who have not owned a home in the three years prior to a purchase) should be aware that a new tax credit applies to primary home purchases made between Apr. 9, 2008, and June 30, 2009; there is an additional standard deduction for taxpayers who do not itemize their deductions, but pay real estate taxes, and this is an amount equal to the amount of real estate taxes paid up to $500 for single filers or up to $1,000 for joint filers: it may be possible to deduct qualified tuition and required enrollment fees up to $4,000 that a taxpayer pays for himself or herself, a spouse or a dependent; and an educator expense deduction worth up to $250 allows teachers and other educators to deduct the cost of books, supplies, equipment and software used in the classroom.

The IRS fact sheet also covers a recovery rebate credit, new rules for “cash” charitable contributions, the earned income tax credit, recordkeeping and other items.

It can be found at,,id=201142,00.html

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IRS tips for year-end charitable contributions IR 2008-138

Mike Habib, EA

IRS reminds individuals and businesses making contributions to charity that they should keep in mind several important tax law provisions that have taken effect in recent years. One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. IRS explains some of these changes in a news release as detailed below.

Special charitable contributions for certain IRA owners. An IRA owner, age 70 1/2 or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

Observation: Distributions from IRAs to charities that qualify for this tax break aren’t subject to the charitable contribution percentage limits since they will neither be included in gross income nor claimed as a deduction on the taxpayer’s return. Because such a distribution is not includible in gross income, it will not increase AGI for purposes of the phaseout of itemized deductions, personal exemptions, or any other deduction, exclusion, or tax credit that is limited or lost completely when AGI reaches certain specified levels.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients. Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions.

Rules for clothing and household items. To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.

Guidelines for monetary donations. To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

Other IRS charitable giving reminders. To help taxpayers plan their holiday-season and year-end giving, IRS offered these additional reminders:

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008 even if the credit card bill isn’t paid until next year. C
  • Only donations to qualified organizations are tax-deductible. IRS Publication 78 lists most organizations that are qualified. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions.
  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  • The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.