IRS Problem

Trust & Estate Tax Resolution

May 7, 2008 | Mike Habib, EA

Transfers to LLC were not includable in decedent’s estate
Estate of Mirowski, TCMemo 2008-74

The Tax Court has held that assets the decedent transferred to a family limited liability company (LLC) shortly before she died were not includable in her gross estate under Section 2036(a).

Facts. The decedent’s husband was a cardiologist who developed an implantable cardioverter defibrillator (ICD) device to prevent people who suffered from ventricular fibrillation from dying because they were not in a hospital near an external defibrillator. The husband died in 1990, and, pursuant to his will, his interest under the ICD patents license passed to the decedent. Sales of ICDs increased significantly after the husband’s death, and royalties received under the ICD patents license increased dramatically from thousands of dollars a year to millions of dollars a year.

Innocent Spouse Tax Relief

May 7, 2008 | Mike Habib, EA

Innocent spouse relief granted despite ex-husband’s objection Bishop, TC Summary Opinion 2008-33

The Tax Court agreed with the IRS and, over the objection of the taxpayer’s ex-husband, held that the taxpayer was entitled to equitable relief under Section 6015(f) from her husband’s tax underpayments.

Facts. The taxpayer married in 1982, and the couple had two children. The husband was previously a revenue agent who conducted income tax audits for the IRS. However, in 1995, he pled guilty to the charge of bribing a public official and was sentenced to 28 months in prison. He was released from prison in 1997 and rejoined his family. Thereafter, he began working as an auditor for a state agency. The taxpayer was employed as a claims processor for a health insurance company. The couple separated in 2003 and were divorced in 2004.

Employee vs. Independent Contractor Tax Problems

May 2, 2008 | Mike Habib, EA

New bill seeks to reduce worker misclassifications

H.R. 5804, 4/15/08 [Taxpayer Responsibility, Accountability, and Consistency Act of 2008] Rep. James McDermott (D-Wash) has introduced legislation that would revise employee vs. independent contractor rules and increase information reporting penalties The legislation is called the “Taxpayer Responsibility, Accountability, and Consistency Act of 2008,” and it primarily focuses on Section 530 of the Revenue Act of 1978. Under Section 530, employers that meet the following three requirements are protected from potentially large employment tax assessments, even though they incorrectly categorized a worker as an independent contractor: (1) reasonable basis, (2) substantive consistency, and (3) reporting consistency. An employer can meet the “reasonable basis” requirement if judicial precedent, IRS rulings, a past IRS audit, or industry practice supports the classification of a worker as an independent contractor. An employer meets the substantive consistency requirement if it (and any predecessor business) consistently treated the workers in question as independent contractors. The reporting consistency requirement is met if the employer has not classified the workers as employees on any required federal tax returns, including information returns.

New Rules. The new legislation would repeal Section 530 and replace it with a new Code section, IRC §3511, that would make it more difficult for employers to avoid employment tax liability if they misclassified a worker as an independent contractor. IRC §3511 would generally require employers to have a “reasonable basis” for classifying a worker as an independent contractor. The “reasonable basis” standard is met only if:

(1) The employer classified the worker as an independent contractor based on: (i) a written determination (as defined in IRC §6110(b)(1)) that it received addressing the employment status of either the worker in question, or another individual holding a substantially similar position with the employer; or (ii) an employment tax examination of the worker, or another individual holding a substantially similar position with the employer, that did not conclude that the worker should be treated as an employee; and

(2) The employer (or a predecessor) has not treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after Dec. 31, 1977.

1600% Increase in IRS Tax Levies since 2000

May 2, 2008 | Mike Habib, EA

<span [Audit Report No. 2008-30-095]:

Fiscal year 2007 marked another period of improvement in IRS’s compliance activities, continuing an eight-year period of upward trends in such endeavors, the Treasury Inspector General for Tax Administration (TIGTA) said in a new audit.

Many enforcement activities continued to increase despite a slight reduction in the staffing of the Collection and Examination functions, the audit said, adding that both functions plan to hire enforcement personnel during FY 2008. The Collection and Examination Enforcement budget was flat for FY 2006 through FY 2008, but President Bush’s budget proposal for FY 2009 calls for an 8% increase, the audit noted. The amount of enforcement revenue collected increased by almost 74% in the last five years.

Tax Problems: Type of Tax Problems and how to resolve them

May 1, 2008 | Mike Habib, EA

Tax Problem Solver – Why You Need Professional Help

Tax problems come in different forms; IRS tax problems, State tax problems, and Sales tax problems. Tax authorities are constantly increasing their tax enforcement efforts through tax collection and tax audit.

When taxpayers receive the dreaded tax notice that their tax return or their business is going to be audited and examined, the first thing they should do is seek professional tax advice. Same thing when taxpayers receive collection letters threatening levying and garnishing their wages or paychecks, or the tax levy letter for their bank account, taxpayers should seek professional tax advice to resolve their tax problems.

Audits of S Corporations are on the rise

April 30, 2008 | Mike Habib, EA

TIGTA study finds modest audit rate increase for C corps but marked increase for passthroughs ( S Corps)

Trends in Compliance Activities Through Fiscal Year 2007, TIGTA Reference Number 2008095

A recently released TIGTA (Treasury Inspector General for Tax Administration) report reveals that despite a slight uptick in FY 2007, IRS audits of corporations have declined dramatically over the last ten years. However, audits of S corporation and partnership returns increased substantially over the same period.

IRS tax levy wage garnishment bank levy

April 30, 2008 | Mike Habib, EA

TIGTA issues statutory review of IRS compliance with legal guidelines when issuing levies [ Audit Report No. 2008-30-097 ]:

During the process of issuing levies, IRS has been complying with legal guidelines regarding proper notification and the protection of taxpayer rights, the Treasury Inspector General for Tax Administration (TIGTA) reported in a recent audit.

The agency is required to notify taxpayers a minimum of 30 calendar days before initiating any levy action to give taxpayers the chance to appeal the proposed levy. Since prior audits found that IRS had implemented tighter controls related to systemically generated levies, the latest annual audit on the subject focused on the issuance of manual levies.

Auditors looked at 30 Integrated Collection System and 30 Automated Collection System manual levies issued between July 1, 2006, and June 30, 2007. Analysis of these levies “showed revenue officers and customer service representatives continued to properly inform taxpayers of their rights at least 30 calendar days prior to issuing the levies,” TIGTA said.

Offshore payroll tax problems

April 30, 2008 | Mike Habib, EA

Houses passes legislation that would make sure certain government contractors pay employment taxes – Foreign shell companies payroll tax problems

Mike Habib, EA
myIRSTaxRelief.com

The House of Representatives has passed legislation [H.R. 5719, Sec. 18, 4/15/08] proposed by Representatives Brad Ellsworth (D-Ind.) and Rahm Emanuel (D-Ill.) that seeks to end the practice of U.S. government contractors setting up shell companies in foreign jurisdictions to avoid paying payroll taxes. Under current law, US companies are required to pay Social Security and Medicare taxes for their American workers overseas. But some firms have been able to get around that requirement by hiring workers through offshore shell companies or foreign subsidiaries.

The legislation would amend the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under contract with the U.S. government as American employers for Social Security and Medicare tax purposes. The legislation would require any foreign company that is at least 50% owned by a U.S. federal contractor to pay payroll taxes for its American employees.

The bill was inspired by recent news that defense contractor KBR Inc. had avoided paying Social Security and Medicare taxes by creating shell companies in the Cayman Islands. A similar provision is being sponsored in the Senate by Senators John Kerry (D-Mass.) and Barack Obama (D-Ill.).

Tax shelter tax problem resolution

April 29, 2008 | Mike Habib, EA

District court allows $60 million of income to be offset by Son-of-Boss shelter

Sala v. U.S. (DC Co 4/22/08) 101 AFTR 2d ¶ 2008720

Mike Habib, EA
myIRSTaxRelief.com A district court has allowed an individual to offset $60 million of compensation income with losses from a Son-of-Boss transaction.

Facts. Carlos E. Sala had income in 2000 of more than $60 million. However, he claimed a tax loss that essentially nullified his tax burden. Sala achieved the loss through his involvement in a foreign currency options investment transaction known as Deerhurst. He claimed that the $60 million loss resulted from a series of steps that made use of an S corporation (Solid Currencies, Inc.) and an investment in a partnership (Deerhurst Investors, GP). These steps were orchestrated under a then-existing tax rule that disregarded short options as liabilities for purposes of establishing partnership basis. Under this rule, liabilities created by short options were considered too contingent to affect a partner’s basis in the partnership.

IRS challenged this transaction, which is commonly known as a Son-of-Boss shelter, on various grounds. The district court faced these key issues:

(1) whether the transactions creating Sala’s 2000 tax loss were sham transactions;
(2) whether Sala had a profit motive for entering into the transactions creating his 2000 tax loss;
(3) whether the transactions creating Sala’s 2000 tax loss, as executed, allowed the tax loss; and
(4) whether any allowable tax loss was rendered retroactively disallowed by Reg. § 1.752-6.

Retailer tax problem resolution

April 29, 2008 | Mike Habib, EA

Payments made by retailer in connection with sales promotion weren’t taxable – PLR 200816027

Mike Habib, EA

myIRSTaxRelief.com