Tax Controversy

AMT relief 2008

October 7, 2008 | Mike Habib, EA

AMT relief in the 2008 Extenders Act I am writing to provide details regarding three key provisions in the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008″ (the 2008 Extenders Act), which was enacted on Oct. 3, 2008. The provisions extend partial relief to individual taxpayers from the alternative minimum tax, or AMT. Earlier temporary measures to deal with the unintended creep of the AMT‘s reach expired at the end of 2007, meaning that more than 20 million additional taxpayers would have faced paying the tax on their 2008 returns without the new relief.

Brief overview of the AMT. The AMT is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as state, local and property taxes. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system and under the AMT system taking into account certain “preferences” and “adjustments.” If their liability is found to be greater under the AMT system, that’s what they owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to apply to more middle-income taxpayers, due in part to the fact that the AMT parameters are not indexed for inflation.

In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”–allowances that reduce the amount of alternative minimum taxable income (AMTI), reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose AMTI exceeds specified amounts.) For 2007, the AMT exemption amounts were $66,250 for married couples filing jointly and surviving spouses; $44,350 for single taxpayers; and $33,125 for married filing separately. However, for 2008, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form.

Tax Relief Act 2008

October 7, 2008 | Mike Habib, EA

Individual and business extenders and other relief provisions in the 2008 Extenders Act The “Tax Extenders and Alternative Minimum Tax Relief Act of 2008″ (the 2008 Extenders Act), which was enacted on Oct. 3, 2008, provides extensions for several popular tax breaks and the addition of several new relief provisions, including disaster area tax relief. Here’s an overview of the key provisions in the new legislation:

Deduction of state and local general sales taxes. The option to deduct state and local general sales taxes is extended through 2009.

Qualified tuition deduction. The above-the-line tax deduction for qualified higher education expenses is extended through 2009.

Trust Fund Recovery Penalty

September 29, 2008 | Mike Habib, EA

Once is enough as far as collection of the trust fund recovery penalty is concerned Chief Counsel Advice 200838027

The IRS has issued a new Chief Counsel Advice (CCA) on the trust fund recovery penalty. The IRS notes that the CCA may not be used or cited as precedent.

IRC §6672, imposes a penalty on any person who is required to collect, truthfully account for, and pay over withheld income and Social Security taxes who willfully fails to do so. The amount of the penalty is equal to the amount of the tax that was not collected and paid. The penalty is often referred to as the “trust fund recovery penalty” (TFRP). The penalty is imposed on a “responsible person.” A “responsible person” is anyone within a corporation or partnership who has the duty to collect, account for, or pay over the tax. Depending on the facts of the case, a responsible person could be an officer, a director, an accountant, a comptroller, or even a payroll manager.

PEO Payroll Tax Problem

September 25, 2008 | Mike Habib, EA

Leader of $181 million payroll tax scheme admits guilt [United States v. Amodeo, DC FL, Case No. 6:08-cr-176-Orl-28GJK

Frank Amodeo, the former head of Mirabilis Ventures Inc., has pleaded guilty to federal charges that he and his co-conspirators knowingly failed to remit payroll taxes to the IRS totaling between $172 million and $181 million. (The government says it’s $181 million. Amodeo agrees that it’s at least $172 million.) The unremitted payroll taxes included $129 million in FICA and withholding taxes. According to a Department of Justice press release on Aug. 7, 2008, Amodeo and his co-conspirators controlled a web of one public and several private companies, including multiple employee leasing companies, also known as professional employer organizations (PEOs). The press release says that Amodeo conspired with his co-conspirators to absolve themselves, and the companies they controlled, of the responsibility for existing payroll tax liabilities, and to divert payroll tax funds paid by the PEO clients to the PEOs that Amodeo and his co-conspirators controlled.

In early 2005, Amodeo and others were in contact with the IRS regarding one of the company’s tax liabilities. However, they withheld information about the company’s tax liabilities until February 2006, by means that included the late filing of Forms 941. At the time, the company’s payroll tax liabilities exceeded $100 million. In June of 2006, a co-conspirator advised the IRS that the payroll tax money not paid to the IRS was used to purchase two other companies. However, it turned out the money was used to purchase, among other things, several companies, cars, a plane, and real estate. In August 2006, Amodeo communicated a revised version of his account to the IRS, in an attempt to obstruct and impede the IRS‘s investigation, after being advised by a co-conspirator that it may expose them to prosecution for federal offenses. In August 2008, Amodeo was indicted on charges of conspiracy, failure to remit payroll taxes, wire fraud, and obstruction of an agency proceeding.

IRS Harassment

September 24, 2008 | Mike Habib, EA

TIGTA review finds small number of cases where IRS employees harassed taxpayers while attempting to collect taxes [Audit Report No. 2008-10-162]:

In 2007, there were five cases involving Fair Tax Collection Practices (FTCP) violations for which an IRS employee received administrative disciplinary action, according to a recent audit by the Treasury Inspector General for Tax Administration (TIGTA).

In addition, auditors identified an unspecified number of cases that should have been coded as FTCP violations but instead were coded with other designations. As described in the audit, the FTCP prohibits IRS employees from using abusive or harassing behavior toward taxpayers when attempting to collect taxes. An employee who violates the FTCP may be subject to disciplinary action.

Ike Tax Relief

September 19, 2008 | Mike Habib, EA

Texas Hurricane Ike Victims Qualify for IRS Disaster Relief

IR-2008-107, Sept. 18, 2008

WASHINGTON — Texas taxpayers who were adversely affected by Hurricane Ike qualify for tax relief from the Internal Revenue Service, including the postponement of tax filing and payment deadlines until Jan. 5, 2009.

LLC Wage Levy

September 18, 2008 | Mike Habib, EA

IRS explains how to collect from sole member of LLC law firm Chief Counsel Advice 200836002

In Chief Counsel Advice (CCA), IRS has concluded that a levy served on a limited liability company (LLC) will attach to property or rights to property belonging to the LLC’s sole owner. He practiced law and received income from the LLC from contingent fee agreements between the LLC and clients. The CCA further concluded that if payments being made to the sole owner are in the nature of salary or wages, IRS may be able to serve a continuing wage levy on the LLC to reach the payments.

Background. IRS can enforce a lien created by Code Sec. 6321 in two ways. It can bring a foreclosure action under Code Sec. 7403 or it can levy on the taxpayer’s property under Code Sec. 6331. Unlike a foreclosure action, the levy is a provisional, administrative procedure, and it generally reaches only property possessed and obligations existing at the time of the levy–the “fixed and determinable” requirement. (Code Sec. 6331(b), Reg. § 301.6331-1(a)(1)) However, an exception to this rule under Code Sec. 6331(e) authorizes a continuing levy on salary or wages.

WHFIT & WHMT Tax Relief

September 18, 2008 | Mike Habib, EA

IRS provides WHFIT penalty relief for 2008 and WHMT reporting relief for 2007 Notice 2008-77, 2008-40 IRB

In a Notice, IRS has informed trustees and middlemen of widely held fixed investment trusts (WHFITs) that it will not assert penalties under Reg. § 1.671-5(m) (dealing with WHFIT reporting rules) for calendar year 2008. In addition, it informed trustees and middlemen of widely held mortgage trusts (WHMTs) that, pending future published guidance, certain modifications of mortgages held by a WHMT that has entered into a guarantee arrangement aren’t required to be reported under the WHFIT reporting rules.

Background. A WHFIT is an arrangement classified as a trust under Reg. § 301.7701-4(c), provided that: (1) the trust is a U.S. person; (2) the beneficial owners of the trust are treated as owners (under subpart E, part I, subchapter J, chapter 1 of the Code); and (3) at least one interest in the trust is held by a middleman. (Reg. § 1.671-5(b)(22)) A WHMT is a WHFIT, the assets of which consist only of mortgages, regular interests in a real estate mortgage investment company (REMIC), interests in another WHMT, reasonably required reserve funds, amounts received for these assets, and during a brief initial funding period, cash and short-term contracts to purchase these assets. (Reg. § 1.671-5(b)(23))

1031 Exchange New Ruling

September 18, 2008 | Mike Habib, EA

IRS OKs use of one property to engineer a reverse and forward like-kind swap Chief Counsel Advice 200836024

In Chief Counsel Advice (CCA), IRS has given its blessing to the use of one property to engineer both a completed reverse like kind exchange and an attempted forward like kind exchange. The forward exchange was necessary because the value of the relinquished property far exceeded the value of the replacement property that the taxpayer received. Because the forward exchange couldn’t be completed within the statutory time limits, however, the taxpayer wound up paying tax on the net cash it received.

Observation: The new CCA is noteworthy because it shows how far the like-kind exchange rules can be stretched, with IRS‘s approval, to accommodate complex conditions.

Avoiding hobby loss restrictions

September 18, 2008 | Mike Habib, EA

Like many of us, you’ve probably dreamed of turning a hobby or avocation into a regular business. You won’t have any unusual tax headaches if your new business is profitable. However, if the new enterprise consistently generates losses (deductions exceed income), IRS may step in and say it’s a hobby–an activity not engaged in for profit–rather than a business.

What are the practical consequences? Under the so-called hobby loss rules, you’ll be able to claim those deductions that are available whether or not the enterprise is engaged in for profit (such as state and local property taxes). However, your deductions for business-type expenses (such as rent or advertising) will be limited to the excess of your gross income from the hobby over those expenses that are deductible whether or not the enterprise is engaged in for profit. Deductible hobby expenses are claimed on Schedule A of Form 1040 as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” By contrast, if the new enterprise isn’t affected by the hobby loss rules, all otherwise allowable expenses would be deductible on Schedule C, even if they exceeded income from the enterprise.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.