Tax Relief

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.

Business tax planning

September 24, 2008 | Mike Habib, EA

Year end planning moves that optimize enhanced election to expense business property Thanks to the Stimulus Act of 2008, most small businesses, and even moderate-sized businesses that don’t have huge capital equipment needs, may be able to claim a full Code Sec. 179 expensing deduction for the cost of business machinery and equipment purchased in tax years beginning in 2008. The results: reduced effective costs for the assets, fewer assets to track for depreciation purposes, and no alternative minimum tax adjustment for property expensed under Code Sec. 179. For unincorporated taxpayers (or those operating through a pass-through) there are other benefits: By using the expensing election to lower adjusted gross income (AGI), the taxpayers may be able to benefit from itemized deductions or personal exemptions (or other tax breaks) that otherwise would be limited or phased-out because of the taxpayer’s AGI. This article details the unique year-end tax planning opportunities that are possible because of the generous expensing limits in effect for tax years beginning in 2008.

Boosted expensing limits. For tax years beginning in 2008, the Stimulus Act of 2008 has increased the Code Sec. 179 expensing election to $250,000. Plus, under the Act, the expensing amount is reduced only when $800,000 of expensing-eligible property is placed in service. Absent a law change, the amount that may be expensed under Code Sec. 179 for tax years beginning in 2009 will be $133,000, and the expensing limit will be reduced when more than $530,000 of expensing-eligible property is placed in service.

Observation: Under the expensing election, a taxpayer can deduct costs immediately, rather than depreciating them over several years. And, unlike depreciation subject to the mid-quarter or half-year conventions, a full expensing deduction is allowed regardless of when in the tax year the qualifying property is placed in service. For example, property placed in service on the last day of the tax year may qualify for full expensing. As a result, where possible, taxpayers should factor the annual expensing limit into their annual equipment-purchase plans.

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.

LLC Wage Levy Tax Help

September 4, 2008 | Mike Habib, EA

LLC may receive continuous wage levy on owner

Chief Counsel Advice 200835030

A new IRS Chief Counsel Advice (CCA) says that a limited liability company (LLC) may be required to honor a continuous wage levy on salary and wage payments to its sole owner. [Note: The CCA may not be used or cited as precedent.]