IRS Hangs Tough On IRA 60 Day Rollover Rule
We’ve reported, many times, about various situations in which beleaguered taxpayers have been unable to meet the requisite 60 day IRA rollover rule (to avoid treating the dough coming out of the IRA in the first instance to be taxable), and IRS has bent over – showing its “kinder and gentler” side and not slapping the taxpayer with penalties. Most of these cases have fact patterns indicating the delinquency was not the taxpayer’s fault, but often times that of the IRA custodian because of that guy’s administrative delays.
But in a recent private letter ruling, IRS refused to waive the 60 day rollover requirement for a taxpayer whose attempt to use an IRA distribution to buy an interest in a partnership failed because the IRA custodian couldn’t hold the interest – a mistake that the taxpayer did not learn of for almost a year. In response to the taxpayer’s plea that the timeliness failure was due to his receipt of incorrect advice, IRS hung tough on the notion that the failure was in fact due to his decision to use IRA proceeds to fund a business venture.
IRS will consider several factors in determining whether to waive the 60 day rollover requirement, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institutions, etc.
In this case, the taxpayer’s financial advisor prepared the paperwork for the taxpayer to sign, and on November 21, 2012, the custodian issued a check payable to the partnership. The taxpayer intended that his IRA purchase the shares, and that they be held by the custodian.
But as it turned out, due to some technicality in the partnership agreement, the custodian was eventually unable to hold the investment on behalf of the IRA. The taxpayer believed that the financial advisor should have prepared paperwork to transfer the amount to a financial institution that could have held the partnership interest on behalf of the IRA. The problem was not discovered until October of 2013 – obviously well beyond the 60 day rollover period.
Right or wrong, IRS conclusion, here, was that taxpayer’s failure to complete a timely rollover wasn’t due to any of the factors described above which have been held in the past to constitute valid excuses, but instead was due to his choice to use the IRA proceeds to fund a business venture.
Result: taxpayer is forced to include the distribution in his taxable income for 2012.
And did you hear the latest from Hillary’s campaign re her tax proposals? $250 billion in direct “investment” over the next five years. Plus an additional $25 billion to fund a “national infrastructure bank.” None of this dough comes from the “middle class,” of course, whose taxes Hillary would “cut.” Hillary wants to give those folk “a raise,” while she hits the top 3% of earners to pay for all of this largesse.
Heard that one before? How much is enough?
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at [email protected].
Revenooers Comin’ After High Earners!
And the Treasury Inspector General for Tax Administration (TIGTA) doesn’t like the IRS’ “MO”.
In its most recent audit report, last week, TIGTA notes that IRS has taken steps to improve its audit coverage of high-income taxpayers. But it should reevaluate whether the threshold of $200,000 for its High-Income and High-Wealth strategy results in an efficient allocation of audit resources.
Translation: “Doesn’t everybody make $200,000 or more each year?”
TIGTA says that because IRS is devoting more audit resources to these taxpayers, it is important to know at what level of income or wealth taxpayers tend to begin establishing complex financial holdings that are at greater risk for noncompliance with the law.
IRS’ High-Income and High-Wealth strategy devotes nearly 50 percent of its high-income audits to taxpayers earning $200,000 to $399,999, whose tax returns potentially present the least productivity of all high-income taxpayers, says TIGTA.
“The IRS should reevaluate the income level it uses to identify taxpayers for its High-Income and High-Wealth strategy so that it can better allocate audit resources to the most significant audit risks,” says J. Russell George, TIGTA major domo.
The IRS Large Business and International Division (LB&I) established the Global High Wealth (GHW) Industry, which takes a comprehensive approach in auditing high-income taxpayers by extending audits beyond the individual tax return to the entities which these taxpayers control.
But IRS is using resources from three other LB&I industries to assist with auditing GHW cases, though no evaluation has been made regarding the impact of that decision on those other industries. Further – and importantly – IRS cannot quantify its GHW audit performance because of limitations of IRS audit information systems, and GHW has not implemented a quality review process for its audits.
And you can thank Obama for recently eliminating a process (the “file and suspend method” of claiming Social Security benefits) via recent legislation which will nix this strategy used by married folk to maximize their lifetime benefits.
Under this approach, a higher earning spouse would claim benefits at his full retirement age (presently 66) but suspend the benefits until a later date allowing the Social Security credits to continue to grow. The lower earning spouse would then claim benefits based on the higher earning spouse’s earnings record, which would be more than the benefits based on his or her own earnings record. The new rules eliminate this opportunity for claims filed after April 30, 2016.
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at [email protected].
No Penalty Despite Taxpayer’s 5th Amendment Claim
Some folks we’ve run into have a hard time with the questions on the individual tax return regarding the existence of foreign bank accounts. “None of their business!” claim some, even though the law says that it sure is.
So here comes taxpayer Youssefzadeh who asserted his 5th amendment protection against self-incrimination in objecting to provide certain info called for on Schedule B of his 2011 tax return. Along come the Revenooers, however, slapping our boy with the $5,000 frivolous return penalty, which the law requires in cases where the return doesn’t contain info on which the substantial correctness of the self-assessed tax may be judged. Even though his return did include the numerical information, including the total amount of interest income which he received for the year.
“Whoa,” said the Tax Court, in concluding that indeed the return was not frivolous. Indeed, noted the Court, the document filed by the taxpayer did contain sufficient information for IRS to judge “the substantial correctness of the self-assessment.” The Court found that the return was sufficient to determine its substantial correctness – which doesn’t necessarily require that It be “completely correct.” The Court noted that the total amount of interest was included on the return, thus distinguishing Youssefzadeh from other tax protestors who merely fill out a return with zeroes on every line.
Anyway, we don’t advise folks to just ignore information requests on returns (like the queries about foreign bank accounts). This guy may have avoided the frivolous return penalty in his case, but playing fast and loose with the foreign financial account requirements presently permeating the law often is just asking for trouble.
And here’s a novel idea – advanced by Congressman Andy Harris (R-Md) whose recent bill would permit individuals to prepay their federal estate tax during their lives by increasing their income tax obligation by one percent of their adjusted gross income, generally, and foregoing basis adjustments at death.
The estate tax would be avoided only if the taxpayer paid at least seven years of additional income tax. If the bloke otherwise dies fewer than seven years after making the election, the taxes paid would be allowed as a credit against the estate tax liability.
Sounds like one Bernie would favor, don’t ya think?
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at [email protected].
Don’t Forget to Sign the Darned Return!
So you go through all the hassle of getting your records together and getting that return assembled, but at the eleventh hour, you send that joint return to the Revenooers without having your spouse sign the darned thing.
Bad Karma – as learned the hard way by taxpayers Mr. and Mrs. Reifler, who the Tax Court recently slammed down hard as technically not having actually filed a timely return at all in the circumstances!
Mr. and Mrs. Reifler, you see, were married folk who even employed an accountant to prepare their returns. Mr. Reifler had significant business experience. For tax year 2000, Mr. Reifler signed the return and left it for the Mrs. to sign but she didn’t – for whatever reason. Mr. Reifler didn’t notice the omission when he mailed it to IRS before the October 15, 2001 extended due date.
IRS and the taxpayers both acknowledged that Mrs. Reifler relied on her hubby to handle the family financial and tax matters, including preparation and filing of the tax returns, and that she, indeed, intended to file a joint return for 2000.
In any case, the IRS Service Center returned the 2000 return to the taxpayers because of the missing signature (as is the usual procedure in our experience) though the taxpayers claim there was no explanatory information from the IRS regarding why they sent the package back. Mr. Reifler thought nothing of it because he had requested copies of his tax returns from time to time from IRS for various business reasons. But unfortunately, upon receipt of the returned return, the taxpayers did not subsequently send the original return back to IRS with the requisite signature.
Sooooo, in 2002, IRS issued a delinquency notice to the taxpayers, informing them that the 2000 return had not actually been received in Uncle Sam’s grubby hands, whereupon the taxpayers then did both sign and return a second copy of their 1040. And it was this second copy which IRS officially accepted as the originally filed 2000 return – albeit delinquent at this point.
The ensuing beef between the taxpayers and the IRS led the parties to an eventual day in the Tax Court, where the taxpayers made two arguments in support of their claim that the original 2000 return (without Mrs.’ Signature) was validly and timely filed.
- They first argued the so-called “substantial compliance doctrine,” claiming that their tax return need not have been “perfect” to be valid, as sanctioned by the Supreme Court previously in the Zellerbach Paper Co. case, noting that if a return “purports to be a return, is sworn to as such…and evinces an honest and genuine endeavor to satisfy the law,” it will be treated as a return.
- The second argument advanced by the Reiflers was based on the so-called “tacit consent doctrine,” premised on the notion that absent Mrs. R’s signature, they truly intended to file a joint tax return.
“No Bueno” concluded the Tax Court on both counts. And indeed, adding insult to injury as
usually happens, the Court also found that the taxpayers did not exercise ordinary business care and prudence in handling the original 2000 return when IRS sent it back, therefore concluding that the failure to file penalty was applicable!
Moral of the story? Make sure that both hubby and wifey sign before they seal and deliver!
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at [email protected].
When is IRA Contribution Deductible?
Not really a trick question – the law permits deduction of an IRA contribution in the tax year it is actually made – with one little modification: you can still deduct your 2015 contribution, f’rinstance, if you deposit it no later than April 15, 2016.
So here come taxpayers Mr. and Mrs. Stephen J. Dunn – he a tax lawyer, no less – to butt heads with the Tax Court on this question. During the first part of 2008, Dunn was employed by a private law firm, and was an “active participant” in that firm’s qualified retirement plan. (He became self-employed in late 2008 and remained self-employed through the end of 2010.) Recall that for taxpayers with incomes above a certain level, IRA contributions are not deductible when one is an “active participant” in an employer plan. Nonetheless, Dunn claimed a deduction for his IRA contribution in 2008. Upon audit, the Revenooers disallowed the deduction because of the “active participant” status. But the taxpayer concocted the somewhat novel argument that the 2008 IRA contribution was an “excess contribution” which could be carried forward or, alternatively, should be deemed to have been made for 2009.
“No dice” concluded the Tax Court. Each IRA contribution year stands on its own. And, adding insult to injury, clipped Dunn for the “accuracy-related penalty,” based on the fact that as an experienced attorney, he should have known better that his arguments “have no support in the Code, the regulations, relevant case law, or basic tax principles.”
So there.
And we were struck by the common sense words of Thomas Sowell, the Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution, as published in the Fall 2015 edition of the Hoover Digest. To wit:
“In a recent panel discussion on poverty at Georgetown University, President
Barack Obama gave another demonstration of his mastery of rhetoric—and
disregard of reality……In Obama’s rhetoric, those who produced the wealth
that politicians want to grab……are called “society’s lottery winners.” Was Bill
Gates a lottery winner? Or did he produce and sell a computer operating system that allows
billions of people around the world to use computers, without knowing anything
about the inner workings of this complex technology? Was Henry Ford a lottery
winner? Or did he revolutionize the production of automobiles, bringing the price
down to the point where cars were no longer luxuries of the rich but vehicles that
millions of ordinary people could afford, greatly expanding the scope of their lives?
Most people who want to redistribute wealth don’t want to talk about
how that wealth was produced in the first place.
They just want “the rich” to pay their undefined “fair share” of taxes. This share
must remain undefined because all it really means is “more.” Once you have
defined it –whether at 30 percent, 60 percent, or 90 percent—you won’t be able
to come back for more.”
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at [email protected].