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?
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!
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.”
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.”
No surprise here – Obama’s Justice Department declared, just the other day, that IRS (in the person of the now famous Lois Lerner) really did nothing nefarious in its myriad investigations and scrutiny of various nonprofit “Tea Party” groups relative to their tax exemption applications. Obama’s boys have decided that there will be no charges filed against Lerner, or anybody else amongst the Revenooers.
According to Assistant Attorney General Peter Kadzik, Justice has found “substantial evidence of mismanagement, poor judgment and institutional inertia leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints. But poor management is not a crime……We found no evidence that any IRS official acted based on political, discriminatory, corrupt, or other inappropriate motives that would support a criminal prosecution. We also found no evidence that any official involved in the handling of tax-exempt applications or IRS leadership attempted to obstruct justice. Based on the evidence developed in this investigation and the recommendation of experienced career prosecutors and supervising attorneys at the department, we are closing our investigation and will not seek any criminal charges.”
The conclusion obviously leaves Darrell Issa (R-California) cold after his House Oversight Committee spent a few years chasing all of this down.
“The Justice Department’s decision to close the IRS targeting investigation without a single charge or prosecution is a low point of accountability in an administration that is better known for punishing whistleblowers than the abuse and misconduct they expose.”
And more IRS news came down last week – good news, the Revenooers say, for we and thee: new “protections” being put in place for next filing season, relative to preservation of taxpayers’ identity.
Quoth Commish Koskinen, “Joining me today are representatives from the electronic tax industry, the software industry and the states. These members of our Security Summit group have collaborated with the IRS on this effort from day one. We began mapping out a strategy in March, and together we have made significant progress in just a few months……I’m delighted to report that, for next year’s tax filing season, we are on track to fulfill our goal of having new safeguards in place for taxpayers when they file their returns……Most of these new protections will be invisible to taxpayers, but behind the scenes we are putting in place a multi-layered, multi-faceted approach……We’re going on offense like never before.”
Ahhhhhhhhhh, we feel so much better now, secure in the knowledge that IRS is truly on top of things.
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, and can be reached at email@example.com.
If there’s anything good that may have come from Obama’s actions (or inactions, as the case may be) lately it’s the fact that inflation is little or none in the last year or so.
The bad news, of course, is that Social Security recipients can expect zero in the way of a raise, next year, because any annual cost of living increases arise when the consumer price index moves upward. The good news, however, is that worker bees will experience no increase in the amount of their annual earnings which will be subject to Social Security and Medicare taxes. Thus, for 2016 the combined FICA and Medicare tax rate will remain at 15.3%, paid half each by the worker and his employer. Likewise, there will be no change in the tax rates or earnings base applicable to self-employed folk.
And speaking of FICA, an aspect of this annoying levy has long irked folks whose employment arrangements include their earning of certain forms of “deferred compensation.” And a recent decision of the Court of Appeals for the Federal Circuit (in the case of Mr. Balestra) brings this annoying law front and center.
Seems Mr. Balestra was an employee of United Airlines (UAL) until his retirement in 2004. He had earned some “nonqualified deferred compensation” which had not been paid as of his retirement date, upon which date the full present value of his deferred comp was included in the FICA tax base, resulting in FICA withholding on income which he didn’t receive as of that point in time! And unfortunately, UAL had entered bankruptcy in 2002, two years before our boy’s retirement date. Consequently, of course, UAL’s obligation to pay Balestra’s deferred comp was ultimately discharged, with the majority of the benefits never having actually been paid to Balestra. In 2010, UAL made the final payments to creditors as required under its bankruptcy plan, leaving Balestra essentially out in the cold – no deferred comp, despite FICA having been paid by him!
O tempora, O mores!
Balestra went to Court, seeking a refund of the FICA withheld, but the Revenooers and the Courts told him to take a hike.
And finally, this week, we recently learned via The Wall Street Journal that the Tax Foundation’s annual International Tax Competitiveness Index finds that, once again, the U.S. of A. ranks a dismal 32nd out of 34 industrialized nations.
The index measures various factors that determine how “friendly” a government is to business and investment, including the amount of taxation and the complexity of tax rules. While Uncle Sam gets credit for not imposing any sort of “value added tax” over and above all of the other taxes, the U.S. comes in “dead last” among the 34 developed countries in the Organization for Economic Cooperation and Development (OECD) when it comes to taxing corporate income! The U.S. top marginal corporate rate of 39% is a whopping 14 points above the OECD average of 25%!
Don’t laugh, but Estonia again cops the top ranking in this year’s index – with a flat 20% rate on both personal and corporate income – and zero tax on personal dividend income!
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, with offices in Incline Village and Reno. He can be reached at firstname.lastname@example.org.
So, we’re into the last quarter of the tax year – no time like the present to start your tax planning, and enhance your awareness of some recent changes in the rules. A few items of importance, starting with some provisions of the recently enacted “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (the Transportation Act):
- Partnerships and S corporations must file their 2016 returns by the 15th day of the third month after the end of the tax year – this means March 15 for calendar year entities. This is a change for partnerships, which previously had until the fourth month after year end by which to file. C corporations will have to file by the 15th day of the fourth month after year end – previously the deadline for these entities was the third month after year end.
- Effective for returns required to be made and statements required to be furnished after December 31, 2016, lenders must report more info on mortgages, including the origination date, the amount of outstanding principal, and the address of the underlying property. (More info for use by the Revenooers in potential audits of issues associated with your mortgage loan!)
- IRS will now have six years (instead of just three) within which to audit your return in situations where overstatement of your tax basis (and not just omission of gross income) results in a substantial understatement (2 5% or more) of your taxable income. (The Revenooers had long thought these facts always allowed them the three additional years for audit, but they consistently lost the issue in the courts – including cases before the Supremes – so they now have been successful in their efforts to have the law actually changed to reflect the answer they want.)
Another important recent change, courtesy of the Ninth Circuit Court of Appeals, results in a doubling of the home mortgage interest deduction for unmarried taxpayers, as we recently mentioned. The limitations on the amount of debt eligible for the home mortgage interest deduction ($1 million of mortgage “acquisition debt” and $100,000 of home equity debt) are to be applied on a “per individual” basis, and not on a “per residence” basis as IRS had always thought. Consequently, for unmarried co-owners of a residence, the combined limit for the mortgage interest deduction is doubled from a maximum of $1.1 million to a maximum of $2.2 million! Pretty nice windfall!
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 may be reached at 831-7288, and welcomes comments at email@example.com.
The Tax Court was quite busy in September – particularly in hammering taxpayers with a “nice try, but no cigar” conclusion to their cases. Three in particular:
- In Ronald C. Fish v. Commissioner, the taxpayer tried one which has been pled to us on many occasions by beleaguered taxpayers: deduction on the 1040 of losses passed through from partnership investments owned by his IRA. The taxpayer in this case argued that (in his view) an IRA has “all the attributes of a grantor trust and is therefore a pass through entity which makes all items of income, deduction and credit treated as belonging…(to him) and reportable on …(his) individual tax return.” Of course, IRS and the Tax Court did not agree, because clearly transactions occurring within the IRA do not result in taxable events which are reported on the holder’s individual income tax return. The law is quite clear that only distributions from and payments out of an IRA trigger income tax consequences for the payee or distribute. And if you think about it, the taxpayer eventually will get the benefit of the losses – in the form of less dough available within the IRA to distribute to him as retirement income. It’s just that simple.
- And then we have Donald L. Dunnigan v. Commissioner which was another “nice try” on the taxpayer’s part, but to no avail. Seems that Dunnigan obtained a business line of credit to help support his sole proprietorship appraisal business, and he drew $50,000 down on the line over time. In 2009, he was unable to repay the borrowed funds in full, negotiating with the lender to settle the obligation for about $15 grand. The lender ultimately issued a Form 1099-C at year end, reporting the $35 grand as cancellation of indebtedness income, of course, but erroneously checked the box on the form indicating that the taxpayer was not “personally liable” for the debt repayment. So, in preparing his income tax return for the year, Dunnigan improperly relied on the incorrect 1099-C, in addition to concluding that he was exonerated from reporting the income on some theory of “hardship” (due to a medical condition). Unfortunately, neither claim succeeded, in that the incorrect 1099-C was irrelevant, given the actual legal agreement which the taxpayer had signed in the first place, and further, the law does not provide any form of “hardship” exception for health reasons relative to this kind of tax event.
- Finally, in Charles Okonkwo, et ux. v. Commissioner, IRS slapped the taxpayers for trying to deduct a rental loss associated with a house rented to their daughter for less than a “fair market value” rental rate. The Internal Revenue Code is crystal clear in stating that a dwelling unit is used as a residence of the taxpayers (and thus, by definition, a personal use property and not a rental property) if the taxpayers or a family member uses it for personal purposes for more than a defined period of time and/or does not pay fair market value rent. Thus, daughter’s use of the residence in question was personal and is attributed to the taxpayers themselves. Result: no allowable rental loss!
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 may be reached at 831-7288, and welcomes comments at firstname.lastname@example.org.
Many folks have come to know and love the Internal Revenue Code’s “Section 179” deduction. Under this rule, tangible personal property which would otherwise be capitalized and depreciated over several years can be written off in full in the year the property is purchased and placed in service.
And indeed, the deduction has been quite generous in recent years – allowing taxpayers to deduct expenditures of as much as $500,000 in the acquisition year. But unless Congress takes action to retroactively restore this generous allowance to property purchases after December 31, 2014, the limit drops from $500,000 to $25,000! So if you bought that fancy machine in January or later of this year, get on the horn to your Congressman and insist that he and his cronies extend this provision, lest you be stuck with only a measly depreciation deduction for this year’s expenditure.Read More
Recall that some dependent children must file a Form 8615 with their tax return, and subject unearned (generally, investment) income to income taxation at his parents’ tax rate. The form must be filed for any child who meets all of the following conditions:
- The child had more than $2,000 of unearned income.
- The child is required to file a tax return.
- The child either was under age 18 at the end of the tax year, or was age 18 at the end of the year and did not have earned income that provided more than half of his support, or was a full-time student at least age 19 and under age 24 at year end and did not have earned income that provided more than half of his support.
- At least one of the child’s parents was alive at the end of the year.
- The child does not file a joint return.Read More
A Federal judge, last week, ordered the Revenooers to turn over the records of any requests from the White House which may have sought taxpayer private info in recent times.
Judge Amy Berman Jackson said IRS cannot simply refuse on the basis of confidentiality laws.
“This court questions whether Section 6103 (of the Internal Revenue Code) should or would shield records that indicate confidential taxpayer information was misused, or that government officials made an improper attempt to access that information,” quoth Judge Amy who denied IRS efforts to close the case.Read More
A recent decision of a district court in the District of Columbia agreed with the Revenooers, who actually revoked the tax exempt status of a foundation because some of its activities resulted in extraordinary benefits (“private inurement,” to use the vernacular of the bureaucrats) to the entity’s founder’s family.
Seems a decedent’s estate gave about $2.5 million to a foundation which had previously been put in place. The estate, of course, took a charitable deduction for estate tax purposes, resulting in zero, zip, nada being paid in estate taxes.Read More
The Ninth Circuit Court of Appeals (our jurisdiction) recently reversed the Tax Court and potentially handed unmarried mortgage debtors a significant windfall.
The panel’s decision involved the debt limit provisions – recall that the Internal Revenue Code has long allowed taxpayers to deduct interest on up to $1 million of home acquisition debt and $100,000 of home equity debt. The case of Voss v. Comm. involved two unmarried co-owners of real property. Voss and Sophy are domestic partners registered with the State of California. They co-own two homes as joint tenants – one in Rancho Mirage, California and the other, their primary residence, in Beverly Hills, California.Read More
Apparently taking note of ever-increasingly blatant tactics foisted upon we and thee by scammers, IRS recently issued a new warning to taxpayers.
These thieves, you see, pop up by telephone, emails and letters on authentic-looking letterhead, in an effort to trick taxpayers into providing personal financial information, or scare folks into making a payment to the criminal, ostensibly in settlement of the target’s delinquent tax account.Read More
If you listen to U.S. District Court Judge Emmet Sullivan, anyway.
Judicial Watch recently announced that Sullivan has threatened to hold IRS Commissioner Koskinen (and Justice Department attorneys!) in contempt of court after IRS failed to produce status reports and recently obtained emails of Lois Lerner.Read More
Hold on to your wallets, you Dems out there. Here comes Hillary – after all of us, actually, and not just you!
Last week she made known her plan to significantly increase the tax on long term capital gains for we and thee! It’s currently 20% (plus, of course, the Obama exaction of another 3.8% to help save Medicare) if your holding period is at least one year, but Hillary wants to raise it all the way up to 39.6% unless you hold on to your capital asset for six years or more!
Not quite sure whose votes she’s after with this, as she seems to be even further sagging in the polls.Read More
In her mid-year report to Congress, National Taxpayer Advocate Nina Olson came up with a real tear-jerker, noting that “With funding down about 17 percent on an inflation-adjusted basis since FY 2010, and with the IRS having had to implement large portions of the Affordable Care Act (ACA) and the Foreign Account Tax Compliance Act (FATCA) this year without any supplemental funding, sharp declines in taxpayer service were inevitable.”
F’rinstance, notes the Advocate, the IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the hold time for taxpayers who got through averaged 23 minutes. This level of “service” represents a sharp drop-off from the 2014 filing season, when IRS answered 71 percent of its calls and hold times averaged about 14 minutes.Read More