Revenooers Show No Mercy in Recession

            Probably no surprise, but the sad fact seems to be that IRS has filed about 60% more liens against beleaguered taxpayers since the current recession began.  USA Today recently reported that IRS has filed more than one million liens in the fiscal 2010 year, the highest in almost two decades.

            “Lien filings can badly damage or destroy a taxpayer’s creditworthiness because they are picked up by the credit-rating agencies and retained on the taxpayer’s credit reports for seven years from the date the tax liability is resolved, or longer if it is not resolved,” quoth National Taxpayer Advocate Nina Olson.

            So there you have it – no mercy will be shown.

            Nonetheless, most folks probably don’t know that they can create their own mercy of sorts – by using IRS Form 5213 if they want the IRS to stay away from an inspection of a business loss situation in which they might otherwise claim the activity may not be engaged in for profit.

            Recall that the IRS is entitled to “presume” that your business may not be seriously pursuing profits, generally if the government takes note of the fact that the business loses money in three years of a five year period.  Use Form 5213 to elect to postpone an IRS determination as to whether the presumption is applicable – to essentially “buy” more time to develop the situation to the taxpayer’s benefit and arming him with more facts and a track record, on the basis of which he might refute an IRS assault.

            Anybody who elects a postponement of IRS snooping, by filing Form 5213 on time, will keep the IRS at bay until after the end of the fourth consecutive tax year after the tax year in which the business is commenced.

            That’s the good news.  Needless to say, this deal does not come free of charge – generally the filing of Form 5213 automatically extends the statute of limitations for assessing any tax deficiency specifically attributable to the activity.   The normal statute is three years.  Once the statute comes and goes, IRS can’t touch you.

            So tread carefully with the apparent “opportunity” which Form 5213 affords.

            And here’s one for all you privacy advocates out there – California now (starting with 2010 return filings) wants to know your birth date – no, we don’t think they are asking just so they can send you a card.  The party line is that the Franchise Tax Board thinks that if you give them this info, they somehow will be able to stop identity theft and fraud (stolen Social Security numbers, f’rinstance).  Right.  Can you think of a few other things they might do with this info?

            Early indication is that they will accept your return even if you don’t disclose your birthday.  Not a difficult decision, in our book.

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 is also a contributor to the recently published 14th edition of Tax Savvy for Small Business, published by Nolo.  He can be reached at 831-7288, and welcomes comments below.

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