IRS Passport Revocation

In December 2017, the IRS started to formally start the process of certifying to the US Department of State which taxpayers owed more than $50,000 (which will be adjusted for inflation) to the IRS, by collecting that information from their computer systems and verifying it. Per the IRS website, as of January 9, 2018 the IRS has not actually notified the State Department, but that will most likely begin very soon.

Under IRC Sec 7345, of the Internal Revenue Code, if a taxpayer has seriously delinquent income or payroll tax debt, this law causes the IRS to tell the State Department of the tax debt, and the State Department will generally not issue a passport to the affected taxpayer, or revoke your current passport, once they get this notice from the Internal Revenue Service. If the revocation occurs when you are overseas, the State Department, in its discretion, may issue a temporary passport so you can still enter back into the United States.

The definition of seriously delinquent tax debt under this rule is tax debt greater than $50,000 (including interest and penalties), and for which a Notice of Federal Tax Lien or Tax Levy has been issued, and all administrative remedies to contest the tax law have been exhausted. These taxes are also limited to Title 26 taxes, so items like FBAR penalties and collecting child support arrears would not count toward the $50,000 amount. The other very important exceptions to this rule is if you have 1) a valid installment agreement, 2) filed an offer in compromise and it was accepted and you are making the payments, and 3) the collection process has stopped since you filed for innocent spouse relief.

Before the State Department denies the passport, they will give 90 days to 1) make full payment of the tax debt or enter into a IRS payment plan (notice that entering into an installment agreement appears to be enough to stop the process),  2) resolve an error by the IRS that you owe them. The IRS will not reverse the certification if you bring the tax debt below $50,000. The IRS has thirty days to contact the State Department that the tax debt issue has been resolved with a payment plan or some other arrangement. The IRS will mail you a form Notice CP 508R when it reverses its certification.

The IRS will notify taxpayers about this issue by sending them via regular mail a Notice CP 508C. Its very important that if this issue affects you that you take action quickly since the IRS does not act quickly, and it will take time to resolve this tax issue. Under IRC Section 7345 law, the State Department can not be held liable for errors by the IRS. If the IRS makes a mistake in this process, the first step would be to appeal to them to fix the issue. If this is not successful, the next step would be to go to the IRS Taxpayers Advocates office. If this is not successful, you can file suit in the US Tax Court or US District Court to have the court determine if the IRS made a mistake.

By: Timothy S. Hart

 

 

New Tax Act and Additional Itemized Deduction Implications

Individual taxpayers should be aware of major changes that will be implemented this year for their 2018 return. Even though it seems still like a long time to April 2019, it is necessary to have some impression about the new Tax Act and how it might affect you. Due to changes in the tax brackets, itemized deductions, and personal exemptions, etc this is one of the most significant changes in the tax rules since 1986.

The new Tax Act imposed different limitations on itemized deductions. Prior to the Act, the total amount of otherwise allowable itemized deductions (other than medical expenses, investment interest) was limited only for upper-income taxpayers. The limitation reduced the otherwise itemized deductions by 3% of adjusted gross income (AGI) if AGI exceeded a certain threshold amount. This limitation did not reduce itemized deductions by more than 80%. On the other hand, the new Tax Act repeals the overall limitation on itemized deductions for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, but at the same time limits which expenses can be claimed as an itemized deduction (see below for details).

The second big difference in the new tax law versus the old tax law is the mortgage interest deduction. Prior to the new Act, a taxpayer could deduct mortgage interest paid with respect to a principal residence and one other residence of the taxpayer. The interest payments up to $1 million in acquisition indebtedness and up to $100,000 in home equity indebtedness could be taken as a deduction. The new Tax Act reduces the $1 million acquisition indebtedness to $750,000 for debt incurred after Dec. 15, 2017. The limitation of $1 million remains the same amount for prior  debts, so that is helpful. For tax year beginning after Dec. 31, 2025, the limitation reverts to $1,000,000 regardless the date of the debt’s occurrence.

In the past, individuals could deduct state and local income and property taxes paid. For states without income taxes (for example: Florida), they can claim a deduction for state and local sales tax, so they get some deduction benefit. The 2017 Reform Act allows individual taxpayers to deduct state and local sales, income or property tax up to $10,000 ($5,000 for married but filed separately). For amounts paid in tax year beginning before Jan 1, 2018, with respect to State or local income taxes, this payment will be treated as paid on the last day of the tax year that such tax is imposed. Therefore, taxpayers in high tax states like New York who make a lot of money will see their itemized deductions plummet.

Another change that was imposed was for charitable contributions. For tax periods that begin before 2018 and after 2025, the limitation for cash contributions made to public charities, private operating foundations and private distribution charities was 50% of AGI. The deduction for cash contribution to private nonoperating foundations was limited to 30% of AGI. For contributions that are made to an educational institution’s athletic events exchange for a contribution to educational institution is permitted to deduct 80% of amounts contributed. The Reform Act increased the cash contribution limitation from 50% to 60%. It also suspends the 80% deduction for contributions made for university athletic seating rights.

By: Timothy S. Hart

Tax Reform and How Tax Reform Affects You as An Individual

On Dec. 22, 2017, President Trump signed the “Tax Cuts and Job Act” into the law. The Senate passed the bill on Dec. 20 and the House passed the bill later. The bill individual tax cut is temporarily until 2025. The income tax overhaul is forecast to raise the federal deficits by substantial amounts, so not a welcome change unless spending is curtailed. People who take itemized deductions in high tax rate states (NY, CA, etc) will be hurt since the law caps the itemized deduction which includes deductions for property taxes paid, and mortgage interest. The Act removes ACA personal mandate, which was a primary provision of Affordable Act. Below, I will give you a grasp of how the tax reform bill affects your taxes as an individual.

At first, we review the individual income tax rates. The tax reform bill retains the current structure of seven income brackets. Mostly, it lowers tax rates. The highest rate comes down from 39.6% to 37%, meanwhile the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22% and 15% bracket to 12%. The lowest tax rate of 10% and the 35% bracket remain unchanged. The income threshold also changed accordingly. All thresholds will be indexed for inflation in tax years after Dec. 31, 2018. This was a good move, to help boost the economy

Normally, an individual can reduce AGI (adjusted gross income) by taking itemized deductions or standard deduction. The tax reform bill made a big change to standard deduction as well. Prior to the reform, the standard deduction is based on filing status. For example, for tax year 2017, the standard deduction for single individuals or married filing separate is $6,350, for married individuals who file jointly returns is $12,700 and for heads of households is $9,350. The tax reform bill increases standard deduction significantly. For single individuals, married individuals who file joint returns and heads of households, the standard deduction increases to $12,000, $24,000, and $18,000 respectively. The increased standard deduction is effective for tax years after Dec. 31, 2017 (so your 2018 taxes). The problem with this approach is that if you live in a high tax state, and your itemized deductions are capped, then the standard deduction will be higher than your itemized deduction and you lose out on the difference between the uncapped itemized deduction amount and the standard deduction.

Furthermore, tax reform bill repeals deduction for personal exemptions. This rule comes effective after Dec.31, 2017, and before Jan. 1, 2026. Prior to tax reform bill, for example, an individual can deduct $4,050 for each person exemption for 2017, for instance. Therefore, this will disproportionately affect large families. The child tax credit was increased, so that will mitigate the negative effect of losing personal exemptions.

Mostly, taxpayers are required to compute their income for regular tax and alternative minimum tax. A taxpayer’s tax liability is the greater of his/her regular tax liability or their AMT liability. For tax years after Dec. 31, 2017 and before Jan. 2018, the Act increases AMT exemptions for qualified individuals, so that will be helpful.

In next following blog posts, we will continue discuss more about new Tax Act and its implications for individual and corporate.

By: Timothy S. Hart

IRS Currently Not Collectible Status

When you are in a situation that makes it impossible to pay the taxes that you owe, and it can be proven to the IRS that collecting from you will create a financial hardship, the IRS will put you into a noncollectable status known by IRS terms as “currently not collectible”.  This status can be granted to individuals and corporations.  In most cases, this status will be reviewed in one to two years to reevaluate if your financial situation has changed. During the time that your account is deemed as currently not collectible, the IRS will cease collection efforts (i.e. levies).

In most cases, the IRS gathers financial information of noncollectable status by making the taxpayer complete a 433-A, 433-B, and 433-F forms, and verify assets and income sources and amounts. These forms are very complicated to complete correctly since you want to give correct information that shows your inability to pay. The other factors the IRS uses to grant this status is a person’s age, education level, employment status, cost of living in the area the taxpayers lives, and medical issues, to name a few items the IRS considers. The IRS uses national and local standard expense amounts, so deviations from the standardized amounts need to be proven for each case.

The IRS defines hardship in perhaps a way that you would not. If you do not have assets, and your income is only enough to cover basic living expenses, then there is a good chance that the IRS would not view your income as being a good levy target and you would be deemed currently not collectible. If you have assets, it will be more difficult to prove this status even though the assets may not be liquid.

It is critical if your account is placed in currently not collectible status that you remain current with your taxes by filing tax returns timely and paying current taxes by the due dates (including any estimated taxes). However, if the IRS has determined you to be noncollectable, and you incur a new tax debt within 12 months of them determining that you are currently not collectible, they will typically add the new unpaid tax debt to the total debt owed without a new determination of currently not collectible status. If you have unfiled tax returns, this would be a good time to become current and file all missing tax returns there is a certain subjective component of the IRS determination, and you want to show good will in resolving your tax problem.

In most cases, once you are deemed noncollectable, the IRS will file a tax lien on your property to protect its interest in any assets you have if you owe more than $10,000. When a tax lien is filed, this event will lower your FICO score, so sometimes its better to establish a payment plan that to go this route. Since filing a tax lien can further create a financial crisis, a Form 9423 and Form 12153 appeal should be filed to try to avoid the tax lien filing. The other downside of being put into this noncollectable status is that penalty for not paying the taxes, and interest still accrue, so your tax debt becomes larger.

By: Timothy S. Hart

Tax Penalties

The Internal Revenue Service (IRS) and State tax authorities, have the ability to penalize taxpayers who do not pay their taxes on time, or file their tax returns on time. In my practice, I spend a lot of time trying to get those penalties reduced or eliminated for my clients. Both the IRS and States charge a harsher penalty for not filing a tax return versus not paying the tax. Therefore, it is important to file your tax returns, even when you can not pay the tax debt owed to help minimize the tax penalties related to filing the tax return late.

The two typical methods to have a tax penalty waived is the first time penalty abatement, and the other method is to demonstrate reasonable cause. The first time penalty abatement waiver requires that in the last three years before the tax year with the penalty that you paid all taxes on time, and filed all your tax returns on time. If that is the case, the IRS will normally remove the tax penalty since you have demonstrated that the issue was a one time event and not a pattern. To demonstrate reasonable cause that something caused you not to be compliant with paying taxes or filing tax returns, it would typically have to be shown that you took ordinary and reasonable steps to follow the rules, and that something outside your control made that impossible. As an example, say a taxpayer before the great depression of 2008-2010 purchased a investment property for 1.5M, and it needed .5M to finish it. He hopes to sell the property for 2.5M, so to net a .5M gain. Then the economy slumps and the property is worth 1.5M. and he can not get a loan and risks the foreclosure of the property since it can’t maintain the cost of just holding it.   He then decides to take .5M from a retirement account to finish the house and sell it. Unfortunately, he does this but the home slumps to 1M of value and he can not sell it and get his investment back. When he took out the .5M from his retirement account,  he incurred about $140,000 in taxes. When he does not pay these taxes, the IRS and States will start charging a tax penalty of 1/2 of one percent per month for the failure to pay the taxes owed on time. Under this scenario, it will be difficult to show reasonable cause since the taxpayer had the money to pay the taxes when he withdrew .5M from he retirement account to pay the taxes, so it would not meet the definition of not being able to pay his taxes since it was within his control to do so.

Under these circumstances, we often need to go to the IRS office of appeals and ask for penalty relief. Each situation is unique, and the taxpayers case has to be developed to put it into the best light to prove that the taxpayer was being reasonable under the circumstances. If the penalty cannot be waived, a tax settlement through an offer in compromise may be available so the total tax bill is not paid.

By: Timothy S. Hart

Is using Tax Preparation Software a good idea?

The ability to prepare and file your own income tax return can be a very convenient experience.  There are many tax software programs available, and most do a good job of helping you prepare and file the income tax returns for a small fee. For the average taxpayer, these programs cover the main issues, and produce an accurate tax return after a few hours of data entry. Most taxpayers take paying their taxes seriously, and the process goes smoothly. The problem is when a taxpayer is not an “average taxpayer”, and does not realize it.

A good example of when you need professional tax help is when you have foreign bank accounts, have a business, or went through a major life event, such as you received an inheritance or are going through a divorce. In the example of having a foreign bank account, there are income tax forms to file and also disclosure forms, that only a tax professional should prepare to avoid costly mistakes. The penalties related to incorrect foreign disclosure of assets can amount to tens of thousands of dollars of penalties if not done correctly.

When a person receives a tax bill from the IRS, it is a very stressful time. We are here to help, and give sound advice on how to minimize the problem. One mistake I see often if when a person views a tax preparer as an expert that does not need your input in any matter other than given them the tax data (W/2 forms, 1099’s, etc). In these cases, the taxpayer basically hands all the tax forms to the tax preparer, who then prepares the income tax return. The taxpayer, without review, then signs the return since the preparer is an “expert”. What a Mistake!  Once the return is completed by the tax preparer, the critical next step is to review the details of the tax return and look for mistakes and issues. I realize this is not a fun process, but its critical to finding tax problems and issues before the tax return is filed and then needs to be corrected through an amendment or worse yet you get a big tax bill with penalties. If you follow the above advice, you will avoid notices from the IRS that you owe penalties and interest on understated taxes in most cases.

If a mistake does happen, and you were diligent in reviewing the tax return, we can assist and ask for penalty relief by meeting the IRS reasonable cause standards which allow penalty relief when a taxpayer meets certain qualifying standards (https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-reasonable-cause). To obtain relief, in general you need to prove 1) the tax advice or return preparation was from a qualified person (such as a CPA, enrolled agent), 2) that the taxpayer supplied the tax preparer with a complete statement of the facts, and 3) and you relied upon their skills to file your taxes. This tax relief generally will be successful for one time events, but not for an issue that spans over many years. It also is not a good excuse where you failed to file your tax return, since that burden always falls on the taxpayer to make sure the tax return is filed. If the IRS does charge a penalty, then they will also charge interest on the underpaid taxes, and penalty. If they remove or reduce the tax penalty, then the interest related to the penalty will also be reduced.

Lastly, whether you prepare your own taxes, or have an expert prepare them, you still need to be extra careful avoid mistakes that will cost you extra taxes in the form of penalties

By: Timothy S. Hart

Filing of Tax Lien Notice

When a taxpayer owes the IRS,  the tax laws create a tax lien that needs to be satisfied before it is extinguished. When balances owed reach certain limits, and after the IRS demands that you pay the tax debt, and the tax debt remains unpaid, the Internal Revenue Service will file a public notice that the tax lien exists. The notice is called Notice of Filing of Tax Lien (NFTL).

Many clients ask what the notice filings means from a practical perspective, and how it will effect them in the daily lives. The lien the IRS files is similar in concept to a bank filing a mortgage. It gives the IRS priority over other creditors who file later in time in case the property is foreclosed (by the bank or IRS) or sold.  The notice is filed in your county clerk’s office. The tax lien filing, even if the property is not sold will affect you since the notice has a negative effect on your FICO score. The reduction of  your credit score then makes borrowing money (for a car, etc) more expensive since the banks will charge more interest due to a lower credit score. Once the IRS files the tax lien, if you file for bankruptcy, the tax lien will often continue and be a valid issue and not  extinguished in the bankruptcy. The tax lien attaches to almost all property, such as real estate, personal property, cash, stocks, vehicles, and future acquired assets.

Once a tax lien notice is filed, there are limited methods to get the lien notice removed. First, if the tax amount owed can be reduced below $25,000, and a direct debit payment plan has been established, the IRS will typically agree to remove the notice filing within 30 days if you are otherwise compliant with the tax rules (all tax returns are filed). The other methods that enable the tax lien removed is to file an offer in compromise, and upon acceptance and payment the IRS will remove the lien also within 30 days. The other method that sometimes helps is to ask the IRS to subordinate the tax lien. When the IRS agrees to subordinate the tax lien notice, they allow other creditors to be in front of them and this sometimes makes it easier to qualify for a mortgage. Therefore, since it is difficult to have a notice of tax lien removed after it is filed, and a lien subordination is not always helpful, much effort should be given to avoid the filing.

A tax lien withdrawal (as opposed to release) can happen after the tax lien has been released, and it is where the IRS agrees to remove any records of the tax lien notice filing from the public records. Obviously, the tax lien withdrawal is helpful since it can have the effect of reversing the negative effects the tax lien filing has on your FICO score.

NYS Sales Audits

There is no denying that a sales tax audit is not a pleasant experience.  As a tax attorney and CPA that helps clients navigate through the audit process with minimal pain (emotional and financial), I have gained a unique perspective on the motivations of the state to enhance their collections of tax. As awful as this sounds, it should be a reminder that the best defense to an audit is to have adequate records. Often, a client does not have adequate records, since they were either unaware of the need for good records, or it was to much of a financial burden to maintain the records needed to avoid an audit adjustment. When a client does not have adequate records, the tax laws allow the state to start estimating the taxable sales, and they never estimate on the low side.

Since having good records is so critical to a successful audit, I spend a lot of time with my clients to organize and improve their sales tax records before the audit starts. We (my client and I) then sit with the auditors when they perform the audit to be available to answer questions. Most clients are initially uncomfortable being at the audit, but over time they understand the value of being there and helping influence the auditors, by showing our human side and showing that we will not be pushed around, in a friendly but productive fashion. If the auditor is being unreasonable, then we ask to speak to the persons supervisor and division head if we determine that would be productive.

If all else fails, and the client has poor records and the state creates a law bill the appeal of that sales tax bill is the next step. In the conciliation conference, a mediation occurs between the taxpayer and state to negotiate a settlement. Often the results of this process are very good, and a fair result can be obtained. If that does not happen, the next step would be to go to the Division of Tax Appeals. However, from my experience settling at the mediator produces the best outcome for most cases.

 

How Can the IRS Taxpayer Advocate Help!

A recent client came to me with a unique problem. He and his wife owed the IRS about $80,000. He was a NYS Judge and if the IRS filed a notice of federal tax lien (NFTL), it would be very embarrassing to him and since he handles business law cases, the Chief Judge may ask him to resign since the tax liens would effect his credibility in the court system.

The IRS wanted to file the NFTL to protect its interest. By law a NFTL gives other creditors notice that the IRS has a tax lien against your property. The tax lien itself (i.e. not the notice part) is created automatically once a taxpayer owes the IRS. Even after showing the IRS that the NFTL had no real value since the Judge had no assets (we obtained appraisals on all the taxpayers property), they still wanted to file the NFTL, even after we showed that it was not in there best interest to file the NFTL since the taxpayers ability to pay back the debt hinged on his ability to work and earn income.

We then went to the Taxpayer Advocate office. They assist taxpayers who are having difficulty dealing with the IRS. The office intervened and the IRS agreed that a NFTL would not be in the IRS or taxpayers best interest after we showed them a letter from the Chief Judge that my client ability to work required no public notice of this tax issue. We were able to establish an affordable payment plan to pay off the tax debt over five years without the negative effects of a tax lien.

Two uses of the IRS form 433-A, 433-B or 433-F

While involved with an IRS collection case, for matters over $50,000 the IRS will ask for a 433-F form to be completed, which is a financial disclosure of your assets and income, or a form 433-A/B form (a variety of the 433-F form) if an IRS Revenue Officer is assigned to your case. From the clients perspective they often under-estimate the importance of this form, and its proper preparation. I often see even CPA’s not completing the form correctly, so obviously the IRS has not made it easy for the taxpayer who has a tax issue. The main use of the form from the perspective of the IRS is to gather information on assets they can levy and seize, and to compute the monthly income you can pay them. From the clients perspective, it is very important to craft a picture of your assets and income so you form the basis of a payment plan offer to the IRS that is justifiable and that you can maintain without defaulting the payment plan. Therefore, it is critical to complete these forms in your best interests while remaining truthful. Its a skill but the results are worthwhile in resolving your tax debt problem since I often find that as I keep working on the form (in some cases 8-12 hours) I see ways to achieve a result that is very helpful to a clients case.

By: Timothy S. Hart