California Tax Attorney Blog

New Flexible Offer-in-Compromise Terms Help More Struggling Taxpayers

Wed, 23 May 2012 04:07:36 -0800

The IRS announced the other day that it is offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past. In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The new guidelines are announced in a news release by the IRS (IR-2012-53, May 21, 2012). More details are available in Attachment 1 to Internal Revenue Manual (IRM) 5.8.5 Financial Analysis. The changes are extraordinary.

The IRS recognizes that many taxpayers are still struggling to pay their bills so it has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through an installment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential.

The announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.

The new guidelines also include changes to the necessary living expenses:

Allowing taxpayers to repay their student loans.
Expanding the Allowable Living Expense allowance category and amount.

Revising the calculation for the taxpayer’s future income.

Allowing taxpayers to pay state and local delinquent taxes.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The deferred payment option which allows payment over the life of the statute is no longer available.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In general assets which have been dissipated three years or more prior to the submission of the offer in compromise will not be included in the reasonable collection potential. For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.

In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses unless it is determined the assets are not critical to business operations.

Allowable Living Expenses

The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.

The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer's post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

If you have a tax problem, then have a tax attorney help. Call Mitchell A. Port at (310) 559-5259.

Early Withdrawal Penalty (The "Additional Tax") For Education Expenses Applies To Withdrawals From Rollover IRA

Fri, 18 May 2012 03:49:40 -0800

Withdrawals to pay education expenses from your employer's retirement plan before you turn age 59 1/2 are NOT subject to the 10% early withdrawal penalty. Withdrawals for the same reason before age 59 1/2 ARE subject to the 10% additional tax when taken out of your IRA which you funded with a rollover from your employer's retirement plan.

On May 9, 2012, the Seventh Circuit Court of Appeals in the case of Young Kim vs. Commissioner of Internal Revenue ruled in favor of the IRS that the taxpayer owes the 10% tax and, because he had not paid it, also owes a penalty for substantial underpayment of taxes.

Here's the opinion in its entirety:

At age 56, Young Kim left his position as a partner in a law firm and enrolled in the London School of Economics. Employees who depart at age 55 and up may withdraw money from the employer’s retirement plan. They must pay income tax (retirement plans contain pre-tax dollars), but they do not owe the 10% additional tax that the Internal Revenue Code imposes on most withdrawals before age 59½. 26 U.S.C. §72(t)(1), (2)(A)(v). During 2005 Kim moved the funds from the law firm’s retirement plan to an individual retirement account. A rollover is not a taxable event. 26 U.S.C. §402(c); 26 C.F.R. §1.402(c)–2. During 2006 Kim withdrew about $240,000 from the IRA. He paid the income tax but not the 10% additional tax. The Commissioner of Internal Revenue concluded that he owes the 10% tax and, because he had not paid it, also owes a penalty for substantial underpayment of taxes. 26 U.S.C. §6662.

Kim sought review by the Tax Court, which held a trial. The parties reduced the scope of the dispute because the money spent on tuition and other education expenses attending the London School of Economics— and the amount Kim paid for his daughter’s tuition and other education expenses at Bryn Mawr College—is not subject to the 10% tax. See 26 U.S.C. §72(t)(2)(E).

The Tax Court held that Kim owes the 10% tax on the withdrawn money that he had put to other uses and also owes the penalty for a substantially inaccurate return. The parties agreed that, if the Tax Court’s decision is correct, Kim owes $20,456.50 under §72(t)(1) and $4,091.30 under §6662. Judgment was entered to that effect. Kim asks us to hold that he owes nothing—or at least that he does not owe the accuracy-related penalty under §6662.

Kim relies on §72(t)(2)(A)(v), which provides that the 10% additional tax does not apply to a distribution from a pension plan “made to an employee after separation from service after attainment of age 55”. His immediate problem is that the distribution from the IRA was not “made to an employee”; he was not an employee of the IRA’s custodian. He had been an employee of the law firm and therefore could have taken a distribution from its pension plan, but that’s not what happened.

Just in case this point was unclear, the Internal Revenue Code adds: “Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan.” 26 U.S.C. §72(t)(3)(A). Kim withdrew money from an IRA, an individual plan; subparagraph 72(t)(2)(A)(v) therefore “shall not apply”.

Kim calls his account a “SEP IRA” (“simplified employee pension”, see 26 U.S.C. §408(k)) as opposed to a “traditional IRA,” but §72(t)(3)(A) does not distinguish among flavors of individual retirement plans. Before reaching 59½, Kim withdrew money from an individual retirement plan, rather than from his former employer’s plan, and therefore must pay the 10% additional tax. Kim insists that this makes no sense. He could have taken the money from the law firm’s pension plan without the 10% additional tax; why should it matter that the money went from the law firm’s plan to an IRA before being withdrawn? The answer is that the Internal Revenue Code says that it matters, and Kim does not contend that §72(t)(3)(A) violates the Constitution.

Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles. Why can an employee withdraw money from an employer’s plan without the 10% addition at age 55 but not age 54? Why does the 10% additional tax apply to withdrawals at age 59 and 181 days, but not 59 and 183 days? These questions cannot be answered by logical analysis. The Code’s lines are arbitrary. The law firm’s pension plan put Kim to a choice between taking the money and moving part or all of it to an IRA. He chose to roll over the whole balance, because he did not want to pay any income tax immediately.

The Code allowed Kim to extend the tax deferral at the cost of the 10% additional tax if he later took some of the money before age 59½. Money deposited in pension plans and many IRAs is not subject to income tax until the funds (including interest and capital appreciation) are withdrawn. Tax deferral is expensive to the Treasury, so the Code makes resort to some tax-deferral opportunities costly. Hence someone who puts money in an IRA can’t take it out freely before age 59½; the prospect of the 10% additional tax on early withdrawal makes IRAs less attractive (and the 10% tax also compensates the Treasury for some of the revenue foregone from deferred payment of the income tax on sheltered funds). Subsection 72(t)(2)(A)(v) offers an opportunity for avoiding the 10% tax on withdrawals between age 55 and age 59½, but that opportunity is limited by the “to an employee” language and the proviso in §72(t)(3)(A), lest it effectively reduce the age of free withdrawal from 59½ to 55. The interaction of these provisions is bound to seem irrational to many affected persons, but Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries. Fidelity Investments, which administers Kim’s IRA, sent him a statement in 2006 informing him that he owed both income tax and the 10% additional tax. But the accountant who prepared his tax return omitted the 10% additional tax, which, coupled with the fact that the deficiency exceeded $5,000, led to the substantial-understatement penalty.

Section 6662 excuses the taxpayer if “there is or was substantial authority for [the tax return’s] treatment” (§6662(d)(2)(B)(i)) or all relevant facts were disclosed on the return and “there is a reasonable basis for the tax treatment of such item by the taxpayer” (§6662(d)(2)(B)(ii)(II)). Kim contends that there was “substantial authority” for his return’s treatment of the withdrawal, but there was and is no authority at all for it. Kim does not contend that any court has accepted his argument that an IRA (SEP flavor or otherwise) is the same as an employer’s plan under §72(t)(2)(A)(v).

The Tax Court treats the “reasonable basis” exception in §6662(d)(2)(B)(ii)(II) as applicable when the taxpayer furnishes accurate information to, and then relies in good faith on, the opinion of a competent tax adviser. See Neonatology Associates, P.A. v. CIR, 115 T.C. 43, 98–99 (2000), affirmed, 299 F.3d 221, 233–35 (3d Cir. 2002); 26 C.F.R. §1.6664–4(c). See also United States v. Boyle, 469 U.S. 241, 251 (1985). The record does not show what information Kim furnished to his accountant or whether the accountant competently analyzed the situation under §72(t). The Tax Court accordingly concluded that Kim could not take advantage of §6662(d)(2)(B)(ii)(II).

Kim observes that the Tax Court lacked any evidence from the accountant, but the shortfall is Kim’s own responsibility. After the deadline for submitting expert evidence had passed, Kim filed a motion for a continuance, which the Tax Court denied. That decision was not an abuse of discretion. Kim might have asked the Commissioner to stipulate to what the accountant would have testified, but he did not make such a request. Nor did he make an offer of proof. So we have no idea what evidence the accountant would have provided. Kim testified at the trial but did not tell the Tax Court what information he had furnished to the accountant. With respect to the facts relevant under Neonatology Associates, the record is essentially empty. There is no warrant for upsetting the Tax Court’s decision. Finally, Kim asks us to order the Commissioner to abate interest on his underpayments. That subject was not before the Tax Court and therefore is not before us. CIR v. McCoy, 484 U.S. 3 (1987). Kim must ask for this relief from the Commissioner, and if he is dissatisfied with the Commissioner’s decision he can file a separate petition in the Tax Court. See 26 U.S.C. §6404(e)(1); Bourekis v. CIR, 110 T.C. 20, 25–26 (1998). AFFIRMED

Internal Revenue Service Guidance

Thu, 17 May 2012 03:31:21 -0800

Here are seven of the most common forms of guidance in the form of documents and publications that provide assistance to charitable groups, business firms and taxpayers.

Notice

A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

Announcement

An announcement is a public pronouncement that has only immediate or short-term value. For example, announcements can be used to summarize the law or regulations without making any substantive interpretation; to state what regulations will say when they are certain to be published in the immediate future; or to notify taxpayers of the existence of an approaching deadline.

Private Letter Ruling

A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer's return is filed. A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued.

Technical Advice Memorandum

A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally stems from an examination of a taxpayer's return, a consideration of a taxpayer's claim for a refund or credit, or any other matter involving a specific taxpayer under the jurisdiction of the territory manager or the area director, appeals. Technical Advice Memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued. Technical Advice Memoranda are generally made public after all information has been removed that could identify the taxpayer whose circumstances triggered a specific memorandum.

Revenue Procedure

A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. It is also published in the Internal Revenue Bulletin. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how those entitled to deduct certain automobile expenses should compute them by applying a certain mileage rate in lieu of calculating actual operating expenses.

Revenue Ruling

A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts. Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.

Regulation

A regulation is issued by the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to address issues that arise with respect to existing Internal Revenue Code sections. Regulations interpret and give directions on complying with the law. Regulations are published in the Federal Register. Generally, regulations are first published in proposed form in a Notice of Proposed Rulemaking (NPRM). After public input is fully considered through written comments and even a public hearing, a final regulation or a temporary regulation is published as a Treasury Decision (TD), again, in the Federal Register.

To consult with a qualified tax attorney on these or any other tax controversy, call Mitchell A. Port at (310) 559-5259

Backlog Of Offers In Compromise

Wed, 25 Apr 2012 03:57:59 -0800

The IRS faces a 28% increase in the number of requests for Offers In Compromise. The requests by Californians and others behind in their tax payments to pay "pennies on the dollar" has reached almost 60,000 for 2011 when the data was last analyzed.

Why are Offers up? In part the struggling U.S. economy is responsible, and in part it’s the IRS’ own doing. Since the National Taxpayer Advocate labeled the offers in compromise program as one of the most serious problems facing taxpayers from 2001 through 2009, the IRS has been trying to improve and promote the program. It made the OIC form (Form 656) simpler, created a YouTube informational video and began a “streamlined” process for taxpayers with incomes of $100,000 or less and liabilities of $50,000 or less to make deals. A “Fresh Start” initiative is also bringing in more taxpayers to the OIC program.

At the end of last month, the U.S. Treasury published a report entitled "Increasing Requests for Offers in Compromise Have Created Inventory Backlogs and Delayed Responses to Taxpayers" which is available by clicking here.

Forbes Online also has a good explanation of what's going on at the IRS with regard to the OICs which is available at this link.

Get help from a tax attorney. Call Mitchell A. Port at (310) 559-5259.

Power of Attorney

Fri, 20 Apr 2012 03:16:34 -0800

When Is a Power of Attorney Not Required?

A power of attorney is not required in some situations when dealing with the IRS. The following situations do not require a power of attorney.

Representing a taxpayer through a nonwritten consent.

Allowing the IRS to discuss return information with a third party designee.

Allowing a tax matters partner or person (TMP) to perform acts for the partnership.

Providing information to the IRS.

Allowing the IRS to discuss return information with a fiduciary.

Authorizing the disclosure of tax return information through Form 8821.

Providing information to the IRS. If you are merely providing information to the IRS at the request of the IRS, a power of attorney is not required.

Disclosure of tax return information. You do not have to file a power of attorney to authorize the IRS to discuss and provide specific confidential tax return information to any organization you designate through the use of Form 8821, partnership, corporation, firm, trust, or individual. You may file your own tax information authorization without using Form 8821, but it must include all the information that is requested on the form.

Form 8821 is strictly a disclosure authorization form and cannot be used to designate an individual to represent you. If you want to name a representative, you should use
Form 2848.

With a Federal tax matters, like income or payroll taxes, you have the right to represent yourself or have someone represent you before the IRS. If you want someone to represent you before the IRS file form 2848, Power of Attorney and Declaration of Representative, with the IRS office where you want your representative to act for you. The most recent form has been revised as of March, 2012. Your representative must be a person authorized to practice before the Internal Revenue Service; I am an authorized representative. Your signature on Form 2848 allows the individual or individuals named to represent you before the IRS and to receive your tax information.

Call for proper representation. Call for a free phone consultation. Speak with Mitchell A. Port at (310) 559-5259.

The Tax Court

Mon, 09 Apr 2012 12:22:03 -0800

The United States Tax Court is a court established by Congress under the Constitution. When the Internal Revenue Service has determined a tax deficiency and has sent the notorious 90-day letter, the so-called Notice of Deficiency, you may dispute the deficiency in the Tax Court before paying any disputed amount.

The Tax Court’s jurisdiction also includes the authority to order abatement of interest, award administrative and litigation costs, review certain collection actions, determine relief from joint and several liability on a joint return, redetermine worker classification, adjust partnership items, redetermine transferee liability, make certain types of declaratory judgments, and review awards to whistleblowers who provide information to the Commissioner of Internal Revenue.

The U.S. president appoints all 19 Tax Court judges. Trials are conducted and other work of the Court is performed by those judges. All of the judges have expertise in the tax laws and apply that expertise in a manner to ensure that you are assessed only what they owe, and no more. The main Court is in Washington, D.C., while the judges travel all over the country to conduct trials in various designated cities such as Los Angeles, San Francisco, San Diego and Fresno (where only small tax cases are heard).

DO NOT miss the filing deadline to start a case in the Tax Court. File your petition early. The Court cannot extend the time for filing which is set by law.

A $60 filing fee must be paid when the petition is filed. Once the petition is filed, payment of the underlying tax ordinarily is postponed until the case has been decided. Keep in mind that interest and some penalties continue to run while your Tax Court case is pending.

If you don’t think you’ll ever appeal your case beyond the Tax Court, then consider using the Court's simplified small tax case procedure. Trials in small tax cases generally are less formal and result in a speedier disposition. In certain tax disputes involving $50,000 or less, you may elect to have your case conducted using this procedure.

Cases are calendared for trial as soon as practicable (on a first in/ first out basis) after the case becomes at issue. When a case is calendared, the parties are notified by the Court of the date, time, and place of trial. Trials are conducted before one judge, without a jury, and you are permitted to represent yourself if you desire. Taxpayers may be represented by practitioners admitted to the bar of the Tax Court.

Most cases are settled by mutual agreement without the necessity of a trial. However, if a trial is conducted, a report is usually issued by the presiding judge laying out findings of fact and an opinion. The case is then closed.

Speak with a tax attorney about your rights in the Tax Court. Call Mitchell A. Port at (310) 559-5259.

Standards Clarifying When Federal Employment Taxes Are Paid By Employee Leasing Companies Or By The Employer

Fri, 09 Mar 2012 03:44:43 -0800

California’s employers as well as employers throughout the U.S. are required to withhold and pay Federal employment taxes (consisting of Federal Insurance Contribution Act –FICA- taxes and Federal Unemployment Tax Act –FUTA- taxes with respect to wages paid to their employees.

The one determined to be the employer under a multi-factor common law test or under specific statutory provisions generally has the obligation for Federal employment taxes. For example, a third party that is not the common law employer can be a statutory employer if the third party has control over the payment of wages.

In addition, certain designated agents who prepare and file employment tax returns using their own name and employer identification number are jointly and severally liable with their principals for employment taxes with respect to wages paid to the principals’ employees.

In comparison, reporting agents who prepare and file employment tax returns for their clients using the client’s name and employer identification number payroll service providers acting are usually not liable for the employment taxes reported on their clients’ returns.

Employee leasing companies often prepare and file employment tax returns for their clients using the leasing company’s employer identification number and name, often taking the position that the leasing company is the statutory or common law employer of their clients’ workers. Employee leasing is the practice of contracting with an outside business to handle certain administrative, personnel, and payroll matters for a taxpayer’s employees. Some employers use leasing companies to avoid employment taxes.

Reasons for Change

Is the employee leasing company or its client is liable for unpaid Federal employment taxes arising with respect to wages paid to the client’s workers? When an employee leasing company files employment tax returns using its own name and employer identification number, or when no returns are filed with respect to wages paid by a taxpayer that uses an employee leasing company or when no one pays the taxes due, there can be uncertainty as to how the Federal employment taxes are assessed and collected. Providing standards for when an employee leasing company and its clients will be held liable for Federal employment taxes will facilitate the assessment, payment and collection of those taxes and will preclude taxpayers who have control over withholding and payment of those taxes from denying liability when the taxes are not paid.

Proposal

The new budget proposal provides standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes. The proposal would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns required to be filed with respect to wages paid after December 31, 2011.

Classifying Workers: Independent Contractors Or Employees?

Tue, 21 Feb 2012 03:21:28 -0800

The Government Proposes To Increase Certainty With Respect To Worker Classification

Current Law

For both tax and nontax purposes, workers must be classified into one of two mutually exclusive categories: employees or self-employed (sometimes referred to as independent contractors).

Worker classification generally is based on a common-law test for determining whether an employment relationship exists. The main determinant is whether the service recipient (employer) has the right to control not only the result of the worker’s services but also the means by which the worker accomplishes that result. For classification purposes, it does not matter whether the service recipient exercises that control, only that he or she has the right to exercise it.

Even though it is generally recognized that more highly skilled workers may not require much guidance or direction from the service recipient, the underlying concept of the right to control is the same for them. In addition, only individuals can be employees. In determining worker status, the IRS looks to three categories of evidence that may be relevant in determining whether the requisite control exists under the common-law test:

(i) behavioral control, (ii) financial control, and (iii) the relationship of the parties.

For employees, employers are required to withhold income and Federal Insurance Contribution Act (FICA) taxes and to pay the employer’s share of FICA taxes. Employers are also required to pay Federal Unemployment Tax Act (FUTA) taxes and generally state unemployment compensation taxes. Liability for Federal employment taxes and the obligation to report the wages generally lie with the employer. For workers who are classified as independent contractors, service recipients engaged in a trade or business and that make payments totaling $600 or more in a calendar year to an independent contractor that is not a corporation are required to send an information return to the IRS and to the independent contractor stating the total payments made during the year. The service recipient generally does not need to withhold taxes from the payments reported unless the independent contractor has not provided its taxpayer identification number to the service recipient. Independent contractors pay Self-Employment Contributions Act (SECA) tax on their net earnings from self-employment (which generally is equivalent to both the employer and employee shares of FICA tax). Independent contractors generally are required to pay their income tax, including SECA liabilities, by making quarterly estimated tax payments.

For workers, whether employee or independent contractor status is more beneficial depends on many factors including the extent to which an independent contractor is able to negotiate for gross payments that include the value of nonwage costs that the service provider would have to incur in the case of an employee. In some circumstances, independent contractor status is more beneficial; in other circumstances, employee status is more advantageous.

Under a special provision (section 530 of the Revenue Act of 1978 which was not made part of the Internal Revenue Code), a service recipient may treat a worker as an independent contractor for Federal employment tax purposes even though the worker actually may be an employee under the common law rules if the service recipient has a reasonable basis for treating the worker as an independent contractor and certain other requirements are met. The special provision applies only if (1) the service recipient has not treated the worker (or any worker in a substantially similar position) as an employee for any period beginning after 1977 and (2) the service recipient has filed all Federal tax returns, including all required information returns, on a basis consistent with treating the worker as an independent contractor.

If an employer meets the requirements for the special provision with respect to a class of workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively and even as to newly hired workers in the same class. Since 1996, the IRS has considered the availability of the special provision as the first part of any examination concerning worker classification. If the IRS determines that the special provision applies to a class of workers, it does not determine whether the workers are in fact employees or independent contractors. Thus, the worker classification continues indefinitely even if it is incorrect.

The special provision also prohibits the IRS from issuing generally applicable guidance addressing the proper classification of workers. Current law and procedures also provide for reduced penalties for misclassification where the special provision is not available but where, among other things, the employer agrees to prospective reclassification of the workers as employees.

Reasons for Change

Since 1978, the IRS has not been permitted to issue general guidance addressing worker classification, and in many instances has been precluded from reclassifying workers – even prospectively – who may have been misclassified. Since 1978 there have been many changes in working relationships between service providers and service recipients. As a result, there has been continued and growing uncertainty about the correct classification of some workers.

Many benefits and worker protections are available only for workers who are classified as employees. Incorrect classification as an independent contractor for tax purposes may spill over to other areas and, for example, lead to a worker not receiving benefits for unemployment (unemployment insurance) or on-the-job injuries (workers’ compensation), or not being protected by various on-the-job health and safety requirements.

The incorrect classification of workers also creates opportunities for competitive advantages over service recipients who properly classify their workers. Such misclassification may lower the service recipient’s total cost of labor by avoiding workers’ compensation and unemployment compensation premiums, and could also provide increased opportunities for noncompliance by service providers.

Workers, service recipients, and tax administrators would benefit from reducing uncertainty about worker classification, eliminating potential competitive advantages and incentives to misclassify workers associated with worker misclassification by competitors, and reducing opportunities for noncompliance by workers classified as self-employed, while maintaining the benefits and worker protections associated with an administrative and social policy system that is based on employee status.

Proposal

The proposal would permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. The reduced penalties for misclassification provided under current law would be retained, except that lower penalties would apply only if the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency and if the service recipient had filed all required information returns (Forms 1099) reporting the payments to the independent contractors. For service recipients with only a small number of employees and a small number of misclassified workers, even reduced penalties would be waived if the service recipient (1) had consistently filed Forms 1099 reporting all payments to all misclassified workers and (2) agreed to prospective reclassification of misclassified workers. It is anticipated that, after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not have been clear. (Statutory employee or nonemployee treatment as specified under current law would be retained.)

The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. This would enable service recipients to properly classify workers with much less concern about future IRS examinations. Treasury and the IRS would be directed to issue guidance interpreting common law in a neutral manner recognizing that many workers are, in fact, not employees.

Further, Treasury and the IRS would develop guidance that would provide safe harbors and/or rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful for service recipients, it would generally be industry- or job-specific. Priority for the development of guidance would be given to industries and jobs in which application of the common law test has been particularly problematic, where there has been a history of worker misclassification, or where there have been failures to report compensation paid.

Service recipients would be required to give notice to independent contractors, when they first begin performing services for the service recipient, that explains how they will be classified and the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and hour implications.

The IRS would be permitted to disclose to the Department of Labor information about service recipients whose workers are reclassified.

To ease compliance burdens for independent contractors, independent contractors receiving payments totaling $600 or more in a calendar year from a service recipient would be permitted to require the service recipient to withhold for Federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor. The proposal would be effective upon enactment, but prospective reclassification of those covered by the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for independent contractors with existing written contracts establishing their status.

New Proposed Federal Budget Impacts IRS

Wed, 15 Feb 2012 11:25:39 -0800

REVISED OFFER IN COMPROMISE APPLICATION RULES

I would like to pay particular attention to the president’s recent budget proposals submitted to Congress that directly impact my clients who have IRS tax problems and disputes.

One proposal that would be effective for offers-in-compromise submitted after the date of enactment of the budget by Congress would eliminate the requirements that an initial offer-in-compromise include a nonrefundable payment of any portion of the taxpayer’s offer.

As explained in other blog articles, the offer-in-compromise program is designed to settle cases in which taxpayers have demonstrated an inability to pay the full amount of a tax liability. The program allows the IRS to collect the portion of a tax liability that the taxpayer has the ability to pay.

Current law provides that the IRS may compromise any civil or criminal tax case before a reference to the Department of Justice for prosecution or defense. In 2006, a new provision was enacted to require taxpayers to make nonrefundable payments with any initial offer-in-compromise of a tax case. In the case of an offer-in-compromise involving periodic payments, the initial offer must be accompanied by a nonrefundable payment of the first installment that would be due if the offer were accepted. When the offer involves one lump sum payment, the new provision requires taxpayers to include a nonrefundable payment of 20 percent of the lump-sum with the initial offer.

The president believes that by requiring nonrefundable payments with an offer-in-compromise, access to the offer-in-compromise program may be significantly reduced. Reducing access to the offer-in-compromise program makes it more difficult and costly to obtain the collectable portion of existing tax liabilities.

EXTEND STATUTE OF LIMITATIONS WHERE STATE ADJUSTMENT AFFECTS FEDERAL TAX LIABILITY

In general, additional tax, interest, penalties and additions to tax must be assessed by the IRS within three years after the date a tax return is filed. If an assessment is not made within those three years, the IRS cannot assess or collect additional liabilities at any future time.

Similarly, the statute of limitations with respect to claims for refund expires at the later of three years from the time the return was filed or two years from the time the tax was paid. There are exceptions to the general statute of limitations.

State and local authorities use a variety of statutes of limitations for State and local tax assessments.

Pursuant to an agreement, the IRS and State and local revenue agencies exchange reports of adjustments made through examination so that corresponding adjustments can be made by each taxing authority. In addition, States provide the IRS with reports of potential discrepancies between State returns and Federal returns.

The problem perceived by the current administration is that the general statute of limitations serves as a barrier to the effective use by the IRS of State and local tax adjustment reports when the reports are provided by the State or local revenue agency to the IRS with little time remaining for assessments to be made at the Federal level.

Under the current statute of limitations framework, taxpayers may seek to extend the State statute of limitations or postpone agreement to State proposed adjustments until such time as the Federal statute of limitations expires in order to preclude assessment at the Federal level. In addition, it is not always the case that a taxpayer that files an amended State or local return reporting additional liabilities at the State or local level that also affect Federal tax liability will file an amended return at the Federal level.

The budget proposal would create an additional exception to the general three-year statute of limitations for assessment of Federal tax liability resulting from adjustments to State or local tax liability. The statute of limitations would be extended to the greater of: (1) one year from the date the taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local tax return; or (2) two years from the date the IRS first receives information from the State or local revenue agency under an information sharing agreement in place between the IRS and a State or local revenue agency.

The statute of limitations would be extended only with respect to the increase in Federal tax attributable to the State or local tax adjustment. The statute of limitations would not be further extended if the taxpayer files additional amended returns for the same tax periods as the initial amended return or if the IRS receives additional information from the State or local revenue agency under an information sharing agreement. The statute of limitations on claims for refund would be extended correspondingly so that any overall increase in tax assessed by the IRS as a result of the State or local examination report would take into account agreed-upon tax decreases or reductions attributable to a refund or credit.

The proposal would be effective for returns required to be filed after December 31, 2011.

Have a tax dispute with the IRS? Call Mitchell A. Port at (310) 559-5259 to speak with a tax attorney for help.

Getting The IRS To Pay Your Legal Bills

Tue, 07 Feb 2012 03:38:46 -0800

Internal Revenue Code Section 7430(a) provides that the prevailing party in any administrative or court proceeding may be awarded a judgment for (1) reasonable administrative costs incurred in connection with such an administrative proceeding within the IRS, and (2) reasonable litigation costs incurred in connection with such a court proceeding.

In addition to being the prevailing party, to receive an award of reasonable litigation costs a taxpayer must have exhausted all administrative remedies, shows that the position of the United States is not "substantially justified," and must not have unreasonably protracted the court proceeding.

Section 7430(c)(4)(B)(i) makes it clear that the IRS bears the burden of proving that its position was “substantially justified” (i.e., the IRS’s position has a reasonable basis in both fact and law and is justified to a degree that could satisfy a reasonable person). "Reasonable litigation costs" include reasonable court costs, expert witness fees, the cost of any study, analysis or project which is determined by the court to be necessary for the preparation of a taxpayer's case, and reasonable attorneys' fees. IRC Section 7430(c)(1). The amount of reasonable attorneys' fees are limited. For an interesting Tax Court case deciding against the Internal Revenue Service and awarding fees to the taxpayer’s attorney, read Arthur Dalton, Jr. and Beverly Dalton, Petitioners vs. Commissioner Of Internal Revenue, Respondent.

I found a handy chart that may help determine whether your attorney's fees will be paid.

Do you qualify to have your attorney’s fees paid by the Internal Revenue Service? A tax litigation attorney can help. Call Mitchell A. Port at (310) 559-5259 to discuss it.

Late Filing Tax Penalties

Mon, 30 Jan 2012 04:07:00 -0800

For 2012, no late filing penalties apply when missing the April 15 tax filing deadline. That's because for this year, the federal tax filing deadline is April 17. Since April 15 falls on a Sunday, the deadline is moved to the following Monday; but because Monday is Emancipation Day in Washington, D.C., the filing deadline is moved to the following Tuesday, April 17. Here's an explanation from the IRS in one of it's "tax tips".

Help from a tax litigation attorney is at hand. Call Mitchell A. Port at (310) 559-5259.

New Guidelines For Innocent Spouse Relief

Fri, 27 Jan 2012 04:02:36 -0800

Right after the New Year, the Internal Revenue Service released new proposed guidelines designed to provide relief to more innocent spouses requesting equitable relief from income tax liability. In an earlier blog post, other rule changes were discussed.

A Notice proposing a new revenue procedure revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests.

"The IRS is significantly changing the way we determine innocent spouse relief," said IRS Commissioner Doug Shulman. "These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”

This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

Need help? Call a qualified tax litigation attorney at (310) 559-5259.

Pennies On The Dollar - NOT!

Wed, 18 Jan 2012 03:26:48 -0800

JK Harris & Co. - "the nation's largest tax representation firm" - is in bankruptcy. It may stop trying to restructure its business to liquidating its business instead.

This case shows how hard it can be to settle tax disputes for “pennies on the dollar”. JK Harris advertised that it could resolve people's tax debts for "pennies on the dollar." It appears that it had its own problems: the cost of large settlements related to multiple claims that it misled consumers. In many cases, attorneys general complained that the company told consumers it could resolve their tax problems, and took their payments, when no such relief was possible for those particular clients.

Its own employees have now become creditors for unpaid wages. No doubt it has payroll tax problems with the Internal Revenue Service because if it didn’t pay wages, it probably didn’t pay payroll taxes. It probably won’t qualify for a settlement involving pennies on the dollar.

Company founder and Chief Executive Officer John K. Harris will likely be assessed by the IRS for all the unpaid trust fund taxes owed to the government if any are due and he's found to be both willful and responsible for nonpayment. His personal assets will probably be subject to tax claims made by the Internal Revenue Service.

Work with a reliable attorney to resolve your tax problems. Call Mitchell A. Port at (310) 559-5259.

Offshore Voluntary Disclosure Program Reopens

Fri, 13 Jan 2012 04:09:07 -0800

As of this past Monday, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

Two New Types of Corporations In California

Mon, 09 Jan 2012 03:55:21 -0800

California became the seventh state to adopt two new subtypes of stock corporations — a “flexible purpose corporation” and a “benefit corporation" as of January 1, 2012. Now, investors and entrepreneurs can pursue both social and economic objectives allowed by the new corporation subtypes. These two types of new entities may sound like marketing hype but they help shield them against lawsuits brought by shareholders who say that company do-gooding has diluted the value of their stock.

The new stock corporation subtypes differ from traditional for profit corporations that are organized to pursue profit and nonprofit corporations that must be used solely to promote social benefits.

Entrepreneurs who wanted to incorporate social causes or green initiatives often had to become non-profits which limited their ability to raise venture capital.

Approval from 2/3 of a company’s outstanding shareholders is needed to become a benefit corporation. A similar vote is needed to return to the traditional type of corporation.

The Articles of Incorporation for a benefit corporation must include the following additional statement: “This corporation is a benefit corporation.” The Articles of Incorporation for a benefit corporation may identify one or more specific public benefits that shall be the purpose or purposes of the benefit corporation. For complete legal authority, look at California Corporations Code sections 14600-14631.

For a flexible purpose corporation, the Articles of Incorporation must include one of the purpose statements required by California Corporations Code section 2602(b)(1), as well as a statement that a purpose of the flexible purpose corporation is to engage in one or more of the specific purposes provided in California Corporation Code section 2602(b)(2). For complete legal authority, look at California Corporations Code sections 2500-3503.

To help form one of these two new corporations, call business attorney Mitchell A. Port at (310) 559-5259.