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The Taxpayer Bill of Rights

 

On June 10, 2014, the IRS implemented the Taxpayer Bill of Rights. In an effort to make it easier for taxpayers to understand and access their rights when dealing with the IRS, this Taxpayer Bill of Rights arranges the numerous existing rights established in the Internal Revenue Code into ten basic rights. These rights include:

  1. The right to be informed – This gives taxpayers the right to be aware of and understand what is required of them to comply with the tax laws. This right also entitles taxpayers to be notified of any determinations the IRS has made regarding their tax accounts and how those determinations were made.
  2. The right to quality service – This right entitles taxpayers to be treated in a timely, polite, and professional manner when dealing with the IRS. Furthermore, it allows taxpayers to speak with supervisors if they have experienced incompetent service.
  3. The right to pay no more than the correct amount of tax – Taxpayers must pay only the amount of tax legally due, which may or may not include interest and penalties.
  4. The right to challenge the IRS’s position and be heard – When the IRS initiates actions against taxpayers, this right entitles taxpayers to object and present further documentation in support of their positions; expect that their objections will be taken into account swiftly and impartially; and to be informed of the IRS’s decision and its underlying reasons.
  5. The right to appeal an IRS decision in an independent forum – Taxpayers have the right to an unbiased appeal of most IRS decisions, including several penalties, and to be informed of the Office of Appeals’ decision.
  6. The right to finality – This right entitles taxpayers to know the time frames regarding how much time they have to dispute the IRS’s decisions as well as how much time the IRS has to audit a specific tax year or collect a tax debt. This right also includes informing the taxpayer when an audit has been completed by the IRS.
  7. The right to privacy – When conducting an inquiry, examination, or any other enforcement action against a taxpayer, the IRS must comply with the law and conduct itself in a way that is no more intrusive than necessary. In addition, it must ensure that it does not violate any of the taxpayer’s due process rights.
  8. The right confidentiality – The IRS may not reveal any information provided by taxpayers unless permitted by law or the taxpayers themselves. This right also allows taxpayers to expect that action will be taken against those employees who violate this right.
  9. The right to retain representation – Taxpayers have the right to employ a permitted representative when dealing with the IRS. If they cannot afford one, taxpayers have the right to seek help from a low income taxpayer clinic.
  10. The right to a fair and just tax system – This right permits taxpayers to expect that the facts and circumstances surrounding their liabilities, abilities to pay, or abilities to supply information in a timely manner will be taken into account by the tax system. This right also entitles taxpayers to obtain help from the Taxpayer Advocate Service if they are experiencing financial difficulties.

Initially, the Taxpayer Bill of Rights was only released in English and Spanish. However, in August, to reach as many taxpayers as possible, the IRS published it in four additional languages: Chinese, Korean, Russian, and Vietnamese. The Taxpayer Bill of Rights has also been included in IRS Publication 1, Your Rights as a Taxpayer, which is sent to countless taxpayers across the nation with various IRS notices. Only time will tell whether or not this new Taxpayer Bill of Rights will fulfill the IRS’s mission, which is to “Provide America’s taxpayer’s top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.”

 

 

 

Taxpayers may deduct from their gross income certain interest they pay on a qualified education loan, according to Section 221 of the Internal Revenue Code.

This deduction is known as an “above the line” deduction because it is a deduction on page one of your tax return. You do not have to file a Schedule A and itemize your deductions to claim this one.

You need to meet the criteria to claim this deduction. One requirement is that you be the taxpayer who has a legal obligation to make interest payments on the loan.

The person whose name is on the promissory note has the legal obligation.

For example, if your parents paid your student loan payments for you, they would not be entitled to a deduction on their tax return because they do not have a legal obligation to make student loan payments. Their dependent child does.

Another criterion is that you cannot be claimed as a dependent by another person. Otherwise, the student loan interest deduction will be disallowed. You must be an independent taxpayer to claim this deduction.

Some criteria apply to married taxpayers. To claim the student loan interest deduction, the married taxpayers need to file a joint tax return. If they file married filing separately, they receive no deduction.

If a third party makes student loan payments on behalf of a taxpayer who is legally obligated to make the payment, the taxpayer is treated as having made the payment. The taxpayer is allowed the student loan interest deduction.

The theory behind this is that the third party has made a gift to the taxpayer. The taxpayer then used that gift to make the student loan payment. Therefore, the taxpayer receives the deduction.

The maximum amount of the deduction is $2,500 regardless of your filing status. Single taxpayers and married taxpayers filing a joint return have the same ceiling on the amount of student loan interest they can deduct.

There are also some income limitations regarding the deduction. For 2014, single taxpayers with modified adjusted gross income in excess of $80,000 and married taxpayers filing jointly with modified adjusted gross income over $160,000 are not eligible for the deduction.

©2014 CPAmerica International

 

Douglas and Renitta Lundy are a married couple who failed to distinguish between disability payments that are excludable from income and the income that such payments may produce when they are invested.

In 2005, the Lundys had a dispute with the IRS regarding their 2005 Form 1040 return. The IRS was treating $42,181 of retirement income, which had been reported on a Form 1099-R, as taxable income.

The Lundys were treating that amount of money as nontaxable. Their position was that the money represented disability retirement benefits, which were fully exempted from taxes.

The Lundys ended up winning the case and did not have to pay income taxes on the $42,181 received as the result of a disability.

Fast-forward a few years to the timely filing of the Lundys’ 2011 Form 1040 return. They filed a joint return as in previous years. Mr. Lundy had wages of $11,983.

Mrs. Lundy had net self-employment income of $19,326. A Schedule C was attached regarding the self-employment income.

The 2011 return showed a total amount of $3,536 in income taxes due. This amount consisted of $1,093 in regular income tax, $2,374 in self-employment tax and an estimated tax penalty amount of $69.

The Lundys did not make any estimated income tax payments nor did they have any money withheld from Mr. Lundy’s wages.

No payment was enclosed when the tax return was submitted, so the Lundys made no tax payments at all for tax year 2011.

For a number of months, the taxpayers and the IRS went back and forth on the issue of whether any of this income was taxable in 2011. The two parties exchanged letters and various correspondences.

Finally in April 2013, the IRS sent out a form called a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing.” This is the final step the IRS takes

before it levies bank accounts. The notice was sent out regarding the unpaid 2011 income taxes. The Lundys followed up on this notice with a Form 12153, “Request for a Collection Due Process or Equivalent Hearing.”

In addition, they attached a letter to the form. Their letter stated that whatever income they had derived by investing their original tax-exempt disability benefits would also be nontaxable to them. They were adamant about their opinion.

The facts in this case were not in dispute. The Lundys felt that they did not owe any income tax on the wages or the self-employment income.

Their defense was that nontaxable disability income was the seed money that started the Schedule C business and therefore any income earned from the Schedule C

business should be nontaxable as well. They didn’t address why they felt that Mr. Lundy’s wages should be nontaxable.

Internal Revenue Code Section 61(a) provides that gross income means all income from whatever source derived. This includes compensation for services and income derived from business. Exclusions from income are construed narrowly, and taxpayers must bring themselves within the clear scope of the exclusion.

Because they did not have an applicable exclusion, Mr. Lundy’s wage income and Mrs. Lundy’s net business income are included in gross income (Douglas W. Lundy and Renitta H. Lundy v. Commissioner, U.S. Tax Court, TC Memo, 2014-209, TCM, Oct. 8, 2014).

The Lundys’ disability income from tax year 2005 was nontaxable. Any income earned from that money, which was invested in business assets, is not. The Lundys learned this the hard way. They ended up owing the IRS the $3,536, plus additional interest and penalties.

©2014 CPAmerica International

 

Gerald Wayne Wheeler and the IRS seemed to be playing a game of “Who’s the True Earner?” – and Wheeler lost.

The U.S. Tax Court recently settled sales proceeds, inventory basis, rental payment and income questions raised by the IRS in Gerald Wayne Wheeler v. Commissioner, U.S. Tax Court, T.C. Memo 2014-204.

In this case, Wheeler had owned Specific Enterprises, an S corporation. The company was a cabinet door business during the late 1980s through 2002.

Specific Enterprises was operated at a commercial building, which Wheeler owned. During 2002, the business was liquidated and closed. The business assets were equipment and inventory.

A separate entity called Cabinet Door Shop, LLC, was now operating out of the commercial building owned by Wheeler. Cabinet Door Shop was managed by one of Wheeler’s three daughters. The assets of Cabinet Door Shop were the equipment and inventory originally owned by Specific Enterprises.

Wheeler received the assets of Specific Enterprises in liquidation. He held those assets personally.

Wheeler created a trust called RCC Capital Group. Wheeler transferred ownership of the assets and inventory received from Specific Enterprises to RCC. He also transferred ownership of his commercial building and land to RCC.

RCC exchanged two promissory notes valued at a total of $1.65 million in consideration of the assets, inventory, land and commercial building received. RCC then leased these assets to Cabinet Door Shop.

Wheeler drafted the rental agreement and determined the amount of the rental payments. The contract was for two years starting in January 2003 and running through the end of December 2004. The representatives of RCC and Cabinet Door Shop were not involved in the contract negotiations.

Cabinet Door Shop made rental payments to RCC of $273,000 for 2003 and $126,000 for 2004. RCC did not exercise its right to buy the building from Wheeler until March 2004.

After receiving the rental payments from Cabinet Door Shop, RCC turned around and remitted exactly the same amounts to Wheeler. So, Wheeler received $273,000 and $126,000 for 2003 and 2004, respectively.

In a separate deal between Wheeler and Cabinet Door Shop, inventory was sold to Cabinet Door Shop in the amount of $80,798.

Cabinet Door Shop ceased rental payments to RCC in June 2004. RCC in turn stopped paying Wheeler. Wheeler stated that the remaining payments owed to him by RCC were a gift to RCC.

Wheeler failed to file 1040 returns for 2003 and 2004. The IRS prepared those returns on his behalf.

The first issue that the U.S. Tax Court addressed was the sale of the inventory between Wheeler and Cabinet Door Shop. Wheeler’s position was that, because his basis in the inventory exceeded the sales price of the inventory, he had no income from the transaction.

Wheeler was unable to prove the amount of his cost or basis in his inventory. The information Wheeler provided the IRS was deemed not sufficient to establish his basis, so it was disregarded.

If the taxpayer provides some reasonable evidentiary basis, the court can estimate the basis.

Wheeler did not provide any facts or details that permitted the court to estimate the basis of his inventory. Therefore, the court ruled that the inventory had no basis, and the entire sales proceeds amount of $80,798 was included in income.

The second issue that the Tax Court addressed was regarding the sale of the land, building and equipment to RCC. The court held that this was a sham transaction. The “true earner” of income is the person or entity that controls the earning of such income – not necessarily the entity that receives it.

Wheeler is the true earner of the income for three reasons:

1. Wheeler personally owned the assets that were being rented to Cabinet Door Shop – at least he did for the first 14 months of the lease. The assets were not transferred to RCC until March 15, 2004. The lease with Cabinet Door Shop started in January 2003.

2. RCC was merely a conduit for the income. RCC received the rental payments from Cabinet Door Shop and sent that exact same amount to Wheeler.

3. There was no separation of trust administration from the operation of Cabinet Door Shop. In essence, Wheeler maintained control over RCC even though he didn’t technically own it. This was evidenced by the fact that Wheeler negotiated and set the price for the asset lease between RCC and Cabinet Door Shop. Wheeler also convinced RCC not to file any trust tax returns for the applicable time period.

For these three reasons, the court concluded that the rental payments were actually taxable income to Wheeler, not to RCC.

©2014 CPAmerica International

 

Travel expenses are tax deductible when you’re away on business.

As long as the trip is primarily business in nature, a tax planning element is available. You can spend some of your time for pleasure or personal purposes and still deduct most of your travel expenses.

The main types of travel expenses are travel fares, meals, lodging and expenses incident to travel. Some examples of expenses incident to travel include telephone charges, tips and dry cleaning bills.

As with all business expenses, travel expenses must be ordinary, necessary and reasonable in amount to be deductible.

When taxpayers travel for both business and personal purposes, they must allocate the expenses. If the trip is primarily for business, travel fare is deductible in total, and other various expenses must be allocated between business and personal.

For example, if you take a trip for both business and personal purposes and spend three days on business and two days for pleasure, you would allocate the expenses as follows:

➤ You would be able to deduct 100 percent of the travel fare because the travel is primarily for business.

➤ Your hotel, rental car, and meals and entertainment would be deductible for the amounts spent during the three days of business but not for the two days of pleasure.

➤ The deductible business portion of the meals and entertainment would still be subject to the 50 percent limitation.

However, if your trip is mainly for personal purposes, you will not be able to deduct any of the travel fare, for example, an airline ticket. The hotel, rental car, meals and entertainment are deductible for the business portion of the trip but not for the personal portion.

When your spouse or children accompany you on a business trip, expenses attributable to them are not deductible unless there is a bona fide business purpose. The performance of some minor tasks by your spouse and/or children does not cause these expenses to become deductible business travel expenses. They are still considered personal.

©2014 CPAmerica International

 

In today’s low yield environment, where a five year CD yields 1.5%, publicly traded partnerships (PTPs) have been proliferating. These are companies, usually associated with oil and gas, that are required to distribute their “distributable cash flow” and avoid the double taxation that is inherent to corporations. They usually have yields in excess of 5% with the biggest names in the sector such as Kinder Morgan yielding 6.8%, Energy Transfer Partners 6.7%, Linn Energy 9.4%, and Enbridge Energy Partners 6.6%, just to use a few as examples.

So what is the downfall of these high yields? – Cost. Owners of these PTP’s, no matter how small, receive a K1 for their share of the earnings. Having multiple K1s creates an inordinate of time for tax preparation. On these K1s there is usually ordinary income, interest, capital gains and losses, intangible drilling costs, and alternative minimum tax items that CPA’s have to contend with. And these are just some of the pass-through items.

Recently, Kinder Morgan decided to do away with their complex PTP and combine with their general partner to create a regular C Corporation. They did this to make a simpler structure and reduce their borrowing costs. This disclosure made their stock go up almost 20% in a day. But wait, there is a caveat. Upon this conversion, all holders of KMP units that are to be converted into this new company will have to pay capital gains taxes. This can be a complicated calculation with the distributions received over many years that weren’t taxable combined with income or losses that have accrued that may or may not have been deductible.

For PTPs, as with any investment decision, it is important to weigh the tax consequences and costs. This is an area where CPAs can come in handy; we aren’t here just for April 15!

 

 

If you participate in wagering, or gambling, your taxable gains from those transactions can be reduced by your wagering losses – even if the underlying dealings are illegal.

However, wagering loss deductions are subject to a number of limitations:

➜ These losses can be used to offset winnings only during the same year, and not to offset any other types of income for that year. You may not use losses as a carryback or carryforward to reduce gambling income in earlier or later years.

➜ The losses can be claimed only as itemized deductions unless you are in the trade or business of gambling.

➜ The losses must be verified with adequate documentary evidence or other evidence, other than your personal assertion. The courts have been consistent in the past in ruling against taxpayers who have not kept detailed documentation regarding gambling losses.

If you are gambling at a casino, a good tip to follow is to use a player’s card that casinos hand out to their patrons. This card helps to keep detailed track of your activity on a daily basis. It helps track both your wins and losses.

You can use the card to print out an activity summary. The summary shows both your wins and losses on a daily basis. This is the type of independent third-party documentation that the IRS wants to see.

Losing lottery tickets would be another example of the type of documentation needed to support that gambling loss deduction.

Remember that gambling losses can be used only to offset gambling winnings. But to make sure you receive the gambling loss to which you are entitled, make sure you have adequate documentation.

 

A stiff prison sentence imposed by a district court on an individual convicted of filing a false refund claim and interfering with the administration of internal revenue laws has been upheld by the U.S. Court of Appeals for the Eleventh Circuit.

Taxpayer Donus R. Sroufe had submitted an unsigned Form 1040 return to the Internal Revenue Service for tax year 2008. The return contained fictitious revenue items from various sources, including the United States Department of Treasury. The total amount of income reported was $2.5 million.

Sroufe also listed a number of companies that supposedly had made estimated income tax payments to the IRS on his behalf. Sroufe claimed that such payments totaled more than $2.6 million. The tax return stated that a refund was due in the amount of nearly $1.76 million.

In addition to the tax return, Sroufe submitted a Form 56, Notice Concerning Fiduciary Relationship, listing the Secretary of the Treasury Department as his fiduciary. He also submitted a letter making an odd request of the Commissioner of the IRS to “file the enclosed 2008 Federal Tax Form 1040 along with any forms and/or returns that may be due, including those that may be required for tax years 2006 and 2007.”

The IRS deemed the submission a frivolous tax return and sent it to the Frivolous Return Program (FRP).

A letter from the FRP informed Sroufe that he had taken a frivolous position and had 30 days to file a correct return to avoid a monetary penalty. The FRP viewed Sroufe’s submissions as an attempt to “delay or impede the administration of Federal tax laws.”

In a reply letter to the FRP, Sroufe stated that he had reviewed his 2008 submissions, which he considered proper and correct.

Sroufe later sent another letter to the FRP stating that the original Form 1040 was incorrect and he was in the process of correcting it. He also said that he intended to complete and file his tax returns for 2006, 2007 and 2008. But he never filed returns for 2006 and 2007 – and never amended or corrected his 2008 return.

The result was that Sroufe was indicted by a federal grand jury for interference with administration of internal revenue laws and filing a false claim against the United States for a tax refund. Sroufe pleaded not guilty, and the case proceeded to trial where he was convicted on both counts.

The judge stated that Sroufe had intended to defraud the IRS and had attempted to obtain a $1.7 million tax refund to which he was not entitled. He was sentenced to 51 months in prison on this charge.

In addition, the judge found Sroufe guilty of interference with administration of internal revenue laws because he had submitted fictitious documentation to the IRS in response to various inquiries from the agency. The taxpayer was sentenced to 36 months in prison on this charge (United States of America v. Donus R. Sroufe. U.S. Court of Appeals, Eleventh Circuit, 2014-2 U.S.T.C.).

Both sentences were at the high end of the sentencing guidelines due to the taxpayer’s prior issues with the IRS. The sentences are to run concurrently.

©2014 CPAmerica International

 

In response to the domestic violence case of Ray Rice and other NFL football players, a senator has introduced legislation to end the tax-exempt status of the National Football League as well as a number of other sports leagues.

Sen. Cory Booker, D-N.J., introduced the legislation which, if enacted, would end the tax-exempt status of 10 professional sports leagues, including the NFL, National Hockey League, Professional Golf Association and the U.S. Tennis Association.

Individual teams are taxed, but sports leagues typically file for tax-exempt status under Section 501(c)(6) of the IRS code. Some have held tax-exempt status for decades – the NFL’s tax-exempt status dates back to 1966.

Major League Baseball dropped its nonprofit status in 2007, reportedly in part because it didn’t want to make public large executive salaries. The National Basketball League never had tax-exempt status.

NFL Commissioner Roger Goodell earned a reported $44 million in 2012, according to published reports. The NFL brings in $9 billion a year.

Booker said the act could raise up to $100 million over the next 10 years, which could be used to support domestic violence prevention programs.

Booker is not the only government official trying to end the tax breaks for professional sports leagues. Sen. Tom Coburn, R-Okla., has been pushing to end the tax breaks since 2013.

Coburn wants teams with more than $10 million in annual revenue to lose their exempt status. In addition, he wants a number of leagues organized under 501(c)(6) to have their exempt status revoked.

Sen. Maria Cantwell, D-Wash., has joined the battle, saying she wants the exemption gone because of the NFL’s failure to force Washington to change its name from “Redskins.”

Code Sec. 501(c)(6) status means that these sports leagues do not pay any federal income tax. The code section refers to “business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of a private shareholder or individual.”

It is tough to get lawmakers in cities that have professional sports teams to back this legislation. Because of the interplay between ticket prices, fan loyalty and voting preference, sports fans might not look too kindly on their lawmakers if they help to increase the cost of event ticket prices.

©2014 CPAmerica International

 

The IRS has increased both the high- and low-cost per diem rates.

An employer that pays a per diem allowance in lieu of reimbursing actual expenses that an employee pays or incurs for travel away from home may use the high-low method. Under the high-low method, a high rate applies to areas designated as high-cost localities, and a low rate applies to every other locality within the continental United States.

The federal per diem rates are generally adjusted every Oct. 1. The 2014-2015 special per diem rates, according to IRS Notice 2014-57, have increased as follows:

➜ The high-cost area per diem rates increased from $251 to $259 per day.

➜ The low-cost area per diem rates have increased from $170 to $172 per day.

The IRS publishes a listing of various cities that it considers to be high-rate localities.

If you are away on business in one of these cities, you can use the high-cost per diem rate to reimburse yourself for lodging, meals and incidental expenses.

This rate would be in lieu of reimbursement for your actual expenses. By using the rate, you don’t have to keep a receipt for every single item you purchase.

If you are away on business in a city that is not considered to be a high-rate locality, you would use the low-cost area per diem rates for reimbursement.

Notice 2014-57 provides the new per diem rates and lists any additions or subtractions to the high-cost area list.

The rules and procedures regarding claiming per diem expense deductions are outlined in Rev. Proc. 2011-47. Only the per diem amounts have changed, not the basic rules and procedures.

©2014 CPAmerica International





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