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Can you imagine waiting for your tax refund – and it never arrives?
Not because you don’t deserve it or the IRS didn’t send it, but because your tax preparer substituted his bank routing number for yours after you signed the form.
And then, worse news, the IRS doesn’t reimburse you for your loss.
That scenario has happened to hundreds of taxpayers who made the mistake of trusting unscrupulous, uncredentialed preparers.
But preparer fraud victims are at the back of the line when it comes to getting a refund from an IRS barraged with hundreds of thousands of identity theft cases it is processing.
In fact, the IRS has generally declined to issue refunds to victims of preparer fraud at all, according to National Taxpayer Advocate Nina Olson.
“The IRS has consistently dragged its heels, making one excuse after another, because providing relief to these victims just is not a high enough priority, or more disturbingly, because the IRS simply does not want to provide relief,” says Olson in the report she submitted to Congress and the IRS entitled “Areas of Focus, Return Preparer Fraud: A Sad Story.”
Between 2000 and 2011, the IRS Office of Chief Counsel issued four opinions and other guidance authorizing the IRS to issue replacement refunds to the victims of tax preparer fraud.
But no refunds have been issued by the IRS, Olson said.
Some victims have been waiting since 2008 to be reimbursed, the advocate’s office reports.
One section of the new Taxpayer Bill of Rights adopted recently by the IRS states, “Taxpayers have the right to expect appropriate action will be taken against employees, return preparers and others who wrongfully use or disclose taxpayer return information.
“Nowhere has the IRS failed to abide by the Taxpayer Bill of Rights more than with respect to the issue of return preparer refund fraud,” Olson said.
Olson’s report said IRS Commissioner John A. Koskinen decided in March that the IRS would issue refunds to victims who have filed police reports and met certain other substantiation requirements. To date, the IRS hasn’t implemented that decision or given a date for victims to expect refunds, Olson said.
To help prevent future fraud, Olson reiterated her longstanding recommendation that a meaningful preparer standards program must contain four components:
A Pennsylvania professor was fined $10,000 by the Tax Court on July 31 for repeated frivolous arguments about deductions on his tax returns.
Alvin Kanofsky, a physics professor at Lehigh University since 1967, was continuing to protest a federal tax lien for unpaid taxes for 1996, 1997, 1998 and 2000.
Kanofsky was ordered to pay the taxes in a 2006 Tax Court Memorandum decision, which was reaffirmed on appeal in 2008. He reappeared again before the court in the subsequent levy case in 2010. Three attempts by Kanofsky to have the case heard by the Supreme Court were denied. In February of this year, the IRS requested a summary judgment because payment hadn’t been received and asked for a penalty to be imposed.
The unpaid taxes concerned Schedule C deductions that Kanofsky claimed had offset any tax liability for the years in question. The tax deficiency in this case totaled over $41,000, not including penalties.
At issue was a building he owned near Lehigh University, which he said he used for business purposes. Expenses he claimed included building repairs, mortgages and interest. He said all of his materials in the building had to be cleared out because he “ran into a worldwide scam.”
Many of the documents Kanofsky tried to show the court to support his claim were not admitted because of IRS objections. His appeals were based on what he called the Tax Court and IRS unfairly “suppressing” important information in the case. Kanofsky said that he and his late brother were whistleblowers in a number of instances of fraud and that he has been subjected to retaliation because of the whistleblowing.
Earlier Kanofsky had filed suit related to taxes due for 2006 and 2007, of $26,033 and $45,433 respectively, which the U.S. Court of Appeals for the Third Circuit in 2013 agreed were owed to the IRS. The court held that “neither the Tax Court nor the IRS improperly obstructed petitioner’s presentation of evidence” and “allegations of fraud and corruption and his assertion of ‘whistleblower’ status were irrelevant to the merits of his case.”
“He did not explain to the Tax Court, and does not explain now, how events as disparate as the Sandusky prosecution or alleged corruption related to the Barnes Foundation have any bearing on his tax liability,” the Court of Appeals further stated.
In its summary decision on July 31, 2014, the Tax Court said, “Petitioner is no stranger to this court. He was warned in prior proceedings that his conduct could subject him to a penalty if he continued to repeat arguments he made in earlier cases.
“He has returned for a fourth time to this court, once again raising his arguments about fraud, corruption and whistleblowing activities. … He has repeatedly asserted irrelevant and meritless arguments. He designed his petition to delay the collection of the income taxes he owes.”In rendering its decision, the Tax Court said it has unequivocally warned taxpayers about abusing procedural protections by pursuing frivolous actions for the purpose of delaying payment.
“Petitioner is a well-educated individual who admits that he understood cautions and warnings given by the court, yet he continues to reiterate the same irrelevant and groundless arguments. He has wasted the time and resources of both the [IRS] and the court.”
The court warned Kanofsky that additional penalties would be applied if he continued to raise “irrelevant, frivolous and groundless arguments or institutes or maintains further proceedings in this court to delay the payment of federal income tax lawfully assessed against him” (Alvin Sheldon Kanofsky v. Commissioner, T.C. Memo 2014-153, July 31, 2014).
©2014 CPAmericaInternational
Taxpayers do have rights. It may not always seem so, but they do.
In fact, there is even a national taxpayer advocate named Nina Olson who works inside the IRS building and does what her title implies – she advocates for the taxpayer.
Olson’s office has been pushing for a Taxpayer Bill of Rights for some time, and the IRS formally adopted one this summer.
The list of 10 taxpayer rights brings together dozens of existing rights into a clear, accessible format that Americans can easily understand, according to the IRS.
There is now a special section on the IRS website highlighting the 10 taxpayer rights. While the bill of rights currently has no enforcement mechanisms, Olson says articulating the rights of taxpayers brings into focus areas where there are “gaps between rights and remedies.”
Here is your Taxpayer Bill of Rights:
1. The Right to Be Informed
Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.
2. The Right to Quality Service
Taxpayers have the right to receive prompt, courteous and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
3. The Right to Pay No More than the Correct Amount of Tax
Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.
4. The Right to Challenge the IRS’s Position and Be Heard
Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.
5. The Right to Appeal an IRS Decision in an Independent Forum
Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.
6. The Right to Finality
Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
7. The Right to Privacy
Taxpayers have the right to expect that any IRS inquiry, examination or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search-and-seizure protections and will provide, where applicable, a collection due process hearing.
8. The Right to Confidentiality
Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers and others who wrongfully use or disclose taxpayer return information.
9. The Right to Retain Representation
Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.
10. The Right to a Fair and Just Tax System
Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.
U.S. income tax is basically pay as you go. As you earn income during the year, you’re expected to pay your taxes on it – or you’ll be penalized.
You may pay taxes in basically two ways:
➤ Through withholding from your paycheck
➤ By making estimated payments if your withheld tax is insufficient
Those needing to make estimated payments are self-employed individuals who run their own businesses or professionals in business for themselves, as well as investors and retirees who receive interest or gains, among others.
For 2014, estimated tax deadlines for individuals are April 15, June 15 and Sept. 15, 2014, and Jan. 15, 2015. The January payment may be skipped without penalty if you file your 2014 tax return and pay all taxes due by Feb. 2, 2015.
If you do not pay enough tax throughout the year, penalties may apply. But with proper planning, the penalties are avoidable.
You won’t be penalized if you owe less than $1,000 in taxes after subtracting withholding and credits. You also won’t be penalized if you pay at least 90 percent of the tax you owe for the current year, or 100 percent of the tax shown on your tax return from the prior year.
If adjusted gross income for 2013 was more than $150,000 for married taxpayers, 110 percent of the 2013 tax liability must be paid for 2014, or there will be a penalty.
There are special rules for farmers and fishermen. If two-thirds of income comes from farming or fishing, only 66 2/3 percent of the current-year tax owed is payable in one installment due Jan. 15.
In general, your estimated tax payments should be made in four equal amounts to avoid a penalty. But if your income is received unevenly during the year, annualizing your payments and making unequal payments may enable you to eliminate or lower your penalty.
If it appears that you will be subject to an underpayment penalty, you may be able to reduce or eliminate the penalty by initiating or increasing your quarterly estimated tax payments or by adjusting your withholdings.
A quirk in the penalty rules treats withheld taxes – even those withheld late in the year – as if they had been taken evenly throughout the year. So, if you’re employed, instructing your employer to withhold more from your pay can even eliminate penalties that accrued earlier in the year.
While most people want to avoid unnecessary penalties, it is seldom a good idea to pay more than the law requires or to pay your taxes earlier than necessary. Why let the government hold your money only to return it to you next year as a tax refund – with no interest?
Your goal should be to pay just enough to avoid an underpayment penalty but not so much as to create a large refund. Consult with your tax adviser to optimize your tax payments to avoid penalties.
©2014 CPAmerica International
Final IRS regulations make permanent, and expand the scope of, proposed regulations that allow the use of truncated, or shortened, taxpayer identification numbers on payee statements and certain other documents.
A truncated taxpayer identification number (TTIN) displays only the last four digits of a taxpayer identifying number and uses asterisks or X’s for the first five digits.
Because of concerns about identity theft, the IRS has run a pilot program allowing filers of certain information returns to truncate an individual payee’s Social Security number (SSN) or other nine-digit identifying number on paper payee statements if the filers met certain requirements. The pilot program was not available for any information return filed with the IRS, any payee statement furnished electronically, or any payee statement that was not in the Form 1098, Form 1099 or Form 5498 series.
Last year, the IRS published proposed reliance regulations that established the TTIN and set forth guidelines for its use. The scope of the proposed regulations mirrored that of the pilot program with one exception: The proposed regulations permitted use of a TTIN on electronic payee statements in addition to paper payee statements.
The IRS has now issued final regulations that expand the circumstances under which taxpayers may use TTINs. Specifically, the final regulations permit truncation of an employer identification number (EIN).
The final regulations permit use of a truncated taxpayer identification number on any federal tax-related payee statement or other document required to be furnished to another person except:
➤ Where prohibited by statute, regulation or other guidance published in the Internal Revenue Bulletin, form or instructions;
➤ Where a statute, regulation, other guidance published in the Internal Revenue Bulletin, instructions or form specifically requires use of a Social Security number, individual tax identification number, adoption identification number or employer identification number; or
➤ On any return or statement required to be filed with, or furnished to, the IRS.
A person may not truncate its own taxpayer identification number on any tax form, statement or other document that taxpayer furnishes to another person. For example, an employer may not truncate its EIN on a Form W-2, Wage and Tax Statement, that the employer furnishes to an employee.
The final regulations became effective July 15, 2014. The amendments to the specific information reporting regulations are effective for payee statements due after Dec. 31, 2014.
©2014 CPAmerica International
A business owner who advanced funds to a new employee was not entitled to deduct as a business bad debt either the funds that he knowingly advanced or the funds that the employee misappropriated from the business, the Tax Court determined recently.
Ronald Dickinson was a self-employed consultant. He hired Terry DuPont, a former employee, to work for him again in a new consulting business. Dickinson was aware that DuPont had financial obligations to his former spouse and to his children and was experiencing financial problems as a result.
Dickinson sent DuPont a letter stating, essentially, that he would informally lend him money until DuPont was generating his own commissions. Ultimately, Dickinson wrote several checks to DuPont.
There was no promissory note or similar document evidencing the loans or stating that DuPont was obligated to repay. Dickinson neither charged interest nor provided a fixed repayment schedule, and DuPont did not offer any collateral.
After DuPont started working for Dickinson, he withdrew funds that he was not authorized to withdraw from one or more bank accounts over which he and Dickinson had signatory authority. DuPont also deposited certain funds that he was not authorized to deposit into one or more of his own bank accounts.
Dickinson later filed a complaint against DuPont in the state court alleging that DuPont had requested, and Dickinson had advanced to DuPont, funds totaling approximately $33,000 as loans that DuPont was obligated to repay. In his answer and counterclaim, DuPont admitted that Dickinson “did on occasion write checks payable” to DuPont but disputed the amount. DuPont also admitted that the funds were advanced at his request and constituted loans that he was obligated to repay.
The lawsuit was ultimately dismissed by the state court.
Dickinson claimed a business bad debt deduction of $32,550. He attached a letter to the return with his description of what had occurred. The IRS disallowed the deduction because Dickinson failed to show “that any amount was incurred for a bona fide debt which became worthless during the year.”
The Tax Court agreed with the IRS that Dickenson failed to prove that the arrangement constituted a bona fide loan, noting among other things the absence of any objective characteristics of a loan, such as interest or a debt instrument. The court also found that Dickenson did not have a reasonable expectation of recovering any portion of the funds at the time they were advanced because of DuPont’s known financial problems (Ronald R. and Shirley F. Dickenson v. Commissioner, TC Memo 2014-136, July 10, 2014).
©2014 CPAmerica International
A new partnership formed because of a “technical termination” must continue amortizing any startup and organizational expenses over the remaining portion of the amortization period adopted by the terminating partnership, according to final regulations issued by the IRS.
A “technical termination” occurs if a partnership is terminated by a sale or an exchange of a 50-percent-or-greater interest. The partnership is deemed to contribute all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership.
Immediately afterwards, the terminated partnership – in liquidation of that partnership – is deemed to distribute interests in the new partnership to the purchasing partner and other remaining partners in proportion to their respective interests in the terminated partnership.
The final regulations apply to technical terminations occurring on or after Dec. 9, 2013.
A partnership is considered to terminate only if:
➤ No part of any business, financial operation or venture of the partnership continues to be carried on by any of its partners in a partnership; or
➤ There is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period.
The IRS has become aware that some taxpayers were taking the position that a technical termination entitled a partnership to deduct unamortized startup and organizational expenses. The IRS believes this result is contrary to congressional intent.
Under the final regulations, a new partnership formed as a result of a sale or an exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period must continue amortizing the startup and organization expenses over the remaining portion of the amortization period adopted by the terminating partnership.
©2014 CPAmerica International
Most husbands and wives name their spouse as the primary beneficiary of their IRA. What does a surviving spouse need to consider as the beneficiary?
Like any other beneficiary of a decedent’s IRA, a surviving spouse can receive a distribution as a beneficiary. But a surviving spouse who is the sole beneficiary of the decedent’s IRA has two additional favorable options that are not available to other beneficiaries.
The surviving spouse may:
➤ Elect to treat the decedent’s IRA as the surviving spouse’s own IRA; or
➤ Roll over the decedent’s IRA into an IRA established in the spouse’s name.
In either case, the surviving spouse is treated as if he or she had funded the IRA.
Making the spousal election or rollover has three major advantages:
1. Required distributions may be delayed. With the rollover or the election, required distributions must begin no later than April 1 of the year following the year in which the surviving spouse attains age 70½.
By comparison, if the IRA remains in the decedent’s name and the decedent’s death occurred:
➤ Before lifetime distributions commenced, then lifetime distributions to the spouse generally must begin by the later of (1) Dec. 31 of the year following the year in which the decedent died, or (2) Dec. 31 of the year in which the decedent would have attained age 70½ had he or she lived.
➤ After required distributions began, payouts to the spouse-beneficiary must begin in the year following the IRA owner’s death.
Thus, a surviving spouse who is younger than the decedent can defer the start of the payout period by making the rollover or electing to treat the decedent’s IRA as the spouse’s own IRA.
2. Distribution period may be extended. Normally, a beneficiary’s required minimum distribution (RMD) is based on that beneficiary’s single life expectancy. With a spousal rollover or an election, the IRA is treated as if the surviving spouse had funded it. In that case, the spouse can take RMDs using the favorable Uniform Lifetime Table, which is based on the joint life expectancy of the spouse and a hypothetical 10-years-younger beneficiary. Note that a separate lifetime distribution table applies if the spouse was more than 10 years younger than the IRA owner.
3. Surviving spouse can name own beneficiaries. By naming new, younger beneficiaries after the rollover or the election, the surviving spouse may be able to extend the IRA payout period. Otherwise, when the surviving spouse dies, the balance remaining in the first decedent’s IRA will be distributed over what remains of the payout period that applied when the surviving spouse began receiving RMDs.
There is a potential tax issue for surviving spouses who are under age 59½. Once the spouse elects to roll over the decedent’s IRA into the spouse’s own IRA, pre-age-59½ withdrawals from that IRA generally will be subject to the 10 percent early distribution penalty tax on top of regular income taxes – unless an exception applies.
To avoid this problem, the surviving spouse could keep the entire IRA balance in the decedent’s name until the spouse reaches age 59½. Any withdrawals before that age will be penalty-tax-free. The regulations provide that a surviving spouse-beneficiary’s election can be made “any time after the individual’s date of death.”
©2014 CPAmerica International
The IRS has issued final regulations on the tax credit available to certain small-business employers that offer health insurance coverage to their employees (TD 9672).
An eligible small employer (ESE) is an employer that has no more than 25 full-time equivalent employees (FTEs) employed during its tax year and whose employees have annual full-time equivalent wages that average no more than $50,800 for 2014.
However, the full credit is available only to an employer that has 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,400 for 2014. Beginning in 2014, the maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers.
To be eligible for the credit, the eligible small employers must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement. The credit is available to eligible employers for two consecutive taxable years.
In addition, credit eligibility depends on the employer’s covering at least 50 percent of the cost of employee-only (not family or dependent) healthcare coverage for each employee. Coverage must be purchased through the SHOP Marketplace, or the ESE must qualify for an exception to this requirement.
©2014 CPAmerica International
A business exercising an option to buy property that it was already leasing may deduct a portion of the amount tendered in the transaction as a lease termination payment, the Court of Appeals for the Sixth Circuit ruled, affirming an earlier district court decision.
The court rejected the IRS’s argument that the entire amount had to be capitalized as part of the purchase price of the property (ABC Beverage Corporation v. U.S., CA 6, June 13, 2014).
In 1987, Corporate Property Associates (the landlord) leased a building to ABC Beverage Corporation. The initial lease period lasted 25 years and provided for five successive five-year renewal options.
The lease contained a clause allowing ABC the option to purchase the property. On Dec. 10, 1996, ABC notified the landlord that it was exercising its purchase option. However, the parties could not agree on the purchase price.
Three appraisals obtained by ABC determined a fair market value (FMV) of $2.75 million. The landlord’s appraisals indicated a FMV of $14.1 million, including the value of the unexpired lease.
The parties remained at an impasse. On Oct. 2, 1997, the landlord notified ABC that it was exercising its remedies under the lease and requested that ABC make an offer to purchase the property.
In January 1999, the parties entered into an agreement in which they agreed that the FMV of the property would be no less than $9 million and no greater than $11.5 million. Later in 1999, they agreed on a purchase price of $11 million.
On its 1997 tax return, ABC claimed a deduction for $6.25 million as a lease termination expense and capitalized the property for $2.75 million. ABC apparently based the deduction on its calculation that the minimum it would have to pay to acquire the property was $9 million. Using the minimum purchase price and subtracting the appraisals it had obtained for the property, ABC concluded that the cost of buying out the lease was $6.25 million.
In 2005, the IRS assessed an income tax deficiency against ABC. The dispute over the lease termination payment deduction wound up in district court.
In the original district court proceeding, the IRS argued that ABC could not claim any of the cost of terminating the leasehold as a business expense. Alternatively, it argued that, if a deduction was allowable, the proper year for the deduction was 1999, not 1997.
The district court held that ABC was entitled to claim as a business expense the cost associated with buying out an onerous lease. However, it put off deciding on the proper year for the deduction. In a subsequent proceeding, a jury agreed that 1997 was the proper year for the deduction.
Now the Sixth Circuit has agreed with the district court. In reaching its conclusion, the court upheld its earlier decision in Cleveland Allerton Hotel v. Commissioner and rejected the Tax Court’s decision in Union Carbide Foreign Sales Corp. v. Commissioner. The ABC Beverage case may not be the last word on this topic.
©2014 CPAmerica International
