Welcome to TaxMama s Place Home of the. After SUCCESSFUL Collections or Audits What Next? 08/15/11

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1 1 Welcome to TaxMama s Place Home of the After SUCCESSFUL Collections or Audits What Next?

2 2 Table of Contents Meet Your Instructors The end of the audit Closing letters how to read them, and ensuring you get them, and the importance of ensuring you get them Adjustment of tax attributes Amending prior IRS and State returns affected by the settlement Preparing current year returns based on audit results Getting liens released Evaluations and Thanks!

3 Who is Eva Rosenberg MBA, EA Eva Rosenberg, EA, Your TaxMama has been teaching Enrolled Agents Exam review courses off and on since developing the program for UCLA Extension over 15 years ago.

3 3 Who is Eva Rosenberg MBA, EA Eva Rosenberg, EA, Your TaxMama has been teaching Enrolled Agents Exam review courses off and on since developing the program for UCLA Extension over 15 years ago. These days, she s teaching her own course online at Eva has a BA in Accounting and an MBA in International business. Your TaxMama is a TaxWatch columnist for Dow Jones' and author of the ever-popular book, Small Business Taxes Made Easy, published by McGraw-Hill new edition just released! As a speaker, TaxMama is popular with both tax professionals and taxpayers. You can find her at and subscribe to her free daily podcast at

4 Who is Tom Buck, CPA Tom Buck, CPA is a published author, tax coach, teacher And mentor. He has been a licensed CPA since 1971 and has been in private practice since 1982.

The approach Tom takes and that he would like to pass on to you is this: the science of the work is the law and how it should be applied.

4 4 Who is Tom Buck, CPA Tom Buck, CPA is a published author, tax coach, teacher And mentor. He has been a licensed CPA since 1971 and has been in private practice since Tom was chairman of the Nevada Society of CPAs Taxation Committee. Tom has been representing taxpayers and solving IRS problems ever since the landmark Casino employee cases in The approach Tom takes and that he would like to pass on to you is this: the science of the work is the law and how it should be applied. The art is being able to counter any and all IRS measures which are not supported by law. Does the IRS always follow the rules? Of course not, so part of the art is really in forcing the IRS to obey the law. Of course, having the tenacity of a bulldog is often the critical ingredient. In the final analysis, once you determine what the outcome should be, then you must be ready to take any detours necessary to get your client to the finish line. Tom is a willing and helpful teacher and looks forward to sharing his hard-gained knowledge.

5 5 Who is Sonya Wilt, EA Sonya Wilt, BS in Management, EA and entrepreneur. A graduate of Upper Iowa University, Fayette, and former student of Eva Rosenberg s Enrolled Agent Review Course, Sonya also has an extensive background in management and accounting, small business consulting, and employee training Sonya s desire to stay on top of the changes in tax law is two-fold: 1) 2) To make sure her investments and entities are taking advantage of every legal tax deduction available with adequate documentation, and 2) To provide our clients with accurate information so they may make solid decisions in both resolving current tax issues and legally protecting their future earnings. Sonya and her partner, Tom Buck, CPA aggressively represent clients before state and federal taxing authorities through audits, appeals and collections.

6 The End of and Audit 6 A perfect audit = No Change Whatsoever A good audit = No Change to the tax due, but there are underlying changes that affect carryovers An acceptable audit = Additional tax up to $500 - $1,000 A bearable audit = There s a balance due, but you expected it from the beginning and prepared your client for it. A bad audit = Results you didn t prepare your client for! We won t be talking about this.

7 IRS Letters you might get A. B. C. D. E. F. G. H. I. J. K. L. 7 Form 886-A, Explanation of Items; Form 1273, Report of Estate Tax Examination Changes; Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment. - NEVER SIGN THIS! Form 4549, Income Tax Examination Changes for agreed cases for individuals and corporations; Form 4549 A, Income Tax Examination Changes for unagreed and accepted agreed cases for individuals, corporations, taxable fiduciaries, and taxable small business corporations; Form 4605, Examination Changes Partnerships, Fiduciaries, Small Business Corporations, and Domestic International Sales Corporations used to report audit changes made to partnership, fiduciary, and small business corporation returns; Form 4605 A, Examination Changes Partnerships, Fiduciaries, Small Business Corporations, and Domestic International Sales Corporations for unagreed and excepted agreed cases for partnerships, fiduciaries, and small business corporations; Form 4665, Report Transmittal never send the taxpayer or power of attorney copies of Form 4665; Form 4666, Summary of Employment Tax Examination. Form 4667, Examination Changes Federal Unemployment Tax Form 4668, Employment Tax Examination changes Report and, Form 5385, Excise Tax Examination Changes.

8 Form Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment. - NEVER SIGN THIS! Sometimes IRS assesses additional tax and you can t do anything to prevent it. Instruct the client to pay, if there s no other choice. Do NOT sign this form! Why? If you find additional information later to prove your client s case, you can t use it. The taxpayer has agreed to the tax. If client doesn t sign you can amend that tax return within 2 years of the payment of the additional tax.

9 Adjustments & Closing Letters 9 The importance of closing letters why you need them CYA These letters are your proof. Making sure the revenue officer actually made the changes as agreed. There are often adjustments to NOL or depreciation schedules that will affect other years. If the IRS as agreed with your position on certain issues the closing letter can provide protection against future audits of the same items. Audit results usually impact future tax preparation. Removal of tax liens, proving tax liability has been paid, etc. If you ve dealt much with the IRS, it is not uncommon to have to provide them with information they already have.

Closing Letters 10 10 Ensure you get a copy IRS is required to send out copies to both taxpayer and POA on file, we have our clients fax us a copy of all correspondence received from IRS Reading them

10 Closing Letters Ensure you get a copy IRS is required to send out copies to both taxpayer and POA on file, we have our clients fax us a copy of all correspondence received from IRS Reading them unless it is a no change audit you should receive a 4549 Income Tax Examination form (or similar form depending on type of audit) that explains the changes that were discussed, and the penalties that were assessed.

11 No Need to Amend Future Returns 11 Very few audits result in absolutely no change at all. Changes affecting only the year of audit Schedule A Medical Schedule A Property Tax Schedule A Mortgage Interest Schedule A Miscellaneous Schedule B Dividends and Interest Schedule C profit Schedule D profit Schedule E profit Check to see if changes affect that year s State tax return(s) or future returns.

12 Need to Amend for 12 Some typical changes that may require 1040X: Schedule A Charitable Contributions carryover Schedule B May affect Foreign Tax Credit Form 1116 Schedule C losses NOL carryforward or back Office in Home carryforward Depreciation schedule (Sec 179 recaptured) Vehicle worksheet Schedule D loss carryforwards Basis adjustments of any kinds especially cancellation of debt attribute reductions picked up in audit Schedule E passive losses Form 3468 Investment Credit Carryovers Form 4952 Investment Interest carryforwards Form 6251 AMT carryforwards Form 6252 Installment agreement

13 Attribute Reductions 13 The audit may have generated issues, like a surprise cancellation of debt. You helped client avoid tax using insolvency. The insolvency caused a reduction in tax attributes. You and the examiner prepared a Form 982 for the year of the audit. You must pick up attribute reductions in subsequent years. Attributes that get reduced see Form 982 Note: After a bankruptcy, you may have to reduce tax attributes and amend carryforwards, too.

14 Form 982 Reductions Due to 14

15 Form 982 Attributes to Reduce 15

16 Some Attributes Only Partially Reduced 16

17 Amending Prior Year Returns 17 What amendments are possible or needed? Audits take place 18 months 30 months after filing By end of audit, statutes of limitations on years before audit are often closed Years after the audit, before the current year, are still open. NOL carrybacks may be possible Always remember state amendments, too

18 Form 1040X - Top 18

19 Form 1040X-Center 19

20 Form 1040X- Bottom 20

21 Form 1040X, 2 - Top 21

22 Form 1040X, 2- Bottom 22

23 Amending Open Statute Years 23 Use the Form 1040X Revised Dec 2010 Open old tax return file Print out copy of the original tax return - Stamp it AS ORIGINALLY FILED. Save the file with a new name filenamex Make your revisions in the new file. Make revisions based on the audit Review the tax return for any improvements you can make based on law changes, Presidential disaster areas, new information about dependents, deductions, expenses, etc. Theft Loss deduct in year of discovery up to 7 years after the theft If you know of any significant errors not in the client s favor that need to be corrected, advise the client those should be made, too Print out the revised tax return - Stamp it AS AMENDED

24 Significant Changes and Worksheets 24 In addition to the revised forms, include detailed worksheets or spreadsheets Changes in capital gains (basis) or capital loss carryovers Depreciation Office in Home carryforward Adjusted home basis due to Rental of part of home

25 NOL Carrybacks Special 5 Year Carryback Audit of 2008 or 2009 tax year or fiscal year 25 American Recovery and Reinvestment Act of 2009, enables small businesses with a net operating loss (NOL) in 2008 to elect to offset this loss against income earned in up to five prior years. Typically, an NOL can be carried back for only two years. The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) expanded the carryback for 2008 and The IRS released legal guidance in Revenue Procedure (Update: please see superceding Revenue Procedure ) outlining specific details. If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, the small business may revoke its previous election to waive the carryback. The election revocation must be made on or before April 17, In other words, if the NOL carryback was originally waived, the 5-year option for 2008 NOLs is not available. However, many taxpayers, even preparers, neglect to elect the NOL carryback waiver. So it may be obligatory to carryback any NOLs before carrying them forward. The 5-year option may still be in effect.

26 Waiving NOL Carryback 26 To waive the carryback when filing an original tax return, or an amended tax return that creates an NOL, include the following statement with the tax return: Taxpayer elects to waive the net operating loss carryback under section 172(b)(3) of the Internal Revenue Code If you filed your return timely but did not file the statement with it, you must file the statement with an amended return for the NOL year within 6 months of the due date of your original return (excluding extensions). Enter Filed pursuant to section at the top of the statement. Note: This election is irrevocable.

27 NOL Carryback Options 27 Two options: Form 1040X one year at a time Form 1045 the quick way several years Note 1: After carryback is used up, NOL is carried forward up to 20 years Note 2: States may have different rules about both carrybacks and carryforwards. PDF version of IRS Publication 536 includes an illustrated Form

28 Quick NOL 28 Form You can apply for a quick refund by filing Form This form results in a tentative adjustment of tax in the carryback year. See the Form 1045 illustrated at the end of this discussion. If the IRS refunds or credits an amount to you from Form 1045 and later determines that the refund or credit is too much, the IRS may assess and collect the excess immediately. Generally, you must file Form 1045 on or after the date you file your tax return for the NOL year, but not later than one year after the end of the NOL year. If the last day of the NOL year falls on a Saturday, Sunday, or holiday, the form will be considered timely if postmarked on the next business day. For example, if you are a calendar year taxpayer with a carryback from 2010 to 2008, you must file Form 1045 on or after the date you file your tax return for 2010, but no later than January 2, 2012.

29 Amending State Returns Often forgotten after an audit, Remember to amending the client s state tax returns to conform to IRS results. States will get the IRS adjustments automatically and will issue their own assessments. However, some states (like California) assess penalties when the amended return isn t filed within 6 months after the audit. Sometimes, IRS will send the revisions to the states while you are still in the Appeals or Tax Court process. Alert your client to watch for this Put this assessment on hold until the IRS case is resolved

30 Current & Future Prep Preparing current year returns based on audit results The best way When rolling over clients from prior-year software, roll over the amended file. If you have already rolled over clients, delete the current year file and roll over the amended file. If you already have entries in the current file (probably), roll over the amended file and move the entries to the new client file. This will keep all the carryovers intact Make sure all the carryovers are correct

31 Dealing with Tax Liens Federal Tax Liens hurt your clients! They are damaging to your client s credit score. They often prevent the sale or refinance of your clients property. They often prevent clients from obtaining credit for other purchases. They can impact your clients credit for 10+ years.

32 Dealing with Tax Liens Resolving Federal Tax Liens A Notice of Federal Tax Lien (NFTL) gives the IRS legal claim to your client s property as security or payment for their tax debt. There are several ways to deal with Federal Tax Liens: Release (Paid in Full or Beyond Statute of Limitations) Discharge (Balance Remaining) Subordination (Balance Remaining) Withdrawal (Balance Remaining)

33 Dealing with Tax Liens full pay Lien Release A Certificate of Lien Release Form 668Z sent within 30 days Section 6325(a) directs IRS to issue Certificate of Lien Release within 30 days of full payment or the lien becoming legally unenforceable or if they accept a bond for payment of tax. Copy request Address for submitting written request or additional info see Send Certificate of Lien Release to all reporting Credit Bureaus

Dealing with Tax Liens debt remains Lien Discharge 34 34 - A Certificate of Discharge from Federal Tax Lien removes the lien from the property named in the Notice of Federal Tax Lien (NFTL): Form

34 Dealing with Tax Liens debt remains Lien Discharge A Certificate of Discharge from Federal Tax Lien removes the lien from the property named in the Notice of Federal Tax Lien (NFTL): Form (b)(1) remaining property is equal to 2x (the federal tax liability + mortgages, taxes, and other liens) 6325(b)(2)(A) partial satisfaction when property is being sold and proceeds above mortgages and settlement costs are paid to IRS 6325(b)(2)(B) property being sold for less than combination of mortgage(s) and settlement costs, no value in IRS lien 6325(b)(3) sale of property will pay off lien, funds put in escrow to pay IRS at closing 6325(b)(4) bond issued to protect government interest in property

Dealing with Tax Liens debt remains 35 35 Lien Subordination Convincing the IRS to take a second position.

35 Dealing with Tax Liens debt remains Lien Subordination Convincing the IRS to take a second position. Form (d)(1) refinance of existing mortgage, loan proceeds after closing costs paid to IRS 6325(d)(2) subordination would increase or improve collectability of tax liability; i.e.. Lower interest rate a written statement (signed & dated) explaining benefit to IRS

Dealing with Tax Liens 36 36 Lien Withdrawal IRS Office of Chief Counsel concluded: In the absence of a definition of best interests in the Code or regulations, we believe that this term can be

36 Dealing with Tax Liens Lien Withdrawal IRS Office of Chief Counsel concluded: In the absence of a definition of best interests in the Code or regulations, we believe that this term can be broadly defined so as to permit withdrawal where the NFTL has been released but the taxpayer nevertheless needs the NFTL withdrawn to improve his credit. In the general sense, withdrawal can be said to be in the United States best interests insofar as the improvement in the taxpayer s credit history assists him with future tax compliance.

37 Dealing with Tax Liens Lien Withdrawal Form Help your client improve their credit by requesting a tax lien withdrawal Paid In Full, Client Received Certificate of Lien Release, take it one step further, request withdrawal Balance due <$25,000 with Direct Debit Installment Agreement (DDIA) Feb 2011, IRS announced it will now allow withdrawal of NFTL in client enters or converts to DDIA. Taxpayers with existing DDIAs can also request Lien Withdrawal.

38 The Taxpayers Advocate and Liens 38 Nina Olson is passionate about IRS s slowness in dealing with liens. She feels that, just as IRS has automated the lien generation process, they should be able to automate the lien release process for liens that have expired. section_1.pdf These are just some of the problems she has identified in her annual report to Congress IRS had not addressed the following recommendations regarding management reviews of lien processing information controls: Implement procedures to closely monitor the release of tax liens to ensure that they are released within 30 days of the date the related tax liability is fully satisfied. As part of these procedures, IRS should carefully analyze the causes of the delays in releasing tax liens identified by GAO s work and prior work by IRS s former internal audit function and ensure that such procedures effectively address these issues. Research and resolve the current backlog of unresolved manual interest or penalties reports. Improve the current unmatched exception report by including a cumulative list of all unmatched taxpayer accounts that have not been resolved to date

39 Resources Special 5-year NOL Carryback for The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA) expanded the carryback for 2008 and /newsroom/article/0,,id=215657,00.html Form 1040 X Amended Returns Form 982 Reduction of Attributes Due to Discharge of Indebtedness Lien Discharge Form - Lien Subordination Form - Lien Withdrawal Form- NFTL Guidelines - Internal Revenue Manual Closing Letters - _ html

40 CPE Link Thanks for coming. Remember to give CPE Link your evaluations. Drop by to sign up for other TaxMama classes The next class in the series is Computing Or Recalculating IRS Assessments For Interest And Penalties And Ways To Reduce Or Eliminate Both, if Possible Series are available as Self-Study or Resources: The Tax Practice Series - Taxpayer representation Collections, Offers In Compromise, other payment alternatives TaxMama s Courses

Welcome to TaxMama s Place Home of the

1 Welcome to TaxMama s Place Home of the 10 Steps to Resolving Collection Issues Table of Contents 2 Meet Your Instructors 1. Determine the Statute of Limitations 2. Gather Information 3. Evaluate your