Tax Practice National Income Tax Workbook

Transcription

1 Tax Practice Chapter 6 pp National Income Tax Workbook

2 Tax Practice p. 157 When the IRS Pays a Taxpayer Interest Requesting Technical Advice from IRS Responding to IRS Liens and Levies Installment Agreements and CNC Status Innocent Spouse/Injured Spouse Relief

3 When IRS Pays Interest pp Whether paid & rate paid dependent on event, time of payment, & when filed Overpayment arises only if tax full paid Overpayment date Starts when 1 st payment > liability Based on actual payment date

4 p. 159 Important Dates for Interest Payment dates Withholding: 15 th day of 4 th month > year Estimated: Due date of return (w/o ext.) No interest until due date of return Availability date (for refund or offset) Due date: W/h g, est., pay < due date Date paid/credited: If after due date

5 p. 159 Offsets Best explained by simply looking at the example on page 159: Ex. 6.2 Timely filed 1120 $15, overpayment to 2017 tax Interest: 04/18/17 to 04/17/18 (due dates)

6 Refunds p. 160 Original Return Filed before due date No interest if refunded w/in 45 days > due date Filed after original due date & before ext. No interest if refunded w/in 45 days > date filed Late filed No interest if refunded w/in 45 days > date filed Interest to refund date minus max 30 days Back-off period

7 Refunds p. 161 Interest Rate General rule: federal short-term + 3% Corporate: federal short-term + 2% If > $10,000, federal short-term +.5% Compounded daily Rate set in the 1 st month of the preceding calendar quarter (3 rd Qtr 2018 set in April) Figure 6.2

8 p. 163 Requesting Technical Advice from IRS Private Letter Ruling PLR Before a transaction or before return filed Interprets laws & applies to TP s specific facts Binding on IRS unless facts inaccurate Determination Letter Issued by an IRS Director Completed transactions Principles/precedents by Chief Counsel

9 pp. 163 Technical Advice Memorandum - TAM From Office of Chief Counsel Requests arise during examinations Issued on closed transactions Final determination of IRS position on specific issue in specific case

10 p. 167 Federal Tax Lien Lien attaches automatically to all real and personal property after demand for payment and no payment made Attaches also to later acquired property Notice of Federal Tax Lien (NFTL) filed to Provide public notice of the lien Protect the government s interest

11 pp Federal Tax Lien Jointly Owned Property Joint tenancy or tenants in common Entire property may be sold Nonliable tenant must be compensated Joint tenancy: Death - Lien ceases to attach Tenants in common: Lien survives death Extends to property held by third party as nominee or alter-ego

12 Federal Tax Lien p. 168 Filing Notice of Federal Tax Lien (NFTL) Real: filed where property located Tangible/intangible personal: filed where taxpayer resides If resides outside US, filed in D.C. TP receives notice of filing 5 days Notice + info on appeal rights If not filed properly, no priority for gov t

13 Federal Tax Lien p. 169 Filing Notice of Federal Tax Lien (NFTL) Tax lien continues until liability full paid 10-year CSED + extensions (events) If judgment by suit, no expiration of time to collect until satisfied NFTL: Assessed $, self-release date IRS will refile if CSED extending events

14 Federal Tax Lien p. 170 Options after NFTL Filed Can affect credit rating employers, landlords, getting loans Options after NFTL filed Appeal Request release Apply for withdrawal Apply for discharge Request subordination of the lien

15 Federal Tax Lien p. 170 NFTL Filed - Appeal Form CDP Hearing w/in 30 days of notice IRS cannot levy, suspends statute Equivalency Hearing > 30 days Collection activity can continue Cannot appeal decision to Tax Court Identify alternatives/disagreement Attempt to resolve w/manager first

16 Federal Tax Lien p. 170 NFTL Filed - Appeal CAP Hearing Form 9423 Faster results than CDP Cannot appeal determination in court Attempt to resolve with manager

17 Federal Tax Lien pp NFTL Filed - Release IRS must release w/in 30 days of: Full payment Expiration of collection statute Bond accepted for liability payment If > 30 days & no release Call Centralized Lien Operation Submit written request for release Payment method affects timing of release

18 Federal Tax Lien p. 171 NFTL Filed - Withdrawal Withdrawal = IRS abandoning lien priority Federal tax lien still remains (still liable) NFTL may be withdrawn if: Installment agreement Will help TP pay the liability IRS failed to follow proper procedures NFTL in violation of bankruptcy stay Best interest of the government (TAS)

19 Federal Tax Lien p. 171 NFTL Filed - Withdrawal Ex. 6.5 Making installment payments Needs car for job & no loan due to credit score NFTL withdrawn w/ provision filed again in case of default on installment agreement Form Form 10916(c) if IRS withdraws Letter 4711 if withdrawal denied, can appeal

20 Federal Tax Lien p. 172 NFTL Filed - Discharge Lien removed from specific property (sale) 1. Value of other property under NFTL = 2 x liability (gov t share) 2. Payment value of govt s interest 3. Value of gov t interest in property = 0 4. Sale proceeds in fund retains priority 5. 3 rd party deposit/bond = gov t s interest Form Publication 783

21 Federal Tax Lien p. 172 NFTL Filed - Discharge 1. Other property 2 x liability Must document value with application TP must be in compliance No payment required 2. Partial payment Must be govt s interest in property TP divested of all interest in the property Relocation allowance F residence

22 Federal Tax Lien pp NFTL Filed - Discharge Ex. 6.6 Lien - $203,000 liability Offer $215,000, Mtg $135,000, Costs $15,000 Lien interest = $65,000 ( ) 3. Gov t Interest in Property has No value Copy of proposed escrow agreement w/app Ex. 6.7 Short Sale Mtg $502,114, Sale for $300,000

23 Federal Tax Lien p. 173 NFTL Filed - Discharge 4. Substitution of Sales Proceeds Sale proceeds held in fund subject to claims in same priority as property had Proposed escrow agreement w/ application Ex. 6.8 $40,000 liability (2017) Mtg: 1 st $32,000, 2 nd $5,000 (<2017) Mechanics lien: $3,000 (2018)

24 Federal Tax Lien p. 173 NFTL Filed - Discharge 5. Substitution of Value 3 rd party owner can get cert of discharge Deposits $ = value of gov t interest as determined by IRS Furnishes acceptable bond in $ to cover gov t interest Taxpayer may not use this provision

25 Federal Tax Lien pp NFTL Filed - Subordination Allows other creditors ahead of gov t Form Appropriate when refinancing 1. TP pays $ that is gov t interest 2. Will increase $ to gov t or make collection easier (e.g. lower TPs mtg payment) 3. IRS determines gov t adequately secured after subordination of estate tax lien Can appeal denial -discharge/subord.

26 Federal Tax Levy p. 174 Requirements for IRS to Levy 1. Tax assessed & IRS sent Notice & Demand for Payment to TP 2. TP neglected/refused to pay 3. IRS sent Final Notice of Intent to Levy and Notice of Your Right to a Hearing 10 after #1 and 30 days before levy In person, left at home or business, sent by certified/registered mail w/ return receipt request

27 Federal Tax Levy p. 174 Requirements for IRS to Levy Notices issued simultaneously if TP is: Pyramiding employment taxes (w/h g and not remitting) Made certain frivolous arguments to IRS for 2 or more periods, or Failed to file required returns for 2 successive periods or 3 nonconsecutive periods IRS prepared SFRs If believe tax in jeopardy, levy w/o notice

28 Federal Tax Levy pp Property Subject to Levy Wages, salary, commissions Served once, remains in effect until full paid Dividends, promissory note payments Applies only to those due or right to future payments as of date of levy Bank account Funds available for w/drawal Bank holds for 21 days before giving to IRS

29 Federal Tax Levy pp Property Subject to Levy Federal Payments Through Federal Payments Levy Program Federal retiremt, social security (up to 15%) Vendor/contractor payments (up to 100%) House, car, other property Results in seizure and sale IRS sets value, TP can challenge Any excess proceeds from sale go to TP

30 Federal Tax Levy pp Property Exempt from Levy List 175 Minimum wage amount based on standard deduction + exemption $ (4,150 for 2018) Figure 6.3 Personal residence if deficiency small ( 5,000) Seizure of residence requires judicial approval Seizure of business assets exempt unless area director approves or collection in jeopardy

31 Federal Tax Levy p. 176 Release of Levy Avoid a levy pay, installment agreemt, OIC Release of levy required by law if Amount owed paid in full Levy not issued before CSED Would facilitate collection Installment agreement terms do not allow Levy creates an economic hardship Value of property > amount owed & release will not hinder govt s ability to collect

32 Federal Tax Levy p. 177 Release of Levy Will release wrongful or erroneous levy Wrongful: Improperly attaches to 3 rd party prop. Erroneous Levy If issued 1. Against exempt property 2. Prematurely 3. Before TP received required notice 4. While TP in bankruptcy w/automatic stay

33 Federal Tax Levy p. 177 Release of Levy Erroneous Levy If issued. 5. When seizure & sale costs would exceed FMV of property 6. While alternative requests were pending or accepted (IA, innocent spouse, OIC) 7. While Appeals or Tax Court is considering CDP cases 8. While Appeals or Tax Court is considering denial of innocent spouse relief

34 Federal Tax Levy p. 177 Appealing a Levy 30 days from notice to request CDP hearing Form days from Appeals determination to appeal to Tax Court May appeal through CAP

35 Federal Tax Levy pp Recovery of Wrongfully Seized Property Property may be returned at any time $ may be returned w/in 2 years of date of levy Interest at overpayment rate - date of seizure/sale to date w/in 30 days of return No interest if return due to levy premature, not in accordance w/procedures, some IAs, facilitated collection or best interest of gov t NOTE: 2 years applies to current levies and any levy at 12/22/17 if within original 9-mo pd.

36 Federal Tax Levy p. 178 Recovery of Wrongfully Seized Property Retirement Plan Levies Interest paid regardless of reason for release Contribute return + interest back to plan/ira = Rollover if contributed due date (w/o ext) of tax return for year property returned Contribution treated as made in the year of distribution due to levy Interest paid treated as earnings w/in the plan and not included in income

37 Federal Tax Levy p. 178 Recovery of Wrongfully Seized Property Third Party Claim File a claim or civil action No damages by court if admin remedies not exhausted first Claim by letter to IRS advisory group Details and documents to support If rejected, CAP hearing Publication 4528

38 Federal Tax Levy p. 178 Recovery of Wrongfully Seized Property Claim for Bank Charge Reimbursement Charges incurred due to wrongful levy Form 8546 Claim w/in 1 year of date claim accrues Limited to $1,000 Must include copy of levy and bank records Allowed if: IRS agrees erroneous, TP did not contribute to error, TP cooperative < levy

39 p. 179 If Can t Pay Currently Extension of Time to Pay locally, online Offer in Compromise (2017 Workbook) Doubt as to collectability Doubt as to liability Effective tax administration Installment Agreement Currently Not Collectible

40 p. 179 Installment Agreements Must be current in all filings Online or through Form 9465 Enforcement action suspended While agreement pending While in effect 30 days after rejected During appeal of rejection/termination

41 Installment Agreements pp User Fee Figure 6.4 $43 fee if income < 250% poverty guidelines Form w/in 30 days of IA approval May need new Form 433-F If greater fee paid, excess against tax Note: Bipartisan Budget Act of 2018 Fee cannot exceed fee of February 9, % poverty: No fee if direct debit, if cannot use direct debt, refund fee when full paid

42 p. 181 Installment Agreements Interest and Penalties Interest accrues while IA in effect Failure-to-pay penalty added monthly.5%/month reduced to.25% with IA related to timely-filed return.25% rate N/A if prior to IA had 1% rate Aggregate 25% Using credit card or loan may be cheaper

43 Installment Agreements p. 181 Guaranteed Installment Agreements 1. Aggregate $10,000 (no int., penalt.,additions) 2. In preceding 5 years, TP & spouse have not: Failed to file any return Failed to pay tax required to be on return Entered in an IA for payment of any tax 3. IRS determines TP unable to pay in full 4. Agreement requires full payment in 3 years 5. TP agrees to file all returns & pay

44 Installment Agreements p. 181 Online Application IA for > 120 days (long-term plan) T, P, I $50,000 TP has filed all returns IA for 120 days (short-term plan) T, P, I $100,000 Business TP > 120 days T, P, I < 25,000 - TP has filed all returns If > $10,000 must be direct debit Online app gets immediate notice of approval Not online Form Form 433-F

45 Installment Agreements p. 182 Agreed Examination Deficiency Individuals (no delinquent 941), out-ofbusiness business entities, corps (income tax only), other business entities All required returns filed All required tax deposits/estimates made Guaranteed IA if $10,000 & 36 mos. Streamlined IA if $50,ooo & 72 mos.

46 Installment Agreements p. 182 Agreed Examination Deficiency $50,001 $100,000 Forms 9465 and 433-F forwarded to Collection after case closed > $100,000 Referred to Collection

47 Installment Agreements p. 182 Partial Payment Installment Agreement Unable to full pay by CSED with some ability to pay Form 433-A or B needed IRS may require assets sold If enforcement action appropriate IRS will not approve PPIA

48 Installment Agreements pp Streamlined Processing of IAs Testing expanded criteria for streamlined Requests through SB/SE Campus Collection Operations only Run to 9/30/18 may become permanent Figure 6.5 p. 183

49 Installment Agreements pp Managing Existing IAs Pay minimum when due Moves? Form 8822 Online payment agreement tool If not direct debit, change monthly payment amount or payment due date Convert existing IA to direct debit Reinstate after default If direct debit, call IRS to make changes

50 Installment Agreements p. 184 Termination (Default) Cause for termination: Fails to make payment when due Fails to pay another liability when due Fails to provide requested financials Provided info prior to IA that was inaccurate or incomplete Fails to pay modified payment based on updated financial info

51 Installment Agreements p. 184 Termination (Default) IRS sends written notice re: termination 30 days: Comply or request CAP hearing IRS cannot levy during appeal period

52 pp Currently Not Collectible Status Paying any amount prevents TP from meeting basic living expenses Delay collection until ability improves Must be current with all required returns estimates and w/h g sufficient Forms 433-A, B, or F IRS still bills but no collection action List of reasons p

53 Currently Not Collectible Status p. 185 NFTL generally filed on CNC if aggregate unpaid > $10,000 Levy on wages must be released if CNC If CNC, IRS will check for transferees Unable to Locate Exhaustive search online, state/local records, postal tracers, field calls, utility companies

54 p. 185 Currently Not Collectible Status Imminent Statute Expiration - < 12 months Sale if seized prior to CSED can apply after Proceeds of levy service prior can apply after Will consider filing suit to reduce to judgment If anticipates improvement in finances Bankrupt Entities Nothing more there, after acquired property insufficient, no NFTL will consider TFRP

55 p. 186 Currently Not Collectible Status Decedent & Decedent s Estate Both deceased MFJ, no assets One deceased may pursue CNC possible for hardship Review financial statement and probate Tolerance Level Unpublished $ level for CNC status

56 p. 186 Currently Not Collectible Status Out-of-Business Entities Corp, LLC, EO out of business w/no assets Will consider SHs, successor entities, & others receiving property LLP if PN liability limited Estate or trust if no assets (transferee?)

57 p. 186 Currently Not Collectible Status In-Business Entities Can pay current tax but not back taxes No assets for enforcement action IRS monitors reactivates if not current Collectibility of liable SMO or PN? TFRP investigation Follow-up in mos 433, NFTL etc.

58 pp Currently Not Collectible Status Hardship No equity in assets, expenses income If tax < tolerance and certain conditions exist, no Form 433 If tax > tolerance, Form verification Figure p. 187 Closing code based on living expenses IRS monitors income (TPI vs Code $)

59 p. 188 Currently Not Collectible Status New Liability after CNC Determination If CNC w/in 12 months, CNC for new No CNC for new if: TFRP determination needed Case closed as in-business CNC Prior bankruptcy dispositions New address & CNC unable to locate Case closed without investigation

60 p. 188 Currently Not Collectible Status IRS Follow-up Automatic system follow-up on hardship, unable to locate, unable to contact Mandatory if TP financial to improve Ex Expenses = income, cannot get 3 rd mtg Mtg payoff in 10 mos 12 mo. follow-up

61 p. 189 Innocent Spouse & Injured Spouse Innocent Spouse Relieved of joint liability Injured Spouse Share of refund offset spouse s liability

62 pp Innocent Spouse 6015 (b) Innocent Spouse Relief Relief of additional tax on item of spouse 6015(c) Separation of Liability Relief Separate allocation of additional tax 6015(f) Equitable Relief Unfair to hold TP liable for unpaid or understated tax Figure 6.8 p. 190

63 Innocent Spouse pp Filing Deadline Form 8857 W/in 2 years of collection activity Offset a refund by joint tax due IRS claim in court IRS files suit to collect IRS issues notice of intent to levy Collection activity stat notice, notice of lien, notice & demand

64 Innocent Spouse p. 191 Requesting Relief Cannot request if: Court already considered issue TP meaningfully participated in court proceeding & did not request then TP entered into OIC for the liability TP entered into closing agreement for the year

65 Innocent Spouse p. 191 Participation of Spouse/Former Spouse IRS must contact spouse/ex-spouse Allowed to participate no exceptions Right to appeal preliminary partial/full relief but not appeal to Tax Court Form 8857 information shared w/nonrequesting. May provide some info orally rather than w/form 8857

66 Innocent Spouse Relief p. 191 Conditions for qualifying 1. Joint return understatement due to erroneous items of other spouse 2. When signed return did not know/had no reason to know 3. Unfair to hold liable 4. No fraudulent asset transfers

67 Innocent Spouse Relief p. 191 Erroneous item Unreported income Incorrect deduction, credit, prop. basis Actual knowledge Knew spouse rec d unreported income Knew the facts that disallowed ded/cred Knew exp. not incurred or to extent ded.

68 Innocent Spouse Relief pp Domestic Abuse: May qualify even with actual knowledge Fear of retaliation did not challenge Reason to Know Reasonable person standard Reason to know of the transaction that gave rise to the understatement

69 Innocent Spouse Relief p. 192 Reason to Know 1. Level of education 2. Involvement in the financial/business activities of the family 3. Unusual or lavish expenses 4. Nonrequesting spouse s evasiveness or deceitfulness about finances

70 Innocent Spouse Relief p. 192 Indications of Unfairness - whether 1. TP received significant benefit Property transfer, exceeds regular support 2. Nonrequesting spouse deserted 3. Divorced or separated No longer married favors relief 4. TP received benefit on return

71 Innocent Spouse Relief p. 192 Indications of Unfairness - whether 5. TP will suffer economic hardship Could not cover basic living exp if paid 6. Is legal obligation of nonrequesting spouse 7. TP made good-faith effort to comply Even if not fully successful 8. TP knew/had reason to know tax would not be paid

72 Separation of Liability p. 193 Allocation of an understatement of tax (int & pen) to responsible spouse Available for unpaid liability arising from an understatement (not on return) Cannot request refund of tax paid

73 Separation of Liability p. 193 Requirements No longer married to or legally separated from spouse on joint return OR Not a member of same household at any time during 12 mos prior to filing F8857 Must establish basis for allocation and that no prop. transfer to avoid tax

74 Separation of Liability p. 193 Limitations on relief no relief if: IRS proves assets transferred in scheme to defraud IRS or 3 rd party IRS proves requesting spouse had actual knowledge when signing return Nonrequesting spouse transferred property to requester to avoid tax

75 Separation of Liability pp Transfer of property Done to avoid tax portion allocated to requester increased by FMV Avoidance presumed if w/in 1 year prior to date IRS sent deficiency N/A if pursuant to divorce etc. N/A if prove purpose not avoidance

76 Separation of Liability p.194 Allocations of Erroneous Items Allocated as if MFS returns filed except 1. Benefit on the return who saved? 2. Fraud allocate to either 3. Erroneous income items to spouse who generated income, based on ownership share or equally if cannot establish 4. Erroneous deduction items (same as #3)

77 Separation of Liability p.194 Allocations of Deficiency Allocate deficiency in same ratio as spouse s share of erroneous/total Penalties follow allocation of items causing the penalty Separate treatment item allocable solely to one spouse Erroneous items TP knew of cannot be allocated only to other spouse

78 Separation of Liability p.195 Allocations of Deficiency Separate Treatment Items Deficiency attributable to an item allocable solely to one spouse Credit Self-employment tax Separate treatment item added to allocable share of remainder of deficiency

79 Equitable Relief pp If innocent spouse relief and separation of liability do not apply Understatement or underpayment of tax Inequitable to hold liable Requirements pp Unpaid: File on or before CSED Refund: w/in 3 yrs of filing/2 yrs of payment

80 Equitable Relief pp. 197 Streamlined Determination Establish: No longer married to nonrequesting Would suffer economic hardship Did not know/have reason to know of understatement or deficiency If streamlined N/A, facts & circumstances

81 Injured Spouse Relief p. 201 TP s refund applied to spouse s pastdue financial obligation Requirements of injured spouse: W/h g, estimated payments, refundable credit No obligation to pay past-due amount

82 Injured Spouse Relief p. 201 Form 8379 File Form 8379 With tax return With amended return By itself File when first aware of offset W/in 3 years of due date (w/ext) or W/in 2 years of tax paymt used for offset

83 Injured Spouse Relief p. 202 Form 8379 Allocation of Return Items Fig As if filing MFS Not clearly for one, 50% to each If not o.k. on MFS, allocate joint amount If related to exemptions allocated to spouse qualified to take exemption

84 Injured Spouse Relief p. 202 Form 8379 Allocation of Return Items Fig Business credits on % business interest SE tax to spouse with SE income NIIT same as investment income share Other credits allocate as TP chooses Estimated paymts allocated as agreed No agreement -> based on tax share

85 Injured Spouse Relief pp Share of Overpayment IRS uses info from Part III, Form Determine MFS liability for each spouse 2. Determine injured s share of joint liability Joint liability x [#1 (injured) / total of #1] 3. Allocate credits between spouses (estimated pay, w/h g, EITC etc) 4. Injured spouse share of overpayment = excess of #3 over #2

86 Injured Spouse Relief p. 203 Community Property States Presume property acquired is community property deductions split equally Exception: TP proves is separate prop. or federal law provides is separate prop. If all return items paid with community property, ½ overpayment to each Apply to nonfederal debts/nontax debts Federal tax debt Figure 6.14

87 Questions?