Uber Driver Failed To Report Income

I am reading a case concerning an Uber driver who ran afoul of Form 1099 requirements.

The amounts at issue were impressive.

           Tax                          $193,784

           Penalties                  $ 85,354

Robert Nurumbi drove for Uber in 2015. He ran the business through a single-member LLC and used two bank accounts. Business was doing well. He bought multiple cars which he rented out to family and friends who drove for Uber through him. The twist to the tale is that all Uber payments were paid to the LLC’s bank account - meaning Nurumbi’s bank account, as he was the LLC - and he in turn would pay his family and friends.

Sounds like he established a small business, with employees and all.

Except that he treated his drivers as independent contractors, not employees. I get it: Uber is gig economy.

Every week Uber would pay Nurumbi. He would transfer the family-and-friends portion to a second bank account. He would sometimes pay them by electronic transfer; at other times he paid in cash. He did not keep documentation on these payments, and he further muddied the waters by also paying nondriver expenses from the second bank account.

He filed his 2015 personal tax return showing wages of approximately $19 grand.

Uber meanwhile issued him two 1099s totaling approximately $543 thousand.

The IRS saw a case of unreported income.

It is not clear to me how Nurumbi prepared his tax return, as a self-employed does not receive a W-2 from himself. He should have filed a Schedule C with his return, as Schedule C reports self-employed business activity. I would have expected his C to report gross receipts of approximately $543 grand, with a bunch of expenses reducing the net to approximately $19 thousand. The IRS would have matched Uber’s 1099 to the gross receipts on the Schedule C and spared us the drama.

However, Nurumbi did not prepare his taxes this way.

Dumb, I am thinking, but not necessarily fatal. Nurumbi would submit a Schedule C (or a facsimile thereof) and argue his point.

But the damage had been done. Nurumbi had spotted the IRS gross income of $543 grand. He next had to show expenses bringing his net income down to $19 thousand. This gave the IRS the chance to say: prove it.

Which is why we keep records: invoices, bank statements, cancelled checks, QuickBooks files and so forth.  

Nurumbi had a problem. He kept next to no records. He had not issued 1099s. His records in many cases were inadequate to even calculate a 1099.

Nurumbi played a wild card.

There is a court-created exception to the customary documentation requirements. It is called the Cohan rule, and it refers to the person and case that prompted the exception decades ago. The rule has two key requirements:

(1)  One must prove that the expenditure occurred, and

(2)  One must prove that the expenditure relates to and was incurred in one’s trade or business.

Even then, the exception will probably not yield the same result as keeping records. The Court may spot you something, but that something is likely to be much less than what you actually incurred.

Nurumbi’s records were so feckless that it would have been unsurprising if the Court allowed nothing.

Except …

Remember that he sometimes paid his drivers electronically from the second bank account.

The Court spotted him a deduction of approximately $157 grand for those payments.

What about the cash payments to his drivers?

No dice.

Let’s summarize the damage.

The IRS increased his 2015 income from $18 to $543 thousand.

The Court allowed a deduction of approximately $157 thousand.

There was another significant deduction that we did not discuss: the fee paid to Uber itself. That was approximately $163 thousand.

That still leaves a bump to income of almost $205 grand.

I believe that Nurumbi paid the money to his family and friends.

But there was no tax deduction.

To be fair, he is the one who decided to keep the payments under-the-table. While not stated, I suspect this … flexibility … was a key factor in the Court’s decision.

Our case this time was Nurumbi v Commissioner, TC Memo 2021-79.

Talking Tax Levies

I don’t see it very often.

I am referring to an IRS bank levy.

However, when it happens it can be disrupting.

Let’s distinguish between a lien and a levy.

A lien is a claim against property you own to secure the payment of tax that you owe. The most common is a real estate lien, and I have one on my desk as I write this.

A lien means that you are fairly deep into the collection process. It does not necessarily mean that you have blown-off the IRS. Owe enough money and the IRS will file a lien as a matter of policy. It does not mean anything is imminent, other than the lien hurting your credit score. When I see one is when someone wants to either sell or refinance a property. In either case the lien has to be addressed, which – if you think about it – is the point of a lien.

A levy is a different matter. A levy takes your stuff.

The threat of a levy is a powerful inducement to come to a collection agreement with the IRS. Perhaps the agreement is to pay-off the liability over time (referred to as an installment agreement). There is a variation where one cannot – realistically – pay-off the full liability over time. The IRS settles for less than the full liability, and this variation is called a partial-pay agreement.  A cousin to the partial-pay is the offer in compromise, that of notorious (“pennies on the dollar”) middle-of-the-night TV fame. If one is in dire enough circumstances, there is also currently-not-collectible status. The IRS will not collect for a period of time (around a year). A code is posted on your account and further collection action will cease (again, for about a year).

What collection agreements do is put a stop to IRS levies – with one exception.

Let’s talk about the three most common levies that the IRS uses.

The first is the tax refund offset.

This happens when you file a tax return showing a refund. The IRS will not send you a refund check; rather they will apply it to tax due for other periods or years. It is a relatively innocuous way of collecting on the debt, and I have seen clients intentionally use the offset as a way of paying down (or off) their back taxes.

The offset, by the way, is the one exception to continued IRS levy action mentioned above.

The second is the garnishment. The most common is the wage garnishment. The IRS sends a letter to your employer, advising them to start withholding. Your employer will, because – if they don’t – they become responsible for any amounts that should have been garnished. I have heard of people who will then keep changing jobs, with the intent of staying one step ahead of the IRS.  

There are other types of garnishments, depending on the income source. An independent contractor can be garnished, for example. Even social security can be garnished.

In general, if you get to this type of levy, you REALLY want to work something out with the IRS. The tax Code addresses what the IRS has to leave for you to live on; it does not address how much it can take.

The third is the bank levy.

The IRS sends a notice to the bank, which then has to freeze your account. The notice can be mailed (probably the most common way) or it can be hand-delivered by a revenue officer. The freeze is for 21 days, after which the bank is (unless you do something) sending your balance (up to the amount due) to the IRS.

That is how it works, folks. It is not pretty, and it is not intended to be.

You may wonder what the 21 days is about. The IRS wants you to contact them and work-out a collection plan. Hit the ground running and you might be able to stop the levy. Delay and all hope is likely gone.

The risk of a bank levy is one reason why some taxpayers are hesitant to provide bank information with their tax returns. Granted, as private information becomes anything but and as tax agencies are mandating electronic bank payments this issue is receding into the distance.

Did you, for example, know that the IRS can ping your bank account, just to find out your balance?

Take a look at this:

         § 6333 Production of books.

If a levy has been made or is about to be made on any property, or right to property, any person having custody or control of any books or records, containing evidence or statements relating to the property or right to property subject to levy, shall, upon demand of the Secretary, exhibit such books or records to the Secretary.

There is something about a bank levy that you may want to know: it is a one-time shot.

An offset or wage levy is self-sustaining. It will continue month after month, payment after payment, until the debt is paid off or the levy expires.

The bank levy is different. It applies to the balance in your bank account when the levy is delivered.  This means that it cannot reach a deposit made to the account the following day, week or month. If the IRS wants to reach those deposits, it has to reissue the levy (the term is “renew”).

What got me thinking about bank levies is a Chief Counsel Advice I was reading recently. A bank received a levy, and, wouldn’t you know, the taxpayer made a deposit to the account the same day – but after the bank’s receipt of the levy. The bank had zero desire to mess with surrogate liability and asked the IRS what it should do with that later deposit.

Remember that a bank levy is a photograph – a frozen moment in time. The IRS said that the later deposit occurred after that moment and was not in the photograph. The bank was not required to withhold and remit that later deposit to the IRS.

Makes sense. What doesn’t make sense is that the IRS would have/should have issued a blizzard of paperwork to the taxpayer, including an ominous “Notice of Intent to Levy” and “Final Notice of Intent to Levy and Notice of Your Rights to a Hearing.” Both those notices give one collection rights. I prefer the rights given under the “Final Notice,” but sometimes it takes a saint’s patience to explain to a client why we are not responding to the “Notice of Intent” and instead waiting on its sibling “Final Notice of Intent.”

Anyway, the taxpayer apparently blew-off these notices and kept depositing to the same bank account as if nothing was amiss in their world. Everything in the CCA made sense to me, with the exception of the taxpayer’s behavior.

This time we talked about Chief Counsel Advice 202118010.

Your 2020 Tax Return and the Stimulus Payments

 

Let’s talk about your 2020 personal tax return and the two stimulus payments that you (may have) received.

The first round of stimulus checks was up to $1,200 for each spouse and $500 for each qualifying child.

The second round was up to $600 for each spouse and qualifying child.

So, if you have two qualifying kids and qualified for the maximum, you would have received $5,800 ($3,400 plus $2,400) between the two rounds.

How do you not qualify for the maximum?

One way is easy: you had too much income.

The second way is nonintuitive: the child was over age 16. A qualifying child means a child under the age of 17. Seems odd to me to exclude a high school senior, but there it is.

Let’s talk about the first non-qualification: income.

Let’s use a married couple with two qualifying children as our example.

The income limit for marrieds is $150,000. Past that point the stimulus check goes away by a nickel on the dollar. The maximum for two spouses is $2,400, so we can calculate this as follows:

                      $2,400 divided by .05 = $ 48,000

                      $150,000 plus 48,000 = $198,000

All right, the stimulus for marrieds burns-out at $198,000, right?

Nope.

Why?

Because of the qualifying children.

Each of the kids adds another $10,000 to the phaseout range.

We have two kids. That means $20,000 added to the $198,000, totaling $218,000 before we burn-out of stimulus altogether.

Are we stilling phasing-out at a nickel on the dollar?

Let’s check.

           $218,000 – 150,000 = $68,000

           $3,400 divided by 68,000 equals $0.05.

Yep, nickel on the dollar.

You received the first stimulus check in April, 2020. Remember that tax returns were automatically extended until July 15, 2020 because of COVID. The odds were extremely good that the IRS was not basing its calculations on your 2019 return, because your 2019 return had not been prepared, much less filed. For most of us, the IRS was looking at our 2018 tax return.

Let’s continue.

You received your second stimulus check very late in December, 2020 or (more likely) January, 2021 – but the income phaseout range was the same.

What did change was the tax year the IRS was looking at. By December, 2020 you would have filed your 2019 tax return (let’s skip paper filings that may not have been processed by then, or we are going to drive ourselves crazy).

If your income went up from 2018 to 2019, you would have climbed the phaseout range. You might have received a first stimulus check, for example, but not qualified for a second one. It could have gone the other way, of course, if your income went down in 2019. 

Now your 2020 tax return lands on my desk and we need to settle-up on the stimulus.

How do we settle-up?

We run through the income phaseout range … again.

Using your 2020 tax return this time.

Did you notice we are doing the calculation three times using income from three different tax years?

Yep, it’s a pain.

Mind you, if you have modest income, I know that you received the maximum stimulus.

Conversely, if you made bank, I know that you received no stimulus.

Fall in between – or have wildly varying income – and I you need to tell me the amount of your stimulus checks.

Let’s go through a quick example, using our married couple with two qualifying children.

Their 2018 adjusted gross income was 201,000.

Here is the first stimulus:

phaseout start			150,000.00
phaseout end		198,000.00
add: 2 children		20,000.00
			218,000.00
				68,000.00
2018 AGI			201,000.00
				51,000.00
First stimulus		2,400.00
		1,000.00
			3,400.00	times	51,000.00	=	2,550.00
					68,000.00
			(2,550.00)
			850.00

They would have received $850.

Their 2019 adjusted gross income was $320,000.

Way over the income limit. There was no second stimulus.

Their 2020 tax return lands on my desk. Their adjusted gross income is $104,000.

Way below the income limit. Full stimulus.

Two qualifying kids. The maximum over two rounds of stimulus would be $3,400 plus $2,400 = $5,800.

They already received $850 per above.

That means a $4,950 credit on their 2020 individual tax return. I look like a hero.

But why? After all, their 2019 income was over $300 grand – way above the range for receiving any stimulus.

The quirky thing is that the stimulus is based on one’s 2020 tax return. Congress however wanted the money out as fast as possible. The stimulus had an income test, though, so the first option was to do the calculation on one’s 2019 tax return. When that option proved unworkable, the second option was to use 2018. It was messy but quick, and one would settle-up when filing the 2020 tax return.

Congress realized that settling-up could mean repaying some of the stimulus money. Since that somewhat negated the purpose of a stimulus, Congress decided that the gate would only swing one way. If one did not receive enough stimulus, then one could claim the shortfall on the 2020 return. If one was overpaid, well … one got to keep the money. 

It was a win:win.

Not so much for the accountant, though.

IRS Collection Statute Expiration Date (CSED)

 I consider it odd.

I have two files in my office waiting on the collection statute of limitations to expire.

It is not a situation I often see.

Audits, penalty abatements, payment plans, offers and innocent spouse requests are more common.

Let’s talk about the running of the collection statute of limitations.

COMMENT: I do not consider this to be valid tax planning, and I am quite reluctant to represent someone who starts out by intending to do the run. That said, sometimes unfortunate things happen. We will discuss the topic in the spirit of the latter.

Let’s set up the two statutes of limitations:

(1) The first is the statute on assessment. This is the familiar 3-year rule: the IRS has 3 years to audit and the taxpayer has 3 years to amend.

COMMENT: I do not want to include the word “generally” every time, as it will get old. Please consider the modifier “generally” as unspoken but intended.

(2)  The second is the statute on collections. This period is 10 years.

We might conversationally say that the period can therefore go 13 years. That would be technically incorrect, as there would be two periods running concurrently. Let’s consider the following example:

·      You filed your individual tax return on April 15, 2020. You owed $1,000 above and beyond your withholdings and estimates.

·      The IRS audited you on September 20, 2022. You owed another $4,000.

·      You have two periods going:

o  The $1,000 ends on April 15, 2030 (2020 + 10 years).

o  The $4,000 ends on September 20, 2032 (2022 + 10 years).

Alright, so we have 10 years. The expiration of this period is referred to as the “Collection Statute Expiration Date” or “CSED”.

When does it start?

Generally (sorry) when you file the return. Say you extend and file the return on August 15. Does the period start on August 15?

No.

The period starts when the IRS records the return.

Huh?

It is possible that it might be the same date. It is more possible that it will be a few days after you filed. A key point is that the IRS date trumps your date.

How would you find this out?

Request a transcript from the IRS. Look for the following code and date:

                  Code          Explanation

                    150           Tax return filed

Start your 10 years.

BTW if you file your return before April 15, the period starts on April 15, not the date you filed. This is a special rule.

Can the 10 years be interrupted or extended?

Oh yes. Welcome to tax procedure.

The fancy 50-cent word is “toll,” as in “tolling” the statute. The 10-year period is suspended while certain things are going on. What is going on is that you are probably interacting with the IRS.

OBSERVATION: So, if you file your return and never interact with the IRS – I said interact, not ignore – the statute will (generally – remember!) run its 10 years.

How can you toll the statute?

Here are some common ways:

(1)  Ask for an installment payment plan

Do this and the statute is tolled while the IRS is considering your request.

(2)  Get turned down for an installment payment plan

                  Add 30 days to (1) (plus Appeals, if you go there).

(3)  Blow (that is, prematurely end) an installment payment plan

Add another 30 days to (1) (plus Appeals, if you go there).

(4)  Submit an offer in compromise

The statute is tolled while the IRS is considering your request, plus 30 days.

(5)  Military service in a combat zone

The statute is tolled while in the combat zone, plus 180 days.

(6)  File for bankruptcy

The statute is tolled from the date the petition is filed until the date of discharge, plus 6 months.

(7)  Request innocent spouse status

The statute is tolled from the date the petition is filed until the expiration of the 90-day letter to petition the Tax Court. If one does petition the Court, then the toll continues until the final Court decision, plus 60 days.

(8)  Request a Collections Due Process hearing

The statute is tolled from the date the petition is filed until the hearing date.

(9)  Request assistance from the Taxpayer Advocate

The statute is tolled while the case is being worked by the Taxpayer Advocate’s office.

Unfortunately, I have been leaning on CDP hearings quite a bit in recent years, meaning that I am also extending my client’s CSED. I have one in my office as I write this, for example. I have lost hope that standard IRS procedure will resolve the matter, not to mention that IRS systems are operating sub-optimally during COVID. I am waiting for the procedural trigger (the “Final Notice. Notice of Intent to Levy and Notice of Your Rights to a Hearing”) allowing the appeal. I am not concerned about the CSED for this client, so the toll is insignificant.

There are advanced rules, of course. An example would be overlapping tolling periods. We are not going there in this post.

Let’s take an example of a toll.

You file your return on April 15, 2015. You request a payment plan on September 5, 2015. The IRS grants it on October 10, 2015. Somethings goes wobbly and the IRS terminates the plan. You request a Collection Due Process hearing on June 18, 2019. The hearing is resolved on November 25, 2019.

Let’s assume the IRS posting date is April 15, 2015.

Ten years is April 15, 2025.

It took 36 days to approve the payment plan.

The plan termination automatically adds 30 days.

The CDP took 161 days.

What do you have?

April 15, 2025 … plus 36 days is May 21, 2025.

Plus 30 days is June 20, 2025.

Plus 161 days is November 28, 2025.

BTW there are situations where one might extend the CSED separate and apart from the toll. Again, we are not going there in this post.

Advice from a practitioner: do not cut this razor sharp, especially if there are a lot of procedural transactions on the transcript. Some tax practitioners will routinely add 4 or 5 weeks to their calculation, for example. I add 30 days simply for requesting an installment payment plan, even though the toll is not required by the Internal Revenue Manual.  I have seen the IRS swoop-in when there are 6 months or so of CSED remaining, but not when there are 30 days.

Talking Frankly About Offers In Compromise

I am reading a case involving an offer in compromise (OIC).

In general, I have become disinclined to do OIC work.

And no, it is not just a matter of being paid. I will accept discounted or pro bono work if someone’s story moves me. I recently represented a woman who immigrated from Thailand several years ago to marry an American. She filed a joint tax return for her first married year, and – sure enough – the IRS came after her when her husband filed bankruptcy. When we met, her English was still shaky, at best. She wanted to return to Thailand but wanted to resolve her tax issue first. She was terrified.   

I was upset that the IRS went after an immigrant for her first year filing U.S. taxes ever, who had limited command of the language, who was mostly unable to work because of long-term health complications and who was experiencing visible - even to me - stress-related issues.

Yes, we got her innocent spouse status. She has since returned to Thailand.

Back to offers in compromise.

There are two main reasons why I shy from OIC’s:

(1) I cannot get you pennies-on-the-dollar.

You know what I am taking about: those late-night radio or television commercials.

Do not get me wrong: it can happen. Take someone who has his/her earning power greatly reduced, say by an accident. Add in an older person, meaning fewer earning years remaining, and one might get to pennies on the dollar.

I do not get those clients.

I was talking with someone this past week who wants me to represent his OIC. He used to own a logistics business, but the business went bust and he left considerable debt in his wake. He is now working for someone else.

Facts: he is still young; he is making decent money; he has years of earning power left.

Question: Can he get an OIC?

Answer: I think there is a good chance, as his overall earning power is down.

Can he get pennies on the dollar?

He is still young; he is making decent money; he has years of earning power left. How do you think the IRS will view that request?

(2) The multi-year commitment to an OIC.

When you get into a payment plan with the IRS, there is an expectation that you will improve your tax compliance. The IRS has dual goals when it makes a deal:

(a)  Collect what it can (of course), and

(b)  Get you back into the tax system.

Get into an OIC and the IRS expects you to stay out of trouble for 5 years. 

So, if you are self-employed the IRS will expect you to make quarterly estimates. If you routinely owe, it will want you to increase your withholding so that you don’t owe. That is your end of the deal.

I have lost count of the clients over the years who did not hold-up their end of the deal.  I remember one who swung by Galactic Command to lament how he could not continue his IRS payment plan and then asked me to step outside to see his new car.

Folks, there is little to nothing that a tax advisor can do for you in that situation. It is frustrating and – frankly – a waste of time.

Let’s look at someone who tried to run the five-year gauntlet.

Ed and Cynthia Sadjadi wound up owing for 2008, 2009, 2010, and 2011.

They got an installment plan.

Then they flipped it to an OIC.

COMMENT: What is the difference? In a vanilla installment plan, you pay back the full amount of taxes. Perhaps the IRS cuts you some slack with penalties, but they are looking to recoup 100% of the taxes. In an OIC, the IRS is acknowledging that they will not get 100% of the taxes.

The Sadjadis were good until they filed their 2015 tax return. They then owed tax.

The reasoned that they had paid-off the vast majority if not all of their 2008 through 2011 taxes. They lived-up to their end of the deal. They now needed a new payment plan.

Makes sense, right?

And what does sense have to do with taxes?

The Court reminded them of what they signed way back when:

I will file tax returns and pay the required taxes for the five-year period beginning with the date and acceptance of this offer.

The IRS will not remove the original amount of my tax debt from its records until I have met all the terms and conditions of this offer.

If I fail to meet any of the terms of this offer, the IRS may levy or sue me to collect …..

The Court was short and sweet. What part of “five-year period” did the Sadjadis not understand?

Those taxes that the IRS wrote-off with the OIC?

Bam! They are back.

Yep. That is how it works.

Our case this time was Sadjadi v Commissioner, T.C. Memo 2019-58.

Taxpayer Fail On Discharging Taxes Through Bankruptcy

I have an IRS notice sitting on my desk. I meant to call the IRS about it on Friday, but it got away from me. I will call on Monday. It disgruntles me, as I have already called and considered the matter resolved.

There you have why practitioners get upset with the IRS about hair-trigger or bogus notices: one has only so much time.

My partner brought in this client. They were chronic nonfilers, and we prepared the better part of a decade’s worth of returns for them. I lost humor with them when the husband insulted one of my accountants. Granted, it is unlikely that a younger accountant would know what I know, but the incident was uncalled for. The husband and I had a very different and blunt conversation.

They spoke with my partner about discharging the taxes through bankruptcy, which is one reason I was brought in.

Short answer: forgetaboutit, at least for a while.

There are four basic requirements to discharging taxes in bankruptcy. I have not often seen the fourth reason, but I was recently reading a case involving that elusive fourth.

Here are the four requirements:

(1)  The taxes were due at least three years ago. Obtain an extension and you must include the extension period in the three years.

(2)  Fail to file and the taxes are not dischargeable until at least two years after filing.

(3)  The IRS must have assessed the taxes at least 240 days before filing for bankruptcy.

(4)  The return must not be fraudulent, and the taxpayer(s) cannot willfully have attempted to avoid the tax.

Let’s go through an example.

(1)  Let’s say we are talking about your 2016 tax return. If you filed on April 15, 2017, the first rule gives you a minimum date of April 15, 2020.

(2)  Let’s say you filed that 2016 return on July 21, 2018. The second rule gives you a minimum date of July 21, 2020.

(3)  Let’s say the IRS posted (that is, assessed) the 2016 return shortly after filing – perhaps July 31, 2018. There is no problem with the 240-day rule.

(4)  Let’s also say there was no attempt to evade tax. It was irresponsible not to file, but there is nothing there other than irresponsibility.

Seems to me that the earliest you can file for discharge via bankruptcy would be July 22, 2020 – the latest of the above dates.

Let’s talk about a case involving the fourth requirement.

There is a doctor. Her husband was a CPA – he lost his license after a conviction for tax evasion.

She let her husband prepare the returns for years 2004 through 2014.

I would not have done that, but - to me – a CPA losing his license for tax evasion is a HUGE dealbreaker, husband or not.

The entered into a payment plan. They missed some payments.

Like night follows day.

They were living the high life. They had an expensive house (Newport), but they wanted a more expensive house (Dwight). They bough Dwight on a land contract, hoping to sell Newport.

They then carried two houses, as Newport did not sell.

Now they were tight on cash, and they fell behind with the IRS.

Mind you, that did not stop them from sending their kids to a private school, racking up $325,000 in the process. They also took trips to Mexico and Puerto Rico, as well as parking a Jaguar and a Lexus in the driveway.

Newport was foreclosed.

In 2016 we have the bankruptcy.

The IRS moved to exercise its lien on the Dwight property.

Husband came up with a brilliant scheme.  He sold Dwight for a swan song to a former client.  He would pay the IRS the few dollars that came his way from the “sale,” and he and his wife would rent the Dwight property back from the former client.

Puuhleeeese, said the IRS.

The Court agreed with the IRS. It spotted a willful attempt to evade or avoid, thereby nixing any discharge of taxes although the couple had filed for bankruptcy.

Why? They failed the fourth requirement.

The case for the home gamers is re Harold 2020 PTC 58 (Bankr. E.D. Michigan 2020)