Those applying for social security beginning Monday, May 2, will have to select an electronic payment option – either direct deposit or a debit card. The debit card can be reloaded every month. One has to be careful, though, as fees will apply. For example, there is a $1.50 charge for transferring from the card to a checking or savings account.
If you are already receiving social security, then you have two more years – until March, 2013 - to make this decision.
Tuesday, June 21, 2011
Will Bankruptcy Protect Against An IRS Lien on Your IRA
It happened this busy season. As you may know, we do our share – and then some – of tax representation work. I would say that, despite our size, we do as much representation work as many firms in Cincinnati.
So what happened? A client wanted to know whether the IRS could lien her IRA.
Do you know the answer?
I’ll give it to you momentarily
I was looking at a tax case called Miles v Commissioner. Corrie Miles ran up past due taxes. The IRS filed liens for 1997 and 1998 which attached to her IRA.
Note: Under Section 6321 if a taxpayer fails to pay a liability after notice and demand, the IRS can file a lien on taxpayer’s property and rights to property.
If it goes to the next step, the IRS is allowed under Section 6331 to seize and sell the property (unless it is exempt) subject to a federal tax lien.
Corrie Miles filed for bankruptcy in 2003. Her 1996, 1997 and 1998 taxes were discharged.
Remember: Taxes more than three years old can be discharged.
Can the IRS go against her IRA?
What is your answer? Did Corrie keep her IRA?
This case went through Appeals and the Supreme Court has just refused to give it cert. But it did go that high up the chain. The IRS won. Why? Although Corrie went through bankruptcy, the IRS had a priority position going in to bankruptcy. The bankruptcy will not wipe out the lien. The IRS could proceed against Corrie’s IRA to the tune of $142,000 – the balance in the IRA before she went into bankruptcy.
So what happened? A client wanted to know whether the IRS could lien her IRA.
Do you know the answer?
I’ll give it to you momentarily
I was looking at a tax case called Miles v Commissioner. Corrie Miles ran up past due taxes. The IRS filed liens for 1997 and 1998 which attached to her IRA.
Note: Under Section 6321 if a taxpayer fails to pay a liability after notice and demand, the IRS can file a lien on taxpayer’s property and rights to property.
If it goes to the next step, the IRS is allowed under Section 6331 to seize and sell the property (unless it is exempt) subject to a federal tax lien.
Corrie Miles filed for bankruptcy in 2003. Her 1996, 1997 and 1998 taxes were discharged.
Remember: Taxes more than three years old can be discharged.
Can the IRS go against her IRA?
What is your answer? Did Corrie keep her IRA?
This case went through Appeals and the Supreme Court has just refused to give it cert. But it did go that high up the chain. The IRS won. Why? Although Corrie went through bankruptcy, the IRS had a priority position going in to bankruptcy. The bankruptcy will not wipe out the lien. The IRS could proceed against Corrie’s IRA to the tune of $142,000 – the balance in the IRA before she went into bankruptcy.
Congress Speaks Up on Innocent Spouse Tax Relief
I am glad to see that Congress is addressing the IRS’s position concerning innocent spouse and litigated in Cathy Marie Lantz v. Commissioner.
Here is a summary of the issue:
There are three “types” of innocent spouse claims. Let’s refer to them by the Code subsections they are presented under: (b), (c) and (f). Type (b) is the classic innocent spouse: the erroneous items belong to one spouse; the other spouse did not know or have reason to know. Type (c) is for divorced spouses and allows each spouse to determine his/her liability as if the spouse had filed a separate return.
Type (f) is more of an expansive innocent spouse rule. It was passed years after the original provisions (it was passed in 1998), and it seeks to provide an opportunity for spouses who cannot meet the (sometimes technical) requirements of (b) and (c).
What (b) and (c) have in common is that the spouse has to file the innocent spouse claim within two years of contact by the IRS. What happens, though, if the one spouse is not told by the other spouse of the contact? Could happen. Some would say it will happen. Say further that two years go by. The spouse then learns of the problem and tries to pursue innocent spouse relief under (f). Does the two year rule apply to an (f) filing?
Interestingly, Congress did not include a two year rule in (f), a point which many practitioners, including myself, interpret to mean that Congress did not mean to include a two year rule in (f). Seems straightforward. The law was in place; Congress was aware of the law and chose not to include the two year requirement.
The IRS does not agree. The IRS argues that Congress delegated authority to it to write administrative Regulations for (f), and that, after consulting with Carnac the Magnificent, it believes that Congress intended for there to be a two-year requirement under (f). Congress just forgot to write it in to the law.
There was a case last year,Cathy Marie Lantz v. Commissioner, which unfortunately agreed with the IRS. To be fair, there is a technical argument, and the argument can be persuasive. Unfortunately, it does not pass the “common sense” test.
Congress has now chimed in and 49 Representatives — including all the Democrats who sit on the tax-writing House Ways and Means Committee — have told the IRS Commissioner that the IRS had “violated the spirit of the original law” in limiting relief to two years. Three Democratic senators — Max Baucus of Montana, the chairman of the Finance Committee; Tom Harkin of Iowa; and Sherrod Brown of Ohio — have sounded the same theme.
The national IRS taxpayer advocate - Nina Olson – has also asked for the two year limit to be extended or revoked.
Let’s hope something comes of this.
Here is a summary of the issue:
There are three “types” of innocent spouse claims. Let’s refer to them by the Code subsections they are presented under: (b), (c) and (f). Type (b) is the classic innocent spouse: the erroneous items belong to one spouse; the other spouse did not know or have reason to know. Type (c) is for divorced spouses and allows each spouse to determine his/her liability as if the spouse had filed a separate return.
Type (f) is more of an expansive innocent spouse rule. It was passed years after the original provisions (it was passed in 1998), and it seeks to provide an opportunity for spouses who cannot meet the (sometimes technical) requirements of (b) and (c).
What (b) and (c) have in common is that the spouse has to file the innocent spouse claim within two years of contact by the IRS. What happens, though, if the one spouse is not told by the other spouse of the contact? Could happen. Some would say it will happen. Say further that two years go by. The spouse then learns of the problem and tries to pursue innocent spouse relief under (f). Does the two year rule apply to an (f) filing?
Interestingly, Congress did not include a two year rule in (f), a point which many practitioners, including myself, interpret to mean that Congress did not mean to include a two year rule in (f). Seems straightforward. The law was in place; Congress was aware of the law and chose not to include the two year requirement.
The IRS does not agree. The IRS argues that Congress delegated authority to it to write administrative Regulations for (f), and that, after consulting with Carnac the Magnificent, it believes that Congress intended for there to be a two-year requirement under (f). Congress just forgot to write it in to the law.
There was a case last year,Cathy Marie Lantz v. Commissioner, which unfortunately agreed with the IRS. To be fair, there is a technical argument, and the argument can be persuasive. Unfortunately, it does not pass the “common sense” test.
Congress has now chimed in and 49 Representatives — including all the Democrats who sit on the tax-writing House Ways and Means Committee — have told the IRS Commissioner that the IRS had “violated the spirit of the original law” in limiting relief to two years. Three Democratic senators — Max Baucus of Montana, the chairman of the Finance Committee; Tom Harkin of Iowa; and Sherrod Brown of Ohio — have sounded the same theme.
The national IRS taxpayer advocate - Nina Olson – has also asked for the two year limit to be extended or revoked.
Let’s hope something comes of this.
Mortgage Debt Forgiveness
We saw a home foreclosure reported this tax season.
You may remember that the Mortgage Relief Act allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. This is an exception that the general rule that includes cancelled debt in income. The term of art is “qualified principal residence debt.” The key part here is “principal residence.” You can have several homes, but only one home can be your principal residence. A principal residence can be a house, a condominium, a cooperative, a mobile home or houseboat. I remember a fellow who docks his yacht off the coast of Jacksonville. I suppose he could consider his yacht his principal residence, if he and his wife lived there enough. It wouldn't be a bad life, as the yacht was around 100 feet long and had a professional crew. He was, needless to say, quite well-off.
Here is what doesn’t qualify: a vacation home, a second home, a business property or a rental property.
The debt itself must have been incurred to buy, construct or substantially improve that principal residence. Herein lays a possible trap. Say that you refinanced your house for $250,000 when its original mortgage was $180,000. You used the additional monies to … well, who knows what you did, but you did not fix-up the house. Maybe you sent a kid to college. If the house gets foreclosed and that debt cancelled, you may have a problem. Let’s say the debt is $250,000, to keep the discussion easy. Only $180,000 of that debt will qualify, as only $180,000 represents the purchase, construction or improvement (or refinancing of the same) of the principal residence. The remaining $70,000 ($250,000 – 180,000) represents income from cancelled debt. It may be that the $70,000 may be excludable under another provision (say insolvency), but it will not be excluded under the Mortgage Relief Act.
What I see as an unfortunate fact pattern is a saver who paid off, or paid down, his/her house and then runs up a second mortgage for unexpected debt, such as medical bills or unemployment. You can see that this mortgage would not have been incurred for the purchase, construction or improvement (or refinancing of the same) of a principal residence. There would be no relief for this person, at least under the Mortgage Relief Act.
You may remember that the Mortgage Relief Act allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. This is an exception that the general rule that includes cancelled debt in income. The term of art is “qualified principal residence debt.” The key part here is “principal residence.” You can have several homes, but only one home can be your principal residence. A principal residence can be a house, a condominium, a cooperative, a mobile home or houseboat. I remember a fellow who docks his yacht off the coast of Jacksonville. I suppose he could consider his yacht his principal residence, if he and his wife lived there enough. It wouldn't be a bad life, as the yacht was around 100 feet long and had a professional crew. He was, needless to say, quite well-off.
Here is what doesn’t qualify: a vacation home, a second home, a business property or a rental property.
The debt itself must have been incurred to buy, construct or substantially improve that principal residence. Herein lays a possible trap. Say that you refinanced your house for $250,000 when its original mortgage was $180,000. You used the additional monies to … well, who knows what you did, but you did not fix-up the house. Maybe you sent a kid to college. If the house gets foreclosed and that debt cancelled, you may have a problem. Let’s say the debt is $250,000, to keep the discussion easy. Only $180,000 of that debt will qualify, as only $180,000 represents the purchase, construction or improvement (or refinancing of the same) of the principal residence. The remaining $70,000 ($250,000 – 180,000) represents income from cancelled debt. It may be that the $70,000 may be excludable under another provision (say insolvency), but it will not be excluded under the Mortgage Relief Act.
What I see as an unfortunate fact pattern is a saver who paid off, or paid down, his/her house and then runs up a second mortgage for unexpected debt, such as medical bills or unemployment. You can see that this mortgage would not have been incurred for the purchase, construction or improvement (or refinancing of the same) of a principal residence. There would be no relief for this person, at least under the Mortgage Relief Act.
Now It's Social Security Notices Concerning W-2s
The Social Security Administration is resuming their DECOR notice program. DECOR stands for “Decentralized Correspondence” and means that the SSA could not process a Form W-2. There is any number of reasons why this could happen, including:
1. Typographical errors
2. Name changes, including marriage
3. Misuse of a social security number
The SSA places these earnings in a suspense file called Earnings Suspense File (ESF) rather than posting to a worker’s account.
An employer is requested to check their records. If the worker is still employed, the employer may be requested to verify the employee’s social security card and number. If the employer and employee are unable to resolve the matter, the employee will be requested to contact a local SSA office. If the worker is no longer employed, the employer is required to document its efforts to verify the information.
You may remember that SSA has not sent out DECOR notices for several years because of litigation over Department of Homeland Security regulations.
1. Typographical errors
2. Name changes, including marriage
3. Misuse of a social security number
The SSA places these earnings in a suspense file called Earnings Suspense File (ESF) rather than posting to a worker’s account.
An employer is requested to check their records. If the worker is still employed, the employer may be requested to verify the employee’s social security card and number. If the employer and employee are unable to resolve the matter, the employee will be requested to contact a local SSA office. If the worker is no longer employed, the employer is required to document its efforts to verify the information.
You may remember that SSA has not sent out DECOR notices for several years because of litigation over Department of Homeland Security regulations.
Reporting Health Coverage on Forms W-2
Good news on reporting health coverage on employees’ W-2s.
You may recall that Obamacare requires the reporting of health coverage on an employee’s W-2. This rule was to be first effective for 2011 W-2s to be filed in 2012.
That was changed from 2012 to 2013 – in effect, a one year delay.
Now the rule has been changed again. Small firms, defined as having fewer than 250 employees – do not have to report health coverage on their 2012 W-2s to be filed in 2013.
Larger employers – defined as 250 employees or more – will still have to include this information on their 2012 W-2s.
You may recall that Obamacare requires the reporting of health coverage on an employee’s W-2. This rule was to be first effective for 2011 W-2s to be filed in 2012.
That was changed from 2012 to 2013 – in effect, a one year delay.
Now the rule has been changed again. Small firms, defined as having fewer than 250 employees – do not have to report health coverage on their 2012 W-2s to be filed in 2013.
Larger employers – defined as 250 employees or more – will still have to include this information on their 2012 W-2s.
Social Security Annual Statements
Did you see that the Social Security Administration will stop mailing annual statements to workers in order to save money?
The SSA plans to eventually resume mailing these statements to workers age 60 and over. It intends that those 60 and younger be able to download their statements.
The SSA starting mailing annual statements to individuals age 60 and over back in 1995. In 2000 it included workers age 25 and over. Last year it mailed out more than 150 million four-page statements, which list your earnings history and give an estimate of your expected retirement benefit.
SSA Commissioner Michael Astrue pointed out that the annual statements cost approximately $70 million each year to print and mail.
The SSA plans to eventually resume mailing these statements to workers age 60 and over. It intends that those 60 and younger be able to download their statements.
The SSA starting mailing annual statements to individuals age 60 and over back in 1995. In 2000 it included workers age 25 and over. Last year it mailed out more than 150 million four-page statements, which list your earnings history and give an estimate of your expected retirement benefit.
SSA Commissioner Michael Astrue pointed out that the annual statements cost approximately $70 million each year to print and mail.
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