IRS Tax Liens

What Is a Tax Lien?

A lien is the IRS’ first major step in order to collect back taxes. The lien is filed county-by-county and will attach to all property you own in that county.

Why is a Tax Lien Filed?

The lien is filed to secure the IRS’ position as your creditor. A lien by itself does not mean that the IRS will be taking your money or assets, but it can ruin your credit and make it near impossible to buy a home.

The IRS has a policy of automatically issuing a lien if your debt exceeds $10,000. Mind you, the IRS still has the discretion to issue a lien below that limit.

When is a Tax Lien Filed?

The IRS first sends a letter with an assessment of your tax liability. If ignored, there will be four more letters.

You will then receive the Notice of Federal Tax Lien (NFTL). This means that a lien has already been attached to your property. Remember that liens are public record. Expect your credit card rates to go up.

Effects of a Tax Lien

In addition to ruining your credit, a lien can lead to a levy. A levy is bad. This is when the IRS seizes your assets. You probably have heard of bank levies, where the IRS takes the money in your bank account. There are also wage levies (also called garnishments), where the IRS will give you an allowance to live on and take the rest of your paycheck.

What to Do About a Tax Lien?

The first thing is: don’t stick your head in the sand! This will not go away on its own, unless you are willing to earn no money and accumulate no assets for years and years.

Second: do something! Doing nothing was not your best plan. Take the time to research and learn about IRS collections - or hire someone who practices in this area. If it is a CPA, please be aware that not all CPAs practice tax representation. Preparing a tax return is not the same as representing before the IRS. 

The IRS Is Selling a Super Bowl Ring

I am a huge NFL fan. It is, without a doubt, my favorite sport.

Did you hear about Fuzzy Thurston’s tax problems?

Who is Fuzzy? His actual name is Fred Thurston. He played with the Green Packers from 1959 to 1967. He played guard in the first two Super Bowls under Vince Lombardi.

He was considered a tough football player and part of the famed “Power Sweep.” When asked how he prepared for the bitter cold of the Ice Bowl on December 31, 1966 at Lambeau Field against the Dallas Cowboys, he replied “About 10 vodkas.”

After football he became a restaurateur. He and partners, including Max McGee, opened a restaurant named Left Guard in Menasha, Wisconsin and eventually had six locations throughout Wisconsin. Fuzzy played left guard – hence the name of the restaurant.

The trouble arose with employment taxes. Somewhere between 1978 and 1980 the Janesville restaurant failed to remit payroll taxes withheld from employees. We have spoken of withholding before. These penalties are some of the toughest in the IRS arsenal. It makes sense, if you remember that these are withheld taxes. The money belongs to the employees, and the employer is merely a conduit for remittance to the Treasury. When the employer fails to remit, it not only deprives the Treasury but it has also robbed from its employees.

So Fuzzy had a withholding problem. The tax action goes against the company and the responsible persons at the company. As a partner, Fuzzy must have had enough authority to be considered a responsible person. So were his partners. His partners paid-off their actions, but Fuzzy fought his. The initial judgment against him in 1984 was approximately $190,000.

Fuzzy continued to fight. His liability, with interest and penalties for more than 25 years, is a little more than $1.7 million. The IRS is selling off his football paraphernalia, including his 1960 Packers helmet, two 1960 footballs signed by Packers players and Vince Lombardi, his NFL championship rings from 1958, 1961, 1962 and 1965,  and Fuzzy’s Super Bowl II ring. The IRS is searching for his Super Bowl I ring also, but it hasn’t turned up.

It’s an unfortunate story, but I have to point out that Fuzzy either dug in his heels unreasonably or otherwise received horrendous tax advice. Perhaps he felt that his partners stole from him and that he wasn’t responsible. Fine, but a quick education from his accountant might have included the concept of surrogate liability, and that as a partner in the restaurant he had triggered that liability. At that point it was not a matter of right or wrong, but rather a matter of emergency room decision-making. Stop the bleed, clot the wound, stabilize the patient, live to fight another day. I have to believe he could have come up with $190,000 in 1984. He could then have sued his partners, if it made him feel better. But he was not going to win the responsible person action against him with the IRS.

Your Accountant Makes the Mistake. Do You Owe Penalties?

If your accountant omits some of your income on your personal income tax return, is it fair that you should be penalized by the IRS?

Generally speaking, reliance on a tax preparer is “reasonable cause” to request penalty mitigation from the IRS. Generally, but not always.

Enter Stephen Woodsum (SW). SW has a bachelors degree from Yale and a masters from Northwestern. He was a founding director of Summit Partners, a private equity firm.

Note: Mr. Woodsum is financially savvy.

In 1998 SW entered a transaction described as a “ten year total return limited partnership linked swap.” This transaction involved Bankers Trust Company and Deutsche Bank and included a reference to paying interest at the “LIBOR rate” upon the “notional amount” of the “reference fund.”

        Note: Financially unsavvy people do not use these words.

So, the swap was to expire in 2008 – ten years. SW was unhappy with the performance of the swap and ended it in 2006. He received at that time a Form 1099 reporting the $3.4 million Deutsche Bank paid him and another 1099 for $60,291 of interest income.

SW gave all of his tax documents to his accountant. There were over 160 such documents. SW must have had a good year, as the $3.4 million was not the largest number on his tax return. It would however had been the third largest capital gain had the $3.4 million in proceeds been reported.

The accountant prepared the return, including the interest but excluding the $3.4 million.  Some accountant. SW and his wife met with the accountant on October 15, the day the return was due. They had to go over the federal return and 27 state income tax returns. The federal return alone was 115 pages.

Mr. and Mrs. Woodsum did not notice that the accountant had left out the $3.4 million.

The IRS did notice, of course, and wanted the tax and interest, as well as penalties.

Mr. Woodsum felt he did not have to pay penalties because… well, he relied on his accountant. I agree with SW.

The court made an interesting comment. It observed that courts have previously mitigated the penalties, but it continued …

It may be (and petitioners seem to expect the Court to assume) that the omission was the result of the C.P.A.'s oversight of one Form 1099 amid 160 such forms, but no actual evidence supports that characterization. The omission is unexplained, and since petitioners have the burden to prove reasonable cause and good faith, this evidentiary gap works against their defense.”

No actual evidence supports that characterization? I would have gotten a statement from the accountant clarifying that the accountant was provided but failed to include the 1099 on my return.

The court seemed unwilling to give SW as much latitude because of his financial sophistication. The court goes on…

Mr. Woodsum, however, makes no showing of a review reasonable under the circumstances. He personally ordered the termination that gave rise to the income; he received a Form 1099-MISC reporting that income; that amount should have shown up on Schedule D as a distinct item; but it was omitted. The parties stipulated that petitioners' “review” of the defective return was of an unknown duration and that it consisted of the preparer turning the pages of the return and discussing various items. Petitioners understated their income by $3.4 million—an amount that was substantial not only in absolute terms but also in relative terms (i.e., it equaled about 10 percent of petitioners' adjusted gross income). A review undertaken to “make sure all income items are included” (in the words of Magill)—or even a review undertaken only to make sure that the major income items had been included—should, absent a reasonable explanation to the contrary, have revealed an omission so straightforward and substantial.”

I have had clients who did the same as Mr. Woodsum. It did not occur to me that they were conducting an unreasonable review. They provided all documents, answered all questions, met with me and complained about the amount I told them they owed. These are wealthy people. This is not you or I, where the absence of our salary would be immediately noticeable on our return. Mr. Woodsum reported approximately $33 million of income on his return. Note that the sale was not even the largest number on a schedule to Mr. Woodsum’s return.

The court upheld the penalties.

Perhaps this is what happens when a private equity manager gets into a complex financial transaction with names like “ten year total return limited partnership linked swap.” This court was not willing to bend much on the reporting of a “Wall Street” transaction that requires a tax seminar to understand.
The penalties were over $100 thousand.

I wonder whether Mr. Woodsum is suing his accountant for malpractice.

There Are New Deductible Mileage Rates

The IRS has revised the deductible mileage rates for the second half of 2011.

The new and old rates are as follows:

                                                          NEW                                               OLD
Business mileage                          55.5 cents/mi                                   51 cents/mi
Medical or moving                         23 cents/mi                                      19 cents/mi
Charitable mileage                        14 cents/mi                                      14 cents/mi

The charitable mileage rate did not change because that rate is set by statute and not regulation. It requires Congress to change the charitable mileage rate.

The IRS Sues Over Conservation Easements

It has been several years since I visited Washington D.C. I saw a bit of tax news recently that got me thinking about it. Several years ago I was involved in the planning of a conservation easement in D.C. As Washington has 26 historic districts, this was not that unusual. Our client was renovating residential property, and the easement was for the building façade. We normally associate an easement with access to real property, but it can also be a legally enforceable right to preserve real property. In my case, what was being preserved was the outside of the building, which was of historical interest in a neighborhood of historical consequence. You could say that they were donating the right for future generations to look at the building.

The tax advantage? Quite simple: if you follow the rules you can obtain a charitable contribution for the easement. The deduction is (theoretically) the decrease in property value attributable to the grant of the easement. Memory tells me that a reasonable range for a facade is 10 to 14 percent of the building’s value, which is not insignificant.

This area is fraught with danger. An appraisal – or appraisals – is mandatory. The easement will be transferred to a government or charitable organization, so an attorney is required. You may have to obtain the mortgage lender’s agreement to subordinate their right to that of the government or charity receiving the easement.

The IRS challenged some of these donations early on. In some cases, the IRS argued that the donation was zero, although the IRS took considerable punishment in the courts for this position (Akers and Symington, for example).

I was reading Janet Novak’s article in Forbes where she stated that the Justice Department filed a lawsuit to enjoin the Trust for Architectural Easements from certain practices the IRS considers improper. The lawsuit demands that the Trust turn over the names of approximately 800 property owners in Baltimore, New York City and Boston who have claimed this type of deduction. The IRS has already identified more than 300 taxpayers for audit.

The IRS has been concerned with these easements because of their potential for abuse. In some cases, taxpayers have claimed deductions approaching 50% of the property’s value. In others the charity buys the property, places the easement and then sells it to the taxpayer – at a reduced price. The taxpayer makes two checks out – one to purchase the property and the other as a “donation.” He/she of course deducts the second check on his/her return.

The IRS has taken fire from practitioners who argue that it is over-zealous and not regarding Congress’ intent to encourage these easements. I admit that I felt that way at first. It was easy to see a heavy-handed IRS. Consider the following quote from the court in Symington, for example:

  "We are hard pressed to imagine a prospective purchaser of a 60-plus acre parcel of land who would not   have considered the restrictions of such an open-space easement in determining his offering price. The fact that a purchaser of Friendship Farm would have been precluded from even giving away part of his land if he ever so desired, for example, to his children, or, along the same lines, precluded from ever building an additional home on his property, would certainly have affected the purchase price he would have been willing to pay."

However, I am at a loss why I would structure a transaction requiring the charity to buy the real property and for my client to subsequently write two checks. I wouldn’t. I don’t see it how it reflects normal commercial terms. It feels oily, at least to me. The IRS may have valid grounds for this action.

Possible Change in the FUTA Payroll Tax

Beginning July 1, there may be a change in your FUTA payroll tax rate.

The FUTA tax is 6.2%, although the IRS allows a credit of 5.4% if you pay your state unemployment taxes on time. This makes for a net tax rate of 0.8%. FUTA applies to the first $7,000 of wages per employee. There has been a “temporary” surcharge of 0.2% since the 1970s, and that 0.2% is set to expire June 30, 2011. If the surcharge expires, the 5.4% state credit will nonetheless remain the same, making the net cost to the employer 0.6%.

Please be aware that a proposal in the President’s 2012 budget would make the 0.2% surcharge permanent. There is an alternate budget proposal that would increase the FUTA wage base from $7,000 to $15,000 per employee.

Should the FUTA surcharge expire, it will add to an already confusing year for payroll taxes. Remember that for 2011 employers are paying Social Security taxes of 6.2% while employees are paying 4.2%.

We at Kruse and Crawford are monitoring this issue and will available to answer any questions as June 30, 2011 approaches.

June 30th and the FBAR

If you have a foreign bank account, either personally or through work, please remember that you may have to report the account(s) to Treasury by the end of this month. This report is called the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, and is usually referred to as the FBAR. If the value of the account(s) exceeds $10,000 at any time, then anticipate that you have to file.

Where the FBAR may get tricky is when one has a signature authority over a foreign account at work. Say for example that your company regularly travels to or has a location in Poland. It is very possible that there will be a Polish account, if for no other reason than for administrative ease. Say that you have authority to sign on that account, although you have no ownership over the account. The company owns the account, not you. Is an FBAR still required?

In the past many an accountant would have said no, but the rules are changing. Believe it or not, the situation described may require an FBAR, although it may also qualify for transitional relief. You do not want to mess with FBAR penalties, as they are quite severe and – in some cases – out of proportion to the money in the account. Treasury is convinced that considerable money is hidden offshore and is having much less patience with such matters.