IRS Modifies Streamlined Installment Payment Program

The IRS issued a memorandum on January 20, 2012 liberalizing streamlined installment agreements. I am happy with this change.

As a refresher, the advantage of the “streamlined” is that one does not have to provide financial information to the IRS. If you have gone through this effort, you may remember IRS Form 433 – the financial information form. This is where you provide financial detail such as monthly deposits and expenses. You will also attach documentation, including copies of bank statements as well as copies of your mortgage or rent advice and certain other expenses. 

The IRS has standards for broad household expenses, such as mortgage and utilities, clothing and personal effects, medical expenses and vehicle payment and operating expenses. The IRS is inclined to use their numbers, although they will allow you to document higher or additional expenses. You then have to persuade them that your numbers are better than theirs and do not reflect a “lavish” lifestyle or incorporate”excessive” expenses. To give you an idea, the IRS does not allow for payments on your credit cards. I am not sure if they consider credit card payments to be “lavish” or “excessive.”

The “streamlined” allows you to fast-forward through this.

The liberalized streamlined rules apply only to an individual taxpayer. They do not apply to corporations and other types of businesses. You can now enter streamlined if your assessed balance (taxes, interest and penalties) is less than $50,000, an increase from the previous $25,000. In addition, you now have 72 months to pay, an increase of one year from the previous 60 months.

The IRS does charge a small fee (either $104 or $52, depending on whether you permit direct deposit) for the payment plan. Any streamlined over $25,000 must be on direct deposit.

To clarify, you do not have to enter streamlined, even if your assessed balance is less than $50,000. You can go the normal route, provide information and pursue a more favorable payment plan.  You would do that if you are pursuing a partial pay, for example. You would certainly have to go that route if you are pressing for an offer in compromise. For many people, however, the increase from $25,000 to $50,000 and an additional year to pay may make all the difference.

Why would someone hesitate to provide a 433? For one, it can be a pain to assemble and complete. Also, you have to disclose your bank accounts, including bank account numbers, on the 433. Some people believe this makes it easier for the IRS to levy your bank account. Whether correct or not, you have provided the IRS a roadmap to your finances.

A Sad Tax Story

I recently read a tax case I did not like. The IRS was pursuing action against a woman in Tennessee. My daughter presently goes to the University of Tennessee in Knoxville, so perhaps it was that geographical connection that made me look at the case.

The IRS wanted to garnish her paycheck and levy her car. The woman resisted and represented herself. She eventually took her case pro se before the Tax Court.  Read the following letter she wrote the Court and tell me that you do not feel some anger against the IRS.

To Whom It May Concern,

I don’t know what you want to know cause I don’t understand all the legal stuff you sent me. I can’t afford a lawyer. And the closest legal aid is in Knoxville 30 miles away. My poor car will not go that far. So I will start at the beginning of my story and see if you can help me.

I was in an unhealthy relationship for many years. During a great deal of that time my husband was doing alcohol and drugs. I had 2 children plus his 3 to take care of. I had been doing janitorial work at a strip mall * * *. It was the only place that I could work that I could take my [then] 3 year old daughter with me. I could not support my family and pay day care. * * * My husband took care of bills and such cause he demanded that I turn over my money. We even got a divorce during that time cause I was not obeying him.

Now I am not looking for sympathy just understanding. Do you know how hard it is to be a single parent? * * * I have a high school education and nothing else.

It was nearly five years before I was notified of a problem by the I.R.S. Danny [petitioner’s former spouse] was suppose to be doing taxes. He even made me sign a form that because he made more money he could claim my kids on his taxes cause we were no longer legally married.

I got all the W-2’s from the I.R.S. except 2005 that they still have not sent me. That is why they are not done. I did all those taxes and forfeited the refunds. I do not remember what that total came to.

But it was enough to pay I would say most of back taxes. The 2007 taxes were late and I don’t know why they didn’t arrive. I sent a second copy in as soon as my son gave me my copy. He had my copy for college financial aid and he lost them for a bit of time.

I am not a rich person. I work in a job so I can be home with my daughter. I left my husband in July after he threatened to beat my daughter with a baseball bat. Beating me is one thing but I could not have him beating my girl. So I am a single parent again. Right now we have not had much work in nearly a year. I have rent of 600 a mo. Utilities of 150 and get food stamps or I wouldn’t eat. I make about 700-800 [per] month. There are no better jobs in our town. My daughter is only 11 so its not like I can leave her alone at night or on weekends. D.H.S. says it’s not even legal. She is too young. There is no child care and I have no family here. I have pulmonary fibrosis that makes me sick all the time and the diagnosis says I have about 10 yrs to live. Right now I can work thank God.

I did my taxes this year [for 2008] and you are getting a little over $4,700. I’m not asking for much just a break. You can have my tax returns [refunds ?] I don’t care. Well I do that is a tremendous loss but oh well. I don’t have any money to send you on a monthly basis. Can we stop all the penalties. They are killing me. I will never be able to pay it off. * * * I let a relationship screw me up. I am truly sorry for that and am begging for a lifeline here. You can come to my home and see for yourself. I don’t have fancy t.v.’s or even cable except for internet. I can’t afford a phone. My clothes have holes in them. I even cut my own hair. If I could pay this off faster I would just to stop the nightmares it gives me.

The Tax Court told the IRS to stop it. I am not going to go through the tax back-and-forth, because this situation should never have gotten this far. The IRS was upset because this poor woman did not do everything perfectly, and rather than exercise common sense some government-idiot-with-a-pension had to press the point.

Were it up to me, I would find and fire that idiot.

Terrance Clem Wright v Commissioner

I have a question for you: if you wanted to convince the IRS that you are unable to pay back taxes because of financial hardship, would you hesitate to send them copies of your bank statements?

Let’s take a look at another pro se case before the Tax Court: Terrance Clem Wright v Commissioner. This is also a good opportunity to review the sequence of possible IRS Collections actions against a taxpayer.

Terrance Wright (TCW) fell behind on his taxes for 1999, 2000, 2001, 2003, 2004, 2005, 2006, 2007, and 2008.

On March 18, 2010 the IRS sent him a notice advising him that a notice of federal tax lien (NFTL) had been filed because of his back taxes and that he could request a hearing with the Appeals Office.

On April 25, 2010 TCW filed a request for a Due Process Hearing. The intent of a CDP is to delay a hasty IRS collection action and allow the taxpayer to propose an alternative. He did not contest the tax liabilities but instead requested an installment agreement.

On November 19, 2010, the IRS sent TCW a letter scheduling a telephone conference on January 18, 2011.  The IRS requested TCW to provide financial information and a payment proposal. This would help the IRS Appeals Officer make a decision.

On January 18, 2011, TCW and the Appeals Officer had their telephone conference. TCW told the Appeals Officer that he could not currently afford to make any payments. The Appeals Officer told TCW that - while he had provided some financial information – he unfortunately had not provided bank statements. She needed the bank statements to review his situation and make her decision. Until then she did not have enough information to determine whether TCW should be placed in currently not collectible (CNC) status. She encouraged TCW to pursue CNC status when he obtained all of the necessary financial documents.

NOTE: CNC status means that the IRS will not pursue action for a period of time, very often a year. It does not mean that the tax debt is gone, only that the IRS is granting time for you to get your financial affairs back in order.

Once informed by the Appeals Officer of the alternative, TCW liked the idea of CNC. This does not appear to have occurred to him previously, which indicates – at least to me – that he was not represented by a tax professional.

On February 2, 2011, the IRS issued a notice telling TCW that he would not receive an installment agreement or CNC.

OBSERVATION: Notice the dates: January 18 and February 2. This is not a lot of time, especially by IRS standards. Remember that it took him seven months to get to Appeals. TCW needed to have burnished his case by or before the hearing, as time is short once you are in Appeals.

The Appeals Office, at least in Cincinnati and this part of the country, is undermanned and overworked. I was told recently, for example, that Chicago Appeals are being heard in Wisconsin. My general experience with Appeals has been satisfactory, but one has to be aware and sensitive that these people are pressed for time. I am certain that TCW’s Appeals Officer was frustrated with his lack of cooperation.  

TCW, in a pique, filed a petition with the Tax Court on March 1, 2011.  TCW did not contest the underlying tax debt or the denial of an installment agreement. Instead, TCW’s only argument was that he could not afford to pay. He wanted the IRS to suspend collection action on the basis of his economic hardship. He wanted a CNC, and he wanted the Tax Court to tell the IRS to let him have one.

Here is the Tax Court:

Suspension of collection activity is a “collection alternative” that the taxpayer may propose and that the Office of Appeals must take into consideration. The Internal Revenue Manual (IRM) makes provision for a taxpayer's account to be declared “currently not collectible” in cases of “hardship.” To justify suspension of collection on the ground that the account should be deemed CNC, petitioner must show that he cannot afford to pay the liabilities; and to do so he must show his financial circumstances, including the money that is available to him and the expenses that he bears.

The Appeals officer requested that petitioner submit bank statements and other financial information so that collection alternatives could be considered. Petitioner submitted some of the requested information but failed to submit bank statements. Because petitioner failed to submit the requested bank statement information, the Appeals officer was unable to accurately ascertain petitioner's financial circumstances and, consequently, determined that she could not calculate the appropriate installment agreement terms or grant petitioner CNC status. In the absence of the requested information, respondent's Appeals officer did not abuse her discretion in denying petitioner's request for collection alternatives.

My take? Send the bank statements. It really is that simple.

Can the IRS Disallow Your Net Operating Loss Carryback?

Here is a quiz question:

            Can the IRS reopen a tax year if you file an NOL carryback?

Most tax accountants will remember the intent of IRC Section 7605(b), even if they may not remember the specific citation:

No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

This language entered the Code in 1921, and its intent was and is to relieve taxpayers from unnecessary annoyance.

The question is whether it is the original year that is being reopened or whether it is the carryback from a later year that is being reviewed.

The IRS expounded on IRC Section 7605 in Rev Procedure 2005-32. The wording we are after is “reopening.” Section 2.04 of the Rev Procedure informs us that new section 4.02 is being added to define the “reopening” of a closed tax case.

The new section 4.02 states:

A reopening of a closed case involves an examination of a taxpayer’s liability that may result in an adjustment to liability unfavorable to the taxpayer for the same taxable period as the closed case, with exceptions, some of which are noted below. The Service’s review, including an inspection of books of account, of a taxpayer’s claim for a refund on an amended excise or income tax return, as well as the Service’s review of a Form 843, Claim for Refund and Request for Abatement, claiming a refund for an overpayment reported on a return, is not a reopening.

Someone ran face-first into this in FAA 20114701F. Here are the facts:

Taxpayer deducted a bad debt loss in Year 1. It was audited and the IRS allowed the loss. Enough time goes by that the statute of limitations for Year 1 expires. In a later year Taxpayer has an NOL, which it carries-back to Year 1. The IRS however was still churlish about that bad debt deduction in Year 1.

The FAA goes on to reason that the IRS did not pick this fight. Rather the Taxpayer did by electing to carryback its net operating loss and claiming a refund. The Taxpayer’s action allowed the IRS to “reopen” the closed year.

There was some saving grace, thankfully. The IRS decided it could deny Taxpayer’s claim for refund dollar-for-dollar – but only to the extent of the refund. The worst that could happen is that the Taxpayer would not receive any refund, resulting of course in a total waste of the net operating loss carryback. But hey, at least the Taxpayer did not have to write a check to the IRS for the audacity of claiming a tax refund.

1099s and Weatherly v Commissioner

There are two new questions on your income tax returns this year:

·         Did you make any payments in 2011 that would require you to file Form(s) 1099?

·         If “Yes,” did you file or will you file all required Forms 1099?

Several points come immediately to mind:

·         Remember that you are signing this return as being “true, correct and complete” to the best of your knowledge.

·         I, as the preparer, have to exercise due diligence by also asking you this question.

·         What are the consequences of answering “No?”

Congress will be unsatisfied until it has combed your sofa cushions for loose change. This pressure unfortunately passes down to the IRS, and we are seeing the results in OVDI, FATCA, automated collections and taxpayer liens. Obviously they believe there is money to be found here.

This brings us to Jeremiah Weatherly v. Commissioner (TC Memo 2011-206). It’s a tax case having to do with Forms 1099.

JW operated a bailiff consulting business. These are people who perform evictions and serve process, for example. He hired daily workers to help out. He must have been doing relatively well, as he reported $177,925 of Contract Labor on his 2005 return.

He got audited. The IRS wanted his Forms 1099. JW provided the IRS with 64 Forms 1099.There was a problem, however. JW had not filed the Forms with the IRS.

                OBSERVATION: Really, JW?

The IRS now had no confidence in the 64 Forms 1099, so they requested JW obtain and submit Forms 4669 from the 64 people. Form 4669 requires the payee to report the amount of the payment and where it is reported on his/her return.

OBSERVATION: This is not going to go over well.

JW’s response rate was pretty much what you would expect: he got eight replies. The IRS bounced 2 of them, as the social security numbers were invalid. With the remaining six, JW was able to document $25,115 of his Contract Labor expense. The IRS simply disallowed the remaining $152,810.

JW appealed pro se to the Tax Court. He got schooled. Tax law and long-standing tax doctrine require a taxpayer to maintain records sufficient to establish the amounts of allowable deductions and enable the Commissioner to determine the correct tax liability. This is a two-step requirement: your records have to be good enough for you to prepare a correct return AND to allow someone to double-check your work.

The Tax Court asked for JW’s books and records. Nothing. The Tax Court asked for other evidence to substantiate that these amounts were actually paid. Nothing. The Court then wanted JW to testify about his bookkeeping practices. Nothing. Frustrated, the Court held for the IRS. JW got charged with additional tax of $67,436 and penalties of $29,425.

What can we learn from JW?

Let’s admit, JW should never have represented himself. All he accomplished was to aggravate the Court. It is possible that another taxpayer – more responsive and attuned – could have obtained a different result. The Court did try to help JW, even alluding to the Cohan rule where it will allow estimates as long as the Court is convinced that there truly was an expenditure.

Nonetheless, we can see the position the IRS can and may take if one fails to file Forms 1099. Perhaps your bookkeeping practices are different from JW’s, and you could have provided the Court with substantial and satisfactory alternative documentation. However remember that you would have engaged – and paid – a tax CPA to represent you at audit and Appeals before even arriving at the Court. And you would still be at the Court’s mercy.

This process seems expensive to me. Here is another idea: issue 1099s, especially since you are now required to affirmatively respond to the new questions on your 2011 tax returns. There is now one more reason for the Court to turn you down: you lied when you answered “No” to the first question.

The IRS Is Now Accepting E-Files for the 2012 Tax Season

Tax season officially started yesterday, when the IRS started accepting e-filed returns. Electronic filing is expanding: approximately 100 million returns were e-filed for 2011. The IRS is certainly encouraging this momentum. Professional tax preparers – such as Kruse & Crawford – have to submit individual income tax returns electronically if they expect to prepare more than 10 returns in 2012. One does not have much of a tax practice if one does not prepare more than 10 individual tax returns in a year. The percentage of e-filed individual returns has increased from 58% in 2008 to 77% last year.

The Free File has also started, which allows one to e-file federal individual tax returns for free if one’s income is less than $57,000.

One last note: tax returns will be due Tuesday, April 17th this tear. That is because the 15th is on a weekend and the next business day (Monday) is a holiday in Washington, D.C.

The SMLLC and the Family Payroll Tax Exemption

If you are a single-member LLC (SMLLC) reporting for tax purposes as a sole proprietorship, you may be interested in a recent payroll tax change.

An SMLLC is reported for income tax purposes as either a corporation or a proprietorship. A question came up in recent years on how to treat an SMLLC for payroll tax purposes. In August, 2007 the IRS issued final regulations requiring the SMLLC to be treated as the taxpayer for employment tax purposes. This meant that it had to get an identification number separate from its sole member, for example. These regulations became effective January 1, 2009.

This in turn raised the question on what to do with the family employment tax exemption. The family tax exemption allows a proprietor who pays his/her spouse or children the following:

·         For a child under age 18, unemployment, FICA and Medicare taxes will not apply

·         For a child over 17 but under 21, unemployment taxes will not apply

·         For a spouse, unemployment taxes will not apply

By treating the SMLLC as an entity distinct from the sole member, the parent was not employing the family member, at least technically. This threw-out the family employment tax exemption.

Talk about unintended consequences.

The IRS has now reversed course and has expanded the family tax exemption to SMLLCs – and has made the exemption retroactive to January 1, 2009. This could mean that amended payroll tax returns are in order.

Example: You operate as a SMLLC. You have 7 employees, which include your spouse, a child age 16 and a child age 19. What are the federal employment tax consequences?

a.       The child age 17 is exempt from FICA, Medicare and unemployment

b.      The child age 19 is exempt from unemployment

c.       The spouse is exempt from unemployment