Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.
Thursday, December 24, 2015
Monday, December 21, 2015
Can The IRS Use A Private Debt Collector Against You?
On December
4, 2015 the President signed into law a five- year $305 billion highway bill.
One of the
contentious issues was the 18.4 cents per gallon gasoline tax. You know the
politics: one side wanted to increase it and the other did not. Unable to come to agreement, Congress looked
elsewhere for the money.
One place they
looked was the use of private debt collectors for IRS debt.
Ohio
routinely farms out its tax collection to private agencies. Does it work? Well,
let me answer the question this way: I usually request the file be returned to the
Ohio Department of Taxation. Why? Because the collection agency could not care
less whether the debt is accurate or not, whether the penalties are correctly
calculated, or whether there is even a tax case to be collected. I have, for
example, seen Ohio farm out collection on cases where the appeal period was
still open. Although Ohio is not especially friendly to work with, they are better
than dealing with a debt collector. You would be pressed to find too many Ohio tax
CPAs that have positive opinions about this arrangement.
Congress has
gone down this path before. The most recent collection program started in 2006
and ended in 2009. The program was widely considered a failure, as was its
predecessor in 1996-1997. After accounting for commissions paid as well as
internal IRS costs to administer, both programs actually caused losses
for the Treasury.
The National
Taxpayer Advocate, Nina Olsen, expressed her feelings clearly to Congress:
Based on what I saw, I concluded the
program undermined effective tax administration, jeopardized taxpayer rights
protections, and did not accomplish its intended objective of raising revenue.
Indeed, despite projections by the Treasury Department and the Joint Committee on
Taxation that the program would raise more than $1 billion in revenue, the program
wound up losing money. We have no reason to believe the result would be any
different this time.”
The Federal
Trade Commission routinely reports more complaints about debt collectors than
any other industry. FTC chairwoman Edith Ramirez stated that over 280,000
federal complaints were filed in 2014 alone.
You know
that Congress would not care.
Section 6306
of the highway bill requires the IRS to enter into collection contracts for the
collection of certain inactive tax receivables, defined as:
·
A
receivable removed from active inventory for lack of resources or because the
taxpayer cannot be located;
·
A receivable where at least one-half of the
statute of limitations period has expired and no IRS employee has been assigned;
or
·
A
receivable assigned for collection but at least one year has passed since
taxpayer contact
Did you
catch the use of the word “requires?” That is quite the departure from
pre-existing law, which “authorizes” the IRS to use private debt collection
agencies.
There are
some exceptions, such as:
·
Pending
or active offers in compromise or installment agreements
·
Innocent
spouse
·
Deceased
taxpayers
·
Minors
·
Taxpayers
in designated combat zones
·
Taxpayers
in examination or appeal
·
Victims
of identity theft
The last one
is disconcerting, especially after the Treasury Inspector General for Tax
Administration reported in 2014 that it received over 90,000 complaints about
scam telephone calls demanding payment from impostors claiming to be the IRS. IRS Commissioner Koskinen cited the TIGTA report
and reminded taxpayers that:
Taxpayers should remember their first contact with the IRS
will not be a call from out of the blue, but through official correspondence
sent through the mail.”
Well, that used
to be true.
Tuesday, December 15, 2015
1000% Political Sales Tax
Let’s return
to the topic of state tax lunacy.
Our
destination? California, a frequent contestant (if not winner) of the popular gameshow
“Five Short of a Nickel.”
A citizen
initiative posted on the California Attorney General’s website provides the following:
This initiative amends the California Constitution, Article 13, Section 35,(b).
It adds a section 3 as follows:
"For the privilege of influencing public elections and political issues, a sales tax of 1,000% (one thousand percent) is hereby imposed upon Political Advertisements. The proceeds of which shall solely benefit California public education. There shall be no further exemptions to this tax except as federally required or as passed by a California ballot initiative.
Political Advertisements shall mean any political advertising delivered within the state of California. This is applicable to both cash and barter transactions. This includes but is not limited to all media spending by political parties, political action committees or candidates.
This sales tax will not apply to the first $1,000,000 (one million dollars) of spending within a calendar year by any tax entity. However, if a group of tax entities are controlled or coordinated then this first one million dollar of sales tax relief shall only apply to the group of entities and not to the individual entities.
If a Federal District Court or Supreme Court of the United States find this tax to be too high, then this law shall immediately ratchet down to the highest acceptable level and remain in place.”
Well then.
And it
perfectly typifies much of what has contaminated tax law in recent years:
(1) The insistence on wielding tax law to
accomplish a social program, whether by granting a boon (such as the new
markets tax credit) or striking a blow (such as the ACA penalty).
(2) The delegation of actual tax writing
to a non-electable bureaucracy. For example, what in the world does “Political
Advertisements” mean? He or she who gets to define this term will rank among
the most powerful of California politicos.
(3) An ignorance if not contempt for tax
doctrines, precedent or potential litigation. To begin with, the California
Franchise Tax Board would have to defend a 1000% tax against a free speech
challenge under the First Amendment. One also wonders whether the "takings" clause of the Constitution could be invoked. Is this really a tax issue or just the overheated opinion of a grievance dispenser?
Citizen
initiatives are peculiar to California politics. They began as a way to limit
the outsized influence of special interests but have devolved into a means to
sidestep Sacramento, assuming one can recruit a deep-heeled supporter willing
to fund the initiative. I trust there is little chance that this one will
pass.
Nonetheless,
let’s give a round of applause as we present the award to this week’s winner.
Friday, December 11, 2015
When A Good Cause Is Not Enough
Let’s talk
about the tax issues of tax-exempt entities. It sounds like a contradiction,
doesn’t it?
It actually
is its own area of practice. Several years ago I was elbow-deep working with
nonprofits, and I attended a seminar presented by a specialist from Washington,
D.C. All he did was nonprofits. At least he was in the right town for it.
There are
the big-picture tax-exempt issues. For example, a 501(c)(3) has to be
publicly-supported. You know there is a tractor-trailer load of rules as to
what “publicly supported” means.
Then there
are more specialized issues. One of them is the unrelated business income tax.
The concept here is that a nonprofit cannot conduct an ongoing business and
avoid tax because of its exemption. A museum may be a great charitable cause,
for example, but one cannot avoid tax on a chain of chili restaurants by having
the museum own them.
That is not
what museums do. It is unrelated to “museum-ness,” and as such the chili restaurants
will be taxed as unrelated business income.
Sometimes it
can get tricky. Say that you have a culinary program at a community college. As
part of the program, culinary students prepare meals, which are in turn sold on
premises to the students, faculty and visitors. A very good argument can be
made that this activity should not be taxed.
What is the
difference? In the community college’s case, the activity represents an
expansion of the underlying (and exempt) culinary education program. The museum
cannot make this argument with its chili restaurants.
However, what
if the museum charges admission to view its collection of blue baby boots from
Botswana? We are now closer to the example of culinary students preparing meals
for sale. Exhibiting collections is what museums do.
I am looking
a technical advice memorandum (TAM) on unrelated business income. This is
internal IRS paperwork, and it means that an IRS high-level presented an issue to
the National Office for review.
Let’s set it
up.
There is a
community college.
The
community college has an alumni association. The association has one voting
member, which is a political subdivision of the state.
The alumni
association has a weekly farmers market, with arts and crafts and music and food
vendors. It sounds like quite the event. It uses the parking areas of the
community college, as well as campus rest rooms and utilities. Sometimes the
college charges the alumni association; sometimes it does not.
The alumni
association in turn rents parking lot space to vendors at the market.
All the
money from the event goes to the college. Monies are used to fund scholarships
and maintain facilities, such as purchasing a computer room for the library and
maintaining the football field.
OBSERVATION: The tax Code does not care that any monies
raised are to be used for a charitable purpose. The Code instead focuses on the
activity itself. Get too close to a day-in-and-day-out business and you will be
taxed as a business. Granted, you may get a charitable deduction for giving it
away, but that is a different issue.
From surveys,
the majority of visitors to the farmers market are age 55 and above.
There was an
IRS audit. The revenue agent thought he spotted an unrelated business activity.
The file moved up a notch or two at the IRS and a bigwig requested a TAM.
The
association immediately conceded that the event was a trade or business
regularly carried on. It had to: it was a highly-organized weekly activity.
The
association argued instead that the event was its version of “museum-ness,”
meaning the event furthered the association’s exempt purpose. It presented
three arguments:
(1) The farmers market contributed to the
exempt purpose of the college by drawing potential students and donors to
campus, helping to develop civic support.
(2) The farmers market lessened the
burden of government (that is, the college).
(3) The farmers market relieved the
distress of the elderly.
The IRS saw these
arguments differently:
(1) Can you provide any evidence to back
that up? A mere assertion is neither persuasive nor dispositive.
COMMENT: The association
should have taken active steps – year-after-year – to obtain and accumulate supporting
data. It may have been worth hiring someone who does these things. Not doing so
made it easy for the IRS to dismiss the argument as self-serving.
(2) At no time did the community college
take on the responsibility for a farmers market, and the college is the closest
thing to a government in this conversation. Granted, the college benefited from
the proceeds, but that is not the test. The test is whether the association is
(1) taking on a governmental burden and (2) actually lessening the burden on
the government thereby. As the
government (that is, the college) never took on the burden, there can be no
lessening of said burden.
COMMENT: This argument is interesting, as perhaps – with
planning – something could have been arranged. For example, what if the college
sponsored the weekly event, but contracted out event planning, organization and
execution to the alumni association?
(3) While the market did provide a venue
for the elderly to gather and socialize, that is not the same as showing that
the market was organized and worked with the intent of addressing the special
needs of the elderly.
COMMENT: Perhaps if the association had done things
specifically for the elderly – transportation to/from retirement homes or free
drink or meal tickets, for example – there would have been an argument. As it
was, the high percentage of elderly was a happenstance and not a goal of the
event.
There was no
“museum-ness” there.
And then the
association presented what I consider to be its best argument:
(4) We charged rent. Rent is specifically
excluded as unrelated business income, unless special circumstances are present
– which are not.
Generally
speaking, rent is not taxable as unrelated business income unless there is debt
on the property. The question is whether the payments the association received were
rent or were something else.
What do I
mean?
We would probably
agree that leasing space at a strip mall is a textbook definition of rent.
Let’s move the needle a bit. What would you call payment received for a
hospital room? That doesn’t feel like rent, does it? What has changed? Your
principal objective while in a hospital is medical attention; provision of the
room is ancillary. The provision of space went from being the principal purpose
of the transaction to being incidental.
The IRS saw the
farmers’ market/arts and craft/et cetera as something more than a parking lot.
The vendors were not so much interested in renting space as they were in
participating (and profiting) from a well-organized destination and
entertainment event. Landlords provide space. Landlords do not provide events.
The IRS
decided this was not rent.
You ask why
I thought this was the association’s best argument? Be fair, I did not say it
was a winning argument, only that it was the best available.
The alumni
association still has alternatives. Examination requested the TAM, so there
will be no mercy there. That leaves Appeals and then possibly going to Court. A
Court may view things differently.
And I am
unhappy with the alumni association. I suspect that the farmers’ market went
from humble origins to a well-organized, varied and profitable event. As a
practitioner, however, I have to question whether they ever sought professional
advice when this thing started generating pallet-loads of cash. Granted, the
activity may have evolved to the point that no tax planning could save it, but
we do not know that. What we do know is that little – if any – planning occurred.
Thursday, December 3, 2015
What If You Put Too Much In An IRA?
I am looking
at a Tax Court case (Dunn v Commissioner)
for $1,460 in tax and $292 in penalties. It seemed a low dollar amount to take
to Tax Court, which in turn prompted me to think that Dunn was either an
attorney or CPA. He would then represent himself, skipping the professional
fees.
Dunn is an
attorney.
Then I read
what landed in him in hot water.
Folks,
sometimes we have to pay attention to the details.
We have
talked on this blog about shiny objects like real estate investment trusts, charitable
remainder trusts, private foundations and so forth. Hopefully we have told the story in an
entertaining way, as tax literature does not tend to be riveting reading. For
most of us, however, our finances and taxes are quite humdrum. Odds are our tax
troubles are going to come from not attending to the details.
Let’s tell
the story.
Stephen Dunn
is a tax attorney in Michigan. In 2008 he was working for a law firm. He
finished 2008 as self-employed and continued as such through 2010. He
participated in the law firm’s retirement plan – presumably a 401(k) - for the
part of 2008 he was there.
He made the
following IRA contributions:
2008 $6,000
2009 $6,000
2010 $
800
The IRS took
a look and disallowed his 2008 IRA contribution.
Why?
Because he
was covered by a retirement plan at work.
There is no
income “test” for an IRA contribution if one (or one’s spouse) does not have
another available retirement plan. Have a plan at work, however, and the rule
changes. The tax Code will disallow your IRA deduction if you make too much
money.
What is too
much?
If you are a
single filer, it starts at $61,000. If you are a married filer, it starts at
$98,000.
For what it
is worth, I consider these income limits to be idiocy. I cringe when someone
thinks that $61,000 is “too much money.” Perhaps it was back in the 1950s, but nowadays
$61,000 will not rock you a Thurston Howell lifestyle anywhere across the
fruited plain. Remember also that a maximum IRA is $5,500 ($6,500 if one is age
50 and above). If taxes on $5,500 are a fiscal threat to the Treasury, we have
much more serious problems than any discussion about IRAs.
Dunn got
caught-up in the rules and made too much money for a deductible IRA
contribution in 2008.
No problem,
thought Dunn the attorney. He rolled the $6,000 forward and deducted it in
2010. Mind you, he wrote checks for only $800 in 2010. The $6,000 was a
“carryforward,” so to speak.
So, what is
the problem?
Generally
speaking, individuals report their taxes on the cash basis of accounting. This
means that they report income in the year they receive a check, and they report
deductions in the year they write a check. The tax Code does allow some
latitude with IRAs, as one can fund a previous-year IRA through April 15th
of the following year. That is a special case, however. The tax Code
however does not automatically “carryover” an excess contribution from one year
to the next. In fact, overfund an IRA and the tax Code will assess a 6% penalty
for every year you leave the excess in the IRA.
How do tax
professionals handle this in practice?
Easy enough:
you have the IRA custodian move it to the following year. Say that you are age
58 and put $7,000 in your 2014 IRA. You have overfunded $500, no matter what
the results of the income test are. You would call the custodian (Dunn’s custodian
was Vanguard), explain your situation and ask them to move the $500.
Now there is
a detail here that has to be clarified. Say that you contributed $1,000 of the
$7,000 in March, 2015 (for your 2014 tax year). You could ask Vanguard to move
$500 of that $1,000 to 2015. They probably would, as they received it in 2015.
Let’s change
the facts. You contributed all of the $7,000 in 2014. Vanguard now will likely
not move any of the money because none of it was received in 2015. The best Vanguard can do is send you a $500
check, which you will deposit and send back to Vanguard as a 2015 contribution.
What did
Dunn not do?
He never
called Vanguard and had them move the money. In his case it would have been a
bit frustrating, as he had to get from 2008 to 2010. He would be calling
Vanguard a lot. He would have to refund 2008 and fund 2009; then refund 2009
and fund 2010. Vanguard may have not wanted him as a customer by that point,
but that is a different issue.
Dunn tried.
He even requested the equivalent of mercy, pointing out:
…Congress’ policy of encouraging retirement savings supports
the deduction they seek.”
Here is the
Tax Court:
These arguments are addressed to the
wrong forum.”
Ouch.
Dunn did not
pay attention to the details. He lost his case and also got smacked with a
penalty. I am not a fan of
IRS-automatically-hitting-people-in-the-face-with-a-penalty, but in this case I
understand.
After all,
Dunn is a tax attorney.
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