IRS Collection Alternatives: Pay Attention To Details

 

I was glancing over recent Tax Court cases when I noticed one that involved a rapper.

I’ll be honest: I do not know who this is. I am told that he used to date Kylie Jenner. There was something in the opinion, however, that caught my eye because it is so common.

Michael Stevenson filed his 2019 tax return showing federal tax liability over $2.1 million.

COMMENT: His stage name is Tyga, and the Court referred to him as “very successful.” Yep, with tax at $2.1-plus million for one year, I would say that he is very successful.

Stevenson had requested a Collection Due Process (CDP) hearing. It must have gone south, as he was now in Tax Court.

Why a CDP hearing, though?

Stevenson had a prior payment plan of $65 grand per month.

COMMENT: You and I could both live well on that.

His income had gone down, and he now needed to decrease his monthly payment.

COMMENT: I have had several of these over the years. Not impossible but not easy.

The Settlement Officer (SO) requested several things:

·      Form 433-A (think the IRS equivalent of personal financial statements)

·      Copies of bank statements

·      Copies of other relevant financial documents

·      Proof of current year estimated tax payments

Standard stuff.

The SO wanted the information on or by November 4, 2021.

Which came and went, but Stevenson had not submitted anything.

Strike One.

The SO was helpful, it appeared, and extended the due date to November 19.

Still nothing.

Strike Two.

Stevenson did send a letter to the SO on December 1.

He proposed payments of $13,000 per month. He also included Form 433-A and copies of bank statements and other documents.

COMMENT: Doing well. There is one more thing ….

The SO called Stevenson’s tax representative. She had researched and learned that Stevenson had not made estimated tax payments for the preceding nine years. She wanted an estimated tax payment for 2021, and she wanted it now.

COMMENT: Well, yes. After nine years people stop believing you.

Stevenson made an estimated tax payment on December 21. It was sizeable enough to cover his first three quarters.

COMMENT: He was learning.

The SO sent the paperwork off to a compliance unit. She requested Stevenson to continue his estimated payments into 2022 while the file was being worked. She also requested that he send her proof of payments.

The compliance unit did not work the file, and in July 2022 the SO restarted the case. She calculated a monthly payment MUCH higher than Stevenson had earlier proposed.

COMMENT: The SO estimated Stevenson’s future gross income by averaging his 2020 and (known) 2021 income. Granted, she needed a number, but this methodology may not work well with inconsistent (or declining) income. She also estimated his expenses, using his numbers when documented and tables or other sources when not.

The SO spoke with the tax representative, explaining her numbers and requesting any additional information or documentation for consideration.

COMMENT: This is code for “give me something to justify getting closer to your number than mine.”

Oh, she also wanted proof of 2022 estimated tax payments by August 22, 2022.

Yeah, you know what happened.

Strike Three.

So, Stevenson was in Tax Court charging the SO with abusing her discretion by rejecting his proposed collection alternatives.

Remember the something that caught my eye?

It is someone not understanding the weight the IRS gives to estimated tax payments while working collection alternatives.   

Hey, I get it: one is seeking collection alternatives because cash is tight. Still, within those limits, you must prioritize sending the IRS … something. I would rather argue that my client sent all he/she could than argue that he/she could not send anything at all.

And the amount of tax debt can be a factor.

How much did Stevenson owe?

$8 million.

The Court decided against Stevenson.

Here is the door closing:

The Commissioner has moved for summary judgement, contending that the undisputed facts establish that Mr. Stevenson was not in compliance with his estimated tax payment obligations and the settlement officer thus was justified in sustaining the notice of intent to levy.”

Our case this time was Stevenson v Commissioner, TC Memo 2023-115.

Happy Thanksgiving

 

Another Backup Withholding Story

 

We talked not too long ago about backup withholding.

What is it?

Think Forms 1099 and you are mostly there.

The IRS wants reporting for many types of payments, such as:

·       Interest

·       Dividends

·       Rents

·       Royalties

·       Commissions and fees

·       Gambling winnings

·       Gig income

Reporting requires an identification number, and the common identification number for an individual is a social security number.

The IRS wants to know that whoever is being paid will report the income. The payor starts the virtuous cycle by reporting the payment to the IRS. It also means that – if the payee does not provide the payor with an identification number - the payor is required to withhold and remit taxes on behalf of the payee.

You want to know how this happens … a lot?

Pay someone in cash.

There is a reason you are paying someone in cash, and that reason is that you probably have no intention of reporting the payment – as a W-2, as a 1099, as anything – to anyone.

It is all fun and games until the IRS shows up. Then it can be crippling.

I had the following bright shiny drop into my office recently:     

    

The client filed the 1099 and also responded to the first IRS notice.

It could have gone better.

That 24% is backup withholding, and I am the tax Merlin that is supposed to “take care of” this. Yay me.

This case was not too bad, as it involved a single payee.

How did it happen?

The client issued a 1099 to someone without including a social security number. They filled-in “do not know” or “unknown” in the box for the social security number.

Sigh.

Sometimes you do not know what you do not know.

Here is a question, and I am being candid: would I send in a 1099 to the IRS if I did not have the payee’s social security number?

Oh, I understand the ropes. I am supposed to send a 1099 if I pay someone more than $600 for the performance of services and yada yada yada. If I don’t, I can be subject to a failure to file penalty (likely $310). There is also a failure to provide penalty (likely $310 again). I suppose the IRS could still go after me for the backup withholding, but that is not a given.

Let me see: looks like alternative one is a $620 given and alternative two is a $38,245 given.

I am not saying, I am just saying.

Back to our bright shiny.

What to do?

I mentioned that the payment went to one person.

What if we obtained an affidavit from that person attesting that they reported the payment on their tax return? Would that get the IRS to back down?

It happens enough that the IRS has a specific form for it.               

We filled in the above form and are having the client send it to the payee. We are fortunate, as they have a continuing and friendly relationship. She will sign, date, and return the form. We will then attach a transmittal (Form 4670) and send the combo to the IRS. The combo is considered a penalty abatement request, and I am expecting abatement.

Is it a panacea?

Nope, and it may not work in many common situations, such as:

(1)  One never obtained payee contact information.

(2)  A one-off transaction. One did not do business with the payee either before or since.

(3)  The payee moved, and one does not know how to contact him/her.

(4)  There are multiple payees. This could range from a nightmare to an impossibility.

(5)  The payee does not want to help, for whatever reason.

Is there a takeaway from this harrowing tale?

Think of this area of tax as safe:sorry. Obtain identification numbers (think Form W-9) before cutting someone their first check. ID numbers are not required for corporations (such as the utility company or Verizon), but one is almost certainly required for personal services (such as gig work). I suppose it could get testy if the payee feels strongly about seemingly never-ending tax reporting, but what are you supposed to do?

Better to vent that frustration up front rather than receive a backup withholding notice for $38,245.

And wear out your CPA.

The EV Tax Credit

I was reading an article recently that approximately 40% of Americans have not heard about the EV tax credits.

EVs are battery powered cars. We used to have hybrids, which sometimes used a motor and other times a battery. EVs by contrast are 100% battery powered.

If you are thinking about buying one for personal use, here are a few markers to keep in mind:

(1)   There was an OLD tax credit and now there is a NEW tax credit.

a.     The OLD credit went through April 18, 2023.

b.    The NEW credit of course is after April 18, 2023.

Both credits can get up to $7,500, so what changed was the measuring stick.

Before April 19, the EV had to be assembled in North America.

After April 18, one test became two tests:

·       The battery itself has to be manufactured in North America, and

·       Then critical minerals in the battery (cobalt and lithium, for example) must be extracted or processed in the U.S. or in a country with which the U.S. has a free trade agreement.

Notice that OLD $7,500 credit (assembled in North America) has become two NEW credits of $3,750 each. You can get to $7,500, but along a different route.

It matters. For example, the new Ford Mustang Mach-E only qualifies for one of the credits – only $3,750 – because its battery comes from abroad.

Some – like the Genesis GV70 – used to qualify for the old $7,500 credit but no longer qualify for anything under the new rules.

If you are considering an EV, please double check whether the vehicle qualifies. Here is the Department of Energy’s website:

https://fueleconomy.gov/feg/tax2023.shtml

(2)   Congress included some price caps on qualifying vehicles. These things are expensive, and Congress was trying to exert downward pressure.

To qualify,

·       A van, SUV or pickup truck must cost $80 grand or less.

·       Any other vehicle (a sedan, for example) must cost $55 grand or less.  

(3)   Starting in 2024, you will have the option of using the credit immediately when you purchase the vehicle. It would make for an easy down payment, I suppose.  

The heavy lifting is done behind the scenes, as the dealerships will register on a new website to initiate and receive the credits. If you are curious, that website is: 

https://www.irs.gov/credits-deductions/register-your-dealership-to-enable-credits-for-clean-vehicle-buyers  

(4)   For the first time, used EVs will qualify for a credit. This credit will not be as large as the one for new EVs, but it is not insignificant either. Here are the ropes:

·       The price must be $25 grand or less.

·       The car must be at least two years old.

·       The car qualifies only once in its lifetime.

·       The credit is up to $4 grand, limited to 30% of the price.

·       You can claim the used EV credit once every three years.  

(5)   There are income limits on both the new EV and used EV credits. Make too much money and you will not qualify.  

For example:

New EV

           Married        income < $300,00

                                       Single          income < $150,000

                            Used EV

                                        Married       income < $150,000

                                        Single         income < $75,000  

You can test for income either in the year of purchase or the immediately preceding year. I am thinking – to be safe – that one should generally go with the preceding year. It would be no fun to apply a $7,500 credit against the purchase of an EV and then give it back because you reported too much income on your 2024 tax return.  

(6)   Up to now, we have been talking about buying an EV for personal use. There is a similar credit if you lease rather than buy, but some rules are different.

·       Since the leasing company (and not you) owns the vehicle, the income test does not apply.

·       The credit requires the EV be manufactured by a “qualified manufacturer” rather than the two-step qualification discussed above for a purchased vehicle. This should result in a wider selection.

·       Mind you, the leasing company is not required to pass (all or any of) this credit on to you. Education is important here - and expect negotiation.  

The reason the rules are different is that this second credit is designed for businesses – rather than individuals – buying an EV. By bringing in a leasing company, we flipped from the first to the second credit.  

I am not in the market for a car myself.  If I were, though, I would go in a very different direction.

Another Runaway FBAR Case

 

Let’s talk about the FBAR (Report of Foreign Bank and Financial Accounts). It currently goes by the name “FinCen Form 114.”

This thing has been with us since 1970. It came to life as an effort to identify foreign financial transactions that might indicate money laundering or tax evasion. 

Sounds benign.

The filing requirement applies to a United States person, defined as

·      A citizen or resident of the U.S.

·      A domestic partnership

·      A domestic corporation

·      A domestic trust or estate

 We’ll come back that first one in a moment.

Next, one needs a financial interest or signature authority in a foreign financial account to trigger this thing.

A foreign financial account includes a bank account, which is easy enough to understand. It would also include a broker account (think Charles Schwab, but overseas). Some are not so intuitive, though.

·      A foreign insurance policy with cash value is reportable.

·      A foreign hedge fund is not.

·      A foreign annuity policy is reportable.

·      A foreign private equity fund is not.

·      A foreign cryptocurrency account is not reportable.

Some require a google search to understand what is being said.

·      A Canadian registered retirement savings plan is reportable.

·      A Mexican fondo para retiro is reportable.

Next, the foreign financial account has to exceed a certain dollar balance ($10,000) at some point during the year.

That $10,000 balance has been there for as long as I can remember. You will have a hard time persuading me that $10,000 in 1986 is the same as $10,000 now, but that number is apparently eternal and unchanging.

The $10,000 is tested across all foreign financial accounts. If it takes your fourth foreign account to put you over $10 grand, then you are over. Testing is done. All your accounts are reportable on a FBAR.

Like so many things, the FBAR started with reasonable intentions but has morphed into something near unrecognizable.

Fail to file an FBAR and the standard penalty is $10 grand. Fail to file for two years and the penalty is $20 grand. Have two foreign accounts and fail to file for two years and the penalty is $40 grand.

And that is assuming the error is unintentional. Do it on purpose and I presume they will execute you.

I exaggerate, of course. They will just bankrupt you.

It puts a lot of pressure on defining “on purpose.”

Let’s look at Osamu Kurotaki (OK).

OK was born in Japan and lives in Japan. He obtained a U.S. green card, making him a U.S. permanent resident. One of the pleasures of being a permanent resident is filing an annual tax return with the United States, irrespective of whether you live in the U.S. or not. One can talk about a foreign income exclusion or foreign tax credit – which is fine – but that annual filing makes sense only if someone intends to eventually return to the U.S. It does not make as much sense if someone does not intend to return, someone like OK.

OK paid someone to prepare his annual U.S. tax return. He found a CPA who was bilingual.

In 2021 the U.S. Treasury assessed civil penalties against OK for more than $10 million. His footfall? He failed to file FBARs. Treasury also upped the ante by saying that his failure was “willful.”

Huh?

Treasury is requesting summary judgement that OK willfully failed to file FBARs, prefers waffle over sugar cones and rooted for the Diamondbacks in the World Series. 

The Court wanted to know how Treasury climbed the ladder to get to that “willful” step.

So do I.

Here is what the Court saw:

·      OK is a Japanese speaker and does not speak English “at all.”

·      OK relied on his bilingual CPA to make sense of U.S. tax filing obligations.

·      His CPA provided annual tax questionnaires in both English and Japanese. The English was for theater, I suppose, as OK could not read English.

·      The CPA’s translation now becomes critical. Here are instructions to the FBAR in English:

U.S. taxpayers are required to report their worldwide income; that is, income from both U.S. and foreign sources.”

·      Here is the Japanese translation:

U.S. resident taxpayers are required to report their worldwide income, that is, income from both US. and foreign sources."

OK told the Court that he did not think he had a filing obligation because he was not a “U.S. resident.”

I get it. He lives in Japan. He works in Japan. His kids go to school in Japan. He is as much a “U.S. resident” as I am a Nepalese Sherpa.

Except …

OK was green card – that is, a “permanent” resident of the U.S.

Technically …

The Court cut OK some slack. Technically - and in a law school vacuum - he was a “resident.” Meanwhile - in the real world – no one would think that. Furthermore, OK hired a CPA who made a mistake. Even a trained professional erred interpreting the Treasury’s word salad. 

The Court said “no” to summary judgement.

Treasury will have to argue its $10 million-plus proposed penalty.

And I believe the Court just outlined reasonable cause.

Perhaps OK should consider turning in that green card. 

Our case this time was Osamu Kurotaki v United States, U.S. District Court, District of Hawaii.

 

A Short Story About Connecticut Unemployment Reporting

I read that the Governor of Connecticut has signed a bill repealing certain additional payroll reporting requirements otherwise slated to start next year.

As background, all state quarterly unemployment returns include certain basic information, including:

·       Name

·       Social security number

·       Wages paid in the quarter

Prior to repeal, Connecticut employers were to report additional information with their quarterly unemployment returns. The reporting was to start in 2024, with the exact phase-in depending on the number of employees:

·       Gender identity

·       Age

·       Race

·       Ethnicity

·       Veteran status

·       Disability status

·       Highest education completed

·       Home address

·       Address of primary work site

·       Occupational code under the standard occupational classification (SOC) system of the federal Bureau of Labor Statistics

·       Hours worked

·       Days worked

·       Salary or hourly wage

·       Employment start date in the current job title

·       Employment end date (if applicable)

Ten of the above 15 data elements are not collected by any other state.

There was concern that the additional elements could negatively impact people filing for benefits – that is, the actual purpose of unemployment taxes.

“The Department of Labor would need to edit incoming reports against certain standards and reject employer wage/tax reports or suspend processing while seeking clarification of elements reported.   

“Rejected or suspended wage reports could make wage information unavailable when unemployment claimants apply for benefits.”

It appears a breath of sanity.

Happy Halloween