Tax Resolution Blog: 2011

Monday, October 3, 2011

Foreign Account Tax Compliance Act

The IRS just released a new additional foreign asset reporting form 8938 and even more thrillingly a first draft set of instructions. For many each of the 7 million US persons overseas and hundreds of thousands back home in the States this new reporting immediately represents a significant increase in annual US tax data collection and reporting and will be highly complex to understand.

Here are some highlights from a first reading of the instructions:

For unmarried taxpayers living in the United States, the new form must be completed if one had either more than $50,000 in foreign financial accounts on the last day of the tax year (usually December 31st) or if one had more than $100,000 at any time during the tax year. If married filing jointly, the amounts double (to $100,000/$200,000).

Unmarried taxpayers living outside of the United States who are either bona fide residents of a foreign country or physically present abroad, must file this form if they had more than $200,000 on the last day of the tax year or more than $400,000 at any time during the tax year. If married filing jointly, the numbers increase to $400,000/$600,000.

As for the types of accounts and assets that are reportable:

Any financial account maintained by a foreign financial institution;

Other foreign financial assets, held for investment but not maintained by a financial institution, including stocks not issued by a US person, interests in foreign entities, and various financial instruments issued by non-US persons. The words "for investment" appear to eliminate interests in active businesses even if not reportable on any other return, but the wording is slightly unclear as drafted.

A foreign financial institution is a non-US financial institution that is a bank (or similar entity), hold financial assets for others, and is engaged in investing, holding partnership interests, or other financial roles.

Foreign mutual funds, foreign hedge funds, and foreign private equity funds are covered.

Foreign pension plans are not specifically mentioned, but may well be foreign grantor or non-grantor trusts so may be covered or reportable elsewhere.

Foreign real property is not mentioned specifically.

K&K Tax Group is a national tax resolution firm comprised of experienced tax attorneys, enrolled agents and tax relief professionals practicing as Tax Resolution Specialists certified by the American Society of Tax Problem Solvers (ASTPS). This is what makes us uniquely qualified to successfully solve IRS problems day in and day out. Our licensed professionals (every tax attorney, CPA and enrolled agent) must meet educational, experience and examination requirements prescribed by the ASTPS, a national, not-for-profit professional organization.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

Friday, September 30, 2011

Cancellation of Debt - 1099C

In the past few years due to the economic troubles, many distressed taxpayers have had some or all of debt cancelled or forgiven. This can be through a foreclosure on a home, accounts written off, credit card or other loans from financial institutions. While this can be a relief to those who have received it, many do not understand the tax consequences.

The IRS considers as income amounts over $600 shown on the 1099C with some exceptions:

Cancellation of debt by a private lender, such as a relative or friend which is considered as a gift
Certain student loans.
Cancellation from deductible debt that which could have been included on the Schedule A (home mortgage interest).

The IRS tax laws include income from the discharge of indebtedness in gross income.

There are exclusions from the canceled debt that are considered income:

Discharge of debt through bankruptcy
Discharge of debt of an insolvent taxpayer
Discharge of qualified farm debt
Discharge of qualified real property business debt and
Discharge of qualified principal residence

A taxpayer is considered insolvent when liabilities exceed the fair market value of assets. However, you cannot exclude any amount of cancelled debt that is greater than the amount you are insolvent.

Excluding the discharge of debt through bankruptcy (unless the debt was for business or investment purposes) the income still must be reported on the return but form 982 can be filled out for the exclusion. Failure to do this will result in the IRS considering the cancellation of debt income.

These exclusions can be complicated and detailed especially in the reporting of them in the preparing of the tax return. It is best to consult a tax professional when dealing with these issues.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

Thursday, September 29, 2011

IRS Tax Relief

When the IRS is being completely unreasonable, or for people facing significant hardship because of their tax problem, we have had some success engaging the Taxpayer Advocate Service. However, they tend to be understaffed and keep a full caseload. Access and service are sometimes problematic.

Appeals and Judicial Review

If you disagree with the IRS about the amount of tax you owe, you have the right to ask the Appeals Office or a court to review your case.If you get to this point with a tax problem, you should seriously consider engaging a representative to shepherd you through the appeals process.

Relief from Penalties and Interest

The IRS will waive some penalties and interest in certain situations. To qualify for this, you must be able to prove you acted reasonably and in good faith, that you relied on incorrect advice from the IRS, or that interest charges were the direct result of errors or delays caused by the IRS.

We highly recommend hiring a representative before contacting the IRS directly. If you are in need of tax representation, you may contact us today or call now at 877.395.0304.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

IRS Enforced Collections

The simple truth is that the IRS will come after your money if you have not filed your tax returns, or if you owe them money. It typically takes a serious run of bad luck or circumstances to put you in a position where the IRS is about to garnish your wages, but if the IRS is threatening to enforce liens or levies, or it is already happening, we can likely get you some relief.

Does the IRS really empty people’s bank accounts and seize money from paychecks?

Yes. In 2009, the number of notices of levy served on third parties (employers and banks) rose over 25% to almost 3.5 million compared with 2.6 million in 2008[1]. In real terms, the IRS issued a levy or garnishment for 1 out of every 42 people in the United States that filed a return. And the trend is for these garnishments and levies to continue. There’s a way to fight back! Learn how to stop being a victim of the IRS.

There’s a way to make sure you have the best chance at reducing or eliminating wage garnishment. The question is, will you take advantage of this information or will you sit back and allow the IRS to take your wages without having a say in the process?

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

Unfiled Tax Returns

Generally, the IRS requires last 7 years of returns filed in order for taxpayers to be compliant. Even if the IRS has already filed a substitute return, we can help you complete and file an amended return so that you can claim the additional deductions and refunds that may be due to you.

The IRS won’t issue you a refund for overpayment until you file all current and previously unfiled tax returns. The law allows most taxpayers up to three years to file past-due returns and to claim any refund due. If you don’t file within the three years, the money that was rightfully yours becomes the property of the U.S. Treasury. There is nothing to gain by waiting to address an overdue return. It’s in your best interest financially to call us today at 877.395.0304. We can also go through the steps you need to follow to claim any funds due to you before the IRS claims more of your money.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

How to Make a Voluntary Offshore Disclosure

FBAR

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

Offshore Voluntary Disclosure Initiative - FAQs

Offshore Voluntary Disclosure Initiative

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

Offer in Compromise

Submitting an offer in compromise (OIC) is serious, almost tantamount to filing for bankruptcy. The decision to submit an offer should not be taken lightly. The program is designed for people who cannot afford to pay their taxes (even over time) and for those who do not have enough value built up in property or assets to satisfy the tax debt. While the OIC program is a concession from the IRS, it also represents a major concession on the part of the taxpayer. The paperwork required to submit an offer in compromise gives the IRS a great deal of information about a taxpayer’s financial situation they would not have access to otherwise. The bottom line is that submitting an OIC should be a taxpayer’s last resort.

Many people call us and want to immediately talk about getting an offer in compromise (OIC) so they can settle their tax debt. While the OIC is the most publicized tax settlement option, it is not the only effective approach, nor is it the fastest or most certain. We help our clients settle federal tax debt using strategies that take advantage of multiple IRS programs. Effective IRS settlement strategy is a big part of what K&K Tax Group offers.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

IRS Auditing Business Owners in 419, 412, Sec 79 and Captive Insurance Plans

Many business owners adopted 412i, 419, captive insurance and Section 79 plans based upon representations provided by insurance professionals that the plans were legitimate plans and were not informed that they were engaging in a listed transaction. Upon audit, these taxpayers were shocked when the IRS asserted penalties under Section 6707A of the Code in the hundreds of thousands of dollars. Numerous complaints from these taxpayers caused Congress to impose a moratorium on assessment of Section 6707A penalties.

The moratorium on IRS fines expired on June 1, 2010. The IRS immediately started sending out notices proposing the imposition of Section 6707A penalties along with requests for lengthy extensions of the Statute of Limitations for the purpose of assessing tax. Many of these taxpayers stopped taking deductions for contributions to these plans years ago, and are confused and upset by the IRS’s inquiry, especially when the taxpayer had previously reached a monetary settlement with the IRS regarding its deductions. Logic and common sense dictate that a penalty should not apply if the taxpayer no longer benefits from the arrangement. Treas. Reg. Sec. 1.6011-4(c)(3)(i) provides that a taxpayer has participated in a listed transaction if the taxpayer’s tax return reflects tax consequences or a tax strategy described in the published guidance identifying the transaction as a listed transaction or a transaction that is the same or substantially similar to a listed transaction.

Clearly, the primary benefit in the participation of these plans is the large tax deduction generated by such participation. Many taxpayers who are no longer taking current tax deductions for these plans continue to enjoy the benefit of previous tax deductions by continuing the deferral of income from contributions and deductions taken in prior years. While the regulations do not expand on what constitutes “reflecting the tax consequences of the strategy,” it could be argued that continued benefit from a tax deferral for a previous tax deduction is within the contemplation of a “tax consequence” of the plan strategy. Also, many taxpayers who no longer make contributions or claim tax deductions continue to pay administrative fees. Sometimes, money is taken from the plan to pay premiums to keep life insurance policies in force. In these ways, it could be argued that these taxpayers are still “contributing,” and thus still must file Form 8886.

It is clear that the extent to which a taxpayer benefits from the transaction depends on the purpose of a particular transaction as described in the published guidance that caused such transaction to be a listed transaction. Revenue Ruling 2004-20, which classifies 419(e) transactions, appears to be concerned with the employer’s contribution/deduction amount rather than the continued deferral of the income in previous years. Another important issue is that the IRS has called CPAs material advisors if they signed tax returns containing the plan, and got paid a certain amount of money for tax advice on the plan. The fine is $100,000 for the CPA, or $200,000 if the CPA is incorporated. To avoid the fine, the CPA has to properly file Form 8918.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

Listed Transactions

In recent years, some section 412(i) plans have been funded with life insurance using face amounts in excess of the maximum death benefit a qualified plan is permitted to pay. Ideally, the plan should limit the proceeds that could be paid as a death benefit in the event of a participant’s death. Excess amounts would revert to the plan. Effective February 13, 2004, the purchase of excessive life insurance in any plan is considered a listed transaction if the face amount of the insurance exceeds the amount that can be issued by $100,000 or more and the employer has deducted the premiums for the insurance.

By itself, a 412(i) plan is not a listed transaction; however, the IRS has a task force auditing 412(i) plans.

An employer has not engaged in a listed transaction simply because it is a 412(i) plan.
Just because a 412(i) plan was audited and sanctioned for certain items, does not necessarily mean the plan engaged in a listed transaction. Some 412(i) plans have been audited and sanctioned for issues not related to listed transactions.

Companies should carefully evaluate proposed investments in plans such as the Benistar plan. The claimed deductions will not be available and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable, or similar transactions; an issue that was not before the Tax Court in either Curico or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be filed properly even for years that no contributions are made. I have received numerous calls from participants who did disclose and still got fined because the forms were not filled in properly. A plan administrator told me that he helps hundreds of his participants file forms, and they all still received very large IRS fines for not filling in the forms properly.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com

Captive Insurance Plans under IRS Scrutiny

The IRS is cracking down on small business owners who participate in tax reduction insurance plans and the brokers who sold them. Some of these plans include defined benefit retirement plans, IRAs, or even 401(k) plans with life insurance.

The IRS started auditing § 419 plans in the 1990s, and then continued going after § 412(i) and other plans that they considered abusive, listed, or reportable transactions, or substantially similar to such transactions. If an IRS audit disallows the § 419 plan or the § 412(i) plan, not only does the taxpayer lose the deduction and pay interest and penalties, but then the IRS comes back under IRC 6707A and imposes large fines for not properly filing.

Insurance agents, financial planners and even accountants sold many of these plans. The main motivations for buying into one were large tax deductions. The motivation for the sellers of the plans was the very large life insurance premiums generated. These plans, which were vetted by the insurance companies, put lots of insurance on the books. Some of these plans continue to be sold, even after IRS disallowances and lawsuits against insurance agents, plan promoters and insurance companies.

In a recent tax court case, Curcio v. Commissioner (TC Memo 2010-115), the tax court ruled that an investment in an employee welfare benefit plan marketed under the name “Benistar” was a listed transaction in that the transaction in question was substantially similar to the transaction described in IRS Notice 95-34. A subsequent case, McGehee Family Clinic, largely followed Curcio, though it was technically decided on other grounds. The parties stipulated to be bound by Curcio on the issue of whether the amounts paid by McGehee in connection with the Benistar 419 Plan and Trust were deductible. Curcio did not appear to have been decided yet at the time McGehee was argued. The McGehee opinion (Case No. 10-102, United States Tax Court, September 15, 2010) does contain an exhaustive analysis and discussion of virtually all of the relevant issues.

Taxpayers and their representatives should be aware that the IRS has disallowed deductions for contributions to these arrangements. In order to fully grasp the severity of the situation, one must have an understanding of IRS Notice 95-34, which was issued in response to trust arrangements sold to companies that were designed to provide deductible benefits such as life insurance, disability and severance pay benefits. The promoters of these arrangements claimed that all employer contributions were tax-deductible when paid, by relying on the 10-or-more-employer exemption from the IRC § 419 limits. It was claimed that permissible tax deductions were unlimited in amount.

In general, contributions to a welfare benefit fund are not fully deductible when paid. Sections 419 and 419A impose strict limits on the amount of tax-deductible prefunding permitted for contributions to a welfare benefit fund. Section 419A(F)(6) provides an exemption from § 419 and § 419A for certain “10-or-more employers” welfare benefit funds. In general, for this exemption to apply, the fund must have more than one contributing employer, of which no single employer can contribute more than 10 percent of the total contributions, and the plan must not be experience-rated with respect to individual employers.

According to the Notice, these arrangements typically involve an investment in variable life or universal life insurance contracts on the lives of the covered employees. The problem is that the employer contributions are large relative to the cost of the amount of term insurance that would be required to provide the death benefits under the arrangement, and the trust administrator may obtain cash to pay benefits other than death benefits, by such means as cashing in or withdrawing the cash value of the insurance policies. The plans are also often designed so that a particular employer’s contributions or its employees’ benefits may be determined in a way that insulates the employer to a significant extent from the experience of other subscribing employers. In general, the contributions and claimed tax deductions tend to be disproportionate to the economic realities of the arrangements.

Companies should carefully evaluate proposed investments in plans such as the Benistar Plan. The claimed deductions will not be available, and penalties will be assessed for lack of disclosure if the investment is similar to the investments described in Notice 95-34. In addition, under IRC 6707A, IRS fines participants a large amount of money for not properly disclosing their participation in listed, reportable or similar transactions; an issue that was not before the tax court in either Curcio or McGehee. The disclosure needs to be made for every year the participant is in a plan. The forms need to be properly filed even for years that no contributions are made.

If you are facing severe penalties due to investment in 419 welfare benefit plans, certain 412(i) retirement plans, captive insurance plans with life insurance in them and Section 79 plans, call us at 877.395.0304 for consultation.

K&K Tax Group

(877) 395-0304

www.kktaxgroup.com