Texas Tax Talk

Texas Tax Talk

“The Situtation” for Sorrentinos Getting Worse With Social Media

Posted in Criminal Tax

Courtesy – Mike Sorrentino, Instagram

As many have heard recently, Michael Sorrentino (of MTV’s “Jersey Shore” fame) and his brother Marc were indicted for tax crimes in New Jersey and made their initial appearance in court last week.

At this point, no one but the Sorrentinos, their lawyers and maybe the government really know what happened.  In my opinion some of the charges look a bit questionable.  For instance, there was a single charge of failure to file a tax return.  Clearly, it is a crime to fail to file a tax return.  However, with just a single instance of failing to file there is no pattern.  There are probably very legitimate and innocent reasons why the failure occurred.

The focus of this blog, however, is on the dangers of social media.  Social media like Facebook, Twitter and Instagram are powerful tools and can be great for marketing.  However, they are also great ways for a person to incriminate themselves.

One of Mike’s recent Instagram posts was “To Be Old And Wise You Must First Be Young And Dumb.”  This post may be completely innocent – but why do it?

The IRS is no fool – they love to research their targets’ social media posts.  Oftentimes, this can be a central component of their case.

There is a reason why attorneys tell their clients to clam up – nothing good generally can come from talking.  Any statements that are made need to be well thought out.

My advice is to stop posting anything if you are under investigation.

Does Filing for Bankruptcy Really Give You Tax Relief?

Posted in Criminal Tax, Tax Court, Tax Planning

When times get desperate and tax liabilities pile up – filing for bankruptcy is an option many people consider.  Taxes are “dischargable” in bankruptcy, but there are important rules you need to know.

TIMING

Taxes are only dischargable if they have reached a certain vintage.  Here are the basic rules:

  1. More than three years must have elapsed since the tax return was due.
  2. Taxpayer must have filed his/her tax return  more than two years earlier than the bankruptcy petition.
  3. At least 240 days must have elapsed since the date of an IRS assessment.

Lots of things can extend these time periods including various administrative remedies with the IRS – like filing an offer in compromise.

Bottom line – you need to get IRS Account Transcripts and carefully calculate each time frame to make sure you qualify.

FRAUD EXCEPTION

Taxpayers must also beware of the fraud exception to dischargability in bankruptcy.  Taxes are not dischargeable if the person “willfully attempted to evade the tax.”  This doesn’t mean that you have to be a criminal to lose your ability to discharge the tax.

An example of this came recently out of the 10th Circuit in the Vaughn case (114 AFTR 2d 2014-5191).    Apparently, James Vaughn was a successful businessman who made millions from the sale of his company.  Instead of paying the tax owed, he got into a “BLIPS” tax shelter that was marketed by KPMG.

The Court thought, in my words:

  • He was a sophisticated guy and he should have known that the BLIPS transaction was not legitimate.
  • The IRS put him on notice that the transaction was not legitimate through IRS Notice 2000-44.
  • He depleted his assets through extravagant purchases (expensive homes, cars, jewelry, etc).

These things were enough to push him from the negligent category to the “willful” category.  I’m not sure I agree with the entirety of what the court decided, however.  The taxpayer did seek advice of a highly regarded accounting firm in KPMG.  Additionally, he also went through a divorce and much of his wealth went to his ex-wife.

The bottom line is you cannot purposefully avoid a tax, spend like crazy to dissipate your assets, then file for bankruptcy.  If you do so, not only will you not get your taxes discharged in bankruptcy, but you will likely be looking at going to jail.

Requirements for Alimony – Can it be a good thing?

Posted in Tax Planning

Divorce is messy, divorce is costly – and it should be avoided wherever possible.  Spouses should always attempt to mitigate their losses and one way to do this is to consider designing the divorce settlement to include alimony.

To many people, the idea of alimony can cause your blood to boil.  This negative attitude generally comes from stories about celebrity divorces that require outrageous sums of money to be paid on a monthly basis.

Additionally, alimony causes spouses to have a constant reminder of the divorce every month when the alimony check comes due.

In Texas, the concept of alimony was frowned upon and in fact permanent alimony was banned for quite some time.  Now Texas courts are allowed to order “Spousal Maintenance” in certain circumstances:

  1. Requesting spouse is victim of family violence, or
  2. Spouses have been married for at least 10 years and the requesting spouse lacks funds or ability to earn to meet his/her “minimum reasonable needs.”

Spouses in Texas, however, can agree to “contractual alimony” if spousal maintenance is not available or acceptable to the parties.

Alimony can help shift some of the cost of the divorce to Uncle Sam.  This is because you are shifting income from a higher earning spouse to a lower earning spouse.

In order to qualify for alimony a four-pronged inquiry must be satisfied:

  1. The alimony payment is received under a divorce or separation instrument
  2. The instrument does not designate the payment not categorized as alimony (rather a property settlement)
  3. Persons are not members of same household when payment is made, and
  4. Requirement to make payments terminates on death of payee spouse.

There is a lot more to alimony and each situation needs special consideration.  Nevertheless, it should be considered!

IRS Takes Money From Dead Mom to Pay For Son’s Tax Debt

Posted in Tax Planning

Most people have some strong feelings about how they want their assets to be distributed upon their death.  Some want to give their money to their kids, others are charitably inclined.  However, I would guess that very few would like to see their money go to the IRS to pay the debts of their children.

Imagine working a lifetime, being a careful saver and then when you die it all goes to the IRS.

The famous saying is “you give your children enough money to do something but not enough to do nothing.”

In a recent case out of Kentucky (In RE: The Estate of Audrey Deinlein v. US) the IRS has insured that an heir will not be allowed to “do nothing.”

The basic facts of the case are:

Mom died and left her assets to her three sons in equal shares.  At her death one of the sons owed the IRS close to $500,000.  Mom’s estate was not large, but his share was going to be seized by the IRS.  He tried several different arguments to release his claim to his share.  One argument was that he had already received an “advancement” and the other was to “disclaim” the share.

He probably thought that it would be better for the money to go his other family members.  But the argument failed.

Two comments:

  1. An IRS tax lien attached to all “property” or ”rights to property” that a taxpayer has.  The first step is to determine if there is a property right.  Courts will look initially at what state-delineated rights the person has, but the determination is ultimately a question of Federal law.  The advancement and disclaimer arguments failed in this case.
  2. This problem could have been avoided if mom would have had a more thoughtful estate plan.  Her estate could have provided that her assets would have gone into trust for her heirs, although this is not a cure-all.

The bottom line is a thoughtful estate plan is necessary for big and small estates so that a seizure like this does not happen.

Is the Internal Revenue Service Lying?

Posted in Criminal Tax

Do you remember the controversy where the IRS was accused of targeting and unfairly auditing the Tea Party?

In an article Sunday from CNN’s Political Ticker by Sara Fischer, the IRS has claimed that it is unable to recover subpoenaed emails from former IRS official Lois Lerner. The reason given is a “computer crash.”

A firestorm has erupted in the media and many are calling it a “cover up,” alleging the crash is “convenient” for President Obama’s administration.

Anyone who works on a daily basis with the IRS, like I do, knows that the IRS is very particular about email and computers in general.  With emails, specifically, the IRS has very stringent policies.  Most of the policies, I believe, center around privacy rules – which is important.

But it is very hard for me to believe that Lois Lerner’s emails were lost because her computer crashed.

In this day and age, large organizations do not keep emails saved on individual computers.  Instead, they are saved on large servers that are regularly backed up to provide needed security and prevent that information from getting lost.

If the IRS is working without basic safeguards, that is a problem in and of itself.  It is just not good business practice.  For an organization as large and as important as the IRS, it must function properly.  Anything else is deplorable.

If the “failure” to provide the emails is more sinister – meaning either Ms. Lerner or the IRS have concocted a story of a computer crash on purpose – then an investigation is necessary.  If true, then Ms. Lerner or the IRS should be concerned about a criminal investigation (See 2 U.S.C 192 and 194).

A taxpayer in a civil or criminal examination before the IRS would not be cut much slack.  Undoubtedly they would be subject to a myriad of penalties.

Bottom line is any organization that can punish its citizens either through the civil examination process or through criminal investigations needs to be transparent and above-board with its own behavior.  Anything else would be hypocritical and unfair.

Do we really have a “Taxpayer Bill of Rights”?

Posted in IRS Collection, Tax Practice

The IRS announced the adoption of a “Taxpayer Bill of Rights” Tuesday.   I have listed the rights below along with my commentary.  Just like our U.S. Constitutional Rights, these “rights” are and will be watered down.

All of us have certain rights we feel strongly about.  For instance, folks here in Texas are very concerned about guarding their rights under the Second Amendment as the Open Carry Texas movement demonstrates.

Others feel that guarding our rights under the Fourth Amendment (unreasonable searches and seizures) is important.  Seems like the Fourth Amendment doesn’t even exist anymore given recent Supreme Court Decisions.  Here is an article from the New Republic about a recent case and Supreme Court Justice Antonin Scalia’s dissent.

It seems like at every turn our rights are being watered down.

But when it comes to watering down rights - no one is better than the IRS.  Here is the list:

1. The right to be informed.

  • This usually means the IRS will let you know what they want you to know and when the want to want you to know it.

2. The right to quality service.

  • Anyone who has called the IRS lately knows that they can anticipate being on hold for 20, 30, 40 minutes, or even longer.  Quality service and the IRS are opposites these days.

3. The right to pay no more than the correct amount of tax.

  • In my view, IRS auditors are “advocates” for taxpayers paying more than what they should.

4. The right to challenge IRS’s position and be heard.

  • Generally, taxpayers have rights to challenge the IRS’s position – unless the IRS really doesn’t like the person.

5. The right to appeal an IRS decision in an independent forum.

  • IRS Appeals Officers are supposed to be fair and balanced.  But, just like Fox News or MSNBC – they have substantial biases.

6. The right to finality.

  • This reminds me of the adage from Ben Franklin, “But in this world nothing can be said to be certain, except death and taxes.”

7. The right to privacy.

  • The IRS is generally over-concerned about privacy issues.  For instance, emailing the IRS is a major ordeal because they are worried that someone in cyberspace is going to intercept the information.  Fax on the other hand is just fine (though I am certain those can be intercepted as well).

8. The right to confidentiality.

  • This goes hand-in-hand with my privacy comment.

9. The right to retain representation.

  • Generally the IRS respects the IRS Power of Attorney and will deal only with your authorized representative.  Unless they don’t like your authorized representative, in which case they will bypass them and go straight to you.

10. The right to a fair and just tax system.

  • I think the Tea Party would disagree that this is the case today.

Tax and Business Planning for Farmers to Avoid Higher Taxes and Loss of Subsidies

Posted in Tax Planning

The Agricultural Act of 2014 (aka -  the 2014 Farm Bill) has been controversial, to say the least.  Among its many changes are an $8 billion cut to the “food stamp” program.  The Farm Bill also drastically modifies or ends farm “subsidies.”

In our global marketplace, these subsidies are often necessary to help American farmers compete.  In my opinion, the American farmer can compete and beat anyone in the world,  but not compete when foreign governments provide excessive subsidies to their own farmers.  It is hard to win a 100-yard dash when your competitor starts 25 yards ahead of you.

This new legislation has made it vital to sit down with your tax professional and do some planning to avoid losing the support of the remaining governmental programs – while at the same time not getting hit with additional taxes.

An interesting article was published last month by Roger A. McEowen with the the Iowa State University Center for Agricultural Law and Taxation.  The article makes the point that beginning with the 2014 crop year, farmers with an “adjusted gross income” of greater that $900,000 will not be eligible for certain programs.  The definition of “adjusted gross income” depends on the type of entity that is being used.  Mr. McEowen states the following:

  • For a C corporation, FSA examines line 30 (taxable income) plus line 19 (charitable contributions).
  • For S corporations, FSA only looks at line 21 of IRS Form 1120S (ordinary business income or loss).
  • For estates or trusts, FSA uses line 22 (taxable income) plus line 13 (charitable deductions) of IRS Form 1041.
  • For limited liability companies (LLCs), limited liability partnerships (LLPs), limited partnerships (LPs) or similar entities, FSA looks to IRS Form 1065, line 22 (total income from trade or business) plus line 10 (guaranteed payments to partners).
  • For individuals, the pertinent Form is the 1040, line 37 (AGI).
  • For tax-exempt entities it’s IRS Form 990-T, line 34 (unrelated business taxable income) less income that the CCC determined to be from non-commercial activity.

These rules can cause “unfair” treatment.  For example, if a company has a large capital expenditure that would be normally deductible under section IRC 179 may artificially increase your “adjusted gross income” for purposes of qualifying for the subsidies.  If you have an S-corporation/LLC/Partnership, this deduction counts against you for purposes of qualifying for governmental “subsidies.”  Alternatively, a C-corporation will not be penalized for the exact same purchase.

So does this mean you should convert to a C-Corporation?  Not so fast - a thorough review of your situation is needed before you can really make a decision.

Just a few points to consider:

  1. C-Corporations will potentially subject you to two levels of tax: a) one level of ordinary income for the corporation at 35% maximum rate and b) dividends to shareholders at up to 23.8% (thank you President Obama) for a total tax of up to 58.8%.
  2. Sales of S-Corporations and Partnerships also get preferential tax treatment by avoiding one of  the Obamacare taxes.
  3. Estate Planning - C corporations are also not the ideal estate planning mechanism if you want to keep the family farm - and not see it broken up by the Feds.

There are multiple other planning techniques that folks in the farming business need to consider – and consider now before they get unfairly penalized.

Application for Tax Exempt Status To Be Eased by IRS – Except for the Tea Party

Posted in IRS Collection

In 2013, the IRS revealed that it had selected ”social welfare” groups (like the Tea Party) applying for tax-exempt status for closer scrutiny.  That investigation is still ongoing and it has given the IRS a black eye.

The Tea Party is a 501(c)(4) organization – not your traditional 501(c)(3) which must be “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.”

The IRS also made applying for 501(c)(3) status a major pain.  In order to obtain recognition of exemption from federal income tax under 501(c)(3) of the code, an organization must generally file the 26-page IRS Form 1023.

But we will soon have an easier way to file for smaller organizations.  Here is the recent draft form – f1023ez.

In order to qualify for the 1023 EZ you must:

  1. Have no more than $200,000 of projected annual gross receipts in any of the next three years
  2. Annual gross receipts of not more than $200,000 in any of the past two years
  3. Total assets not in excess of $500,000.

Additionally, there are also a number of types of non-profits that are generally ineligible for this simplified form:

  • Churches
  • Schools
  • Hospitals
  • Credit counseling organizations
  • Other miscellaneous organizations

If you file the 1023 EZ within 27 months of formation, and the IRS approves your application, then the effective date of the exempt status will be the date of formation.  If you fail to file within the 27-month period, then your exempt status will be effective on the date of filing the 1023 EZ.

I generally applaud the IRS for easing this burden.  However, lots of commentators have noted that too much simplicity could help organization qualify as exempt that really shouldn’t qualify in the first place.

Fraud in the nonprofit world is rampant.  Time will tell if the simplified form creates problems.

New Guidance From IRS On At-Risk Rules For LLC Member Guarantees

Posted in Tax Planning

The IRS recently released a chief counsel memorandum AM2014-003 on LLC Member Guarantees of LLC Debt and “Qualified Nonrecourse Financing.”  These memorandums are very helpful because they provide the IRS’ interpretation of complicated issues.  These memorandums do not have the force and effect of law – thus a taxpayer is not bound by them.  However, it is wise to thoroughly consider them.

The at-risk rules are complicated, but in a nutshell, these rules serve to limit the amount of losses that a business can deduct if it suffers losses.  The losses are limited to the amount the taxpayer is economically or actually at risk for the investment.

This situation normally arises where a company has taken a loan to fund its operations.  Some loans cause the taxpayer to be economically at-risk, like a ”recourse” loan.  Others do not, like a “nonrecourse” or “guaranteed” loan.

Limited liability companies have some peculiarities due to state law rules.  Generally, in the case of an LLC, all members have limited liability with respect to LLC debt.

In the absence of any co-guarantors or other similar arrangements, an LLC member who guarantees LLC debt becomes personally liable for the guaranteed debt.   If called upon to pay under the guarantee, the guaranteeing member may seek recourse only against the LLC’s assets, if any.

The IRS holds in its Memorandum that:

Therefore, in the case of an LLC treated as a partnership or disregarded entity for federal tax purposes, we conclude that an LLC member is at risk with respect to LLC debt guaranteed by such member without regard to whether the LLC member waives any right to subrogation, reimbursement, or indemnification against the LLC, but only to the extent that,

(1) the guaranteeing member has no right of contribution or reimbursement from persons other than the LLC,

(2) the guaranteeing member is not otherwise protected against loss within the meaning of § 465(b)(4) with respect to the guaranteed amounts, and

(3) the guarantee is bona fide and enforceable by creditors of the LLC under local law.

Oftentimes, when an LLC is created to carry on a business not much thought is put into tax consequences.  It is important to consider the at-risk rules.  Failure to consider will result in a less advantageous result when tax time comes.

IRS Makes Bitcoins a Tax Headache

Posted in Tax Planning

The IRS just published Notice 2014-21 which explains the IRS’ vision on how general tax principals apply to “virtual currency” transactions like Bitcoin.

If you’re not familiar with Bitcoin, it’s a currency that isn’t issued by a central government. And just to be clear, there isn’t an actual “coin” associated with it either. The currency is created by very powerful computers.

Ok, back to the IRS news. While this is just the IRS’ interpretation of the law – failure to follow it could result in penalties if your contrary opinion ends up being wrong.

The jist of the Notice is that Bitcoin is a capital asset and not currency.

Here is a simple example:

Day One: You purchase one Bitcoin for $600

Day Two: On day two your Bitcoin increased in value to $650.  You then decide to use your Bitcoin to purchase a flight to Europe.

If you would have used cash this would not be a taxable event.  But under the IRS’ ruling you now have a short-term capital gain of $50 ($650 amount realized less your cost basis of $600).  You will also have to send a check to the IRS for about $20 if you are in the highest tax bracket.

Bitcoin will certainly complicate your taxes and cause you to have to keep careful records.

From a policy standpoint, the government thinks that Bitcoin is a favorite tool for tax evasion and other illegal activities (and they are probably right).  This Notice is a clear disincentive from the government to use Bitcoin.