Archive for October, 2017

What? The IRS does not follow its own publications?

October 31st, 2017 No comments

Our tax law is overly complicated. Many of its laws have exceptions, and sometimes those exceptions have exceptions. If you are a DIYer and rely upon the IRS’s published materials to prepare your tax return, you may just find yourself at the wrong end of an IRS audit examination.

The first rule that you need to understand is that you cannot rely upon IRS oral advice. So if you are calling the IRS to seek guidance, the IRS says that you cannot rely upon that oral advice. For years the IRS had a reputation of putting its most inexperienced employees (new hires) on its taxpayer assistance call lines. Thus it was possible that the person calling knew more about federal income taxes than the IRS person on the other end of the call. Today, due to IRS staff cutbacks and long wait times, it is difficult to make contact with an IRS employee by phone. Furthermore, the IRS has closed many of its walk-in offices to the public so many taxpayers can no longer walk into an IRS office and seek oral advice.

We are now in the information age and many taxpayers will look for tax advice on the Internet. The IRS website has its own search engine to allow taxpayers to “research” a tax issue. This website contains a wealth of information. Surely taxpayers can rely on that official IRS information, correct? Read more…


IRS Terminates Equifax Contract

October 24th, 2017 No comments

The Internal Revenue Service has its issues. Nobody will deny that.

After Equifax announced one of the largest security breaches ever, the IRS announced in September that it signed a $7.25 million contract with Equifax. That contract was supposedly a no-bid contract and Equifax was to provide the IRS with taxpayer and personal identify verification services. The contract stated that Equifax was the only company capable of providing these services to the IRS and it was deemed a “critical” service that could not lapse.

The IRS recently announced Read more…


Traditional IRA Converted to Roth IRA – Watch Your Step

October 17th, 2017 No comments

A taxpayer recently informed us that he did a Roth conversion. After completing the conversion, he asked if the IRS could “undo” the conversion under the “step transaction” doctrine. As a side note, it is ALWAYS best to consult with your tax advisor before rather than after making a financial transaction.

The Roth Conversion: In its simplest form, a Roth conversion is when a taxpayer converts a traditional IRA to a Roth IRA. This is allowed by the Internal Revenue Code. When the conversion is made, the taxpayer incurs an income tax liability related to the untaxed earnings that have accumulated in the traditional IRA. Why would someone want to pre-pay their income taxes? Based on several factors which will not be discussed herein, it may be a sound financial decision to pay taxes today to avoid the future taxes that will be due when RMDs (required minimum distributions) are required to be made at age 70 ½ and there are also wealth transfer considerations. Remember that Roth IRAs do not have RMDs and the monies in a Roth account can be withdrawn tax-free once certain conditions are satisfied.

The taxpayer who asked the question was doing what is referred to as a “backdoor” Roth conversion. In this situation, the taxpayer is not eligible to make a Roth IRA contribution. The taxpayer then makes a non-deductible traditional IRA contribution and then (almost immediately) converts that IRA to a Roth IRA. Since the non-deductible traditional IRA likely has little or no earnings, there is little or no income tax due on the Roth conversion.

The Step Transaction Doctrine: This is a judicial doctrine that combines a series of formally separate steps, resulting in tax treatment as a single integrated event. This doctrine is often used in combination with other doctrines, such as substance over form. Thus, the taxpayer who is ineligible to make a Roth contribution as a single transaction is precluded from making the contribution by entering into a multiple of other steps to obtain the desired result. In other words, the multiple steps are collapsed into a single step.

Old and Cold: This is an unstated rule that is generally known to experienced tax practitioners. At some point, events are so old and cold that they acquire reality by themselves and cease to be part of an overall plan or transaction. How long this takes is unclear. Some practitioners would likely argue that a transaction has to be at least two tax years old. We have seen some taxpayers delay a transaction for one full year and a day in another tax year. For example, if a traditional IRA contribution is made in 2017 and the conversion occurs on January 2 in 2019, have two tax years passed? The taxpayer would argue that the step transaction and substance over form doctrines would not apply because the first step of the event occurred in the second preceding tax year.

However, the above old and cold argument is less likely to prevail if the taxpayer consistently each year converted his/her traditional IRA to a Roth IRA.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

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Revocable Trust vs. Irrevocable Trust

October 10th, 2017 No comments

Financial planning includes periodically meeting with an experienced estate tax attorney to ensure that one’s estate plan is current and meets the objectives of the individual. When meeting with legal counsel, one would be well served by understanding the differences between a revocable trust and an irrevocable trust. All comments here are personal and should not be considered the rendering of legal advice. We are not attorneys. Only attorneys can render legal advice which is why we recommend that you seek competent legal advice on these matters.

In its most simplistic terms, a revocable trust (RT) is where the grantor of the trust (you) continue to own the assets in the trust. The trust is reported under your social security number and all income of the trust is reported by you. RTs are often referred to as “grantor trusts” or “living trusts” and are essentially just an extension of your will.

A RT differs from an irrevocable trust (IT) where the ownership of the assets is transferred Read more…


Are You Are Being “Liked” by the IRS

October 3rd, 2017 No comments

Eric Sorensen of WSU News has reported that “The next time you want to tweet something about how much you hate paying taxes, or what you did with your huge tax refund, you might want to rethink it.” Mr. Sorensen referenced the work of Kimberly Houser, a clinical assistant professor of business law at Washington State University’s Carson College of Business, that the IRS is breaking several laws by mining large data sets and combing through social media posts (like Facebook, Instagram and Twitter) in its search for taxpayers to audit.

Mr. Sorensen reported that “According to information obtained by the American Civil Liberties Union, the IRS also has violated Read more…

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