Archives for July 2021

Taxpayer’s Excuse for Non-filing is Dismissed by the Courts

July 22, 2021 by Frank

1985 U.S. Supreme Ct. case of Boyle Again Confirmed

U.S. Supreme Ct. Case of Boyle

The 1985 Supreme Court case United States v. Boyle (469 U.S. 241, discussing IRC Sec. 6651(a)(1) and (2), confirmed that the IRS can impose delinquency penalties for failing to file a tax return or pay a tax unless the taxpayer can establish that the failure was due to reasonable cause and not willful neglect.

What If the Taxpayer Relied Upon His Attorney?

Boyle engaged an attorney to file his mother’s estate tax return. Boyle periodically checked with the attorney and was told that the return would be filed by the statutory due date. However, due to a clerical error at the attorney’s office, the return was not timely filed and the IRS assessed late filing penalties. Boyle appealed the assessment of the penalties saying that his reliance upon the attorney demonstrated reasonable cause by him and not willful neglect. The Court stated that while it was “reasonable” for Boyle to assume that the attorney would meet the statutory deadline with respect to matters between the two of them, it did not relieve the taxpayer of his obligation to file the return on time. The court noted that it required no special training or effort on the taxpayer’s part to ascertain a deadline and ensure that it is met. That the attorney, as respondent’s agent, was expected to attend to the matter did not relieve Boyle of his duty to meet the filing deadline. In other words, taxpayers have a nondelegable duty to be aware of tax deadlines. An agent’s incompetence or willful misconduct will not excuse the taxpayer from delinquency penalties.

What If the Taxpayer Was Incarcerated and Relied Upon His Attorney?

Jeffrey Allen Lindsay (U.S. Court of Appeals, 5th Circuit) was incarcerated and executed a POA (Power of Attorney) with an attorney to manage his affairs, including filing his tax returns. The attorney assured Lindsay he was doing so. However, he failed to do so and embezzled hundreds of thousands of dollars from Lindsay.

Lindsay eventually filed his tax returns and paid the assessed delinquency penalties. He filed a claim for refund; IRS rejected and he filed a suit in district court. The Court of Appeals found for the IRS, citing Boyle.

Lindsay had claimed that he exercised ordinary business care and diligence by giving his attorney his power of attorney and by directing the attorney to file his income tax returns and to pay his taxes. Lindsay routinely asked the attorney whether he was handling Lindsay’s tax obligations, and the attorney confirmed he was. In Lindsay’s view, he had a reasonable cause for late filings and delayed payments because he used ordinary business care and prudence. He was unable to file his returns and pay his income taxes due to circumstances beyond his control, i.e., his incarceration and his attorney’s malfeasance. Unfortunately for Lindsay, the Court found for the IRS. While on the surface it appears that Lindsay had reasonable cause relying upon an attorney while he was incarcerated, it does not meet the IRS’s standard of reasonableness as confirmed by the U.S. Supreme Court.

Tax Tip

Lindsay, like many other taxpayers, found that the courts agree with the IRS when it comes to trying to recover delinquency penalties that can be directly linked to an agent’s misconduct or incompetence. The burden is solely upon the taxpayer and that responsibility cannot be delegated to another person.

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.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

IRS Levies Social Security Benefits

July 19, 2021 by Frank

It is Well-Established that the IRS has 10 Years from its Date of Assessment to Collect Delinquent Taxes – Or Does the IRS Authority to Collect Social Security Benefits Go Beyond 10 Years?

Collection Statute Expiration Date

Internal Revenue Code section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. The collection statute expiration ends the government’s right to pursue collection of a liability unless it seeks a judgement against the taxpayer which would extend the collection period for an additional 20 years. The date upon which the IRS can no longer collect the tax is referred to as the Collection Statute Expiration Date (CSED).

Dean v US (USCA11 Case: 20-14421)

Dean v US involved a motion to dismiss a taxpayer’s suit alleging that the IRS recklessly disregarded the law by continuing to levy on a taxpayer’s Social Security payments beyond the ten year SOL on collections. The 11th Circuit Court of Appeals agreed with the district court’s finding that the IRS’s actions were proper.

What Have We Learned from the Dean Case?

The case illustrates how the ten-year collection period does not prevent collection beyond the ten-year period when there is a timely levy relating to a fixed and determinable income stream.

Most taxpayers and tax professionals understand that the IRS will usually levy an automatic 15% on certain federal benefits, including social security (IRC Sec. 6331(h)). In the Dean case, the IRS levy was made under IRC Sec. 6334(a)(9) whereby the SSA began paying over all of the benefits slated for Dean to the IRS (subject to certain taxpayer exemptions).

Why All the Confusion?

With the CSED expiring, the IRS filed a certificate of release of federal tax lien stating that Dean had “satisfied the taxes,” that the lien was “released,” and authorized the proper IRS officer to “note the books to show the release of this lien.” IRS also abated the assessments. It sure seems as if the 10-year CSED expired and the IRS collections have come to a halt. However, the IRS continued to levy Dean’s social security benefits which resulted in Dean filing a complaint in the district court alleging that the levy was an unauthorized IRS collection action.

Fixed and Determinable Levy Payment

The IRS regulations under Section 6331 describe the relationship between a levy and fixed and determinable payments: “[A] levy extends only to property possessed and obligations which exist at the time of the levy.” 26 C.F.R. § 301.6331–1(a). “Obligations exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date.” The courts have ruled that:

An obligation is fixed and determinable “[a]s long as the events which gave rise to the obligation have occurred and the amount of the obligation is capable of being determined in the future …. It is not necessary that the amount of the obligation be beyond dispute.” United States v. Antonio. 71A AFTR 2d 93-4578], *6 n. 2 (D. Haw. Sept. 24, 1991). Numerous cases establish that Social Security benefits are a fixed and determinable obligation of the SSA and are subject to one-time levies.

As the lower court opinion discusses, the 2013 levy created a custodial relationship between IRS and the SSA and as such the benefits came into constructive possession of the IRS. The regulations under Section 6343 also provide that “a levy on a fixed and determinable right to payment which right includes payments to be made after the period of limitations expires does not become unenforceable upon the expiration of the period of limitations and will not be released under this condition unless the liability is satisfied .” 26 C.F.R. § 301.6343-1(b)(1)(ii).

The Eleventh Circuit also helpfully explains the relationship between the levy and the benefits, directly refuting the claim that the collection occurred after the expiration of the SOL:

Instead, the IRS seized his entire Social Security benefit—that is, his “fixed and determinable right to payment” of his Social Security benefit in monthly installments—immediately upon issuing the notice of levy in June 2013. 26 C.F.R. § 301.6343-1(b)(1)(ii); see Phelps, 421 U.S. at 337. Having seized his entire benefit before the expiration of the collection limitations period, the IRS was not required to relinquish it after the period expired. See 26 C.F.R. § 301.6343-1(b)(1)(ii).

The lower court opinion also nicely discusses the lack of legal significance of the IRS’s abatement of the assessment and issuance of the release of federal tax lien. Both events did not change that Dean owed an underlying tax. As to the abatement, taxpayers are liable for the tax regardless of whether there has been an assessment. While the release of the federal tax lien affects the IRS’s security interest, it did not release the levy and had no bearing on the underlying tax debt.

Disclosure

We wish to thank Leslie Book, a professor at Villanova School of Law, for his posting to the Procedurally Taxing Blog which alerted us to the Dean case.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

When You Say “I Do”, You Need To Do

July 13, 2021 by Frank

Newlyweds Need to Understand How Tying the Knot Affects Their Taxes

Tax Checklist for Newly Married Couples

Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at the SSA. If it doesn’t, it could delay any tax refund as well as generating a notice from the IRS to verify your identity. To update information, taxpayers should file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or by visiting a local SSA office.
Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, people should send the IRS Form 8822, Change of Address. Taxpayers should also notify the postal service to forward their mail by going online at USPS.com or their local post office. Further information can be found at Topic 157, Change Your Address – How to Notify the IRS.
Withholding. After getting married, couples should consider changing their withholding. Newly married couples must give their employers a new Form W-4, Employee’s Withholding Allowance. If both spouses work, they may move into a higher tax bracket or be affected by the additional Medicare tax. They can use the Tax Withholding Estimator on IRS.gov to help complete a new Form W-4 or contact their tax professional. Taxpayers should review Publication 505,Tax Withholding and Estimated Tax for more information.

Filing Status. Married people can choose to file their federal income taxes jointly (MFJ) or separately (MFS) each year. While filing MFJ is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of December 31, the law says they’re married for the entire year for tax purposes. The same holds true for divorcees – if you are divorced on or before December 31, you are considered not married for the entire tax year.
Joint and Several Tax Liability. When a couple files MFJ, remember that both spouses are jointly and severally liable for the tax owed on that return signed as being true and correct under penalties of perjury. This can develop into an IRS tax debt situation for both spouses if one spouse is self-employed and is failing to report all of their income or is exaggerating their expenses. In such situations, the IRS will assess both spouses the taxes owed and attempt to collect from both spouses. Make sure you are comfortable with the income and expenses being reported on your MFJ return before you sign it. If you have any doubts about the information being shown on a MFJ return, speak with a tax professional about filing MFS.
IRS Tax Debts. Often when a delinquent taxpayer is considering marriage, they will get religion and wish to get into tax compliance so as not to burden their newly-wed with their tax problems. However, that is not always the case. Consult with an experienced tax professional as to how each spouses IRS tax compliance can be verified.
Scams. All taxpayers should be aware of and avoid tax scams. The IRS will never initiate contact using email, phone calls, social media or text messages. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Tax Planning Tip #1

NEVER sign a tax return without first reviewing it. You are ultimately responsible for what is reported on your tax return, even if the preparer included fictitious business losses to increase your refund or decrease the taxes you owe.

Tax Planning Tip #2

Inflating business profits may sound counter intuitive as one may think that the taxpayer would be subject to additional income taxes, but some tax credits, such as the earned income tax credit, could result in additional refunds to the taxpayer by showing more business profits.

Tax Planning Tip #3

Due to taxpayers filing false returns claiming tax credits, and tax preparers preparing false returns claiming illegitimate child care and tuition credits, the IRS is now requiring tax preparers to perform due diligence by asking questions and documenting the taxpayer’s responses to the required questions in the IRS’s efforts to combat tax fraud.

Tax Planning Tip #4

When you engage an unscrupulous tax return preparer, you are increasing the odds that your return will be audited by the IRS. When the IRS identifies an unscrupulous tax preparer, it runs the returns prepared by that person through IRS computers looking for similarities. For example, if a preparer is claiming erroneous childcare or educational credits, the IRS computers will identify all taxpayers who have claimed those credits who used that tax preparer.

Return preparer fraud is one of the IRS’ Dirty Dozen Tax Scams and taxpayers seeking a return preparer should remain vigilant. The IRS has information on its website for choosing a tax preparer and has launched a free directory of federal tax preparers.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.