audits

WHAT CONSTITUTES LAST KNOWN ADDRESS FOR IRS MAILINGS?

August 20, 2019 by Frank

IRS Prevails Over Taxpayer In Establishing Last Known Address for Contacting Taxpayer

The Facts of the Case

Damian and Shayla Gregory moved in 2015. After moving, they filed their 2014 Form 1040 using their former address. The IRS audited their 2014 tax return and the married couple filed Form 2848, POA, with the IRS using their new address. The couple had also filed an extension of time to file their 2014 tax return and had shown their new address on that filing.

What Happened?

As a result of the IRS audit examination, the IRS mailed the Gregorys a notice of deficiency in October of 2016 to their old address. The Post Office returned the notice of deficiency to the IRS and marked the mailing as undeliverable. At that time, the couple had not yet filed their 2015 Form 1040. The Gregorys were thus unaware that the IRS had sent them a notice of deficiency and did not timely petition the Tax Court for a hearing within the statutory 90 days.

What Is the Last Known Address?

The taxpayers argued before the Tax Court that the IRS had mistakenly sent its audit deficiency to their old address and not their last known (current) address, and therefore the IRS assessment lacked standing before the court. Unfortunately for the taxpayer, the requirements of Rev. Proc. 2010-16 had not been met and the Tax Court concluded that the IRS had sent its notice of deficiency to the taxpayer’s “last known address”. Thus, the taxpayer’s petition was not timely filed.

Rev. Proc. 2010-16

This Revenue Procedure requires a clear and concise written statement , signed by the taxpayer, mailed to the appropriate IRS address for an address change requesting an address change that shows both the former mailing address and the new mailing address. The Forms 2848 and 4868 that the taxpayer had sent to the IRS with their new address did not inform the IRS that these forms should be interpreted as an address change, and neither form included the taxpayer’s former address.

Tax Planning Tip #1:

When filing Form 1040, the taxpayers should always use their current mailing address. For example, the Gregorys likely believed that they should show their 2014 address on their 2014 Form 1040. Instead, they should have used their 2015 mailing address since the move had been completed before the filing of the 2014 tax return.

Tax Planning Tip #2:

Taxpayers can easily notify the IRS of an address change by filing IRS Form 8822, Change of Address, to the service center based on the mailing address of their former residence.

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.

Copyright © 2019 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and 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.

QUALIFIED OPPORTUNITY ZONES AND FUNDS

August 13, 2019 by Frank

Individuals Who Wish to Invest in Certain Low-Income Areas Can Defer Capital Gains Until Year 2026

What Is a Qualified Opportunity Zone (QOZ)?

A QOZ is an economically-distressed community where new investments may be eligible for preferential tax treatment. Localities that qualify have been nominated by their states and have been certified by the Secretary of the U.S. Treasury (IRS). QOZs are designed to spur economic development and job creation in distressed communities.

Is There a Listing of QOZs?

Yes, the IRS has provided a listing of QOZs on its website. This IRS Notice #2018-48 was amplified by IRS Notice 2019-42.

What Preferential Tax Treatment?

If you own assets with capital gains and have sold those assets or wish to sell those assets in 2019, you can invest those proceeds and/or capital gains (or any portions thereof) in a QOZ within 180 days of the sale, but not later than December 31, 2019, and defer the tax on those invested monies. This tax savings also applies to prior years’ sales if not closed by the statute of limitations and if the required investment criteria are met. Monies invested after December 31, 2019 may lose certain basis adjustments and potentially any future tax benefits enacted.

The law provides for two additional upwards basis adjustments to further minimize capital gains, and if the QOZ is held for at least 10 years, the complete elimination of capital gains tax on the growth attributable to the gain invested.

The gain on the deferral of gains on the funds used in the initial investment isn’t perpetual. Those gains will become taxable at the end of 2026, or when the QOZ is sold, if sooner.

Qualified Opportunity Funds

If you think that this sounds like a good investment opportunity and a worthwhile cause, but do not wish to have direct ownership of property in a QOZ, there is another option. That option is a Qualified Opportunity Fund (QOF). QOFs are investment vehicles that are set up either as a partnership or corporation for investing in eligible property in a QOZ,

Next Step?

Our goal was to make our subscribers aware that such a tax savings opportunity exists. We are not investment advisors and do not make any investment recommendations. We are also not making any claims that this is a prudent investment. As with any investment, you need to exercise caution and perform your normal due diligence when selecting your investments.

We caution you not to solely focus on the tax savings. Remember, bad investments with good tax attributes remain bad investments.

If this is something that you would be interested in including as part of your investment portfolio and tax minimization plan, the next step would be to speak with your investment advisor who can explain how to make a qualified investment in an QOZ or QOF.

Tax Disclosure

The tax rules regarding QOZs are complex and numerous. As stated above, our objective was to make our readers aware that such an investment vehicle exists and that the investment in a QOZ must be made by December 31, 2019.

After meeting with your financial advisor and should you seriously wish to consider investing in QOZs, you need to meet with your experienced tax professional and discuss the QOZ tax rules before making the initial investment.

Tax Planning Tip #1:

When you meet with your tax professional to discuss the tax rules regarding QOZs, be sure to request a discussion if better real estate investment options exist.

For example, discuss if like kind exchanges (LKEs) would be a better fit for you. LKEs provide indefinite deferral of the capital gains and at death, receive a step-up in basis to fair market value, virtually eliminating all capital gain taxes. On the other hand, LKEs do not receive basis upwards adjustments that QOZ investments receive.

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.

ADVANCED PREMIUM TAX CREDIT WOES

August 6, 2019 by Frank

Life Events Can Create Unexpected Financial Consequences – Why It Is Important to Communicate With Your Tax Professional

Unexpected Bad News

Some taxpayers received unexpected news when their 2018 tax returns were prepared and they learned that they had a very significant and unexpected balance due the IRS.

What Happened?

In the Tax Court case of T.T. Fisher, TC Memo 2019-44, Dec. 61,457(M), May 1, 2019, a single person applied for health care coverage from the market place at the start of the calendar year. Since that person’s household income was below the 400 percent of the amount of the federal poverty line, she received the advanced premium tax credit (PTC) for which she was rightfully qualified to receive.

However during the tax year, a major life event occurred. She got married. Why should her marital status affect her tax return where she would owe the IRS a significant balance due?

Since she was married as of December 31, according to the tax law, the household income was computed not only on her income, but that of her husband’s income also. Combining both incomes put the couple’s household income over the 400 percent threshold of the poverty line and the IRS informed the couple that the wife’s entire advanced PTC had to be repaid.

Tax Court Findings

The taxpayers argued that since the wife was eligible for the PTC before the taxpayers married, they should not be required to repay the entire amount of the advance PTC payments made on her behalf.

The court did find that the taxpayers were eligible for “alternative computation” to compute their additional tax liability because they were unmarried at the beginning of the tax year at issue and married at the end of that same year and they filed a joint return.

However after comprehensive calculations, the Tax Court adjudged that the taxpayers’ alternative premium assistance amount for their pre-marriage as well as married months was zero.

Further, the taxpayers’ alternative marriage-year tax credit which is a sum of the alternative premium assistance amount for their pre-marriage and marriage months, was also zero. Therefore, the taxpayers’ additional tax liability was equal to the excess of their advance PTC payments over their alternative marriage-year credit. Because the Tax Court treated excess advance PTC payments as an increase in the tax imposed, the taxpayers were held not eligible for the PTC and were required to repay the entire amount of the advance PTC payments made.

Tax Planning Tip #1:

One of the many benefits of working with a tax professional is that s/he is available year-round to advise you. Whether it is a financial decision you are considering (e.g., purchase of life or disability insurance, college or retirement planning) or a life event has or will happen (birth of a child, unexpected death of a spouse or a planned marriage), it is best to consult with your tax advisor before the occurrence of the event..

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.

A Day Late

July 30, 2019 by Frank

“A day late and a dollar short” is an American idiom that is another way of saying “too little too late”

Background

Mr. & Mrs. Khafra (122 aftr 2d 2018-6610) went to court and argued that they were entitled to a refund of taxes paid on April 15, 2012 for the 2011 tax year because the IRS wrongfully denied their refund claim filed on April 16, 2015. The IRS argued that the Khafras filed their claim for refund too late and thus were not entitled to a refund. The Khafras represented themselves in court. If they represented themselves in court, they very likely prepared and filed their own claim for refund with the IRS. Perhaps that is the reason they found themselves in this predicament.

Important Dates

When taxes are withheld during the tax year via payroll tax withholdings, they are considered paid on April 15 of the following year (IRC Sec. 6513(b)(1)).

IRC Sec. 7503 states that when the last day prescribed under authority of the IRC falls on a Saturday, Sunday or legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day that that is not a Saturday, Sunday or legal holiday.

For tax year 2011, the Khafras paid all their taxes via payroll tax withholdings, so their taxes were considered paid on April 15, 2012.

However, they filed their 2011 income tax return on April 16, 2015. The return reflected an overpayment of tax for which they requested a refund be issued to them. The IRS took NO exception that the filing of a return and claiming a refund can be made on the same return.

Claims for refund must be made during the 3-year period prescribed in IRC Sec. 6511(a).

The IRS contended that since the Khafras filed their 2011 return on April 16, 2015 (a fact not in dispute), their claim for refund fell outside the 3-year period which ended April 15, 2015 and thus they were not entitled to a refund. Missed by one day?

The Khafras argued that in 2012, April 15 fell on a Sunday and that April 16 was a legal holiday, thus their return was not due until April 17, 2012 and the filing of their refund claim fell within the 3-year period to file a refund claim since their claim was filed on April 16, 2015, a day earlier than April 17, 2015 – three years from the original due date per their calculation.

The Khafras further argued that since their 2011 Form 1040 was not due until April 17, 2012, their tax withholdings should be considered to have been paid on April 17, 2012, not on April 15.

Court Findings

The court agreed with IRS Rev. Rul. 2003-1 C.B. 814 that the granting of an extension of time when a due date falls on a Saturday, Sunday or legal holiday only applies when the taxpayer actually files a return on the next succeeding day that is not a Saturday, Sunday or legal holiday.

Tax Planning Tip:

Two additional adages are “penny wise, pound foolish” (as in Great British Pounds) and “a person who represents himself in court has a fool for a client”. We see in our practice multiple times each year when a taxpayer files their own taxes or attempts to resolve their IRS tax debt on their own and the IRS decides against them in a matter that the taxpayer could have prevailed with proper representation. Likewise, representing oneself in court rather than hiring an experienced attorney is a risky endeavor.

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.

ACTION STEPS NEEDED IF YOU RECEIVE A BONUS

June 24, 2019 by Frank

IRS Announces New Withholding Rate on Bonuses Paid to Employees – Action Steps Required To Avoid IRS Underwithholding Penalty

The Good News

A company bonus paid to an employee is great news – it means more money in your wallet.

The Bad News

As with any form of compensation an employer pays to an employee, income tax withholdings (federal, state and local) are required. The amount of federal tax withholdings is dependent upon whether the employer includes the bonus in the employee’s regular paycheck or in a separately issued bonus check.

If the employer issues a separate bonus check, the IRS requires that such supplemental payments have a federal tax withholding rate of 22% (IR-2019-88). If the bonus is included with your normal paycheck, then your Form W-4 withholding allowances controls the taxes withheld.

Day of Reckoning

When the current year tax return is filed (usually by April 15 of the following year), if those bonus withholdings resulted in you overpaying your taxes, then you will recover those overpaid taxes when you file Form 1040. You may find this undesirable because you have given the IRS an interest-free loan.

If your bonus withholdings were too low, then you will not only owe the IRS a payment come April 15, but you may also have to pay a penalty for failure to pay sufficient taxes during the year.

Tax Planning Tip #1:

After the bonus is paid, provide your tax professional with your year-to-date pay stub and ask that s/he provide you with a projection of your current year taxes. If the finding is that you will be significantly overpaid, then a revised W-4 can be submitted to your employer to have fewer taxes withheld over the remainder of the year to get you closer to a break-even position. If you are significantly underpaid, again a revised W-4 can be submitted to your employer.

Some taxpayers do not realize that bonuses can create an underpayment situation for them. Assume that your effective tax rate is 37%. If the bonus payment is withheld at 22%, you can readily see that an underpayment situation may develop.

Tax Planning Tip #2:

If there is a significant balance due, you have two options. You can provide your employer with a revised W-4 to increase your withholdings during the remainder of the tax year to get you closer to a break-even position. You can also remit an estimated tax payment (Form 1040-ES) to the IRS to pay the shortfall.

We prefer the former because W-2 tax withholdings are considered ratably made throughout the calendar year, whereas an estimated tax payment is credited to your account on the date paid. For example, assume you receive a bonus payment in January but that you don’t meet with your tax advisor until May and then remit the estimated payment. Since the estimated tax payment was not made on or before April 15 (the first due date for making an estimated tax payment), you may have underpaid your taxes in the first quarter and be subject to an underpayment penalty.

Tax Planning Tip #3:

Change your mindset about paying income taxes. Rather than being reactive and wondering how to reduce your taxes in the waning days of the tax year, be proactive and consult with your tax advisor during the year to discuss life-changing events and changes to your financial situation.

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.

IRS ADVISES ITS AUDITORS HOW TO AVOID TAXPAYER’S RIGHT TO GO TO TAX COURT

June 11, 2019 by Frank

IRS Challenges Corporate Taxpayers Who Fail to Pay Shareholder Employees a Reasonable Compensation by Denying Taxpayers Access to the Tax Court

Background

Since 2005, the IRS has focused more attention of the issue of compliance and reasonable compensation to improve it enforcement and compliance strategies. If a taxpayer fails to pay its key shareholder/employees a reasonable compensation, the non-compliance by the taxpayer can be very costly. The IRS will assess the taxpayer payroll tax penalties and interest for failure to timely remit its required payroll taxes on the unreported compensation when the taxpayer filed its quarterly Form 941 and the required remittances.

Tax Court Advantage

When a taxpayer has the right to file a petition with the Tax Court, the taxpayer can avoid paying the IRS assessment until the case is resolved. Another significant possible benefit of going to Tax Court is that the IRS Appeals Office, if the taxpayer appeals the audit exam decision, needs to consider the risk of litigation. Generally this means that the Appeals Officer will often look for a compromise payment to have the taxpayer agree not to go to Tax Court if the IRS Appeals Officer feels that the IRS position may not be upheld by the Tax Court.

IRS Strategy to Avoid Going to Tax Court

Tax Planning Tip #1:

The easiest, best and most cost-effective course of action is by avoiding the challenge in the first place by having your tax professional prepare a comprehensive reasonable compensation analysis. These studies can usually be prepared for a cost of approximately $750.00 for the initial year and approximately $300.00 in subsequent years to keep the study current. Compared to audit representation fees that can run in the thousands of dollars, this would be money well spent.

Tax Planning Tip #2:

If you did not do Tax Planning Tip #1, be advised that the IRS examining agent will likely take two steps to keep the dispute out of Tax Court.

First, the IRS will ask that the taxpayer confirm that the corporate officers are employees under IRC Sec. 3121(d)(1) and will not send the taxpayer IRS Letter 3523: Notice of Determination of Worker Classification.

Second, the agent will ask the taxpayer to confirm that it is not entitled to relief under Sec. 530 of the Revenue Act of 1978.

Tax Planning Tip #3:

We recommend that a taxpayer not represent themselves in an IRS audit. Rather, an experienced tax professional, preferably a tax resolution specialist, be engaged to resolve the IRS’s audit concerns. The IRS agent’s job is to collect the monies due the IRS. Sometimes tax issues are not black or while, but are gray and open to interpretation. The IRS will interpret these issues to maximize the tax assessment. A tax pro, who understands the tax law and how the IRS operates, will be an advocate for the taxpayer with the objective of minimizing the audit assessment.

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.