audits

Vacation Properties Owned by Real Estate Professional Not Considered a Rental Activity by the IRS

September 3, 2020 by Frank

Court Agrees with IRS that Real Estate Professional’s Losses Were Considered Non-Deductible Passive Losses

A Tax Advantages of Being a Real Estate Professional Is that Rental Losses Are Not Treated as Passive Losses and Can Be Offset Against Ordinary Business Income

What Makes the Case of Greg & Juli Eger, U.S. District Court, N.D. California, 2019-2 U.S.T.C. ¶50,248, (Aug. 30, 2019) Unique?

Background:

As an affiliate member of the Suburban West Realtors® Association, we see various taxpayer arguments made by real estate investors in our Exton PA office to maximize tax deductions in an attempt to decrease tax liabilities. By sharing these taxpayer arguments, we hope other real estate investors better understand the thresholds that they must meet to protect their tax positions.

The taxpayers, Greg and Juli Eger, owned numerous rental properties, including the three at issue here. The taxpayers grouped these three properties along with their other rental properties as a single rental real estate activity.

Greg Eger met the requirements to claim status as a Real Estate Professional (“REP”). Thus, with respect to the passive activity rules where a taxpayer does not materially participate, the taxpayer’s status as a REP allows their rental activities not be considered passive. This would allow the taxpayer to deduct their non-passive losses against their non-passive income.

The three rental properties at issue were managed by management companies. The Egers paid the management companies a percentage of rent received in exchange for services the management companies provided.

IRS Finds Taxpayers Had No Rental Activity for the Three Properties at Issue

The IRS found that these 3 properties did not qualify as rental activities and that the taxpayers had accordingly artificially increased the total amount of business loss they sought to claim (as the losses from these three properties would be non-deductible passive losses).

The IRS regulation sets forth seven exceptions to the definition of rental activity. The parties agree that their dispute centers on one of the exceptions, which states that the activity is not rental activity if [t]he average period of customer use for such property is seven days or less. A period of customer use is further defined as [e]ach period during which a customer has a continuous or recurring right to use [the property]. The IRS contended that this exception applies to the three properties at issue because the average period of customer use for each of them was seven days or less. The taxpayer argued that it met the 7-day or more test.

Who Was the Renter (Customer) of the Three Properties?

The IRS found that the renters of these three properties stayed for an average period of use as the end-user guests for less than seven days. In fact, the taxpayers made no attempt to prove that its renters stayed for more than seven days. Instead, the taxpayer argued that the management companies, not the renters, satisfied the greater than seven days test.

The IRS cited the definition of rental activity as being any activity where payments are principally for the use of tangible property. Therefore, the payment is tied to the use of the property and in this case the renters, not management companies, were paying to use the properties. The IRS logically argued that the management companies acted as the taxpayer’s representatives, not customers of the properties.

Court Findings:

The court ruled in favor of the IRS by finding that the property management companies did not have a continuous or recurring right to use the three properties because the taxpayers retained significant rights to use the properties throughout the tax years at issue. Moreover, the taxpayers provided no legal or factual support for their position that the management companies had a recurring right to use these properties.

Tax Planning Tip #1

Hogs get slaughtered. The taxpayers may have thought that their aggressive position would never be detected by the IRS. The taxpayers likely self-prepared their tax returns as no experienced tax professional would have taken the position that the property management company was the customer and not the renters. Really? They may have played the audit lottery game and lost.

Tax Planning Tip #2

The taxpayer, rather than agreeing to the IRS assessment, decided to bear the expense of going to court to contest the IRS position. While every taxpayer dreams of having his day in court to show that the IRS is wrong, the facts of this case did not support a challenge. The facts were clear that the renter was the user of the rental properties, not the management company.

Had the taxpayer consulted with an experienced tax professional when the return was prepared, the IRS audit examination of three years of tax returns would likely have been avoided, along with the cost of the audit and court costs.

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.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander, an Enrolled Agent and a Certified Tax Resolution Specialist, is an affiliate member of the Suburban West Realtors® Association, a member of the American Society of Tax Problem Solvers (ASTPS), PA Society of Tax & Accounting Professionals (PSTAP), the National Society of Accountants (NSA) and the National Association of Tax Professionals (NATP). He is the author of “How to Resolve Your IRS Tax Debt Problems” as well as a book on how to start your own business. He has been practicing in Exton for 19 years. His firm serves 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.

If not a subscriber to his blogs, http://www.taxexpertblog.com and http://www.stopmytaxproblems.comyou may wish to do so as he discusses various pertinent tax and business issues.

For individual tax payers, real estate professionals, contractors and other self-employed individuals with IRS tax debt issues or tax planning issues, feel free to contact me at (610) 594-2601 or by email at info@keysolutions.us.

Keystone Financial Solutions, Inc. specializes in providing innovative tax planning, tax preparation, and solving IRS tax debt problems. The company’s web site is https://www.keysolutions.us and its telephone number is (610) 594-2601.

By visiting our website you can learn about the 5 Secrets the IRS Doesn’t Share and order a FREE SPECIAL REPORT: Should You Represent Yourself or Hire a Tax Professional.

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. Should you wish to engage our firm to represent you and your individual situation, please call us at (610) 594-2601.

17 Million Taxpayers at Risk

August 31, 2020 by Frank

Taxpayers Who Lost Their Jobs or Had Their Hours of Work Substantially Reduced May Wind Up In IRS Collections

As We Continue to Endure the Health and Financial Ravages of the Corona Virus, Unfortunately More Bad News May be on the Horizon

Tax Pros Predict that 1 to 2 Million Taxpayers May Fail to File Their 2020 Tax Returns Due to the Pandemic Financial Crisis

Currently, there are 15 million taxpayers in IRS collections. IRS estimates that 7 million taxpayers are currently not filing their tax returns. Many tax professionals are predicting that another 1 to 2 million taxpayers may fail to file their tax returns due to the pandemic financial crisis and the closing of their businesses and loss of jobs.

You don’t need to be a victim. Ignoring one’s tax problem usually results in the problem only getting worse. With failure to file penalties assessed at a rate of 5% a month, over the penalty period of 5 months, that is an additional 25% of penalties on top of the taxes due. Then there is interest being assessed on the underpayment of tax and on the penalties assessed. It is not unusual that the total interest and penalties assessed are 60% to 70% of the total taxes due.

Mistake #1:

Procrastinate. Put off until tomorrow what you can do today. Let those penalties and interest accrue substantially increasing your IRS tax debt.

Mistake #2:

Ignore those IRS letters and notices. The IRS sends numerous letters and notices to taxpayers allowing them certain taxpayer rights to address their assessments and set up a payment plan. Many taxpayers ignore those notices until the IRS begins to levy wages, social security benefits, and bank accounts. When the taxpayer finally realizes that the situation must be addressed, certain appeal rights may have been missed and the process to get the taxpayer into compliance becomes more complex.

Mistake #3:

Forgetting that unemployment compensation benefits paid to you are taxable income and that the taxes withheld on those payments (if any) are usually insufficient.

Tax Planning Tip #1

Call a tax professional who specializes in solving IRS tax problems. Better yet, call several firms. While your tax professional may be an excellent tax preparer, very few tax professionals specialize in solving IRS tax problems. You want the very best handling your tax debt problem, not someone who does it part-time.

When you make those calls, listen very carefully to what they share with you and take notes. Are you speaking with the person who will resolve your problems, or are you speaking with a sales person? What are their credentials and experience? Check their website for testimonials and reviews. Check with the Better Business Bureau. Check if they are in good standing with the IRS if an Enrolled Agent, local bar association if an attorney, and the State Board of Accountancy if a CPA.

Tax Planning Tip #2

Understand the process as to how the tax professional will solve your tax problem.

Our process is quite simple.

We offer a free telephone consultation to understand your situation.
We provide you with a fixed fee retainer arrangement and a letter of understanding as to what services we will provide to you.
We pull your IRS transcripts to learn everything about you from an IRS perspective.
Any unfiled tax returns are prepared and filed.
We provide you with an analysis of the alternatives available to you to solve your IRS tax debts.

About F. Bryan Haarlander, EA, CTRS:

If not a subscriber to his blogs, http://www.taxexpertblog.com and http://www.stopmytaxproblems.comyou may wish to do so as he discusses various pertinent tax and business issues.

By visiting our website you can learn about the 5 Secrets the IRS Doesn’t Share and order a FREE SPECIAL REPORT: Should You Represent Yourself or Hire a Tax Professional.

Are My Unemployment Compensation (UC) Benefits Tax-Free or Taxable? What about the $1,200 Stimulus Check I Received?

August 12, 2020 by Frank

What You Need to Know about Your Unemployment Compensation Benefits and Tax Stimulus Check

Perhaps You Were One of the Millions of Taxpayers Who Lost their Job, Had their Work Hours Reduced, or Were Self-Employed and Received UC Benefits

Understanding the Taxation of Federal and State UC Benefits and Stimulus Checks

Due to the Covid-19 pandemic, millions of taxpayers who lost their jobs, had their hours reduced, or were self-employed and had their revenues decline received unemployment compensation (UC) benefits. Some taxpayers received the typical UC benefits paid by their state. Others may have also received federal UC benefits through their state’s UC website.

Are these UC benefits and stimulus check payments ($1,200 for individuals; $2,400 for married couples) that taxpayers received taxable income?

There is Good News! But alas, there is also some Bad News

The Good News

The Covid-19 stimulus checks are not taxable income. Your 2020 return (filed in 2021) will include a reconciliation so that if you received less than the full amount you were entitled to receive, an adjustment will be made to provide you with the full amount due you.

State taxation varies by state. If you are a PA resident, the good news is that any type of UC benefit received is non-taxable.

The Bad News

Unfortunately, both the state and federal UC benefits received are subject to federal income tax.

Tax Planning Tip #1

Now that the 2019 tax season is over, it is an opportune time to begin to plan for the 2020 tax season. You should make a Tax Folder that contains important tax documents that will be needed when your 2020 tax return is completed. You need to record the amount of the tax stimulus payment you received this year (if any) as that amount will be needed when completing your 2020 Form 1040.

Tax Planning Tip #2

Caution: Some states have stopped issuing Form 1099-G to show UC benefit payments paid to recipients. Accordingly, you need to track the UC dollar benefits you received and any income taxes withheld to file a complete and accurate 2020 return.

Tax Planning Tip #3

If you are in an installment payment plan with the IRS, remember that you must remain compliant by filing your tax returns and paying all of the taxes due each year. Since some taxpayers have no taxes withheld or have only 10% withheld from their UC benefits, they may find themselves with a balance due come April 15, 2021 which they are unable to pay in full. Be sure to make estimated tax payments or increase your tax withholdings to remain tax compliant or else the IRS may terminate your installment payment plan.

About F. Bryan Haarlander, EA, CTRS:

If not a subscriber to his blogs, http://www.taxexpertblog.com and http://www.stopmytaxproblems.comyou may wish to do so as he discusses various pertinent tax and business issues.

By visiting our website you can learn about the 5 Secrets the IRS Doesn’t Share and order a FREE SPECIAL REPORT: Should You Represent Yourself or Hire a Tax Professional.

Where Is My 2019 Tax Refund? Is There a Problem?

July 20, 2020 by Frank

Are You Concerned that Your Refund was Lost or a Victim of ID Theft?

Perhaps You Filed Your Return in April, May or June, and You Still Have Not Received Your Refund. You are Understandably Eager for Details When You Will Receive It (and if you will receive it).

Key Facts to Better Understand the Refund Process

The IRS reminds taxpayers in its IR-2020-161 release that there is no secret way to find out when a refund will be issued.

Some key facts can help people understand the refund process better:

Taxpayers who file electronically and use direct deposit can expect their refund faster than those who mail a paper return, especially since the COVID-19 outbreak has reduced IRS staffing available to process paper returns.

Taxpayers who file a paper tax return are likely to face processing and refund delays.

The best and easiest way to check on a refund is “Where’s My Refund?”

The “Where’s My Refund?” tool available on IRS.gov and the IRS2Go mobile app.

A tax refund’s status can be checked within 24 hours after the taxpayer receives the e-file acceptance notification.

“Where’s My Refund?” is updated once a day, usually overnight. Thus, you checking your refund status multiple times every day is a waste of your time and further adds to your frustration.

Read our January 22 post regarding Filter-X which is the IRS’s filter to identity fraudulent returns and is causing on average delays of 141 days

Taxpayers who claim the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit for educational expenses will have their returns delayed as returns which claim these credits face additional IRS scrutiny due to past fraudulent practices by some taxpayers

Processing delays for paper tax returns

The IRS continues to process electronic and paper tax returns, issue refunds, and accept payments.

The IRS is experiencing delays in processing paper tax returns due to limited staffing. This is causing refund delays. Taxpayers who have already filed a paper return should know that the IRS is processing paper returns in the order in which they are received. Keep in mind that the IRS was closed for a couple of months and those mailed returns were sitting in tractor trailers waiting for IRS employees to return to work.

Interest on individual 2019 refunds reflected on returns filed by July 15, 2020, will generally be paid from April 15, 2020, until the date of the refund. Interest payments may be received separately from the refund and are considered taxable income in the year received.

Taxpayers who filed a paper return should not file the same tax return again.

Common myths about tax refunds include:

Getting a refund this year means there’s no need to adjust withholding for 2020
To help avoid a possible surprise next year, taxpayers should look to make changes now. Adjusting tax withholding with an employer can help ensure that neither too much nor too little tax is withheld from an employee’s paycheck. The Tax Withholding Estimator helps taxpayers figure out the right amount.

Calling the IRS or a tax professional will provide a better refund date
Contacting the IRS or a tax professional will not expedite a refund. IRS assistors and tax professionals cannot move up a refund date nor do they have access to any “special” information that will provide a more accurate refund date.

Ordering a tax transcript is a secret way to get a refund date
Ordering a tax transcript will not help taxpayers find out when they will get their refund and it does not accelerate the issue date of a refund.

The ‘Where’s My Refund?’ tool is wrong because there’s no deposit date yet
When Where’s My Refund? shows the tax return status is received it means that we have received the tax return and are processing it. Some returns may take longer to process than others and need further review. This includes when a return:

Includes errors;

Is incomplete;

Is affected by identity theft or fraud; or

Includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process

Taxpayers will be contacted by mail if the IRS needs more information to process a tax return. People waiting for a refund in the mail should plan for the additional time a check takes to arrive.

Is something wrong when the refund amount is less than expected?

There are a lot of reasons that cause a tax refund to be different than expected. Situations that could decrease a refund include:

Taxpayer math errors or mistakes;

Owing federal or state taxes, child support, student loans or other federal non-tax obligations; or

A portion of the refund is held while IRS reviews an item claimed on the return

The IRS will mail a letter of explanation if these adjustments are made. Some taxpayers may also receive a letter from the Department of Treasury’s Bureau of the Fiscal Service if their refund was reduced to offset certain financial obligations.

Taxpayers can call the IRS’s automated refund hotline at 800-829-1954, which uses the same information as “Where’s My Refund?”. There is no need to call the IRS unless “Where’s My Refund?” says to do so.

Tax Planning Tip

Delays in issuing refunds often cause financial hardship to taxpayers who depend upon those refunds. While it is nice to receive a refund rather than owe the IRS come April 15th, when you significantly over pay your taxes you are giving the IRS an interest-free loan. The objective should be to file your tax return with an insignificant refund due you or a small balance owed to the IRS. This “break-even” can be achieved if a taxpayer works closely with their tax professional throughout the tax year to ensure that W-2 wage withholdings or estimated tax payments closely approximate the projected final taxes due.

About F. Bryan Haarlander, EA, CTRS:

If not a subscriber to his blogs, http://www.taxexpertblog.com and http://www.stopmytaxproblems.comyou may wish to do so as he discusses various pertinent tax and business issues.

By visiting our website you can learn about the 5 Secrets the IRS Doesn’t Share and order a FREE SPECIAL REPORT: Should You Represent Yourself or Hire a Tax Professional.

Failure to Disclose Foreign Holdings (FBAR) – Taxpayer Found to have Committed Fraud

June 15, 2020 by Frank

Taxpayer is found to have committed fraud by willfully failing to comply with FBAR reporting requirements.

FBAR Reporting Requirement

Every year, under the law known as the Bank Secrecy Act, U.S. persons (includes citizens, residents, corporations, partnerships, etc.) must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.

Case of D.R. Ott, DC Michigan

The individual taxpayer did not report his foreign Canadian account balances that represented an overwhelming proportion of his total income.

What Is Tax Fraud?

To prove tax fraud, the burden is on the IRS to show an underpayment of tax due to an act of the taxpayer to evade the assessment of tax which the taxpayer believed to be owing, that the underpayment act was willful and not a result of inadvertence, reliance on incorrect technical advice, a sincerely held difference of opinion, negligence or carelessness.

What Makes This Case Interesting

The IRS was able to demonstrate to the court that Ott had constructive knowledge of his FBAR reporting requirements by signing his tax return, thus proving willfulness. Ott testified that no interest, dividends, or capital gains from his foreign Canadian accounts were reflected in his tax returns. However, Ott signed a return each year, under penalty of perjury, regardless of whether he actually read the return, certifying that he did not have an interest in foreign accounts.

Ott argued that his mistaken reliance on incorrect advice proved that he was at most negligent, not willful. However, the individual’s mistaken understanding was due to advice he received from a return preparer when the individual was a young adult that he could defer tax liability by reinvesting the dividends he earned on stock. The individual’s lack of experience in tax accounting suggested that he knew, or should have known, that relying solely on advice he received as a young adult, without consulting his long-term accountant, was reckless conduct in disregard of potential reporting requirements. At the very least, the individual’s failure to disclose hundreds of thousands of dollars in a foreign Canadian account to his tax preparer demonstrated that he should have known there was a risk of noncompliance, and yet he failed to take any investigative or corrective action.

Concealment

Ott provided the bank with his sister’s Canadian address instead of receiving the mail associated with his foreign accounts at his own address. Using an address that matched the country of the foreign bank accounts suggested that the individual sought to avoid the detection of his account ownership. Failure to review any of the mail sent to the individual’s sister qualified as an act of concealment.

Tax Planning Tip #1

Do NOT do what Ott did – he used his tax professional solely as his tax preparer. Taxpayers need to work closely with their tax professional throughout the tax year to discuss tax compliance requirements and tax strategies to reduce the amount of taxes paid to the IRS (and any other tax authority).

Tax Planning Tip #2

Carefully complete your tax professional’s tax organizer each tax year. Due to the U.S. Treasury Department and IRS’s focus on foreign reporting requirements, it is difficult to envision a tax professional not having a question in the tax organizer inquiring about foreign bank and investment holdings. If you do not understand a question, ask for guidance. All of your responses need to be truthful and to the best of your knowledge.

Tax Planning Tip #3

Review the draft of the tax return prepared by your tax professional for completeness and accuracy before signing the return (or the e-file authorization Form 8829). Remember, you are signing your tax return under penalties of perjury that you have examined your return and its attachments, and to the best of your knowledge and belief, that the return is true, correct and complete.

Tax Planning Tip #4

If you would like to learn more about how the IRS recognizes and develops its fraud cases, we suggest you read IRS Internal Revenue Manual Section 25.1.2.

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.

July 15, 2020 – Day of Reckoning?

May 30, 2020 by Frank

Julius Caesar Had His Ides of March – You Need to Avoid Having Your Ides of July

BACKGROUND

Due to the corona virus pandemic, the IRS due date for filing your 2019 Form 1040 has been postponed until July 15, 2020. If Form 4868 is filed requesting an extension of time to file, the due date for filing your 2019 Form 1040 can be extended to October 15, 2020. In addition, your 2019 final tax liability must be paid no later than July 15, 2019 to avoid interest and penalty assessments.

If your federal income tax W-2 withholdings are sufficient to pay your taxes due, this is all good news.

However, if you are self-employed and are required to make quarterly estimated tax payments, or if you have substantial non-wage income and need to make quarterly estimated tax payments, beware of the Ides of July. In addition to postponing the deadline for filing and paying your 2019 taxes until July 15, the due date for fling both your first and second quarter Form 1040-ES also have been postponed until July 15. This means that three tax payments fall due on the same day.

MISTAKE #1

If you are thinking that you can wait until July 15 to address your 2019 taxes, that can be a very costly mistake! Why? The balance due can be significantly greater than you anticipated meaning that you will not be able to pay your 2019 taxes in full. If you are currently in an installment agreement with the IRS, you have violated the terms of that agreement which will require that corrective action be taken. If you were in an Offer-in-Compromise agreement and are within the first five years of that agreement, that OIC is now null and void and the forgiven taxes, interest and penalties of your OIC are now due.

MISTAKE #2

To avoid the underpayment of tax penalty for tax year 2020, the safe harbors for avoiding that penalty will be based on your 2019 tax liability. After paying the 2019 balance due, will you have sufficient funds to pay your 1Q and 2Q 2020 estimated tax payments? The course of action could lead to you becoming non-compliant in the 2020 tax year.

Tax Planning Tip #1

Appreciate the difference between having your return prepared and having it filed. We recommend that you have your 2019 tax returns prepared ASAP. You then have two options.

Option #1: If you prefer to wait until the due date (July 15) to file your 2019 tax returns, you can do so even if your returns are prepared before that date. (Perhaps this is course of action is desirable because you wanted your Economic Stimulus Payment based on your 2018 tax return). Having your returns prepared well before the July 15 due date, allows you to know how much you owe the IRS for 2019 and how much your 2020 1Q and 2Q estimated payments will be. That will give you about 45 days to plan how you will manage your cash resources to pay your 2019 taxes and 2020 estimated tax payments.

Option #2: When your 2019 tax return is prepared, file it. Filing as early as possible is one of the IRS recommendations to minimize ID theft. When you file a tax return before the due date, you are not required to remit payment with that return. You can file the return, and remit payment by the due date (July 15).

Tax Planning Tip #2

If you have always filed your taxes by check, consider using one of the IRS online payment services. Find the one that best suits your needs. I personally like the IRS’s Electronic Fund Tax Payment System (EFTPS) program. The EFTPS program allows you to schedule payments in advance and within certain limitations to alter those payment amounts and due dates if needed. Thus, you can file your 2019 tax return today, and also schedule your 2019 and 2020 tax payments to be made on July 15, 2020. You can also direct your tax professional to file the return when it is completed and then have the funds withdrawn from your checking account on July 15 to pay your final tax liability

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.