Author Archives: Taraleigh Gray

Sales Tax Comes Back to Bite Online Buyers

June 14th, 2013

Online shopping is the latest and greatest way to shop. It may seem simple if you’re surfing Ebay or Craigslist, and harmless if you make a purchase or two. Online shopping is fun and easy, and having the ability to order from different parts of the country gives you even more variety. However, many do not know there are laws for taxpayers to voluntarily document goods bought online or out of state.

Now, 24 states have a small line on tax return statements that requests a payment amount for sales taxes on any goods or products bought out of state or from online retailers. The catch is that the states must rely on the moral compass of those inclined to actually include all of their spending that they didn’t have to pay taxes on. It’s up to taxpayers to track what they owe to the IRS. Some do, but most don’t, according to the gap between what should be claimed and what is actually claimed each fiscal year.

States are trying to find some of the $20 billion missing due to online sales tax evasion. That large gap is because states always have a “use tax” on items residents buy from out of state vendors; however, a 1992 Supreme Court decision ruled that out-of-state vendors do not have to collect the tax. It’s up to taxpayers to document what they should owe.

The challenge for the average citizen is to know what to claim taxes on. Many who are ethically adamant about claiming all they owe will go through a rigorous process to find every missing piece. For example, many dealerships collect sales tax on cars as part of the registration but many online retailers collect only in states where they have a physical presence.

All of these issues do come with a solution. Lawmakers are currently pushing Congress to pass a bill that will create a Streamlined Sales Tax. States would collaborate their rules and then collect tax on outbound sales and revert the funds over to the inbound state. This would lift the burden of the individual to document and know every purchase or fraction of a purchase that should be claimed on annual taxes. So far, 23 states have signed on to the new bill although large swing states like California and New York threaten the bill’s successful passing.

Until broad laws take effect, the average consumer should rely on personal organization to accurately document their taxes. An executive director of the Streamlined Tax Initiative says that he made a spreadsheet that made it very simple to find out what he owed in just a matter of hours.

Tax Extensions – Good or Bad?

May 31st, 2013
Are you one of the millions of Americans who filed for an income tax extension this year? On average, 3 million businesses and 10 million individuals file for tax extensions each year, but all of those people now find the clock ticking on their 2012 returns.

An extension offers the benefits of allowing the person or company extra time to compile and file a tax return that saves them the most money. However, the flip side is that, if you do owe any additional taxes, when you finally get around to filing your return, those will be backdated with interest to the original April 15th cut-off date. The current IRS interest calculations are 0.5 percent monthly on the entire balance owed, plus an additional 3 percent interest per year that is compounded daily. So although an extension buys you an additional 6 months to file, you may not wish to leave it that long if you’re in debt to the IRS.

Assuming you don’t owe too much to Uncle Sam, an extension doesn’t hold too many pitfalls. But let’s debunk a few myths about filing for a tax extension.

You can get turned down for a tax extension. Provided you filled out the forms accurately and on time, the IRS automatically grants any and everyone a tax extension.

If you file a tax extension you then have to wait 6 months to finally send in your return. This is also false, and the moment your taxes are ready for filing and your paperwork is in order, you can file your return (this is particularly pertinent if, as outlined above, you owe the IRS any taxes).

If you file for an extension you’re more likely to be audited. This is another popular myth, but it is a myth. In fact, some statistics show that companies and individuals who file for extensions are less likely to be audited.

However, if you’ve asked the IRS for an extension it might be because your taxes are in disarray, or perhaps you’re worried about your return. If this is the case, it’s probably wise to opt for the extension, but it will be even wiser to seek the advice and expertise of a tax specialist if you find yourself in that situation. On the face of it, consulting a tax lawyer might seem drastic, but in reality a lawyer who specializes in income tax preparation, IRS tax audits and tax representation can save you a considerable sum of money you’d unnecessarily be paying in taxes otherwise, as well as save you the stress and uncertainty many people suffer from when dealing with the IRS.

Celebrities – Tax Evasion Doesn’t Pay

May 17, 2013
When it comes to income tax, it’s fair to say that nobody relishes paying it. We all feel we work hard for our money and the last thing we want to do is give a portion of it back to a slothful and wasteful government.

But a word of caution to anyone thinking about holding back a little and not giving Uncle Sam his dues: however smart you think you are, and however cleverly you think you can hide various income from the taxman, the IRS has far smarter people on the payroll, and sooner or later they will catch up with you.

If anyone is left in any doubt over this, a quick look at the so-called rich and famous should paint a very obvious picture. After all, these are the people we look up to; these people are the achievers, the successful ones, and they’ve surrounded themselves with managers and accountants. And yet, despite this seeming shield of invulnerability, the IRS – just like the Mounties – always seems to get their man.

Names like Lindsey Lohan and R. Kelly are commonplace in the celebrity train wreck gossip columns, both with high-profile tax ‘issues’ with the IRS among their many other woes. However, there are plenty of far more illustrious and wholesome names who have fallen foul of the IRS.

Just last week multiple Grammy winner Lauryn Hill was convicted of tax evasion and will spend the upcoming months in federal prison, but she is just the most recent in a long line of respected celebrities who have incurred the attention (and wrath) of the IRS.

Hollywood demigod Martin Scorsese had a $2.85 million lien levied against him by the IRS. Champion of green fuels, advocate of marijuana, all-round folk-hero and close friend of President Jimmy Carter, Willie Nelson had all of his belongings (including six houses) seized and auctioned off by the IRS after he failed to pay ‘the man.’ But for the granddaddy of all tax offenders, the Vice President of the United States was even forced to resign from office after (amongst other things) failing to pay taxes. In fact, had Spiro Agnew remained in office the soon-to-happen Watergate scandal would have promoted him to President and leader of the free world.

The moral of these tales is probably ‘suck it up and cut the check to the IRS’, because if even the Vice President got caught, you will too. Another lesson to be learned here is that it’s also a wise move to have someone who knows the tax laws every bit as well as the IRS to be on your side. Whether you’ve already fallen foul of the IRS and need some help, or you simply want to stay on the good side of the taxman, an IRS tax lawyer can be a useful ally.

The Underground Economy

April 30, 2013
United States citizens and residents are taxed on their worldwide income. All of it should be declared on an income tax return and be accounted for. To what extent does that happen? It happens more here than in Greece, but certainly less than in a perfect world. Click to read an excellent article by James Surowiecki from the April 29, 2013 New Yorker, which does a good job of summarizing the extent of the problem.

He gives small mention to large amounts of cash that have been spirited out of the country and invested in tax havens around the world. Treasury has broken into some of the Swiss banks, but there are a lot of other tax havens that have not been touched.

Why doesn’t the IRS do more to correct this problem? It tries, but the problems are huge. IRS has to administer an obscenely complicated set if laws with limited resources. It can only audit about 2% of all returns. Where cash is not deposited in a bank account it is very difficult to detect. Indirect methods of determining income by measuring expenditures can detect unreported income, but the audit costs consume limited resources and it cannot get to everyone.

Cancellation of Indebtedness Income

April 10, 2013

Section 61 of the Internal Revenue Code tells us that gross income includes income from many sources including income from the discharge of indebtedness. The preparation of an income tax return becomes materially more complicated when the taxpayer receives Form 1099 from a creditor reporting an amount of a debt that has been written off. We are currently seeing a lot of those that arise out of foreclosures and short sales of real estate and from the write off of credit card debt. If you receive a Form 1099 from the discharge of indebtedness, you will need to properly report it on your tax returns.

This is not a simple matter. The first part of the analysis is whether any of the various exceptions to inclusion in income provided by §108 of the Code allow you to not include the forgiven debt in income. Exclusions provided by §108(a)(1) are:

(A) Discharge in the context of a Title 11 (bankruptcy) case
(B) Discharge to the extent of insolvency
(C) Discharge that comes from qualified farm indebtedness
(D) Discharge that comes from real property business indebtedness
(E) Discharge of qualified principal residence indebtedness
These exceptions are very complicated and require detailed factual and legal analysis. If you are able to exclude indebtedness under the (A) through (C), §108 then requires a reduction of tax attributes. You must determine the extent to which you have tax attributes and the order in which they are to be reduced.
A further complicating factor in this analysis is whether you are personally liable for the debt or whether it is non-recourse. That distinction makes a significant difference in how the transaction is reported. This requires an analysis of the instruments creating the debt and of state law. If there is no personal liability, there is no debt to be forgiven or discharged and there is no income to report.

When the debt forgiveness comes from a foreclosure or short sale, two parts of the transaction that must be addressed in the return. The first is whether there is gain or loss on the disposition of the asset. This requires a computation of adjusted basis, and if we are dealing with your house a determination of whether it qualifies as your principal residence. The second is the consequence of the discharge of the debt. In addition to these substantive legal considerations there is the further complication of the forms, instructions, and software used to prepare the return.

Reporting FOI on a tax return is no simple matter and this is not a task you should undertake without competent, professional help. You need to get the transaction property reported and documented on your tax returns for federal and state purposes. If you fail to do that, the likelihood of your return being audited goes up considerably and you may have to address the issues again years later in an audit.

Does the issuance of a Form 1099-C by a creditor absolve the taxpayer from liability for the debt? Instructions to Form 1099-C say that a creditor should issue this form to the debtor for any year in which a debt is cancelled. However, in many cases, the creditor sends a 1099-C and continues to try to collect the debt. There is a split in the case law.

The fourth circuit has held that the creditor’s filing of a 1099-C simply represents the required means that the creditor must use to satisfy its reporting obligations to the IRS and does not result in a discharge of the underlying debt. FDIC v. Cashion, 720 F.3d 169 (4th Cir. 2013). This case cites information letters from IRS to that effect. Other courts hold that the creditors issuance of a 1099-C is prima facie evidence that the creditor discharged the debt. The National Legal Research Lawletter, vol. 43, No. 7 has more analysis. Most of these cases should be resolved by expiration of the state law statute of limitations on collection.

Newsletter – September 2011

January 31, 2012
Specialization, Technology and Good Help

Eight years ago I limited my practice to tax controversy matters.  Most of the work involves unfiled returns, collection problems, audits and Tax Court litigation.  Restricting the scope of the practice has dramatically increased efficiency and productivity. I work the same problems over and over, and the line from beginning to end gets shorter and straighter.

Technology continues to make things easier.  We are in the process of going paperless. That puts case files at our fingertips, eliminates searches for paper documents, and spares trees.  We have invested in tax return software and that software cuts the time to prepare a tax return in half.

My work is made much easier by the talents of Margarite Mercado who has been working with me for several years.  Margarite arrived with superior computer and secretarial skills and with practice has become better and better at pulling together tax returns and financial statements.  We work on complicated factual and legal problems and being able to delegate and review accelerates the creative process.

Here are some items of general interest:

Offers in Compromise.  Five years ago, 85% of the offers in compromise submitted to IRS resulted in negotiated settlements.  The IRS became overwhelmed with what it regarded as frivolous offers generated by tax representation firms and it effectively closed its offer in compromise window.  Now about 15% of the offers submitted result in successful conclusions.  The Service papers offers to death and looks for reasons to turn them down.  Will this trend change?  We look for signs. In the meantime we turn to other remedies.

ACS.  IRS collection activity starts with the Automated Collection System (ACS), which is a nationwide call center.  It is staffed by low grade people who extract information from taxpayers and try to squeeze as much out of them as possible.  There are long phone waits and no way to talk to the same person twice. I found that it is much easier to work collection cases by appealing IRS collection decisions and getting the case handled by an IRS Appeals Officer who can assemble a paper file, think through the case with you and come to a reasonable conclusion.

Foreign Accounts and Business Interests.  You may have read that IRS has gotten UBS to turn over 4,000–5,000 customer names and has been aggressively pursuing high net worth United States taxpayers who use foreign banks to evade U. S. taxes.  IRS developed a voluntary disclosure policy tailored to undisclosed foreign accounts.  That announced policy had  now expired deadlines and we in the practice try to figure out what the voluntary disclosure policy is going to be for those who did not make a deal before the last deadline.

Taxpayers who have foreign bank accounts are required to check a box on Schedule B of the tax return, disclosing the existence of those accounts; and they are also required to file a separate annual disclosure of those accounts. Taxpayers having interests in foreign corporations and partnerships are required to file annual disclosure statements disclosing their interests.  There are severe penalties for failing to make these filings. The dark side of the IRS enforcement program is that immigrants that have passive accounts or small business interests  in their countries of origin may be subject to large penalties and a great deal of administrative harassment over situations that have little or no substantive tax impact.  I had one client who had close to $1 million in penalties assessed against him when he failed to respond to notices from IRS in respect to his interests in two foreign entities.

Tax Preparation Firms.  We are bombarded with the TV and radio advertisements of tax preparation firms offering to settle tax debt for pennies on the dollar.  This is bait and switch advertising.  If you go to my website, I have an extensive article on lawsuits that have been brought by states Attorneys General against various tax preparation firms. The common complaint is that they spend all their money on TV advertising and sales closers and have nothing left to pay the people that should be doing the work to solve the problems.  The complaints say that these firms take retainer fees and do not complete the work.