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Friday
Oct262018

Taxpayer's "this pays off my liability" letter wasn't a settlement

Wish it did but...

Longino, TC Memo 2018-175

The Tax Court has upheld IRS's determination to sustain a proposed collection action via lien. Among the arguments rejected by the Court was the taxpayer's argument that IRS, by cashing a check that he had enclosed with a letter stating that the check should be returned if it didn't fully conclude all issues with respect to his tax return, had settled his liability.

Background. Code Sec. 6320(a) requires IRS to give a taxpayer written notice when IRS intends to put a lien on the taxpayer's property. The notice must inform the taxpayer of the right to request an administrative Collection Due Process (CDP) hearing in the IRS Office of Appeals (Appeals).

Appeals is responsible for conducting administrative hearings in collection matters. (Code Sec. 6320(b)) Appeals must verify that the requirements of any applicable law or administrative procedure have been met in processing the case. (Code Sec. 6320(c), Code Sec. 6330(c)(1), Code Sec. 6330(c)(3)(A)) The Appeals Office must also consider any issues raised by the person that relate to the unpaid tax or proposed levy, including offers of collection alternatives, appropriate spousal defenses, and challenges to the appropriateness of the collection action. (Code Sec. 6320(c), Code Sec. 6330(c)(2)(A), Code Sec. 6330(c)(3)(B))

At a CDP hearing, a person may challenge the existence or amount of his or her underlying tax liability if the person did not receive a notice of deficiency or did not otherwise have an opportunity to dispute such tax liability. However, a taxpayer is otherwise precluded from contesting the existence or amount of the underlying tax liability at the hearing. (Code Sec. 6330(c)(2)(B)) Appeals must also consider whether the collection action balances the need for efficient collection against the person's concern that collection be no more intrusive than necessary. (Code Sec. 6330(c)(3)(C))

A taxpayer who is dissatisfied with the findings or conclusions of the CDP hearing can appeal the determination to the Tax Court. (Code Sec. 6330(d)(1)) When the Tax Court receives an appeal from a CDP hearing, however, its review is limited to issues that were properly raised during the CDP hearing. Where the taxpayer's underlying liability is not properly at issue, the Tax Court reviews IRS's decision for abuse of discretion only. (Goza, (2000) 114 TC 176)

Facts. The taxpayer, Mr. Longino, filed Form 1040 for 2006. Two days later he filed Form 1040X for 2006. He explained that the amended return included an additional "page of deductions" that he had overlooked when preparing the original return. The amended return requested a refund of $1,396, which IRS issued to him.

IRS processed the two returns separately. IRS first examined the original return and issued a notice of deficiency determining a deficiency of $39,757. Longino filed a complaint in the Tax Court regarding this deficiency.

Meanwhile, IRS processed Longino's amended 2006 return and determined that he was not entitled to the $1,396 refund. In May, 2013, Longino replied and enclosed a check for $1,396. In his cover letter he asked IRS to "confirm that we are now concluded on this tax return issue and we won't have any more issues with IRS on that year". If IRS thought otherwise, Longino requested that it return the uncashed check to him.

The IRS service center did not respond to the statements in Longino's cover letter, but it did assess the $1,396 liability then offset that liability with Longino's $1,396 payment.

The Tax Court then heard Longino's case and held for IRS. (Longino, TC Memo 2013-80) The Court ordered the parties to submit computations for entry of decision under Rule 155.

Longino filed a "Rule 155 response" in which he asserted that he had settled his 2006 tax liability with IRS and thus had no deficiency for that year. To support this theory, he submitted copies of the $1,396 canceled check and the tax bill he had received in March 2013. He characterized this correspondence as indicating that "his total balance due for 2006 was $1,396", which he had paid. The Tax Court found no merit in Longino's argument and entered a decision reflecting a deficiency of $36,715. The Eleventh Circuit affirmed this decision.

IRS timely assessed the deficiency. When Longino did not pay that liability on notice and demand, IRS filed a Notice of Federal Tax Lien (NFTL) in an effort to collect his liability. He timely requested a CDP hearing, which was held with an IRS settlement officer (SO).

At his CDP hearing, Longino expressed no interest in a collection alternative. His sole contention was that he had settled his Federal tax liability for 2006 by tendering the $1,396.

The SO issued a notice of determination sustaining the NFTL filing. As the basis for this action, the SO determined that Longino:

  1. Was precluded from challenging through the CDP procedure the amount of his 2006 tax liability as determined by the Tax Court;
  2. Could not establish that a settlement or compromise of his 2006 liability had occurred, let alone been approved by an authorized IRS officer; and
  3. Had neither requested a collection alternative nor established his eligibility for one.

IRS SO did not abuse his discretion. The Tax Court concluded that the IRS SO did not abuse his discretion.

First, the Court looked to the issue of whether the taxpayer could dispute his tax liability in this Tax Court proceeding. The Court noted that Longino received a notice of deficiency for 2006 and had two opportunities to dispute his liability — once before the Tax Court and a second time before the Eleventh Circuit Court. That decision was thus final. Thus, it concluded, pursuant to Code Sec. 6330(c)(2)(B), that Longino could not relitigate his 2006 Federal income tax liability in the current proceeding.

Longino argued that he was not challenging the previous Court decisions; rather, he said, he settled his 2006 liability for $1,396 through his 2013 exchange of correspondence with IRS. The Court found several reasons to reject this argument.

First, the Court noted that Longino previously advanced this "settlement" argument in response to the Tax Court order directing Rule 155 computations. The Tax Court rejected that argument.

And in any event, the Court said, Longino's argument was meritless. A disputed tax liability may be settled by agreement between the taxpayer and IRS. A settlement of a case pending in the Tax Court is a contract that may be reached through offer and acceptance. Longino did not settle his 2006 tax liability with IRS counsel. Rather, his case was tried in the Tax Court, and he lost.

Nor did Longino reach a settlement with the IRS employee with whom he exchanged correspondence in May 2013. The IRS service center employee with whom he corresponded did not offer to settle any tax liability.

Further, the Court noted that even if the IRS employee were thought to have made a settlement offer, no settlement of any kind is binding on IRS unless it is duly authorized and properly memorialized, e.g., in a closing agreement under Code Sec. 7121. Longino supplied no reason to believe that his IRS correspondent had the requisite settlement authority.

As to the letter that Longino sent with his $1,396 check, the Court said that there can be no settlement unless there is mutual assent to its terms, which Longino did not show. Citing several cases, including Whitesell, TC Memo 2017-84, the Court said that to demonstrate assent by IRS, Longino must do more than show that IRS cashed his check.

As to whether the SO considered all relevant issues that Longino raised, the Court noted that the only issue Longino raised was his contention that he had settled his 2006 tax liability for $1,396. On that point, the SO correctly determined that Longino's correspondence with respect to the $1,396 assessment was unrelated to the liabilities determined in the earlier Tax Court case. The SO further concluded (correctly) that:

  1. The correspondence did not involve an offer or acceptance of any settlement but consisted only of "standard form letters used by the IRS Service Centers" and
  2. Longino did not (and could not) show that any IRS person with he whom he had corresponded had settlement authority.

Longino declined to request a collection alternative of any sort, insisting instead that he had no liability for 2006. The Court concluded that the SO properly determined that Longino had proffered no plausible evidence of a settlement and that there was no abuse of discretion.

References: For taxpayer right to CDP hearing, see FTC 2d/FIN ¶V-6005; United States Tax Reporter ¶ 63,204. 

Thursday
Jun282018

2018 draft Form 1040 reduced to "postcard" size but requires more schedules

Draft 2018 Form 1040, U.S. Individual Income Tax Return

The new draft version of the 2018 Form 1040, obtained by Thomson Reuters Checkpoint from congressional staff, is markedly different from the 2017 version of the form. In addition to reflecting a number of changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), the draft form has been significantly reduced in size and contains far fewer lines than its predecessor. However, this reduction in length is countered by the fact that the draft form has six new accompanying schedules.

Identifying information. The 2018 draft Form 1040 eliminates spaces from the 2017 version of the form where a taxpayer with a foreign address would specify the foreign country name, province, and postal code, and instead directs a taxpayer with a foreign address to attach a new Schedule 6, "Foreign Address and Third Party Designee", and provide this information on that Schedule.

Dependents. On the 2018 draft Form 1040, in addition to the checkbox reflecting whether a dependent qualifies for the child tax credit, a second checkbox has been added for a taxpayer to reflect whether a dependent qualifies for the new "credit for other dependents".

Adjusted gross income. The 2018 draft Form 1040 contains fewer entries than the 2017 Form 1040 for types of income received by the taxpayer. The omitted items were moved to new Schedule 1, "Additional Income and Adjustments to Income".

Specifically, the following income items have been moved to Schedule 1: taxable refunds, credits, or offsets of state and local income taxes; alimony received; business income or loss; capital gain or loss; other gains or losses; rental real estate, royalties, partnerships, S corporations, trusts, etc.; farm income or loss, unemployment compensation; and other income.

The 2018 draft Form 1040 does not reflect any adjustments to income that appear on the 2017 Form 1040 (e.g., educator expenses, health savings account deduction). Rather, all adjustments that remain in effect for 2018 were moved to the new Schedule 1.

The moving expense deduction entry has also been modified to reflect that, under the TCJA, it is only available for members of the armed forces.

The lines for the pre-2018 tuition and fees deduction and the pre-2018 domestic production activities deduction are shown on Schedule 1 as "Reserved".

Deductions. Similar to the 2017 form, the 2018 draft Form 1040 contains a line where taxpayers indicate whether they are claiming the standard deduction or itemized deductions and provides the 2018 standard deduction amounts in the margin. It is widely expected that significantly more taxpayers will claim the standard deduction in 2018 as the standard deduction amounts were nearly doubled by the TCJA.

The 2018 draft Form 1040 also has a new line for the Qualified Business Income (QBI) deduction.

Notably, the entry for exemptions has been removed from the draft form as this deduction was suspended by the TCJA.

Tax. The 2018 draft Form 1040 contains fewer lines relevant to calculating a taxpayer's total tax, instead moving the entries to a new Schedule 2, "Tax".

Specifically, the following tax items were moved to Schedule 2: tax on child's unearned income (i.e., kiddie tax); tax on lump-sum distributions; other taxes; alternative minimum tax; and excess advance premium tax credit.

Nonrefundable credits. The 2018 draft Form 1040 contains an entry for "child tax credit/credit for other dependents" and has moved the other items to new Schedule 3, "Nonrefundable Credits".

Specifically, the following credits were moved to Schedule 3: foreign tax credit; credit for child and dependent care expenses; education credits; retirement savings contribution credit; child tax credit and credit for other dependents; residential energy credit; general business credit; credit for prior year minimum tax; and other credits.

Observation: The child tax credit and credit for other dependents appears both on the 2018 draft Form 1040 as well as on Schedule 3. Presumably, this duplication will be resolved in a future draft.

Other taxes. The lines for "other taxes" on the 2017 Form 1040 were moved to a new Schedule 4, "Other Taxes".

Specifically, the following "other taxes" were moved to Schedule 4: self-employment tax; social security and Medicare tax on tip income not reported to employer; uncollected social security and Medicare tax on wages; additional tax on IRAs, other qualified retirement plans, and other tax-favored accounts; household employment taxes; repayment of first-time homebuyer credit; health care: individual responsibility; additional Medicare tax; and net investment income tax.

Schedule 4 also reflects a new item, "Section 965 net tax liability installment from Form 965-A". This refers to the new Code Sec. 965 transition tax on the untaxed foreign earnings of certain "specificied foreign corporations" as if those earnings had been repatriated to the U.S., which taxpayers can elect to pay in installments over an 8-year period.

Other payments and refundable credits. The 2018 draft Form 1040 retains entries for the earned income tax credit, the additional child tax credit (denoted by the relevant Schedule, "Sch 8812"), and the American opportunity credit (denoted by the relevant Form, "Form 8863"). Other refundable credits appearing on the 2017 Form 1040 in the section titled "Payments" were moved to a new Schedule 5, "Other Payments and Refundable Credits".

Specifically, the following refundable credits were moved to Schedule 5: the net premium tax credit, the credit for federal tax on fuels; "amounts from Form 2439" (i.e., a shareholder's credit for capital gains tax paid by a mutual fund); and the health coverage tax credit.

With respect to tax payments, the 2018 draft Form 1040 has a line for federal income tax withholdings. Other payment types reflected on the 2017 Form 1040—the amount paid with request for extension to file, and excess social security and tier 1 RRTA tax withheld—were moved to Schedule 5.

Third party designees. The 2018 draft Form 2018 eliminates the "Third Party Designee" section that had previously appeared on the 2017 Form 1040, where a taxpayer would specify whether another person is allowed to discuss the return with IRS and, if so, provide that person's name, phone number, and personal identification number (PIN). The 2018 draft Form 2018 instead provides a checkbox where a taxpayer can check "3rd Party Designee".

Although the 2018 draft Form 2018 doesn't provide a reference to Schedule 6 next to this checkbox, presumably the taxpayer would provide the designee information on that Schedule, which has entries for the designee's name, phone number, and PIN similar to the 2017 Form 1040.

 

Friday
Jun012018

IRS Urges Paycheck Checkup

IRS has urged 2-income families and those who work multiple jobs to complete a "paycheck checkup" to verify they are having the right amount of tax withheld from their pay. (IR 2018-124) Following passage of the Tax Cuts and Jobs Act, checking withholding amounts has become more important, the agency said. "Individuals with more complex tax profiles, such as two incomes or multiple jobs, may be more vulnerable to being under-withheld or over-withheld following these major law changes", IRS said. To conduct a checkup, taxpayers should use the Withholding Calculator which can be accessed here.

 

Wednesday
May302018

Taxpayer wasn't in the business of flipping houses so couldn't deduct expenses

Samadi, TC Summary Opinion 2018-27

The Tax Court has determined that a taxpayer who decided to flip houses with a group of friends and family and obtained his real estate license wasn't entitled to mileage deductions for taking members of the group to see potential properties. The Court found that the taxpayer's real estate activity didn't rise to the level of a trade or business where the group never actually purchased any properties and the taxpayer never earned any real estate commissions.

Background. Code Sec. 162(a) generally allows a deduction for ordinary and necessary expenses paid or incurred in connection with carrying on a trade or business. Whether a taxpayer's activities constitute the carrying on of a trade or business requires an examination of the facts and circumstances of each case. (Groetzinger, (S Ct 1987) 59 AFTR 2d 87-532)

To be engaged in a trade or business, the taxpayer must be involved in the activity with "continuity and regularity" and for the primary purpose of generating income or profit. "The taxpayer's primary purpose for engaging in the activity must be for income or profit." (Groetzinger)

Facts. In 2010, Mr. Samadi, his brother, and three other individuals (collectively, the group) decided to flip houses—buy homes, renovate them, and sell them for a profit. He became a licensed real estate agent in 2010 and continued to be licensed during 2013 and 2014 but did not earn any commissions from selling real estate in 2013 or 2014. Samadi researched potential investment properties for the group; and because he was a licensed real estate agent, he had access to properties that were for sale.

The group decided to look for potential investment properties in West Sacramento, California, where Samadi lived, because the group expected him to manage the investment properties. He prepared mileage logs for 2013 and 2014 to document the extensive mileage he drove to see the potential investment properties. According to the mileage logs, he drove 24,882 miles in 2013 and 25,220 miles in 2014, driving himself, his brother, and other members of the group to see various properties.

Samadi didn't show any potential investment property to the group during the last four months of 2013 or 2014, and the group did not buy any investment property in either year because its members couldn't agree on any of the potential investment properties Samadi showed them.

Samadi had no gross receipts from his real estate activity for either year, and reported losses from the activity on his Schedules C for 2013 and 2014 of $15,719 and $22,502. IRS audited Samadi's 2013 and 2014 returns and disallowed deductions relating to his real estate activity.

At issue was whether Samadi's real estate activity during 2013 and 2014 rose to the level of carrying on a "trade or business" with respect to which he could claim business expense deductions. Samadi argued that he was a real estate agent during 2013 and 2014, that he was acting in that capacity when he showed the group the potential investment properties, and that any expenses incurred in helping the group see the potential investment properties were deductible business expenses.

No trade or business. The Tax Court sided with IRS, finding that while Samadi was a licensed real estate broker during 2013 and 2014, he wasn't in the trade or business of being a real estate agent during those years. Notably, he didn't earn any commissions during those years, and there was no other evidence to suggest that he was continuously and regularly buying and selling real estate or was a real estate agent to clients.

The Court found that in 2013 and 2014, Samadi and the group were attempting to start a business of flipping houses, but were at most in the "exploratory or formative stages". The Court cited a number of cases for the proposition that carrying on a trade or business requires more than initial research—it requires that the business have actually commenced. (Dean, (1971) 56 TC 895)

Accordingly, since the real estate activity didn't rise to the level of a trade or business, the Court held that Samadi wasn't entitled to deduct any Code Sec. 162(a) expenses, including car and truck expenses, incurred in connection with his real estate activity.

References: For trade or business expenses, see FTC 2d/FIN ¶ L-1000; United States Tax Reporter ¶ 1624

Wednesday
May162018

IRS warns about new twist on banking tax scam

 

By Michael Cohn: Accounting Today

The Internal Revenue Service issued a warning Thursday about a new variation on a scam involving requests by criminals who pretend to be working for the IRS asking for bank information from international taxpayers and non-resident aliens.

 The crooks mail or fax a letter to unsuspecting victims asking them to fill out a copy of a Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting,” and saying they need to fax it back to the criminals who are impersonating IRS employees. The letter acknowledges the recipient is exempt from withholding or reporting income tax but insists they need to authenticate their information with the IRS.

The Form W-8BEN is a legitimate U.S. tax exemption document related to the Foreign Account Tax Compliance Act, also known as FATCA. But the IRS noted it can only be submitted through a withholding agent. In the past, scammers have targeted nonresidents of the U.S. using the form as a way to elicit personal details such as passport numbers and PIN codes. The legitimate IRS Form W-8BEN doesn’t ask for any of that information. The bogus letter or fax also refers to a Form W9095, which doesn’t exist, the IRS pointed out, adding that the agency doesn’t require recertification of foreign status.