Offer in Compromise Fees

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Sometimes taxpayers are not 100% clear about the role of the IRS.  Some IRS employees can be very convincing and will lead people to believe that they only want to help and provide some kind of service to the taxpaying public.  This is a nice concept (and one that is embraced by IRS mission statements as well), but it is not reality.  The reality is that the IRS exists to collect revenue, and only to collect revenue.  The more one delves into the “back office” of the IRS, the more obvious this becomes.  This fact is emphasized over and over (both explicitly and implicitly) in official IRS policies and procedures.

One example of this is seen in the Offer in Compromise (OIC) process, specifically with respect to OIC fees.  The IRS accepts offers from taxpayers who have very little to give in the first place, so it is interesting how the IRS places such a big emphasis on the accompanying OIC fees.  An OIC must include a non-refundable $150 processing fee and a 20% deposit (20% of the offer amount).  In fact, if either of these payments are missing then the offer is deemed “Not Processable,” and is returned to the taxpayer.  Yes, there is a fee waiver process for taxpayers who fall below the poverty line, but it rarely works as it should.

Also, IRS employees are given specific instructions on how to categorize offers that are received in Centralized Offers in Compromise sites based on whether or not the OIC packages include money.  IRM 5.8.2.2 lists the different categories, and I don’t believe it is any coincidence that the offers with fees are at the top of the list.

IRS Tips for the Self-Employed

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People incur tax debts for a variety of reasons.  Sometimes wage earners get into trouble by claiming too many exemptions on Form W-4, which results in too little tax being withheld for the federal government.  Sometimes people don’t understand the tax consequences of certain transactions; they see their job as their only source of income and fail to consider other taxable events such as debt forgiveness or retirement account distributions.  But a huge percentage (probably the vast majority) of people with IRS problems are the self-employed.  The self-employed typically get into trouble when they either fail to make estimated tax payments or when they claim invalid/excessive expenses which results in “underreported income.”

Today the IRS offers tips for self-employed taxpayers that will keep them out of hot water:

  1. You may be self-employed even if you don’t consider yourself “self-employed” so be careful!
  2. File a Schedule C to claim your business/self-employment expenses and reduce your taxable income
  3. Pay self-employment tax (Social Security and Medicare) as well as income tax
  4. Make estimated tax payments throughout the year so you don’t have a large bill that you can’t pay come April 15th.  See form 1040ES.
  5. Check to be sure you can deduct the entire business expense or if it must be capitalized
  6. Business expenses are allowable only if they are both ordinary and necessary

 

Tax Tips in an Improving Housing Market

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Stimulus Considerations

Over the past several years there have been various homebuyer tax credits and programs offered to stimulate the housing market. Homebuyer tax credits and programs, while they are great when you can claim them, can also be a tax trap. Therefore, it is important that you know the taxation terms of the credit or program you qualify for, or used to buy your home. This means read (and remember) the fine print as these terms can impact your tax exposure and should be considered when tax planning and considering the purchase or sale of a home. Depending on your tax credit taken or qualified program, you may take a tax hit depending on when you decide to sell.

Profit Considerations

Regardless of whether you’re a buyer or seller, profit on the property is undoubtedly an influencing consideration when deciding to buy or sell your home. The primary tax concern is whether you will pay income taxes on the money you receive from the sale of your home. Your tax exposure depends on how you used the property, your actual selling price, and your cost basis (generally, the cost of the home).

Now that the housing market is showing some signs of improvement, if you’re selling your home you may just be lucky enough to actually profit from the sale of your primary residence. If you do profit from the sale of your home, and as long as it’s your primary residence, you may qualify to exclude from taxation up to $250,000 or $500,000 of the profit received, depending on your filing status. To qualify for the exclusion, you must meet both the ownership test and the use test.

Subject to some exceptions, generally you are eligible for the tax exclusion if, prior to the sale of your home, you have both owned your home and used it as your primary residence for a combined total of two years in the previous five years. You are not eligible for the exclusion if you excluded the profit from the sale of another home during the two year period prior to the sale of your home.

Loss Considerations

If you’re not yet optimistic about a housing market turnaround, you may need to act quickly if you want to adjust your payment terms or get out of your home that’s underwater. While a loss on your home is not deductible, cancellation of a debt generally is taxable and there are tax consequences you really need to consider now as these transactions take time to complete.

The Mortgage Debt Relief Act of 2007 was recently extended through the end of 2013 by the American Taxpayer Relief Act of 2012. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring and mortgage debt forgiven in connection with a short sale, qualifies as excludable income. If you wait until 2014 to get out of your home or modify the payment terms, you may receive an unexpected tax hit by way of additional taxable income.

Bartering: IRS Gets Theirs Even When Cash is not Involved

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Today the IRS reminds us that the value of goods or services received through bartering is taxable (IRS Tax Tip 2013-29).

Bartering is simply trading one product or service for another product or service without an exchange of currency.  I was introduced to bartering in about 3rd grade where the hottest products being traded were Garbage Pail Kids cards and (this is going to make me seem really old) . . . marbles.  You know, little colorful glass spheres that you shoot with your thumb.  Ok, nevermind.  The point is, most people move on from bartering when they grow up and get a job that pays in currency for the work they perform.  But not everyone.

Some people barter informally with people they know, such as the plumber who fixes a leaky pipe for his dentist friend in exchange for dental work (this is the IRS Tax Tip example).  Others barter through organized “exchanges” like the one I found on the internet with a highly redundant name: “Barter Trade Exchange.”  Their home page explains how it works:

In times past people traded live stock, vegetables, grain etc. for  things they needed. It worked fine if you located who needed what you had and had what you needed. It was hard to find them, that’s why money was invented; Stones, Beads, Shells, Pearls, Coins, Silver, Gold and finally paper money.

In an Exchange, you deal with fellow members buying/selling goods and services using trade dollars, not cash. Offer what you have to earn trade dollars to spend. It is an easier way (not free) to acquire what you need without money.

I’m not sure how common bartering is; it is definitely not on my short list of typical tax problems.  And I’m not sure the IRS knows either because my hunch is it doesn’t get reported like it should.  That’s why the IRS came out today (a few weeks before the filing deadline) with a few important points they would like taxpayers to know about bartering.  Here they are:

  1. Barter exchanges must issue form 1099-B to their members
  2. Trade dollars (and the value of goods/services) received in barter must be reported as income
  3. Besides income taxes, there may also be self-employment, employment, or excise tax implications for those who barter
  4. Be sure you understand the specific reporting requirements that apply (for additional information, see the IRS’ Bartering Tax Center)

 

Automated OIC Appeal Review

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Did you know that if your Offer in Compromise (OIC) is rejected, there is a “self-help tool” on the IRS website that will walk you through a series of steps to help you determine if you should appeal it or not?

This is yet another example of the IRS’ attempt to automate everything they do.  I guess it does make sense to explore all available options for replacing the best and brightest who will be leaving the IRS when they retire.  And I guess it makes sense to try to find cheaper alternatives, given that the IRS is not going to get the kind of funding they need to hire live bodies.  This just seems to cross the line.

I know how complicated and frustrating the OIC process can be.  When an OIC has been rejected, what the appellant really needs is to speak with a good tax attorney.  Or, at a minimum, he needs to be able to talk with a live body at the IRS who will explain the IRS’ determination and who will really consider a taxpayer’s individual circumstances.

It does have some value, don’t get me wrong.  I have spent a little time with this tool and, from what I can tell, it is perfect for identifying errors and oversights made by offer examiners.

It's always "hurry up and wait" with the IRS

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It’s always “hurry up and wait” with the IRS.

The Offer in Compromise (OIC) process is a perfect illustration of this point. If a taxpayer finds himself with a tax debt that he cannot pay, one of his options is to file an Offer in Compromise by which he offers to settle with the IRS for less than what he owes. But the IRS will require that the OIC be filed as soon as possible; in fact, the IRS collections department will be poised to levy income sources if the offer is not filed (or some other resolution entered into). It is important to inform Collections of your intention to file an OIC, but they will most likely give you a short due date by which to submit the paperwork.

Once the OIC has been filed, then the waiting begins. It commonly takes several months just for the IRS to assign an offer to be reviewed. Offer examiners have to keep an eye on their caseloads because once a case enters their inventory, they are required to move it along promptly.

When an offer examiner or offer specialist has finished reviewing the offer, things pick back up and the taxpayer has to stay on his toes. Once again, deadlines are given that, if missed, could mean the end of the road. During this period of review the deadlines are typically attached to the submission documents that are required to substantiate details in the personal financial statement.

Once all the information is in and a determination has been made, there is usually additional waiting. The case normally must be submitted to a manager for further review, and that can take some time.

With the coming sequestration and IRS staff furloughs on the horizon, it is likely that the contrast between the hurrying and the waiting will be more pronounced. The IRS has said that furloughs will not begin until after tax season — that’s when we can expect longer-than-normal waiting periods at all levels of the IRS as there will be fewer IRS employees on duty to help.

Tax Relief For The Home Office Tax Deduction Available in 2013

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The home office deduction, while useful, is complex and often the bait for an audit trap. Beginning in tax year 2013, Congress has implemented an optional standard home office deduction in order to make the home office deduction more available to taxpayers in the future.

Pursuant to Internal Revenue Service (IRS) Revenue Procedure 2013-13, beginning next tax season, there will be an optional safe harbor method that individual taxpayers may use to determine the amount of deductible expenses attributable to certain business uses of a residence throughout the tax year. This safe harbor method is an alternative to the burdensome calculation and substantiation of actual expenses needed to satisfy Internal Revenue Code § 280A. This new tax relief procedure is effective beginning on or after January 1, 2013.

These new tax relief provisions allow taxpayers who use their residences for qualifying business purposes to compute the allowable home office expense deduction on the basis of $5 per foot of qualifying home office space per year, up to 300 square feet. The maximum tax deduction allowed when using the new safe harbor provisions is the lesser of $1,500; or the gross income derived from the qualified business use of the home reduced by qualified business deductions.

The new safe harbor option for business home use does away with the previously time consuming calculations and record keeping of actual expenses. However, the traditional calculation method may allow for a greater deduction than allowed under the new safe harbor business home use provisions. Like the decision to take the standard deduction or itemize deductions on your tax return, give yourself time and review your tax situation carefully to ensure you’re not paying excessive taxes in exchange for convenience.

Help the IRS Reduce America's Tax Burden

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You’ve probably never heard of the Taxpayer Burden Reduction (TBR) division of the IRS; few people have. TBR is led by senior advisor, Laurie Tuzynski, who recently explained her role in an official IRS video. Taxpayer Burden is defined as the time and money taxpayers spend to comply with their federal tax obligations. Here’s a perfect example: the Treasury Inspector General for Tax Administration (TIGTA) recently stated that individuals and businesses spend an estimated 6.1 billion hours per year complying with tax filing requirements.

And that’s just prepping and filing taxes!  What about the time spent by taxpayers, tax attorneys, and other practitioners in resolving tax problems?

You can help TBR identify forms, procedures, and rules that are wasteful and overly-burdensome so they can go to work trying to simplify. And the procedure for doing so is fairly simple: you just need to fill out a Form 13285-A “Reducing Tax Burden on America’s Taxpayers.” This form asks you to explain the problem, identify the stakeholders (who it is that the problem affects), and propose your solution. However, if you feel that the “Reducing Tax Burden” form itself is overly-burdensome, there is a procedure for that too! And I quote:

If you have suggestions for making this form simpler, we would be happy to hear from you. You can e-mail us at *taxforms@irs.gov.  Please put “Forms Comment” on the subject line.  Or you can write to [Tax Products Coordinating Committee].

 

Is This The Year You Should Itemize Your Deductions on Your IRS Tax Return

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It’s now February, and tax day is just around the corner … but far enough away to allow you time to explore your options and minimize your tax exposure. While preparing your tax return the goal is always to legally minimize your tax debt and hopefully increase your tax refund. At its simplest, your tax debt is determined by your taxable income after deductible expenses.

Focusing on the deductible expenses side of the tax equation, according to the Internal Revenue Service (IRS), most taxpayers claim the standard deduction. Is this the year that you should itemize your deductions? My most common response to legal questions is apt; it depends. The analysis requires a determination of which is greater, the standard deduction or itemized allowable deductions?

What is the Standard Deduction?

The standard deduction is a preset amount that reduces the amount of income on which you are taxed. The standard deduction amount depends on your filing status, whether you are 65 or older, or blind, and whether an exemption can be claimed for you by another taxpayer. The standard deduction is generally adjusted annually based on inflation.

The standard deduction amounts for tax year 2012 are $5,950 for single filers and married couples filing separately, $8,700 for head of household filers, and $11,900 for married couples filing jointly and qualifying widow(er). If you are 65 or older, or legally blind you may receive an increased deduction per qualifying status. The additional standard deduction amounts for tax year 2012 are $1,450 for taxpayers who file single or head of household, and $1,150 for those filing married filing jointly, married filing separately, or qualifying widow(er).

Should You Itemize Your Deductions?

Now the hard part: is the standard deduction amount greater than the amount that may be claimed if you were to itemize your allowed expenses? If the standard deduction is greater, use the standard deduction. Determining what expenses you had throughout the year that may be itemized and deducted, is usually difficult because you need to maintain accurate records and the list of the various allowed deductions are exhaustive and riddled with exceptions, exemptions and limitations. Once you have a grasp of the type of deductions that may be claimed, you may find that your actual expenses, when itemized, far exceed the standard deduction provided by the government. This is why it truly pays to prepare your tax return early and not procrastinate so you have time to accurately determine the expenses you may itemize.

The types of expenses that may be itemized are typically a social economic incentivizing type of expenses. Generally, and subject to many exceptions and limitations, expenses paid for or associated with medical care, mortgage interest, student loan interest, taxes, education, charity, job search, relocation, earning income, and investments, may at times be itemized and could potentially reduce your taxes. Once tallied and accounted for, if the total amount spent on the qualified deductions, subject to the applicable exceptions and limitations, are more than your standard deduction, this may be the tax year you save on your taxes by itemizing your deductions; so don’t procrastinate and do your homework … or file an extension.

Tax Relief via the Earned Income Tax Credit (EITC)

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The Earned Income Tax Credit (EITC) is a refundable tax credit you may be able to take advantage of this tax season to get the tax relief you need. Since the EITC is refundable, this means taxpayers may get money back, even if they have no tax withheld. However, to get the credit, taxpayers need to file a tax return and specifically claim the EITC, even if they don’t have a filing requirement.

Recent changes to the EITC make the credit available to more taxpayers than in years past. Eligibility for the EITC varies based on income and family size. Households with three or more qualifying children will receive a 2012 tax credit of $5,891 if their Adjusted Gross Income (AGI) is less than $45,060 when filing individually or $50,270 when married filing jointly. The equivalent credit for tax year 2011 was $5,751 for individuals with an annual AGI less than $43,998 or $49,078 when married filing jointly.

On the other end of the EITC spectrum, for tax year 2012, households with no qualifying children will receive a $475 tax credit if their AGI is less than $13,980 when filing individually or $19,190 when filing married filing jointly. Similar middle tier credit adjustments are available for taxpayers claiming one or two qualifying children.

Eligibility for the EITC is very fact specific as to eligibility requirements and prone to errors. Even if someone else prepares your tax return, a taxpayer is still responsible for the accuracy their own tax return. Taxpayers should seek tax advice if they are not sure whether they qualify for the EITC. Common EITC errors identified on the IRS website include:

  • Claiming a child who is not a qualifying child.
  • Filing as single or head of household when actually married.
  • Reporting incorrect income or expense amounts.
  • Missing or incorrect Social Security numbers for self, spouse or qualifying children.

While claiming the EITC will get you immediate tax relief, avoiding these common tax errors will give you stress relief.