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- Written by: Kathleen M. Lach
We are vary familiar with the ability of the IRS to take aggressive collection action against an individual or business with unpaid tax balances. Most commonly, it will levy a bank account or receivable, or garnish wages. Recently, however, we have experienced more aggressive actions by IRS collectors in their efforts to secure payment on tax debts. We would like to briefly discuss two lesser-known actions which may be imposed by the IRS to take a client’s assets, of which you should be aware.
The Nominee Lien
Under IRC §6321, “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” A federal tax lien may only attach to property in which a delinquent taxpayer has rights.
To determine whether a taxpayer has rights to property under the federal tax lien statute, courts must look to state law.1 The federal tax lien statute does not create property rights, but may attach consequences to those rights.2 The consequences in most cases are the rights to equity interests up to the amount of the lien or balance due against the property.
Under a “nominee” theory, the nominee must hold legal title to property for the benefit of someone else. The facts and circumstances of each case are carefully reviewed to determine if a nominee situation exists, including: (1) a close personal relationship between the nominee and the transferor; (2) the nominee paid little or no consideration for the property; (3) the parties placed the property in the name of the nominee in anticipation of collection activity; (4) the parties did not record the conveyance; and (5) the transferor continues to exercise dominion and control over property.3 The IRS is looking closely at real property (most commonly) held by a relative of a tax debtor to determine if it can assert a nominee claim.
One mechanism carefully scrutinized in these situations is the use of a quitclaim deed. The effect of a quitclaim deed is governed by state law, but in many states, a quitclaim deed has the effect of conveying to the grantee all the then existing legal or equitable rights of the grantor in the property described.4 The IRS has challenged such quitclaim transfers under its theory of nominee liens. The Internal Revenue Manual states: “A nominee situation generally involves a fraudulent conveyance or transfer of a taxpayer’s property to avoid legal obligations.”5 There must be adequate consideration (or payment) for any transfer to overcome such a challenge, or the IRS may proceed to collect against a third party’s assets. In such a case, the third party does not have the same rights as a taxpayer to due process under the Internal Revenue Code. The third party must take the costly action of suing the government in federal court to protect his or her property.
For example, real estate was transferred to a spouse by quitclaim deed. The spouse/transferee handled all expenses for the home, except the mortgage. She also handled a significant portion of family expenses. Some years later, the spouse/transferor incurred tax debts. The IRS imposed a nominee lien upon the transferee, whose only recourse was to sue to quiet title in federal court.
Adding a nuance to its arsenal, the IRS has attempted to bolster its nominee lien theory by adding a novel “lien tracing” component based on a very narrow finding in one case, Municipal Trust and Savings Bank v. U.S.6 The facts in that case involved an Estate taxpayer and a complex series of land transfers. Estate property was distributed when tax debts were due and owing, thus the U.S. was able to recover funds from the distributed assets. The limited case law in connection with the government’s lien tracing theory deals mainly with nominee situations, or fraudulent transfers to avoid tax debts. Although lien tracing seems like a stretch to reach assets, a cautious approach is warranted in these types of situations.
Jeopardy and Termination Assessments
Another extraordinary power of the IRS whereby it may take an individual’s property or money, based on suspicion and assumptions, is its ability to make “termination”7 and “jeopardy” assessments. If the IRS chooses to take this action, and it withstands any appeal, the tax is immediately due and payable.8 These procedures can be used to freeze bank accounts, take funds from the taxpayer, and file liens against a taxpayer’s property. All of these procedures may irreparably damage a taxpayer, as we have seen.
For example, a bank may note suspicious activity in an account, as evidenced by large deposits from overseas. Such activity may be investigated by internal bank specialists, who may then report the activity to the FBI or Homeland Security, and the IRS. If the IRS deems any of the activity suspicious, it may freeze the account, assert all deposits are income to a taxpayer, assess tax, and levy the account immediately. Even if an individual claims a business purpose for the deposits, the IRS may take this action if it meets a very low standard of “reasonableness.”
The code provision that allows this action9 focuses on the reasonableness of the IRS assessment. The standards to be employed by the reviewing court in determining whether the government has met its burden of proof, and that the making of a termination assessment is reasonable are:
1. Whether taxpayer is or appears to be planning to quickly depart from United States to conceal himself.
2. Whether taxpayer is or appears to be designing to place his property beyond the reach of the government either by removing it from the United States or by concealing it, or by transferring it to another person, or by dissipating it.
3. Whether taxpayer’s financial solvency appears to be imperiled.
Further, under IRC §7429, a court must consider whether the amount of assessed tax was appropriate, under the circumstances. The method for calculating the tax must not be irrational, arbitrary and completely unsupported. The government need only establish that the taxpayer’s circumstances appear to be jeopardizing collection of a tax, not that they definitely do so.10
Straying from the Federal Rules of Evidence, a challenge in court is a “summary” proceeding, and the court may consider hearsay.11 In broadening the reach of this statute, a federal judge determined “Plaintiff also argues that the IRS, in making the jeopardy assessment, considered evidence that could be inadmissible hearsay at trial and that therefore no value should have been given to that evidence. We find no merit in this argument. In reaching administrative decisions the government can consider hearsay evidence.”12
The reality in these cases is the IRS has a very low burden to meet in order to have a termination assessment sustained. It only has to be a “reasonable suspicion.” There are cases, however, when the “suspicions” are false, and even when the IRS knows they are false, a court may let the assessment and collection stand, and force a taxpayer to challenge the assessment in a refund or Tax Court proceeding, another costly endeavor, by which time a taxpayer may be out of resources to fight the government.
In Summary
The IRS has powerful tools at its disposal as it seeks to collect taxes. Tax professionals should be aware of these tactics, and resources to defend third parties and unsuspecting individuals when faced with such actions.
1. U.S. v. Towne, 406 F. Supp.2d 928, 932 (N.D. Ill., 2005)
2. Id.
3. IRM 5.17.2.5.7.2 (03-27-2012)
4. In re Blair, 330 B.R. 206, 211 (Bankr.N.D.Ill. 2005)
5. IRM 5.17.2.5.7.2 (03-27-2012)
6. 114 F.3d 99, 101 (7th Cir. 1997)
7. IRC §6851
8. Laing v. U.S., 1976-1 C.B. 388, 423 U.S. 161, 96 S. Ct. 473, 46 L. Ed. 2d 416, 76-1 U.S. Tax Cas. (CCH) P 9164, 37 A.F.T.R.2d 76-530 (1976).
9. IRC §7429
10. Cantillo v. Coleman, 559 F. Supp. 205, 83-1 U.S. Tax Cas. (CCH) P 9268, 51 A.F.T.R.2d 83-684 (D.N.J. 1983); Hecht v. U.S., 609 F. Supp. 264, 88-1 U.S. Tax Cas. (CCH) P 9160, 56 A.F.T.R.2d 85-5580 (S.D. N.Y. 1985).
11. Balaguer v. US, 656 F.Sup. 383 (United States District Court, D. Puerto Rico, 1987)
12. 5 U.S.C. § 556(d); Richardson v. Perales, 402 U.S. 389, 407–08, 91 S.Ct. 1420, 1430, 28 L.Ed.2d 842 (1971); Sears v. Department of the Navy, 680 F.2d 863, 866 (1st Cir.1982)
Kathleen M. Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.
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- Written by: Roger Harris
Hillary Clinton and Donald Trump don’t agree on much. But, the two presidential candidates do share a common value when it comes to their proposed tax policies — to stimulate business and inspire economic growth. However, as it usually goes in politics, Clinton and Trump have decidedly different theories on how to accomplish that goal.
It should be noted, a 60-second political speech rarely ends up translating into a 60-page tax law. That would require Congress to agree with the code variations in Clinton or Trump’s proposals, and then follow through with a majority vote to pass them through as law. Even if Congress did agree with aspects of either proposal, the final version would likely look much different than what was originally touted on the campaign trail.
While the chances are slim Americans will see any significant changes to the tax code following the November election, it’s still important to understand the differences between the two proposals, and prepare for whatever changes could come.
Nominee Proposals
On the Democratic side, Clinton’s policy proposes tax increases for high-income taxpayers, new rules that would make it harder for businesses to move overseas, a repeal on fossil fuel tax incentives and an increase to estate and gift taxes. While Clinton’s policy does not propose significant impacts to American small businesses, those businesses will see a slight increase of their taxes. Clinton’s aim with her proposed policy is to improve the country’s economic health by increasing economic revenue by about $1.1 trillion over the next decade.
Another item in Clinton’s tax policy is pointed at closing tax loopholes that reward companies who shift profits and jobs overseas. Instead, she will charge an “exit tax” for companies leaving the U.S., while also adding incentives and rewards to businesses that stay and invest in jobs here.
Trump’s tax policy puts even more focus on the small business marketplace, with the largest impact coming from a reduction in tax rates. If Trump takes the White House in November, his tax proposal would reduce business tax rate from 35% to 15%, while also eliminating most tax subsidies and setting the pass-through income at 15%, as well. Trump’s plan would also impose a one-time transition tax of up to 10% on existing foreign income of U.S. companies, with future profits of foreign subsidiaries of U.S. companies being taxed each year as profits are earned.
It is anticipated that people at all income levels would benefit from Trump’s tax cuts, with the largest benefactors to those cuts being the highest-income households.
But, when broken down, Trump’s tax plan — unless accompanied by huge spending cuts — could increase the national debt by nearly 80% by 2036, essentially offsetting some or all of the incentives he is proposing.
Conversely, but not surprisingly, nearly all of Clinton’s individual tax increases would fall on the top 1% of earners, with the remaining 95% of taxpayers seeing little to no change. Marginal tax rates would increase, reducing incentives to work, save and invest, and the tax code would become more complex. Details within the program do not address a forthcoming proposal to cut taxes for low-and middle-income families.
The Problem with Promises
While Trump’s tax proposal policy seems to be more business friendly and generally would put more money into the pockets of taxpayers, and Clinton’s promises to ease the tax burdens of middle-class Americans, both candidates and their grandiose tax reform plans flounder in practicality.
What American taxpayers and especially business owners are yearning for is simplicity. In nearly every presidential election of the modern era, candidates tout ideas of simplifying the staggering complexities of the tax code. The reality is, most proposed policies come with promises of simplicity, but really only add unnecessary layers to an already complicated system.
For America’s CPAs, this becomes an even bigger point of importance. Ideally, those in the industry would like to see simplification of tax policies for pass-through entities. These types of companies — S corporations and partnerships — make up a significant amount of the small business marketplace and represent the majority of CPA clients.
CPAs long for the day when America’s tax code is finally simplified, providing them stability to most accurately advise clients and be the experts they are expected to be. When it comes down to that, Trump and Clinton, like many of their predecessors, miss the mark.
Roger Harris is president and COO of Padgett Business Services.
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- Written by: Joshua Fluegel
A CPA’s practice thrives on creating a process and then optimizing it for speed and efficiency. The striving for this goal could lead many to neglect a possibly aging technological infrastructure which could be debilitating during tax season. Taking an objective look at your tools of the trade would be a wise endeavor before the heat of the upcoming 2017 tax season.
“A tax professional’s profitability hinges on efficiency,” said JoAnn Kintzel, president of TaxAct. “Even small adjustments like increasing your Internet speed, getting a faster processor, upgrading your operating system and taking advantage of tools like a client portal for secure document exchange can save time. In addition, it may be time to evaluate whether you’re using the right tax preparation software for your practice. Making a switch to a software package that more closely aligns with the number and type of returns you typically handle can provide major cost savings.”
The collection of client information has gone mobile through the use of phones and tablets. Of course the use of these devices is only successful when they are secure.
“One area where we feel there is still significant room for improvement involves client communications and collaboration as the professionals look for ways to more proficiently prepare tax returns,” said John Barnes, vice president, product management at Wolters Kluwer Tax & Accounting. “With today’s increased focus on – and threat to – both firm and client data security, tax and accounting professionals need to securely interact with clients, quickly gather data, and conduct research. They can do so every step of the way through an assortment of technologies currently available to them, including portals and online tax organizers at the onset of the tax preparation and compliance workflow, and eSignatures at the end.”
Catching the essence of someone’s authorization is another challenge that, fortunately, can be remedied by a combination of e-signature and the use of mobile devices.
“We see the ability to use technology as a solution for the needs of the remote taxpayer as one of the necessary advances for the tax preparation market over the next several years,” Charles W. Petz, CPA, CFO and member of the board of directors at Petz Enterprises. “One of the key challenges on this front is getting signatures in a timely and efficient manner when you have an increasingly mobile and busy customer base. The good news is that with the ubiquity of mobile devices and smart phones we have been able to bridge this gap with ease-of-use tools such as remote signature capture.”
“One area that firms can really benefit from is the adoption of an electronic signature solution for the digital signing of Form 8879,” Jon Baron, managing director of the professional segment at Thomson Reuters. “Tax season is becoming more compressed and is already hectic, therefore a solution that can reduce the amount of manual signatures, tracking and client coordination can really help."
Effectively handling documents and data is a necessity that can be improved by simply exploring recent advancements in such tools.
“There are many options to think about (high speed connections, high dpi scanner, electronic signature apps, to name a few), but I would recommend a secure online document exchange solution where you conveniently transfer files to and from clients without printing and mailing,” said Jamie Stiles, president of Drake Software.
“One technology that will make a significant contribution to tax prep is the ability to leverage digital ‘source data’ that is already available in multiple locations,” said Jim Buffington, CPA, customer liaison, ProConnect group at Intuit. “For example, W-2s, 1099s, 1095s information is already available in digital format from payroll providers, brokerages and healthcare companies. Since data collection and data entry comprise about 65% of tax preparation time, preparers can leverage these technologies to enhance productivity and also increase accuracy.”
Increasing productivity can be enhanced by practice management and workflow software.
“For many sole practitioners and professionals in small tax and accounting firms, the traditional tax season has evolved into a year-round opportunity to provide service and guidance to their clients,” said Satyan Penmetsa, general manager at Wolters Kluwer Tax & Accounting North America, Small Firm Segment. “Adopting a dedicated practice management software solution gives tax and accounting professionals smarter management of client deliverables and valuable insight into job profitability and revenue opportunity to grow their firm.”
Upgrading hardware, improving Internet speed and optimizing software now to enhance your 2017 tax season.
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- Written by: Joshua Fluegel
Clients assume you know every money-saving tax tactic in the book. By the end of tax season it certainly looks that way as well. What the client does not see is the years of combing through books, court cases and continuing education. This research is what makes you the authority for your clients and assures your value in the accounting profession. As this knowledge is the epicenter from which you stake your claim as a tax professional, the essential resource in the arsenal is tax research software. As most tax professionals have access to some sort of tax research resource, it is important every included feature is being used to maximum benefit.
The tax code itself is enough to get lost in and waste countless hours. It is important to get in and out of the required research as quickly as possible. It is also important to make sure the information retrieved is perfectly applicable thus rendering a desirable return on investment for the time spent.
“With all they have to do, CPAs can become more efficient by harnessing the power of technology,” said Lisa Fitzpatrick, vice president and general manager for tax and accounting at Bloomberg BNA. “Leveraging a comprehensive research platform with searchable source materials, news, and practice tools allows them to more quickly access a richer set of data to inform their analysis and planning, and ultimately provide better service to their clients.”
A question often asked and answered far fewer times is whether the task is done or not. So is true with tax research. With an opposing force as powerful as the IRS, the appropriate measures must be taken without over committing resources to a particular subject. A tax professional must know the functionality of his or her tax research software to be certain of information derived.
“We often hear that tax professionals are unsure while they are researching whether they have found all they need on a topic or whether they have ‘finished’ their research and have all of the option considered for their clients,” said Jill Weinstein, product line manager at Wolters Kluwer Tax & Accounting. “Tax professionals need to be comfortable using their research tools, and feel confident that they are getting the answers they need from the sources they trust. Using practice tools – like charts, checklists, decision trees – is a great way to help make sure you have all of your bases covered.”
Data is simply data until a solution can be extracted from it. This is why it’s important that tax research software provide means to not only extract information but discern its meaning to communicate to clients it as well.
“…we know that getting to your answer quickly is not the end of your tax research journey, said Brian Peccarelli, president of Thomson Reuters. “Tax practitioners expect to apply their answers to the issue at hand by taking advantage of practice aids and tools embedded directly in context of the research workflow – whether it’s a checklist to ensure all the implementation steps are covered, a calculator to quantify the impact, a form or statement to prepare on behalf of a client, or a sample letter that explains conclusions in plain language. When practice aids are thoughtfully integrated as part of the research workflow, it’s like having a roadmap to go from answer to action in one continuous process. This supports the tax practitioner in bringing demonstrable value to their clients.”
The tax code is subject to regulations, revenue rulings and court interpretation. It is constantly shifting, augmenting and altering its meaning depending on distinct case circumstances. Tracking interpretation in tax is key.
“Every serious tax practitioner needs to stay atop the latest developments in taxation,” said Sean Fitzpatrick, managing director, North American research solutions at LexisNexis.
By leveraging the tax research tools available a tax professional can help clients before tax season and after tax season for continued financial guidance.
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- Written by: Joshua Fluegel
A common problem for clients is their business getting in the way of running the business. A CPA can not only provide clients money-saving tax tactics but review clients’ financials to make sure they will be able to pay employees. This is where small business accounting software helps a CPA provide business owners an invaluable service.
“Accounting itself is a challenge for small businesses,” Mike Mc- Derment, CEO and cofounder of FreshBooks. “Owners would rather be focusing on their business than going through receipts, reports and a mountain of paperwork. It can be intimidating and even isolating for those that are not knowledgeable in the complexities of accounting.”
Compliance and managing the inflow and outflow of money require more hours from an accounting firm owner than there are in a day. However, software can help in both respects.
“One of the biggest challenges small businesses face is the impact of regulatory and compliance issues,” said Chuck Gossett, CEO of Cougar Mountain Software. “To avoid fines and penalties, businesses must always remit accurate and timely filings. For many small businesses, keeping tax tables up to date and calculating tax amounts correctly is a tedious task. To help solve this problem, comprehensive accounting software solutions… make use of subscription services that keep the tax rates and calculations up to date. Updates are quickly available and can be applied automatically, saving both time and the risk of data entry error.”
“Small business owners often wear many hats: founder, HR manager, social marketing strategist, bookkeeper, you name it,” said Karen Peacock, senior vice president and small business segment leader at Intuit. But unfortunately, with so much on a small business owner’s plate, they often don’t have the time, energy or training to manage their books and deeply understand their finances. “Using an online robust business management tool allows small businesses to easily track their finances, integrate apps to help them automate redundant tasks and access their data anytime, anywhere."
Making time to run a business is one thing but managing all the associated data is not only a requirement for tax purposes but is extremely useful when used in realtime.
“Reliable and consistent accounting data, in a protected system environment seems basic, but it is still seen as one of the biggest challenges when it comes to small businesses,” said Luis Murguia, global head of SAP Business One at SAP Accounting. “In today’s digital economy era, what enables small businesses to drive their margin and revenue is the ability to connect data from their inventory, sales and purchase orders, and customers. The comprehensive analysis of accounting data can help to identify errors and even possible frauds.”
“Small business owners cited the economy (28%) and raising capital (15%) as top hurdles,” said Russ Fujioka, U.S. president of Xero. “The cloud, which allows small business owners the ability to access business data anytime and anywhere, is the single most important element that can help small business owners move the needle."
A genius in tax code and law may enjoy managing their own firm’s accounting, then take responsibility for the firm’s clients and appropriate some of the burden using the tools available.
“The biggest challenge for small businesses remains the same as it has always been: proper accounting has great benefits (compliance, business insights), but it’s not a natural part of the small business owner’s skill set,” Kirk Simpson, CEO and co-founder of Wave. “Accounting software that assumes any degree of expertise in accounting, will be a bad match for the owners of small and micro-businesses. This does not mean that accounting software should be ‘dumbed down’ — real double-entry software is as important as ever. But the software workflows must be made to match the business owner’s processes and abilities.”
“Small businesses are often under-resourced and lack accounting expertise,” Raj Sabhlok, president of Zoho Corporation. “Accounting software and features that can mask the technical accounting nuances are most important for small businesses. Owners don’t have to be an expert in order to financially manage their business, nor to generate accountant ready financial statements. More importantly, business owners are able to see the financial health of their business at a click of a button.”