Compliance Requirements to Establish an Agreement With IRS

In order to be eligible to resolve an outstanding federal tax liability on a voluntary basis (i.e. installment agreement or offer in compromise), as opposed to having it forcefully resolved through collection action such as levies, garnishments, and the seizure of assets, the IRS has two basic requirements.  The first requirement is that you are in filing compliance.  This means that all outstanding tax returns that are required to be filed have been filed.  Most people do not have a difficult time understanding this requirement once it is determined whether or not there are delinquent returns that need to be filed.

The second requirement is that the taxpayer is current with all required federal tax deposits and/or quarterly estimated deposits.  There are several different possible deposits that may need to be made to be considered current by the IRS.

One type of deposit is the Estimated Deposit Requirements for Individual Income Taxes. 
 The deposit requirements for individuals tend to be simpler than that of a business, because there is only one deposit that may be required. If a federal tax liability has been assessed against you personally, and you are seeking a voluntary resolution such as a payment plan or an offer in compromise, it is a prerequisite that any required quarterly estimated payments be made.

In order to determine if you are required to make a quarterly estimated payment, the first and best step is to review your prior year’s federal income tax return, Form 1040.  If the return was filed with a tax liability of over $1,000 (after subtracting federal tax withholding and credits), and you expect the federal withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2015 federal tax return, or 100% of the tax shown on your 2014 federal tax return (only applies if your 2014 tax return covered 12 months – otherwise refer to 90% rule above only), then you are required to make quarterly estimated payments toward your next income tax return as it is presumed that the next income tax return will be similar to the current one.

There are two ways of determining the amount of each quarterly estimated payment that needs to be made.  The simpler way is to just divide the tax liability of the last and most recently filed return by four.  For example, if you filed your 2014 1040 income tax return with a tax liability of $5,000, you are required to make four quarterly estimated payments of $1,250 toward your 2015 1040 income tax return.  If you anticipate your next return to be substantially different than your present return, another means of determining the amount of each quarterly estimated payment is to complete an IRS estimated tax worksheet.  This can be found at on the IRS website.  The worksheet is a series of calculations and estimates that will determine the amount of the quarterly estimated payments in an attempt to eliminate any future liability on the next filed return.

If you are an individual whose income is derived from a W2 wage, one fairly simple method of eliminating the need for a quarterly estimated payment is to increase the income taxes being withheld from your wage

 

The required quarterly estimated payments are due on April 15th, June 15th, September 15th, and January 15th. However, you do not have to make the payment due on January 15th, if you file your tax return by February 1st and pay the entire balance due with your return.

 The second type of deposit is IRS Deposit Requirements for Businesses. 
 Similar to an individual, a business may also have to make quarterly estimated payments toward its future income tax return. The same criteria for individual estimated payments apply to a business.  However, in addition to being current with quarterly estimated payments for income tax, the business also has to be current with its required federal 941 employment tax deposits and possibly with its 940 unemployment tax deposits.  The 941 employment tax deposits are due either on a quarterly, monthly, or semi-weekly deposit schedule depending on the amount of wages that are issued each quarter.

Additionally, the business may be required to make quarterly deposits toward its future 940 unemployment tax return.  The amount is determined by looking at the current quarter’s tax liability.  If the 940-unemployment tax is $500 or less during that quarter, you can carry it over to the next quarter and not make a deposit.  You can continue to carry the tax liability over to the next quarter until the cumulative tax is more than $500. At that point, a tax deposit is required for the current quarter.  The deposit is due by the last day of the month after the end of the quarter.  If your tax for the next quarter is $500 or less, you are not required to deposit your tax again until the cumulative amount is more than $500.  If the cumulative tax liability never exceeds $500 then it is acceptable to pay the liability with the return at the end of January of the following year when you file the return.

The IRS requires deposit and payment compliance to obtain voluntary resolution for one important and primary purpose.  The IRS wants to ensure that a liability is not incurred on a future return.  It is a critical requirement for any voluntary resolution of a back tax liability to not accrue any additional tax liability.  The IRS does not want to grant voluntary resolution such as a payment plan to resolve a back tax liability if the payment plan is likely to default in the near future when you file your next return with a liability. Thus, the IRS has established these requirements in an attempt to ensure that a future liability does not occur, thereby allowing the taxpayer to adhere to the terms of their approved resolution plan.

The above article has been prepared by Greg Johnson.  Mr. Johnson is a tax attorney and of counsel at The McGuire Law Firm.  Greg has represented many individual and business taxpayers before the IRS regarding many different issues.

Identifying Tax Related Identity Theft

Identity theft has become a very common crime and can impact individuals in many ways.  Apart from an identity thief stealing your identity and obtaining credit cards or bank account information, an identity thief may use your personal information and steal your identity for tax purposes and tax related theft.  Although, the Internal Revenue Service and state taxing authorities work hard to prevent identity theft, you can assist your assist by being aware of common signs of tax related identity theft.  The article below has been prepared by a tax attorney to provide information and what you may consider as warnings or red flags that your identity has been compromised, and the thief using your identity for a tax related purpose.

  • When you go to file your tax return electronically, the return is rejected. The message may state that a return with a duplicate social security number or tax identification number has already been filed.  This may mean that someone has used your social security number to file a tax return.  You may want to check the social security number you used, but if the social security number you are using is correct, your identity may have stolen.  The Internal Revenue Service has an identity theft affidavit (Form 14039) that can be filed with the IRS.  Please see the instructions for Form 14039, and any related form.
  • The Internal Revenue Service may forward you a letter requesting that you verify whether you have filed a return with your name and social security number. When the IRS receives a suspicious return, the IRS may hold the return and mail a letter to the taxpayer to verify certain information.  If you did not file the return, it is likely someone is attempting to steal your identify for a tax related purpose.
  • If you receive a W-2 or a 1099 (or other items) reported to you for income you did not receive or from third parties you did not work for, or perform services for, someone may have compromised your identity and reported income under your social security number.
  • You receive a check from the United States Department of Treasury as a refund that you did not claim. If the refund is incorrect, you likely do not want to deposit the check, and should contact the IRS or a tax attorney.
  • You receive a wage and income transcript, account transcript, tax return transcript or other tax return transcript from the Internal Revenue Service that you did not request. A identity theft may be attempting to test or receive information via transcript.

The Internal Revenue Service has information available regarding identity theft, including Publication 4524.  The article above has been prepared for informational purposes by John McGuire, a tax attorney at The McGuire Law Firm.  Please consult with your tax attorney, tax advisor or other parties regarding our specific questions.

Tax Identity Theft by Denver Tax Attorney

How is a Profits Interest in an LLC Taxed?

If I am given a profits interest in a partnership or limited liability company, how am I taxed?  It is relatively common for an LLC (for purposes of this article, a partnership and LLC may be considered the same type of business) to give an interest to a service provider.  The taxation of the interest is different depending upon the type of interest as a capital interest can be different than a profits interest.  The article below discusses a profits interest.  A profit’s interest is a type of equity in the applicable business, and is designed to give the individual a predetermined share of future growth in the value of the business.  A profits interest can be differentiated from a grant of stock within a corporation because the profits interest would not entitle the holder of the profits interest to share in the businesses current value.  Rather the profits interest provides for a share of future profits and appreciation within the business, as opposed to an interest or share in the company’s current value.  This position, is what dictates the tax treatment of a profits interest when provided to the holder of the interest.

 

Initially, courts appeared to have mixed feelings regarding the taxation of a profits interest.  In 1974, a federal court of appeals held that the receipt of the profits interest should be considered taxable income when the interest had a readily determinable market value.  However, later another federal court made a determination that would appear to suggest the service provider receiving a profits interest and acting as a partner within the company could receive the interest without the interest being taxed upon receipt.

 

Revenue Procedure 93-27 was issued by the Internal Revenue Service in 1993 to provide guidance regarding the taxation and treatment of a profit’s interest in a partnership.  The Internal Revenue Service used a hypothetical liquidation test in the Revenue Procedure 93-27 analysis.  Under the hypothetical liquidation analysis, a liquidation would not give the profits interest holder a share of the partnership assets if the partnership liquidated all assets and distributed cash to the partners.  In terms of the timing of the liquidation, the liquidation is deemed to occur at the time of the partner receives the profits interest, and thus there would have been no real increase in the value of the business from the time of receipt to the time of the deemed liquidation.  This analysis entitles the holder of the profits interest only to a share of future profits and appreciation in the business, rather than an immediate interest in the partnership’s current value.  Thus, when a partner receives a profits interest for services, or for the benefit of the partnership in a partner capacity, or even in anticipation of being a partner, the IRS will likely not treat the receipt of the interest as a taxable event.  It is important to note that the IRS may not treat the receipt of a partnership interest as a non-taxable event if in fact the profits interest would bring about a substantially certain and predictable amount of income to the recipient.

 

The article above has been prepared by John McGuire of the McGuire Law Firm.  As a tax attorney and business attorney, John’s practice focuses primarily on taxation issues and business transactions.

Denver Tax Attorney

Denver Tax Attorney

Is Your Business a Hobby?

Is your business considered a hobby by the Internal Revenue Service?  One of the key questions or issues is whether or not your business is an activity engaged in for profit.  While you may feel your business is established and engaged in for a profit, the IRS may feel otherwise, and the Internal Revenue Code can impact your deductions.  This article has been prepared by a tax attorney to provide additional information regarding this issue.  Please consult with your tax advisors or tax attorney regarding any questions you have.

The pertinent section relating to activities engaged in for profit is section 183, which is often referred to as the “Hobby Loss Rule.”  IRC Section 183 limits deductions that a business may anticipate they can claim when the business is not engaged for a profit.  As a business owner you can deduct ordinary and business expenses when conducting your business activity.  However, if your business activity is deemed to not be engaged in for the production of income (a profit), you may not be able to deduct some or all of the expenses.

The IRS will consider certain facts and circumstances when determining whether your activity or business is a hobby, or an activity engaged in for profit. Some of these issues are stated below.

 

  • Do you depend upon the income? Do you rely upon the activity or business to provide income that supports you?
  • What amount of effort and time do you put into the activity, and does the amount of time and effort show you intended to make a profit?
  • What is your knowledge base in regards to the activity and does such knowledge provide you with the ability to make a profit?
  • Have you been successful in making a profit with the applicable activity or a like activity in the past?
  • Has the activity made a profit in some of the taxable periods?
  • What actions or methods have you implemented to improve profit or allow the activity to be profitable?
  • If the activity has sustained losses, are the losses explained by circumstances beyond the taxpayer’s control?
  • If the activity has sustained losses, are the losses due to reasonable or anticipated start up expenses?

 

If an activity makes a profit in at least three of the last five years, then the IRS should validate the business as an activity engaged in for profit.  If the activity is deemed a hobby (not for profit), the losses from the activity cannot be used to offset other income.  In short, the activity cannot produce a loss.  Thus, the allowable deductions and expenses for the activity cannot exceed the gross income (gross receipts) of the activity.

If you have questions related to your business income, deductions and related matters, speak with a tax attorney at The McGuire Law Firm.  Free consultation with a tax attorney in Denver or Golden Colorado.

IRS Lien Release With Offer in Compromise Acceptance

A Notice of Federal Tax Lien can provide a number of problems for a taxpayer.  Recently, the IRS has been releasing the Notice of Federal Tax Lien when a taxpayer successfully has an offer in compromise accepted by the IRS and pays the offer amount.  This is a wonderful benefit to the taxpayer as the IRS did not always release the tax lien upon payment of the settlement amount, but rather would wait for the five-year compliance period after the offer has been accepted.

The video below has been prepared by a tax attorney at The McGuire Law Firm to provide additional information regarding this issue.  If you have any type of tax issues with the Internal Revenue Service, contact The McGuire Law Firm to speak with a tax attorney.

Funding a Buy Sell Agreement

When business partners enter into a buy sell agreement, one of the pertinent issues or items for the partners to discuss is how the buy-out will be funded. The purchasing business entity or purchasing party can obtain the funds to purchase business interests from a variety of sources, which are discussed below.

The purchaser always has the ability of self-funding the purchase.  If the purchaser does not have the required cash to purchase the interest, issues may arise whereby the seller will request some type of security interest.  Furthermore, if the purchaser lacks the cash to purchase the interest in full and equity in assets to fully secure the seller, a seller may request the buyer obtain a life insurance policy whereby the seller or the seller’s designee is the beneficiary of the policy until the purchase terms have been complied with.

Apart from a self-funded purchase, the most common source of funds for a buy-sell agreement is insurance.  Multiple types of insurance such as life insurance or disability insurance could be used to fund the buyout of the seller’s interest.  Where the triggering event for the purchase of the applicable interest is death, life insurance on the individual can be a very clean means by which to fund the purchase.  However, what if a disability or the retirement of an individual leads to the need to purchase such individual’s ownership interest?  Under these circumstances, life insurance may not be very useful as a source for funds.  To be useful as a source of funds for a buyout, a life insurance policy may need a significant cash value.

When the buy-sell agreement is between the owners of the business, it will likely be necessary for each owner to carry insurance on the life of each of the fellow business owners.  Therefore, multiple policies may be needed if each owner is separately insured.  Further, consider how many policies may be needed if there were say 8 different partners or business owners? If a redemption agreement is used, the owners do not insure the lives of the other owners, but rather, the business must purchase a joint-life policy or separately insure the life of each owner who the business has the obligation to redeem.

The types of life insurance policies could include term life insurance, cash value life insurance, whole life insurance, universal life insurance and survivor joint life insurance.  In regards to the need to purchase an owners interest because of a disability, the owners should consider disability insurance.  In many respects, it may be more likely for a business owner to be disabled than pass away during a time in their life when they still own the business interests and thus a purchase would be necessary.  Therefore, business owners should consider the need for disability insurance to fund a buyout, in addition to having life insurance available.

This article was written by John McGuire, a business attorney and tax attorney at The McGuire Law Firm in Denver, Colorado. Please remember this article was prepared for informational purposes and you should always speak with a business attorney or other counsel to discuss your specific issues & circumstances.

Denver Business Attorney

 

 

Valuing Real Estate for an Offer in Compromise

When calculating an offer in compromise amount, one of the biggest issues is a taxpayer’s equity in assets.  If a taxpayer owns a home the equity in the home will need to be accounted for calculating the offer amount.  This brings about the pivotal question, how is real property or a home valued for the purposes of an offer in compromise with the IRS?  Unlike a bank account, stocks, bonds or other account with an easily ascertained fair market value, the value of land and/or a home is more subjective and at issue.

That being said, recently our position has to been to value the home at the most recently assessed tax assessment from the county.  Generally speaking, the Internal Revenue Service has agreed with this valuation.  If a taxpayer thinks the value of their home is less than the tax assessed value, you will want a formal appraisal conducted and you will need to show why the value is less than the tax assessed value.

If you have any questions related to a tax settlement or offer in compromise, please contact The McGuire Law Firm to speak with a tax attorney.  We offer a free consultation with a tax attorney to all potential clients.

Denver Tax Attorney

IRS Form 14654

IRS Form 14654 is used when submitting documents for the Streamlined Offshore Voluntary Disclosure Program.  The video below has been prepared by a tax attorney at The McGuire Law Firm to provide additional information regarding the Form.  You can contact The McGuire Law Firm to speak with a tax attorney regarding your tax matters, including foreign tax accounts and assets.

Depreciation and Impact on Basis

When an asset is placed into service and depreciation is taken as a deduction, the adjusted basis of the asset will be impacted.  The video below has been prepared by a tax attorney at The McGuire Law Firm to discuss this issue.  Please remember to always consult your tax attorney, business attorney, CPA and/or other advisers regarding your specific facts and circumstances.

John McGuire is a tax attorney and business attorney at The McGuire Law Firm.  You can contact John at 720-833-7705 or via the website at: https://jmtaxlaw.com/contact-us/

 

What is a 401(k) Deferral?

Contributions to a 401(k) are qualified deferrals.  This means that the amount should not be included in your income when calculating income tax.  You can check your W-2 and the amount of taxable wage should not include the 401(k) contributions.  The video below has been prepared by a tax attorney at The McGuire Law Firm to provide additional information regarding this matter.