Denver Tax Attorney Discusses Collapsible Partnership Rule With Differing Interests

In previous articles, the collapsible partnership rule has been discussed.  The article below has been prepared by a tax attorney to further our discussion of this rule and provide an example of the rule when partner’s allocation of profits and losses are different.  Many partnership agreements call for special allocations whereby one partner (or multiple partners) may receive a different allocation of profits and/or losses and thus it is beneficial to apply such a situation to the rule.

In this example, we will assume that John, Jimmy & Jeff are the members of a cash basis partnership, J Cubed LLC and that each John, Jimmy & Jeff have a 1/3 interest in the capital of the partnership and partnership losses.  John, however has a ½ (50%) interest in the partnership profits because both Jimmy & Jeff realized and acknowledged that John is the true brains behind the business and overall business operations.  In regards to the remaining 50% interest, Jimmy and Jeff each have a ¼ interest in partnership profits.

J Cubed LLC has $12,000 in cash, $10,000 in accounts receivable ($0 basis) and $21,000 in investments with a $15,000 adjusted basis.  John, Jimmy & Jeff each have an adjusted basis of $9,000 in their partnership interest.  John has a value of $17,000 in his partnership interest and Jimmy & Jeff each have a value of $13,000 in their partnership interest.  John’s value is $17,000  because he would be allocated 50% of the profits when the receivables are collected ($5,000) and 50% of the profits when the investments are collected ($3,000).

John eventually gets tired of Jimmy & Jeff’s incompetence and wishes to sell his partnership interest, and start a new business.  John sells his interest to Terry (who has little to no idea about Jimmy and Jeff) for $17,000.  John’s total gain would be $8,000 ($17,000 less $9,000).  Of the $8,000 gain $5,000 would be treated as ordinary income because $5,000 would have come from accounts receivable and $3,000 would be treated as capital gain from the investments.  John will use this $8,000 gain to start a competing business and eventually, J Cubed LLC (which Jimmy & Jeff decided to dba J Squared after John’s departure) will dissolve.

Because the collapsible partnership rule only applies if a partnership owns ordinary assets, we should take a minute and define ordinary assets or ordinary income assets.  An ordinary income asset would be an asset owned by the partnership that would give rise to ordinary income if sold by the partnership at its fair market value.  Two categories of ordinary income assets exists under the collapsible partnership rule, those being unrealized receivables under IRC Section 751(c) inventory under IRC Section 751(d).  Of course, these categories are fairly broad and thus could trigger application of the rule whenever a partnership owns an asset with ordinary income potential.

Contact The McGuire Law Firm to speak with a tax attorney in Denver if you are considering selling your partnership interest.  In addition to tax implications, there are other considerations to make and discuss between the partners, and of course, the proper documents need to be drafted.

Schedule a free consultation with a Denver tax attorney at The McGuire Law Firm!

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Denver Tax Lawyer Discusses Offer in Compromise Calculation

How much can I settle my IRS tax debt for?  I have heard, and answered this question many many times.  Of course, this is a common question for an individual or a business owner that owes taxes to the IRS.  My answer is always, “it depends.”  This is because the amount that the IRS will accept for an offer in compromise to resolve a tax debt is based up an equation related to a taxpayers ability to pay and not necessarily the total amount of the taxes owed to the IRS.  The IRS calculates an offer in compromise based upon a taxpayer’s reasonable collection potential which correlates to a taxpayer’s equity in assets and disposable income.  In regards to equity in assets this includes all assets from your home, car, retirement account, jewelry and anything and everything you own.  You may be able to receive a deduction in the fair market value of an asset for certain assets.  In calculating disposable income, the IRS will look at total income and your expenses, but they have established allowable expenses for items such as food, clothing, housing, utilities, transportation and other expenses.

The video below has been prepared by a Denver tax lawyer to provide additional information regarding the calculation of an IRS offer in compromise.  If you have a tax debt to the IRS and are questioning your ability to settle such debt, speak with a Denver tax lawyer at The McGuire Law Firm through a free consultation.

Denver IRS Tax Relief

What is IRS tax relief?  You may have heard this statement on the radio, tv or elsewhere but what do you think it means?  A tax attorney from the McGuire Law Firm has prepared the video below to provide what they feel constitutes IRS tax relief.  In short, such relief is likely to involve the assistance and help in resolving an IRS problem or tax matter.  Thus, resolving a tax debt or tax audit would likely be considered tax relief.  Further, helping a taxpayer remove tax penalties or settling a tax debt would also be considered tax relief.

Please watch the video below and contact The McGuire Law Firm if you feel our knowledge and experience in resolving IRS tax matters could benefit you.  We offer a free consultation to all potential clients.

Denver Tax Lawyer Video on Schedule A and Itemized Deductions

When you file your 1040 Individual Income Tax return, if you itemize your deductions, you file a Schedule A with your income tax return.  Generally, you will itemize your deductions if these deductions are greater than the standard deduction allowed.  Examples of itemized deductions would include: mortgage interest, real estate taxes, medical expenses (subject to 7.5% of your adjusted gross income), state income taxes withheld, charitable contributions and un-reimbursed employee expenses.

Taking these deductions will lower your taxable income and thus federal income tax.  It is also important to note that at certain income levels, these itemized deductions are phased out, meaning that you may only be able to take a certain portion of the total itemized deductions.

You can discuss your tax questions and matters with a Denver tax lawyer at The McGuire Law Firm.  A free consultation is offered to all potential clients.  Hopefully, the video below provides some additional information regarding the Schedule A and itemized deductions!

Denver IRS Offer in Compromise

The vast majority of individuals know that they can settle a tax debt with the IRS through an offer in compromise.  As a tax attorney, almost every individual and business that has owed taxes to the IRS has asked me questions related to an offer in compromise.  The article and video below should provide comprehensive information regarding an offer in compromise.

What is an Offer in Compromise?

An offer in compromise is an agreement with the IRS where an individual or business taxpayer offers to pay an amount to the IRS that is less than the total amount of taxes owed to satisfy their liability.  Many people would call this a tax settlement or an accord and satisfaction with the IRS, and it pretty much is.

What is the Offer in Compromise Equation or How Much do I have to Pay the IRS?

I am always asked, “how much do you think it will take to settle my taxes with the IRS?”  Many people have the misconception that there is a percentage that can be offered to the IRS to settle their liability or that the IRS will automatically accept.  The truth is, the amount the IRS will accept to settle the tax debt is based upon each taxpayer’s ability to pay and what the IRS considers to be a taxpayer’s reasonable collection potential (RCP).  A taxpayer’s RCP is determined by their equity in assets and their disposable income, and then general equation for an offer in compromise would look like:  Equity in Assets + Disposable Income X 12 (or 24).  Please note that prior to May of 2012, the IRS would multiply disposable income by 48 or 60, which often created situations whereby the IRS would accept an offer, but the taxpayer without assistance had no way to satisfy the debt within the time period the IRS wanted payment.

Equity in Assets:

Equity in assets would be calculated by taking the fair market value of the taxpayer’s assets from their home, car, bank accounts, retirement accounts, stock, gun collections, jewelry, art and all other assets (including business interests) less any liability associated with the asset such as mortgage or car loan.  It is important to know that the taxpayer is allowed an exemption for certain assets and a reduction in the fair market value of certain assets.  For example, a taxpayer is allowed approximately a $3,450 exemption for each personal vehicle, up to two vehicles.  Thus, if a taxpayer had a 2010 Ford F150 with a fair market value of $20,000 and a car loan of $10,000 the equity in such vehicle that would be included within the taxpayer’s offer would be $6,550.  This would be calculated: $20,000 (Fair Market Value) less $10,000 (car loan) less the $3,450 exemption.  If the car loan exceeded the fair market value of the vehicle, then no equity would be included from such vehicle in the offer amount.  An example of a reduction of the fair market value would be that generally, the IRS will allow a 20% reduction in the fair market value of a taxpayer’s primary residence when calculating the equity in such property.  Thus, if a taxpayer owned a house with a fair market value of $300,000 and a mortgage of $200,000, the amount of equity from such property included in the offer amount would be $40,000.  This would be calculated: $300,000 (fair market value) multiplied by .8 less $200,000 mortgage= $40,000.  You could also multiply $300,000 by 20%= $60,000 and then subtract such amount from the fair market value of the property.

Disposable Income:

Disposable Income is calculated by taking the taxpayer’s total household income less the taxpayer’s allowable expenses.  I state “allowable” expenses because the IRS may not allow all of the taxpayer’s expenses and the IRS has established national standards for allowable expenses that will provide an amount that the IRS will allow the taxpayer to use or claim as an expense.  Items such as food, clothing, housing, utilities and transportation have an allowable standard that is all the taxpayer will be allowed to claim as an expense.  For example, a single taxpayer living in Denver, Colorado may be allowed $1,250 for housing and utilities.  If the taxpayer was actually paying $1,750 for housing and utilities, the taxpayer would only be able to claim $1,250 as an expense when calculating disposable and essentially the excess $500 would be considered disposable income by the IRS.

Now that we know the offer equation and have a better understanding of how the IRS will view equity in assets and disposable income, lets provide an example.  Assume Jeffrey owes the IRS $123,000.  Jeffrey has total equity in assets after exemptions and reductions in fair market value of $12,000.  Jeffrey has monthly disposable income of $1,500 after all allowable expenses are deducted from his monthly income.  Jeffrey’s offer amount would be $30,000 ($12,000 + $1,500 x 12) or $48,000 ($12,000 + $1,500 x 24).

What Terms of Payment Plan Will the IRS Allow for my Offer in Compromise?

When preparing your offer in compromise you must select one of two options for payments to the IRS.  Option one is considered a cash offer whereby you pay 20% of the offer amount when submitting the offer, and the remaining offer amount is paid over five or fewer payments within a certain time period of the IRS accepting the offer.  Generally, the IRS will want the remaining 80% of the offer within 3-6 months of acceptance.  When offering to pay under such terms, the taxpayer’s disposable income is only multiplied by 12 as opposed to 24, which could be a very big advantage to the taxpayer.  If you were offing $20,000 to settle the liability, you would make a payment of $4,000 when submitting the offer and the remaining $16,000 would be payable upon acceptance within a reasonable time frame.  Option two allows the taxpayer to pay their offer amount over 24 months.  The taxpayer’s disposable income is multiplied by 24.  If a taxpayers was proposing an offer amount of $24,000 the taxpayer would make a payment of $1,000 when submitting the offer and would continue to make $1,000 per month payments to the IRS until a determination or final agreement had been reached.  If a taxpayer’s offer in compromise is not accepted, the payments are applied to the total liability.

How do I Prepare and Submit an Offer in Compromise to the IRS?

You must complete the appropriate financial statement(s) and Form 656.  If you are attempting to resolve an individual liability, such as a 1040 debt, you would complete Form 433A OIC.  If the individual attempting to resolve their 1040 debt owns a business, they will likely request that you complete Form 433B, which is a business financial collection statement.  A business attempting to resolve its debt with the IRS would prepare and submit Form 433B OIC.  After completing the necessary financial statements, it is imperative that you include all of the required attachments, which will be dictated by your circumstances, but might include, bank statements, pay stubs, most current statements for retirement accounts and verification of other items as stated on the statement.  Form 656 states the taxpayer’s information, the periods of tax that are included within the offer, the reason for the offer, offer amount and terms.  Once all statements and forms have been compiled, your offer will be submitted to an IRS Offer in Compromise Unit.  There are two main offer units, one in Holtsville, NY and the other in Memphis, TN.  The 656 Instructions will state which unit you should forward your offer too, which is determined by where you live.  Further, these instructions will provide for the current application fee, which must be enclosed when the offer is submitted.

What is the Procedure with the IRS Offer Unit?

Within two to four weeks of submitting your offer, you should receive a notice from the offer unit that the offer has been received and generally this notice will state that you will be contacted within 90 days.  Don’t hold your breath though!  Often the only contact I receive in 90 days is another notice stating that we will be contacted within another 90 days.  Upon receipt, the offer unit will check to make sure the offer can be processed.  Generally, this means they will check for the correct payments and forms, and may check to ensure the taxpayer is current and compliant with all tax obligations.  If the taxpayer is not current & compliant, the offer will likely be returned, and the taxpayer will not have appeal rights.  Thereafter, the offer will be forwarded to an offer examiner who at some point in time will contact the taxpayer or the taxpayer’s Power of Attorney.  The examiner may or may not request additional information and could issue an immediate determination of which must go through their manager for review and final acceptance.  It is fairly typical for the examiner to request additional information, updated information and/or have some questions.

The examiner will eventually issue a determination in writing.  This determination has four potential outcomes.  One, the offer could be returned, which generally only occurs when the taxpayer is not in compliance or has not made one of the appropriate payments.  Two, the offer could be accepted as proposed.  Three, the offer examiner may state that the offer cannot be accepted at the amount proposed (is actually rejected), but if the taxpayer increases their offer amount to a specific figure, they will recommend acceptance.  Four, the offer is rejected because the examiner feels the taxpayer has the ability to satisfy the tax liability in full.

Outcome one is bad as you have no appeal rights with the IRS Appeals Office and your only real option is to resubmit another offer.  Outcome two is wonderful- your offer has been accepted and you can settle your tax debt!  Outcome three may be great or maybe not great as it will depend upon how much the examiner has requested you increase your offer amount too.  Outcome four, may be disappointing but is not the end of the road.  If your offer is rejected under outcomes three or four above, you can still provide additional information to the examiner for reconsideration and often I have seen a successful outcome with the examiner after an initial rejection.  Even if the examiner and offer unit will not change their initial position and rejection determination, you have the right to request an appeal of their decision with the IRS Appeals Office.  Again, I have submitted and negotiated offers that were initially rejected, but later accepted through an appeal.  Thus, if you offer is initially rejected, do not lose hope!

Other Important Issues & Considerations Regarding an Offer

When considering whether or not to submit an offer to the IRS, you should know that although, there is a stay of enforcement while the offer is being reviewed, penalty and interest will continue to accrue, and the collection statute is tolled (is not running).  Thus, I would only recommend submitting an offer of which has at least a realistic possibility of being accepted, if not better.

If your offer is accepted, recently the IRS has been releasing the federal tax liens within 30 days of the offer amount being paid.  However, in addition to paying the offer amount that you have agreed to pay, you must also remain current and compliant for generally a five year period following acceptance of the offer.  Thus, the failure to timely pay taxes or file a return could cause the offer to default.  If the offer defaulted, you would be responsible for the unpaid debt, along with penalty and interest.

If you are questioning your ability to settle your tax liability with an offer in compromise, please consider speaking with a tax attorney at The McGuire Law Firm.  A free consultation is offered to all potential clients, and a reasonable fee may be worth having an experienced tax attorney prepare the documents and negotiate with the IRS.

Denver IRS Offer in Compromise

Video on IRS Trust Fund Recovery Penalty by Denver Tax Attorney

Quite often a client will be in my office and they will state that their business has a 941 tax debt (employment tax debt).  This generally occurs because the business is tight on cash flow and thus the employees will be paid their net checks, but the taxes withheld will not be paid to the IRS as they are supposed to be.  When this occurs, a portion of the taxes known as the trust fund can be personally assessed to one or multiple individuals.  That is right, individuals can be personally responsible for certain business taxes and often a business owner is shocked (and scared) to learn this fact.

The trust fund portion of the 941 tax debt is the employee’s portion of the social security and Medicare tax and the employee’s federal withholding tax.  Thus, if you looked at a 941 tax return, and no tax payments had been made, you could multiply the social security and Medicare tax by 50% and add this amount to the total federal income tax withheld and this would be the trust fund amount for the applicable quarter.  This is the amount that individuals can be held responsible for.

When a 941 tax debt is due, a revenue officer from the IRS will conduct an interview known as the 4180 Interview to determine the willful and responsible parties.  The willful and responsible parties will receive a proposed assessment of the Trust Fund Recovery Penalty.  You have 60 days from the date of the proposed assessment to protest the assessment, and if the assessment is not protested, the individual will then have a tax debt under their social security number.  Thus, the IRS could file a tax lien that would attach to your personal assets, and can collect the trust fund from the individual even if the business is making payments towards the tax debt.  Therefore, a 941 tax liability is a very serious matter, and I would recommend that any business with a 941 tax debt that cannot be immediately paid, speak with a tax attorney.  You can speak with a Denver tax attorney at The McGuire Law Firm through a free consultation!

The video below has been prepared by a tax lawyer at The McGuire Law Firm to provide additional information regarding the IRS Trust Fund Recovery Penalty.

941 Federal Tax Deposits Discussed by Denver Tax Attorney

As an employer you are required to withhold income tax and self employment taxes and remit these taxes to the Internal Revenue Service via federal tax deposits.  The frequency of the deposits is dictated by your tax liability.  Typically, a deposit will be required to be made with every payroll, every month on or before the 15th or with the 941 return.  A taxpayer can mail in payment or a very easy way to make the payment is through EFTPS.

The failure to timely make your federal tax deposits can lead to multiple issues and problems such as:

1) The failure to deposit penalty

2) The failure to pay tax penalty

3) 941 Employment Tax Debts

4) Personal Assessment of the 941 Trust Fund Portion to Individuals

As indicated above, 941 taxes are considered a trust fund tax, and thus when the tax is not paid, the trust fund portion can be personally assessed to one or multiple individuals involved with the business, and the IRS can collect from both the business and responsible individuals.  Publication 15 (also known as Circular E) can also be a useful resource for business owners and tax professionals.

The video below has been prepared by a tax attorney to provide additional information regarding federal tax deposits.  You can speak with a Denver tax attorney at The McGuire Law Firm if you have any questions regarding your depositing requirements or other 941 matters.  John McGuire has assisted many businesses with 941 tax related issues and debts, and has resolved many issues for individuals related to the trust fund portion.  All potential clients receive a free consultation and we would welcome the opportunity to meet with you!  Offices in Denver and Golden for your convenience.



S Corporation Election and Requirements by Denver Business Attorney

To become an S Corporation (or to be taxed as an S Corporation) an election is made with the Internal Revenue Service.  In addition to such election, an S Corporation must meet certain requirements related to: it’s shareholders, types of shares and numbers of shares.  The video below has been prepared by a Denver business attorney at The McGuire Law Firm to provide additional information regarding the S Corporation Election and some of the requirements.

Please feel free to contact The McGuire Law Firm to schedule a free consultation with a business attorney or tax attorney.

Denver IRS Tax Problems

What is an IRS tax problem?  You may have seen or heard commercials regarding IRS tax problems, but what would constitute such a problem?  As a tax attorney I have witnessed many tax problems and the article and video below outlines and discusses these situations.

IRS Tax Audits

An IRS tax audit would certainly be considered an IRS tax problem to most individuals or businesses, especially if they were the taxpayer being audited by the Internal Revenue Service.  The IRS can audit taxpayers at random, or many tax returns that are audited are chosen because an item on the return was flagged.  For example, maybe the taxpayer’s total expenses seemed very high in relation to their total income and number of years in business.  Maybe a specific expense such as travel and/or meals and entertainment appeared high in comparison to the taxpayer’s income and other expense.  Not only is the audit a tax problem by itself, but such audit may lead to other tax problems such as the audit of additional tax periods and/or the taxpayer being assessed additional tax liabilities.

IRS Tax Liability

A tax liability would certainly be considered an IRS tax problem to all taxpayers as well.  The IRS can be a formidable creditor and has the power to file a Federal tax lien, levy bank accounts, garnish wages and even seize assets.  Additionally, the assessment of penalty and interest to the tax liability only makes it harder to repay the debt, and interest and penalty continue to accrue until the debt is paid.  The good news is, you have options to resolve such debt, such as an installment agreement, offer in compromise and other remedies & resolutions.  If you do owe a tax debt, it is recommended you work to resolve the issue as quickly as possible to prevent IRS enforcement action and the assessment of penalty and interest.  Common types of tax liabilities are outlined below.

1040 Individual Income Tax Liability:

This would mean that when you file your individual income tax return you owe an amount and have not paid such amount to the IRS.  Generally individuals accrue income tax liabilities because of the following circumstances: 1) They do not have enough federal income tax withheld.  This can be resolved by changing the number of exemptions on your W-4.  2) When an individual is self employed, they are required to pay all of the self employment tax and make estimated tax payments during the year.  Often a self employed individual is shocked at how much must be paid in self employment taxes, and when they have not made estimated tax payments, the tax bill adds up and thus there is significant tax due come April 15th that the taxpayer cannot afford to pay.  3) The taxpayer has specific transaction or 2 during the tax year and without the proper planning is not ready for the large tax bill.  For example, a taxpayer may have sold or disposed of an asset such as stock or a business interest and must recognize capital gain, or even have sold an asset (or been involved with a business that sold an asset) of which a large amount of depreciation had to be recaptured.  I have seen taxpayers receive a large sum of money through such as sale and then perhaps use the proceeds to satisfy other debts or spend the money elsewhere.  Thus, when the time comes, they have no cash to pay the tax.

941 Employment Tax Liabilities:

941 debts are a common tax liability and a very big tax problem.  Form 941 is the form used to report employment taxes.  If a business pays the net pay check to an employee but then does not pay the taxes over to the IRS, the business will accrue a 941 tax debt.  This creates a problem for the business because the IRS will look to collect the tax from the business and it creates a problem for certain individuals (typically the owners of the business) because they will be held personally responsible for the trust fund portion of the 941 debt (the trust fund portion being the employee’s share of the self employment taxes and federal withholding).  Thus, a 941 tax debt, creates an IRS tax problem for both the business and individuals within the business- kind of like a double whammy because the IRS can and will attempt to collect from the business and the responsible individuals.

IRS Enforcement- Tax Lien, Bank Levies & Wage Garnishments:

When taxes are not paid, the IRS files a Notice of Federal Tax Lien which attaches to all of the taxpayer’s assets.  A tax lien creates a problem because it impacts the taxpayer’s ability to transfer an asset without paying money to the IRS (if there is equity in the asset), and the ability to obtain lending is impacted and the taxpayer’s credit it likely to take a hit.  In addition, because the lien is public record, it is highly likely you will receive annoying solicitations from many tax companies promising to resolve your problem, but quite often, they will only take your money and leave you in a worse position.  Caveat emptor!

A bank levy issued by the IRS would certainly be an IRS tax problem unless of course you enjoy waking up to find no money in your bank account, checks & payments bouncing and your bank assessing fees for processing the levy and bounced checks.  Such a levy also indicates a tax liability, which stated above is a problem, and likely a bigger one at that!  The IRS may release or partially release the bank levy, but I have seen a taxpayer accrue hundreds of dollars in bounced check and payment fees because of a levy, and the bank can charge a levy processing fee.  Upon receipt of the bank levy the bank will hold the funds in your account up and to the levy amount for 21 days.  If the bank does not receive a release or partial release of levy in such 21 day time period, the bank will then release the funds to the IRS.

In addition to levying a bank account, the IRS can garnish wages and a wage garnishment is obviously a big problem because it cuts off your source of income.  Thus, it can be very hard to pay your everyday bills.  Moreover, as opposed to a bank levy, which is typically only a one time act of collection enforcement, a wage garnishment is continuous.  This means that each and every paycheck you receive is garnished until the liability is satisfied!  The IRS will consider releasing a wage garnishment in full or a partially release depending upon the taxpayer’s circumstances.

The above state the most common forms of an IRS tax problem in my opinion.  In general, those problems would be: 1) A tax audit; 2) A tax liability (1040, 941 liabilities or others), and 3) IRS enforcement action (bank levy and/or wage garnishment).  If you are experiencing any of these types of problems, please feel free to contact The McGuire Law Firm for a free consultation.  The video below was prepared by a tax attorney to further discuss IRS tax problems.  Please click on the link to view the video.

Denver IRS Tax Problems

Denver IRS Tax Help

A tax attorney at The McGuire Law Firm can assist you with your IRS issues and questions.  Below is a list of some, but not all of the matters a tax attorney can help you with, and a video that discusses and/or provides one attorney’s idea as to what would constitute IRS tax help.

IRS Tax Problems or Disputes

IRS Tax Debts

Tax Audits

Bank Levies

Wage Garnishments

Notice of Deficiency

Tax Planning and Analysis

Please contact The McGuire Law Firm to discuss how a Denver tax attorney can provide you with the IRS tax help you need!  A free consultation is offered to all potential clients.