Comprehensive Review of Your Rights to a Collection Due Process Hearing Before the IRS

Under certain circumstances and upon the Internal Revenue Service issuing certain collection notices, you have the right to request a Collection Due Process Hearing. Requesting and holding a Collection Due Process Hearing before the IRS Appeals Office can be a very beneficial tool in resolving an outstanding tax liability. The article below provides detailed information relating to a Collection Due Process Hearing.

What is a Collection Due Process Hearing?

A Collection Due Process Hearing is a right afforded to a taxpayer when the IRS has proposed a levy or enforcement action to collect on a tax debt. The hearing allows the taxpayer to work with an impartial appeals officer towards a collection alternative to resolve the debt as opposed to the proposed levy action by the IRS.

When Can a Taxpayer Request a Collection Due Process Hearing?

The most common time a taxpayer has the right to request a Collection Due Process Hearing is upon the IRS issuing a Final Notice of Intent to Levy. A Final Notice of Intent to Levy is also known as Letter 11 (L 11) or Letter 1058 (L 1058). A taxpayer has 30 days from the date on the Final Notice of Intent to Levy to request the hearing.

How Does a Taxpayer Request a Collection Due Process Hearing?

The taxpayer makes the request by filing Form 12153 with the service center or revenue officer who issued the Final Notice of Intent to Levy. Form 12153 is completed with the taxpayer’s general information, the tax periods of which the Final Notice of Intent to Levy was issued upon or included on the notice, the reason the hearing is being requested, and the proposed collection alternative. The hearing request can be faxed and/or mailed to the appropriate party within the IRS.

What Are the Benefits or Potential Benefits of Requesting a Collection Due Process Hearing?

While there are many benefits to requesting a Collection Due Process Hearing, perhaps the biggest or most advantageous benefit is the stay or hold on enforcement action that is afforded the taxpayer when a timely hearing request is filed. When a taxpayer timely requests a collection due process hearing, there is an automatic hold on IRS collection actions such as bank levies, wage garnishments, and other asset seizures. Please note that the automatic stay on enforcement action may not apply when the taxpayer owes 941 employment taxes and the taxpayer is not in compliance with the current quarter. This stays on enforcement, which allows the taxpayer time free of levies and seizures to prepare for the hearing and make a proposal to resolve the outstanding tax liability based upon their current financial circumstances.

Once a Collection Due Process Hearing is Requested, What Can I Expect?

Generally, the taxpayer will receive a notice from the IRS Appeals Office within 30-60 days from requesting the hearing that their hearing request has been received, and an appeals officer will contact the taxpayer once assigned to the case. Thereafter, the taxpayer will receive a notice from the appeals officer assigned calling an initial hearing or conference date. The initial hearing or conference date can be adjusted by the taxpayer, but the taxpayer must contact the appeals officer to reschedule the hearing date. The notice from the appeals officer will generally request additional information the taxpayer wishes to present and produce during the hearing relating to the resolution proposal the taxpayer is proposing. This information could be financial statements and information relating to an installment agreement, an offer in compromise, or perhaps a request that the liabilities be placed in a currently non-collectible status.

What is the Procedure or Process of Working With the IRS Appeals Office?

First, the appeals officer will verify that the IRS has taken all required and legal steps towards a collection of the debt and that the taxpayer has received their proper due process. Further, the appeals officer verifies that they have had no prior involvement with the applicable case or taxpayer and are a true impartial party to the matter. Upon establishing the hearing or conference date, the taxpayer will need to compile the necessary information, documents, and statements to submit to the appeals officer along with their proposal to resolve the tax liability. If the taxpayer was an individual and owed individual income tax, they would draft an individual collection information statement, also known as Form 433A, and compile all of the necessary attachments such as W-2s, income statements for self-employment income, bank statements, current statements for stocks, bonds, 401(k)s, mortgage statements, etc., to verify the income, expenses, and assets stated on the financial statement. If the taxpayer was a business or the applicable individual owned a business, the taxpayer would also need to compile Form 433B, which is a collection information statement for businesses. The taxpayer would use the financial statements and documents to propose an installment agreement or request their liabilities be placed in a non-collectible status. A taxpayer can also request a settlement, known as an offer in compromise, through the hearing process. If a taxpayer requests an offer in compromise through the hearing process, the offer will be submitted by the appeals officer (usually) to the IRS Offer in Compromise Unit, and the appeals officer will maintain the file while the IRS Offer in Compromise Unit makes an initial determination on the offer. If the determination on the offer needs to be appealed to the appeals office and the taxpayer appeals the initial offer determination, the appeals officer will then have control or jurisdiction of the appeal. Inevitably, through the appeals hearing process, the appeals officer will make a determination relating to a resolution of the liabilities.

What Are the Potential Outcomes of Holding a Collection Due Process Hearing?

The outcome or determination issued by the appeals officer through the hearing process may be dictated by the resolution proposed by the taxpayer. If the taxpayer has proposed an installment agreement and the appeals officer and taxpayer agree on the terms and conditions of an installment agreement, the appeals officer will issue a determination that an installment agreement has been reached, and thus, the levy action proposed by the IRS is not sustained. In short, if the taxpayer and appeals officer come to a collection alternative, then the appeals officer will issue their determination stating the agreement that has been reached and that collection action is not sustained. However, if an agreement or resolution cannot be agreed upon with the appeals officer, the determination made by the appeals office will state that the proposed levy action by the IRS is sustained, and thus, the taxpayer is open to enforcement such as levies once the file or case is returned to IRS Collections or the IRS revenue officer.

What if I am Unable to Establish a Formal Agreement Through the Collection Due Process Hearing?

If you cannot come to an agreement with the appeals officer, it does not mean an agreement is not possible. You are still able to enter into an installment agreement or submit an offer in compromise through the IRS Offer Unit, but you would do so outside of the context of the appeals hearing or appeals office. The key would be to work on formalizing or proposing an agreement as quickly as possible after the appeals hearing concludes because, technically, once the matter is back before the IRS Collections Department or the revenue officer, you are subject to enforcement because there is no longer a stay or hold on enforcement.

Tax-exempt and/or nonprofit organizations may be required to file form 5471. There are several instances where form 5471 would be required. Often, detailed analysis and thorough understanding of the tax rules are required to determine if there is a filing obligation. Failing to file (including late filing) for form is subject to a $10,000 penalty on a per form per year basis. The penalty may be abated if the taxpayer has reasonable cause for the failure to file the form 5471.

Please consult with a qualified professional when making determinations of form 5471 filing obligations. As you might expect, I am such a qualified professional. Please reach out with any form 5471 questions. Please see my contact information below.

When is a tax-exempt and/or nonprofit entity or organization required to file form 5471?

On its face, it seems unlikely that tax-exempt (TE) and/or a nonprofit (NP) entity or organization would ever be required to file form 5471, but there are a number of occasions where the form 5471 is required to be filed by a TE and/or NP entity .

To understand the form 5471 filing requirement, it helps to know who is required to file form 5471? In a very condensed summary, US persons (individuals, corporations, partnerships, trusts) are required to file form 5471 if they own or control certain percentage amounts of a foreign corporation. Specifically, if a US person owns, controls, purchases or disposes of 10% or more of a foreign corporation, there is a strong likelihood of a form 5471 filing obligation at some point in the lifecycle of the investment. US entities or people who own 10% or more of a foreign corporation are considered US Shareholders for definitional purposes of form 5471 filing obligations. For a more thorough discussion on when a form 5471 is required to be filed, please read this discussion.

US TE and NP organizations are generally organized in one of two ways: either as a state corporation or a trust. Both corporations and trusts are subject to the rules for filing form 5471 as they are specifically considered US persons as defined by the Internal Revenue Code (IRC). As such, TE and NP organizations would be considered US persons for purposes of applying the form 5471 filing rules.

There are a couple reasons why a TE and/or NP organization would own shares in a foreign corporation. First, and the most obvious, is the organization has established an entity in foreign country to carry out its mission. For the vast majority of TE and/or NP organizations, this scenario won’t arise, but could be a possibility. Second, the TE and/or NP has invested in a foreign corporation either directly or indirectly through its fund investments. The most likely instance a TE and/or NP organization would have a form 5471 filing obligation arises when that organization has made investments in non-open market vehicles such as hedge fun or private equity fund investments. Hedge fund, private equity fund and special purpose investments can give rise to form 5471 filing obligations depending on how the investment is structured.

Why should a TE and/or NP organization care if had or has a form 5471 filing obligation?

In short, penalties. Failure to file form 5471 may result in a $10,000 penalty per form per year. Additional penalties may apply depending on category filer the shareholder falls into for form 5471. Filing the form 5471 late is considered a failure to file the form and subject to penalty.

For a large organization, the failure to file penalties can add up to a large amount if it is determined the organization has failed to file multiple forms 5471 over several years.

What can be done to prevent the form 5471 penalty?

Timely filing the from 5471 will prevent a penalty. If the 5471 is already delinquent, the organization may be able to avoid the penalty if it has reasonable cause for its failure to file. Note, reasonable cause is ill defined and a fairly subjective standard in the hands of an IRS examiner.

Where does form 5471 get filed?

Generally, the form 5471 is attached to an income tax return. For a TE and/or NP entity, the form 5471 is generally attached to form 990-T, whether or not the organization has any unrelated business taxable income.

How can a TE and/or NP organization tell if they have a form 5471 filing obligation?

The only sure way to tell if the organization has a form 5471 filing obligation is through a thorough analysis of its investments. Often, it is not obvious that an investment has been made in a foreign corporation, but taking the following steps could help make the determination:

• Step 1
  • Analyze each of the investments the TE and/or NP has made to determine if it is a foreign or US formed entity.
• Step 2
  • If the entity is foreign, determine what type of entity it is and if there have been any US choice of entity elections made.
• Step 3
  • If the foreign entity is a corporation for US tax purposes, determine how much of the entity is owned by the organization. This ownership analysis includes determining the percentage owned of value of the foreign corporation and the percentage owned of voting rights of the foreign corporation.
• Step 4
  • If the organization owns between 10% and 50%, determine how much of the entity is owned by other US Shareholders (those owning vote or value of 10% or more). This analysis helps determine if the entity was a controlled foreign corporation while the organization owned its interest.
• Step 5
  • Determine if the entity owns an interest in other foreign entities.
• Step 6
  • If you have owned this investment longer than the current tax year, analyze when the investment was made and make determinations as to whether there was a filing obligation in the past as well.

What is the point of all these steps?

The point of these steps is to gather enough information to determine if there is, or should have been, a form 5471 filing obligation.

Step 1 details:

In step 1, the entire list of the alternative investments made by the organization should be reviewed to determine if the entity is US or foreign. The best way to make that determination is to work through your investment consultant or inquire directly with the investment company.

Step 2 details:

In step 2, determining what type of entity will help direct what US tax forms may be required. With respect to form 5471, the entity in question would be a corporation for US tax purposes. There are a few ways to get an indication of the type of entity, but the best way is to inquire of the fund. Sometimes reliance on common sense will result in the wrong answer. For example, the fund may be organized as a limited partnership in the Cayman Islands. It seems clear the entity is a partnership in the Cayman Islands. For Cayman Islands legal (and tax) purposes, that entity is in fact, a partnership. What can’t be determined just by the name of the entity is if the US owner (current or past) has made a check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes. Certain entities are eligible to choose how they will be treated in the US for US income tax purposes, either as an association taxable as a corporation, a partnership, or a disregarded entity. If the owner made the check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes, it should be considered a corporation for determining form 5471 filing obligations.

Inquiry to the fund asking specifically about any check-the-box elections is preferred.

Step 3 details:

At this point the form 5471 determinations can start to be made. Understanding the ownership percentages will allow the owner to determine if they are considered a US Shareholder or not. If the TE and/or NP organization is a US Shareholder then at some point a form 5471 should have been filed with respect to that ownership of the foreign corporation. If the TE and/or NP owns more than 50% of the foreign corporation, there is a clear form 5471 filing obligation for the TE or NPF organization.

Step 4 details:

If the TE and/or NP owns between 10% and 50% of the foreign corporation, certain annual form 5471 filing obligations will be required if the foreign corporation is considered a Controlled Foreign Corporation (CFC). A foreign corporation is a CFC when US Shareholders (US people that own 10% or more) own more than 50% of the foreign corporation. Thus, in the instance a TE and/or NP organization is consider a sub-50% US Shareholder of a foreign corporation, it will need to understand if there are other US Shareholder such that the foreign corporation is considered a CFC in order to determine how to file form 5471.

Step 5 details:

In step five, a determination or inquiry should be made to understand if the foreign corporation owned by the TE and/or NP organization owns an interest in other foreign corporations as subsidiary companies. If so, the TE and/or NP organization may be required to file form 5471 for those lower tier entities as the TE and/or NP organization is deemed to own what its investment owns in proportionate share.

Step 6 details:

Step 6 ensures that the TE and/or NP organization either has or doesn’t have delinquent form 5471 filing obligations.

What happens if a TE and/or NP is required to file form 5471?

If the discovery is made for the current tax year filing and the tax return is still timely and not late, then prepare and file the form 5471. That’s an easy thing to say, but the form 5471 is a relatively complicated form and understanding what needs to be completed on the form should be addressed. Generally, it is best to seek professional advice.

If it is determined that the form 5471 filing should have occurred in a prior year, the prior year return should be amended to attach the form 5471. As discussed earlier, late filed form 5471 is subject to penalty. The penalty may be abated if the failure to file was due to reasonable cause. Work with a qualified professional to determine how best to proceed.

Christopher Stroh, J.D. & LL.M (Taxation)

chris@jmtaxlaw.com

720-784-3296

Christopher has spent the majority of his career focused on the international tax implications for businesses, tax-exempt organizations and individuals who engage in some form of cross-border activity, either knowingly or not!  Christopher advises entities and individuals who need help or advice with the US international tax implications of structuring businesses (US or foreign) or has any sort of non-US activity that may require US tax reporting. In addition to planning and consulting on US international tax items, Christopher helps prepare and advise on all manner of US international tax forms.

The title of Form 5471 lays it out succinctly, “Information Return of U.S. Persons Concerning Certain Foreign Corporations.” 

It is the form used to report information about a foreign corporation where a US person owns an interest in the said foreign corporation. It sounds simple enough….

A taxpayer or tax practitioner should begin thinking about whether or not a form 5471 is required when a US person (generally an individual, partnership, corporation, or trust) owns an interest in a foreign entity. That is a fair place to get form 5471 on your radar. It won’t always mean the form is required, but it should warrant some investigation.

One of the first determinations is what exactly the taxpayer owns. For Form 5471, you should be looking for the taxpayer to own an interest in a foreign corporation.

What Is A Foreign Corporation?

Foreign Corporations: The Regulations provide that “per se” corporations, as listed in 301-7701-2(b)(8), are corporations as are associations as defined in Tres. Reg. 301-7701-3.

Foreign entities where all members have limited liability are considered, by default, to be associations treated as corporations for US tax law. A member has limited liability when, under the laws of which it is organized, the member has no personal liability for the debts of or claims against the entity because of being a member.

This is an exciting point because a foreign limited liability company, where all members have limited liability, is treated as a corporation for US tax purposes under the default rules. 

This is contrary to how a US-based limited liability company (LLC) is treated for US tax purposes. Often, taxpayers and practitioners assume that foreign limited liability companies are treated as flow-through entities for US tax purposes (as a US LLC is treated). Still, they are not treated that way unless an entity classification election has been made.

Suppose a US person owns an interest in a foreign entity treated as an association for US tax purposes. In that case, that entity defaults to a corporation for US tax purposes.

Once the determination is made on the type of entity owned, the US person needs to determine how much of the entity that person owns.

How Much Of The Foreign Corporation Do You Own?

Ownership of a foreign corporation is determined in three ways:

1. Direct Ownership

2. Indirect Ownership

3. Constructive Ownership

Direct Ownership

As the name implies, the shareholder can own an interest directly. When determining how much of an entity a person owns, the voting interest in the corporation and the value of the corporation’s shares are considered. Generally, the higher percentage of interest is the deemed ownership for determining filing obligations.

Indirect Ownership

Indirect ownership arises when the US person owns an interest in a foreign corporation through the US person’s ownership in another entity. If the US person owns an interest in a partnership or other foreign corporation, that US person may be deemed to own a proportionate share of what that entity owns (see also Constructive ownership).

Again, consideration should be given to voting rights and values of ownership.

Constructive Ownership

There are several instances whereby the US person is deemed to own interests in a foreign corporation because of a related person (or entity) owning an interest in a foreign corporation. These rules can be complicated as they apply the constructive ownership rules under Section 318, with some tweaks. 

The constructive ownership rules broadly say a US person is deemed to own what certain family members own and what certain corporations, partnerships, trusts, and estates own. A formal discussion of 318 is more than this article hopes to present, but at least knowing to look for related party interests can help frame the need to either look more deeply into what the US person owns or to find some help.

A Quick Example Of How The 318 Rules Can Play Out

A US person (individual) owns 2% of a foreign corporation’s voting rights and value. You will see later that a 2% interest does not, on its own, create a filing obligation for form 5471. 

Since you’ve read this article, you know enough to ask who the other owners are. The US person’s non-resident alien (not a US person) father owns 90% of the foreign corporation. After applying the 318 rules, it is deemed that the US person owns 92% of the foreign corporation for specific form 5471 reporting purposes. Several layers of tax law must be applied and considered to get the correct answer.

A point to remember is that sometimes the face of the facts is not enough to make a proper filing determination for form 5471. Be sure to inquire deeper than the surface.

Now that you know a US person owning an interest in a foreign corporation and know how much of that foreign corporation the US person owns, you can apply that information to determine if the 5471 needs to be filed.

Categories of US Persons Who File Form 5471

The form instructions provide that the return must be filed by US persons (US individuals or US entities)

who meet specific ownership amounts or are a director or officer of the foreign corporations. The form instructions outline the ownership requirements provided across several internal revenue code sections, primarily sections 951, 953, 957, 958, 6038, 6046, and 965. The instructions break down the different filing obligations into certain Category filers to determine who has to file form 5471.

Category 1 Filers (Sec. 965)

A Category 1 filer is a US person considered a US Shareholder of a foreign corporation that is a section 965 specified foreign corporations. Effectively that means the taxpayer is a US person who owns 10% or more (vote or value) of a foreign corporation (making the taxpayer a US Shareholder), which is a controlled foreign corporation (discussed later) or the taxpayer is a US person who owns 10% or more of a foreign corporation where a domestic corporation owns 10% or more of the foreign corporation.

Note, that a domestic corporation could mean either a C-Corporation or an S-Corporation. Still, the rules and regulations on this are very unclear for applying the specified foreign corporation rules.

Reminder, if the US person owns less than 50% of the foreign corporation (directly, indirectly, or constructively), you should always check to see if the Category 1 filer rules apply.

Category 2 Filers (Sec. 6046)

A Category 2 filer is a US citizen or resident who is an officer or director of a foreign corporation in which a US person has acquired enough stock to exceed 10% overall ownership or an additional 10% purchase.

When a US citizen or resident is an officer or director of a foreign corporation, and another US person buys enough stock, that US citizen or resident has to file form 5471 to report that other person’s purchase.

Category 3 Filers (Sec. 6046)

A Category 3 filer is a US person who acquires stock in a foreign corporation which either increases the US person’s ownership over 10% of the vote or value of the foreign corporation or adds 10% ownership of the vote or value of the foreign corporation. Additionally, a person who becomes a US person while owning 10% or more of a foreign corporation is a Category 3 filer. 

US persons who dispose of enough stock to drop that person under the 10% ownership threshold are also a Category 3 filer.

Finally, a person treated as a US shareholder of a foreign insurance company is a Category 3 filer.

Here are a few examples of this rule (assuming direct ownership):

US person owns 3% of a foreign corporation. That person purchases an additional 9% of the foreign corporation. In that year, the total ownership went over 10%, thus, that US person is a Category 3 filer that year. 

US person owns 15% of a foreign corporation. Unless that person bought that 15% in the current year, there is no Category 3 filing obligation for that year. BUT, if the US person buys an additional 10% or more during the year, that person would be a Category 3 filer.

In year 1, US persons own 40% of a foreign corporation. That US person disposes of 20% of their interest in year 2, leaving them with a 20% interest. That disposition does not give rise to Category 3 filing obligation. 

In year 3, that US person disposes of an additional 15% of their holdings, bringing their total holdings under 10%. That person is a Category 3 filer in year 3.

Category 4 Filers (6038)

In short, a category 4 filer is a US person who “controls” a foreign corporation. Control means the US person owns (directly, indirectly, or constructively) more than 50% of the vote or value of the foreign corporation at any time during the foreign corporation year.

Referring back to the example in the constructive ownership section, since the US person’s son would be deemed to own 92%, even though he only directly owns 2%, he would be deemed to control the foreign corporation for purposes of  Category 4 and who is required to file form 5471.

Category 5 Filers – Controlled Foreign Corporations (Sections 951, 957, 958, 6038)

If a foreign corporation is considered a controlled foreign corporation (CFC), US persons who are US shareholders are Category 5 filers. A US person is a US shareholder if that person owns 10% or more of the vote or value of the foreign corporation. A foreign corporation is a CFC if US shareholders own more than 50% of the vote or value of the foreign corporation.

Concerning each Category filer, there may be exceptions to the required filing. Careful examination should be made to determine if an exception applies.

A person can fall into multiple categories in any given year.

What Happens If I Don’t File Form 5471 or It Is Late?

The taxpayer that fails to file form 5471 or is late and was required to file the form may be subject to a $10,000 penalty per form per year.

What Other Forms Should I Consider Filing?

Often the requirement to file the form 5471 means there may also be other international forms or elections that should be filed. 

If the taxpayer is filing form 5471, that taxpayer should also look into filing the following forms or elections as well (note, this is not an exhaustive list, just a sample):

Form 8938 – Statement of Specified Foreign Financial Assets Foreign Bank Account Reporting (FBAR)

Form 926 – Return by US Transferor of Property to a Foreign Corporation

Form 8992 – US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)

Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)

Section 962 Election – Election by Individuals to be subject to tax at corporate rates.

Form 8858 – Information Return of U.S. Persons concerning Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs).

Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

Summary of Form 5471:

The 5471 is a challenging form to file. It can be challenging to determine if you have a filing obligation for form 5471. As a brief summary and something that should get you thinking about form 5471, broadly consider the following:

A taxpayer may have to file form 5471 if the taxpayer is a US person and owns (by voting rights or value).

An interest in a foreign corporation, and that interest exceeds 10% of the voting rights or value of the foreign corporation, or that foreign corporation is an insurance company, and the taxpayer owns any amount, or the taxpayer is a director or an officer of a foreign corporation. A US person has acquired 10% of the stock of a foreign corporation.

This can be an area that can be quite detailed and, at times, difficult just to determine if there is a filing obligation, to say nothing of the actual preparation and filing of the forms. 

Unless you practice in this area, it is likely worthwhile to seek professional advice.

*This article is meant to present a very high-level discussion of filling obligations for Form 5471 and does not present a thorough or complete discussion on the subject. There is a lot of information and rules in this area, which can get quite deep.

Should you have any questions about form 5471 or would like some help with issues around this form, please contact Christopher Stroh, JD, LL.M (Taxation) at The McGuire Law Firm. To speak with our professional Tax Attorneys, call us at 720-833-7705.

Marriage

Several factors may impact your tax bill if you’re planning to get hitched. You’ll need to consider whether you plan to file jointly or separately and what kind of benefits you might qualify for. If you’re filing jointly, you’ll also need to determine whether you’ll claim any dependents and, if so, how many. Finally, you’ll need to assess your income level before deciding whether to file as single or head of household.

Education

School can be expensive, especially if you go to college. But there are ways to get financial aid and reduce those costs. You may qualify for federal grants and loans, and state programs may offer scholarships. There are also tax breaks available to students. For example, you can deduct up $2,500 of tuition and fees from your income when filing your taxes. And if you’re still paying off student loans, you can deduct the interest paid on them.

In addition to tax benefits, there are other perks to obtaining professional certifications. For example, the American Society of Mechanical Engineers (ASME) offers a $1,000 stipend for those pursuing certification through its ASME Certification Program. The National Institute of Standards and Technology (NIST) provides a $2,500 grant for those seeking NIST certification. The American Board of Medical Specialties (ABMS) offers a $5,000 stipend for pursuing ABMS certification. And the National Association of Realtors (NAR) offers a $10,000 grant for real estate agents pursuing NAR certification.

Having a Child

A baby can help you save money. You can claim several tax credits when you have a baby, including a child tax credit and a dependent care credit. These credits will lower your taxable income and make you pay fewer taxes. A baby can also give you access to other benefits like the EITC.

A Job Promotion or Change

A work raise is an increase in salary that comes with a corresponding tax decrease. If you get a raise at work, you could pay higher taxes if you’re already in a high-income bracket. You should check the IRS withholding calculator to see your current rate after getting a raise. Then, you can update your W-4 form to reflect your new number.

Purchasing or Selling a Home

If you buy a home, you can deduct all kinds of expenses when selling it. If you file jointly, you can also get tax breaks on up to $500k in capital gains.

Becoming a Widow or Widower

If you die in 2022, your representative will need to file a final tax report in your name, just like if you were still alive. If you have a surviving spouse, then your spouse can file a joint tax return for that year. Depending on the size of your assets, an inheritance tax return may also need filing. After the estate assets are distributed, it becomes the responsibility of your beneficiaries to file their tax reports that include any inherited assets.

At McGuire Law Firm, we aim to provide the best experience possible when you file your taxes. That means asking you enough questions to start and then helping you complete your return. 

Gaining an inheritance

Inherited funds are not subject to taxes when distributed to beneficiaries. However, if you inherit real estate, you may owe capital gains tax on any appreciation in its value since the decedent’s death. You also may need to pay additional taxes on any increase in the cost basis of the inherited property.

McGuire Law Firm provides IRS representation and tax law services. Contact us today for your legal tax needs and to speak with a Denver tax attorney or Denver business attorney.

Income taxes are a significant source of revenue for states. Most states impose an income tax on residents and non-residents alike. Individual taxation is usually progressive, meaning that the amount of tax owed increases with each additional dollar earned. States also levy other taxes, including sales, property, excise, and corporate taxes.

The Internal Revenue Code and Treasury Regulations are long and complex. Many laws apply to and impact your 1040 income tax return and must be considered when planning for future individual decisions. In addition to assisting clients with their IRS matters, a tax attorney at The McGuire Law Firm can help you with your personal tax questions and issues that impact your individual income tax returns.

Filing Taxes

Individuals may also choose to file an annual tax return themselves. Individuals filing returns must complete Form W-4, Employee’s Withholding Allowance Certificate. Employers must withhold federal income tax at the rate specified on the W-4. State income tax is calculated based on the total wages earned during the year.

Income taxes are paid quarterly or annually, depending on your income level and source of income. If you earn more than $150,000 annually, you will need to pay the regular income tax. You will not owe any additional tax if you earn less than $150,000. Self-employed individuals must file estimated tax returns every quarter or year.

Individuals must file Colorado individual income tax returns (form 104) and pay all taxes owed to the State of Colorado by April 15th each year. If you owe taxes, you can get them back if you file your return within three years after the end of the tax year. You may also request an extension until April 15th.

Tax Liability

Taxpayers’ total Colorado income tax liability is determined using a flat tax rate of 4.6% of adjusted gross income. Additions and subtractions are made to federal taxable income before applying the flat tax rate. Credits are subtracted from the resulting figure to determine the net Colorado income tax. The Department of Revenue publishes an annual report detailing income tax expenditures, including additions, deductions, and credits.

Income Tax Credits

Credits are available for individuals and corporations. Some are available for both. For example, the Earned Income Tax Credit (EITC) is available for individuals and corporations.

Tax credits are usually nonrefundable, so you get what you pay for. Refundable tax credits are those that are refunded to taxpayers. Any money left over after paying all taxes is returned to you. You can carry over unused credits to the following year, but you won’t receive anything back if you owe less than your credit.

Tax Distributions

In 2017, the State Education Fund received $1.4 billion in total revenues, including $845 million from personal income tax and $566 million from corporate income tax. Of those funds, $735 million went towards K-12 public schools, while $636 million went towards higher education institutions. The remainder went toward other purposes, including the Department of Corrections and Rehabilitation ($65 million), the Office of Public Defender ($31 million), the Department of Natural Resources ($30 million), and the Department of Revenue ($27 million).

Federal Income Taxes

Taxpayers must file federal income tax returns yearly, even if they did not earn any taxable income during the previous calendar year. Taxpayers whose adjusted gross income exceeds certain thresholds must also pay estimated taxes at regular intervals throughout the year. These payments are called “payments underestimated tax” or “PUETs.”

Federal taxable income is calculated as Gross Income minus any Tax Deductions and Exemptions a taxpayer might Qualify for. Net Federal Income Tax is then calculated using Marginal Income Tax Rates, and Tax Credits are subtracted from this amount to arrive at the final Net Federal Income Tax.

Taxable income is determined by your total gross income minus certain deductions. For example, you may deduct expenses like mortgage interest, property taxes, and charitable contributions. You also get an exemption for dependents under age 17. Taxpayers must file Form 1040EZ if their adjusted gross income is less than $100,000 ($200,000 for joint filers) and they don’t owe any federal income tax. If you earn more than those amounts, you need to file Form 1040.

The tax year 2021 tax rates by income and filing status. Tax rate For single individuals, taxable income over. For married individuals filing joint returns, taxable income over.

 A tax attorney at The McGuire Law Firm can analyze your situation and provide guidance and counsel regarding your specific situation and circumstances.

Qualified charitable distributions (QCDC) allow individuals over age 70 ½ to donate money directly from a taxable IRA without triggering a 10% early withdrawal penalty. This type of contribution is called a “qualified charitable distribution.” A QCDC does not trigger a 10% early withdrawal fee, unlike traditional IRA withdrawals. However, it is subject to income taxes and limits on contributions.

The maximum amount you can contribute each calendar year is limited to $100,000 ($200,000 if married and filing jointly). You must donate within 60 days of turning 70 ½ years old. In addition, you cannot use the funds for personal expenses such as home improvements or college tuition.

Eligibility and Qualified Charitable Distributions

Qualified charitable distributions are particular gifts that allow taxpayers to deduct their gift’s total value without worrying about how much money they spent on it or whether the charity gets taxed on the amount received. They’re often used to help families offset the costs of home improvements, college tuition, and medical expenses.

In prior years, the rules governing QCDs required re-authorization from Congress each fiscal year, and those decisions could be made late in the calendar. As a result, many people waited until the end of the year to ensure they qualified for a QCD.

With the passing of the Protecting America’s Affordable Health Care Act (ACA) or “Obamacare,” the QCD provision is no longer subject to annual re-authorization. Instead, the provision became law as part of the ACA and is now permanently part of the Internal Revenue Service code.

You can plan your charitable contributions and begin reviewing your tax situations early each year. You’ll want to know if you qualify for a QCD before making significant charitable contributions.

If you qualify for a QCD, you’ll receive a 1099 form from the charity indicating your donation amount. If you don’t qualify, you’ll receive a W-2G form from the charity showing what portion of the donation went toward qualifying items.

Tax Benefits of the CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides immediate tax breaks for individuals and families impacted by COVID-19. This includes those affected by job loss due to the outbreak, self-employed people whose income drops because of the shutdown, and those who lose wages while working from home. In addition, the law extends unemployment insurance coverage to gig economy workers and expands access to free food assistance programs like SNAP.

Minimum Distributions Suspended

The IRS announced that it is suspending the requirement for people age 70½ to take mandatory withdrawals from their traditional IRAs and Roth IRAs. The move came just days before the deadline for taking those early withdrawals.

This probable relief for many who would’ve had to withdraw money from their retirement account. If you’re one of those folks, don’t worry — you’ll still be able to make gifts from your IRA. But if you’re younger than 70½, you might want to consider making a gift to a Colorado Foundation instead.

New Tax Incentives

The new tax incentives are included in the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act. This bill relieves individuals, families, businesses, and nonprofits during the COVID-19 pandemic.

The $1,200 check you receive will cover basic expenses like food, rent, utilities, and medical bills for most people. However, there are some exceptions. If you qualify for Medicaid or Medicare coverage, you won’t receive a total of $1,200. And if you’re self-employed or work for yourself, you’ll still pay taxes on the money.

But don’t worry about it too much because you can deduct your donations to qualified organizations. So if you donate $500 to charity, you could write off $250.

If you’re eligible for the standard deduction, you can contribute up to $300. If you’re itemizing, you can give away up to $600.

Key Takeaways

Charitable contributions from an individual retirement account (IRA) are qualified charitable distributions. These distributions are treated differently than regular income earned from stocks and bonds. For example, you can deduct up to 50% of your adjusted gross income (AGI) on your federal taxes. However, there are some limitations to contributing to an IRA. Here are three key takeaways about charitable giving from IRAs:

1. You can donate from an IRA without paying taxes. Contributions from an IRA are deductible from your federal taxes. This means that you don’t pay taxes on the money donated. If you donate $5,000 from an IRA to charity, you’ll receive a deduction of $2,500 ($5,000 x.50).

2. Your IRA trustees must report the distribution to the IRS on your tax form. Any contributions to an IRA must be reported on Schedule D of Form 1040, which reports all types of investments held within the IRA. Distributions made from an IRA are reported on Form 1099-R.

3. There are restrictions on how much money can be withdrawn from an IRA each year. For instance, withdrawals are limited based on age. Also, the amount withdrawn cannot exceed what is needed to cover certain expenses like medical costs or college tuition.

Please remember this article is not intended to be tax or legal advice, and you should always consult directly with your tax attorney or tax advisors. You can contact The McGuire Law Firm to speak directly with a tax attorney regarding any of your tax issues.

Form 8283 is a tax reporting form used to report donations to charities. If you donate property valued at $500 or more during the calendar year, you must complete and submit Form 8283 within 30 days of making the gift. This includes cash gifts, securities, life insurance policies, annuities, real estate transfers, and other items.

The IRS requires donors to provide information such as the name of the charity, date of the transaction, type of gift, the value of the gift, and whether the donor received goods or services in exchange for the gift. Donors are required to attach Form 8283 to their tax returns, regardless of whether they claimed a deduction for the contribution on their taxes.

Donations of appreciated assets can qualify for tax deductions under Section 170(e)(3) of the federal tax code. However, donors must still complete and submit Form 8282, even though the asset is already worth more than $5,000. This article has been prepared by a Denver business attorney and Denver tax attorney to discuss charitable contributions. 

The Two Parts of Form 8283

Form 8283 is a two-part form used to report noncash charitable contributions to qualify for an itemized deduction. This form must be filed along with your federal income tax return.

The form consists of two parts. Part one covers contributions valued up to $5,000. If you contribute to property worth more than $5,000, you file part 2 of the form.

Part 1 of the form provides information about the type of gift, the date it was made, and the donee’s name. In addition, section A requires the donor to list the fair market value of each contribution.

Section B is optional and allows donors to report more than $5,000. For example, if you donate stock to charity, you may want to include the total value of the stock in this section.

Charitable Contributions

Noncash contributions are items such as property, artwork, clothing, furniture, books, etc., given to charity. Businesses, organizations, or individuals often donate them. These donations aren’t subject to sales taxes because they don’t go toward purchasing goods and services. Instead, they’re deductible on federal income tax returns.

Section A of Form 8283 requires taxpayers to list the name of the donee organization, the date of the gift, the value of the item(s), and whether it was received directly or indirectly. For example, if you donate a painting to a museum, you’d list the name of the museum, the date of the donation, the value of the painting, and whether it was received “directly” or “indirectly.”

Section B of Form 8283 covers gifts over $5,000. In this section, the donor must provide information about the nature of the gift, including the type of property donated, the property’s fair market value, the payment method, and the date acquired.

For example, if you give $10,000 worth of stock to a nonprofit organization, you’d list the value of the stock, how much you paid for it, and the date you bought it. You’d also indicate whether the gift was made “in one transaction” or “over several transactions.”

The IRS doesn’t require donors to use Form 8283. However, it does recommend that those making significant noncash contributions file the form. To ensure you do, complete Form 8283 for each noncash contribution of $5,000.

Donee Information

The donor organization files this form if it sells, transfers, or disposes donated property. The form must be filed with the IRS within 30 days after the end of the calendar year following the year the donation occurred. Donated property is defined as the property received for public use or benefit. A gift is treated as having been given during the calendar year in which it was transferred.

If you donate property worth over $5,000, you must file Form 8283. The form covers donations of cash, securities, and real estate. You must complete Schedule B even if you don’t owe the property’s value tax.

Where to Find Form 8283

The Internal Revenue Service offers Form 8283, “Sales and Other Dispositions of Capital Assets,” on its website. This form must be completed when selling capital assets such as vehicles, real estate, etc., and includes information about how much money was received and what percentage of the proceeds went toward buying another asset. If you sell stock options, you must use Form 8949, “Reportable Transaction – Sale of Certain Securities.”

Form 8283 Requirements

Form 8283, “Noncash Charitable Contributions,” requires filers to report contributions valued at $250 or more. This includes gifts of cash, stocks, bonds, mutual funds, life insurance policies, annuities, retirement accounts, real estate, and personal property. If you make a gift of property worth less than $500, you don’t have to file Form 8283. But you still need to complete Schedule A, Itemized Deductions, on your federal income tax return.

The IRS allows taxpayers to deduct up to 50% of the fair market value of donated tangible property. For example, if you give away a car, you can claim a deduction equal to half the cost of the car ($5,000).

You can deduct the total donation amount even if you don’t itemize deductions on your taxes. However, if you itemize, you can subtract only those expenses related to the donation.

If you make multiple donations during the same calendar year, you can combine them into one total deduction.

To qualify for the deduction, the donor must establish that the property was given away without expecting to receive anything in return.

A gift recipient may also choose to receive a charitable deduction for the contribution.

Takeaways

Noncash contributions are deductible under Section 170(c)(2) of the Internal Revenue Code. If you donate property, you must file IRS Form 8283 within 30 days of contributing. You cannot deduct the value of certain types of gifts unless you itemize deductions on Schedule A of your federal income taxes. These include:

• Household goods and furnishings valued at up to $500.
• Clothing worth up to $250.
• Books, records, and similar items worth up to $200.
• Artwork, antiques, collectibles, jewelry, musical instruments, sports equipment, tools, and toys worth up to $50 each.
• Donations of vehicles and real estate.
• Charitable contributions of securities, stock, bonds, mutual funds, and insurance policies.

This article was prepared by a tax attorney at The McGuire Law Firm. If you have any questions about charitable contributions, Form 8283, or other tax matters, please contact our firm to speak with a Denver tax attorney.

When businesses acting as the seller or purchaser are going through the acquisition process, there is likely to be discussion as to whether the acquisition will be structured as an asset purchase or a stock purchase. There are advantages and disadvantages to an asset purchase and a stock purchase for both the seller and purchaser. 

However, there may be a means to treat a stock purchase as an asset purchase and receive the best of both worlds. The article below has been prepared by a Denver tax attorney and Denver business attorney to discuss certain tax matters. Still, please always discuss your specific issues with your attorney and check for current laws and regulations that may have changed.

A Stock Purchase

A stock purchase is relatively simple as the seller or target corporation’s stock is purchased. The buyer obtains control of the target corporation’s assets with no other action by owning all of the stock. This being said, the buyer may also inherit liabilities of the target corporation as the business continues and is exposed to prior matters. An asset purchase transaction may be more complex in that the buyer is purchasing the assets and not the stock, thus requiring the transfer of title to each asset, which depending upon the facts and circumstances, could begin to amount to significant time and cost etc. Further, if the target corporation has special licenses and permits, these may not be transferable to the buyer and could create additional issues under an asset purchase.

An Asset Purchase

As it is good and bad with both structures, a buyer, from a tax perspective, will generally prefer an asset purchase because the buyer, after the asset purchase, can step up the basis in purchasing assets. Therefore, the asset’s stepped-up basis will lead to more significant depreciation to lessen taxable income and thus tax at the corporate or personal level. In comparison, when the stock is purchased, the buyer will receive a basis in the stock at the purchase amount. The realization of the tax benefit may not come until the buyer sells the stock using the basis in the stock to offset a capital gain. Thus, the buyer will likely not “realize” the tax benefit of the stock purchase until a later date than they would under an asset purchase agreement.

There is a means under Internal Revenue Code Section 338 for the buyer to make an election treating a qualifying stock purchase as an asset purchase for federal income tax purposes. Under 338, if the transaction qualifies and the election is made, the transaction is treated as if the buyer purchased the target corporation’s assets for the purchase price of the stock. Therefore, the buyer will receive a more advantageous step-up based on the assets.

Section 338 Election

The buyer acquires the seller’s stock at a discount in a stock acquisition transaction. Suppose the buyer makes a qualifying stock purchase within 60 days of the date of transfer. In that case, it must elect to treat the transaction as an asset acquisition for federal income tax purposes. This is known as a “step-up” election.

If the buyer makes a Sec. 338 election, it treats the transaction as a stock purchase for legal purposes. Hence, it continues to acquire the seller’s liabilities, including outstanding debt, shares of capital stock, and certain contingent obligations. However, the buyer does not acquire the seller’s assets. Instead, it steps up the basis of those assets to the purchase price paid for the stock. At the end of the period, the buyer reports the transaction as a sale of stock and recognizes ordinary income equal to the difference between the purchase price and the adjusted cost basis of the stock.

The buyer can choose to allocate the excess of the purchase price over the adjusted cost basis to goodwill. Goodwill represents the purchased excess over the adjusted cost basis of intangible assets such as customer relationships, brand recognition, and patents.

Making the 338 elections is a means to structure an acquisition as a stock sale, which may have benefits, but allow the buyer the tax advantage of an asset purchase agreement.  John McGuire, a Denver tax attorney and Denver business attorney at The McGuire Law Firm, has prepared this article.

 What is FIRPTA?

FIRPTA is a withholding tax requirement for a foreign person’s disposition of a U.S. real property interest that is reported on Form 8288.

 Do I need to report it?

If you are a foreigner transferring an interest in any real property in the U.S., you are subject to the FIRPTA requirements. Further, if you are purchasing an interest in any real property from a foreigner, you may be subject to the withholding requirements for tax purposes under FIRPTA.

 Who qualifies as a foreigner?

The IRS defines a foreign person as a nonresident alien or a foreign corporation that has not made an election under the Internal Revenue Code section 897(i). As a purchaser, it is your responsibility to determine if the seller is a foreign person based on the definition provided by the IRS, which can be broken down into two components. First, an alien is an individual who is not a U.S. Citizen or U.S. national. Second, to qualify as a nonresident alien, the individual must not have passed the green card test or the substantial presence test.

Note that the substantial presence test requires that an individual be physically present in the U.S. for at least 31 days during the current year. Additionally, the individual must be present for 183 days during the 3 years, including the current year and the two years immediately prior. A pivotal element to FIRPTA requires that the real property is located in the U.S. An alternative to the actual property location requirement is an interest in a domestic corporation.

If the seller of the real property is a foreigner and you fail to withhold the appropriate amount of tax, you may be on the hook. The purchaser has to determine whether the purchaser from whom they are buying an interest in the property is a foreign person or not. As a purchaser, you must do your due diligence to ensure you do not have to withhold taxes.

 How much do I need to withhold?

In the past few years, the IRS has made changes to the withholding rates. On February 17, 2016, Congress passed the Tax Cuts and Jobs Act (TCJA), which included a provision allowing taxpayers to elect to pay taxes at a lower rate. If you purchased your real estate before February 17, 2016 and you meet specific criteria, you may be eligible to claim the lower withholding rate. You must file Form 8949, Election To Pay Lower Rate, within 60 days after the date you filed your return for the year in which you paid the highest federal income tax rate.

May I withhold less than 15%?

Maybe. If you calculate your tax liability for the disposition of the real property, and this is lower than the reporting requirements under FIRPTA, you may qualify for a lower withholding rate. This is determined by filling out Form 8288-B.

The most common exception to the FIRPTA withholding tax involves the sale or transfer of a residential property not more than $300,00.00. In addition, either the individual or a family member must plan to live at the property for at least 50% of the days that the property is used for the two years following the transfer. If you qualify under this exception, you may not be required to withhold tax under FIRPTA.

*John McGuire of The McGuire Law Firm prepared the above article. John Is a Denver tax attorney and Denver business attorney and can be reached at www.jmtaxlaw.com

Many individuals (and businesses) buy stock and securities with the hopes and intent of the securities appreciating and perhaps paying interest or dividends. What determines when an individual is treated as an investor, dealer, or trader? Furthermore, what are the tax treatment and proper way to report income and expenses when one is classified as an investor, dealer, or trader?

The article below has been prepared by a Denver business attorney and tax attorney to provide information related to the above issues and questions. Please remember to always discuss your specific facts and circumstances with your tax attorney and tax advisors, as this article is for informational purposes only.

The Internal Revenue Service applies different definitions and meanings to investors, dealers, and traders. Thus, we will begin with an explanation of these terms.  

What’s An “Investor”?

An investor would typically buy and sell securities in anticipation of the securities appreciating and producing other returns such as interest or dividends. In short, the investor would buy a security and hold the security for personal investment as opposed to conducting these activities in a trade or business. Generally, the investor would hold the securities for themselves and a substantial period. When an investor sells or disposes of the securities, the transactions are reported as capital gain or loss on the investor’s 1040 via a Schedule D.

As an investor, capital loss limitations under IRC Section 1211(b) would apply as well as wash sale rules under IRC 1091. Investors may be able to deduct expenses associated with creating the taxable income on their Schedule A itemized deductions. Further, interest paid for money to buy an investment property that generated taxable income may be deducted. The cost of commissions and related fees to dispose of the stock are not deductible but should be accounted for in calculating the gain or loss from the sale or disposition of the securities.

Who’s A “Dealer”?

Securities dealers are required to register with the SEC under section 5(a)(1) of the Securities Act and section 15A(b)(4) of the Exchange Act. A dealer must file Form BD, Schedule 13D, and Form 10K/10Q within 30 days of registration.

The term “dealer” refers to both individual and corporate persons. An individual dealer engages in activities involving offering, purchasing, or selling securities for their account. Corporate dealers include broker-dealers, investment banks, clearing agencies, and others involved in similar activities.

Individual dealers are subject to regulation under federal securities laws. In addition to registration requirements, they are prohibited from engaging in certain types of transactions without prior approval, including short sales, options contracts, futures contracts, and forward contracts.

Corporate dealers are regulated primarily by state law. However, the federal government regulates some aspects of their conduct. For example, brokers, dealers, and agents must comply with recordkeeping rules promulgated by the National Association of Securities Dealers (NASD). These rules require that dealers maintain books and records to comply with applicable federal securities laws and regulations.

Dealers must maintain inventories of securities that represent the interests of their customers. This includes holding shares of stock for customers’ accounts. Dealers must also keep records showing the identity of each customer and the number of securities held for such customers.

Dealers are permitted to engage in activities that involve purchasing and selling securities for their accounts. Such activities include buying and selling securities to make markets, hedging, managing risk exposure, arbitrating, and providing liquidity.

Dealers are sometimes referred to as market makers. Market makers provide a service to buyers and sellers of securities by maintaining a continuous bid. They do not buy or sell securities for their account; instead, they act as intermediaries between buyers and sellers.

Who’s a “Trader”?

Apart from being designated as an investor or dealer, special rules can apply when you are determined to be a trader in securities. In short, a trader would be considered buying and selling securities for your account. Under certain circumstances, you could be regarded as a business even if you do not hold an inventory and maintain customers. The IRS could consider you to be in business as a trader in securities if you meet the following conditions:

• The activity is substantial;
• You are attempting to profit from daily market movements if the pricing of securities and not so much from appreciation, interest, or dividends; and,
• The activity is practiced with continuity and regularity.

If you are a trader in securities,, you can report your income and expenses on a Schedule C with your 1040,, and thus, Schedule A limitations would not apply. Further, the gains and losses from selling securities are not subject to self-employment tax.

What’s A Security?

Security is an item that represents ownership interests in something else. Examples include stocks, bonds, mutual funds, ETFs, REITs, commodities, currencies, and real estate. Securities are traded on exchanges and over-the-counter markets.

 Reporting The Sale of Securities

When you sell a security, it’s called a “sale.” You generally receive cash or another form of payment for the sale. For example, you’ll receive cash or a check if you sell stock shares. When you sell a bond, you usually receive coupon payments.

You need to report the sale of a security on Form 1099-DIV, Short Form Miscellaneous Transaction Information if the proceeds exceed $10,000.

The Mark-to-Market Election

You’ve probably heard about the mark-to-market rule if you’re a trader. This rule allows specific trades to be treated as though they occurred during the current taxable year. For example, if you sold shares of stock at $10 per share, you could elect to treat the gain as ordinary income rather than capital gain. You’d then pay taxes on it at regular rates. In addition, you couldn’t deduct any loss on those shares.

However, there are some restrictions on how this works:

1. You can’t take advantage of the rule unless you sell the stock.
2. You can’t do this if you bought the stock for less than the cost.
3. You can’t use the rule if the security you sold was held for investment purposes.

In addition, you must file a form called Form 4797, Sales or Exchange of Certain Securities. On this form, you’ll list each transaction you want to include in calculating your capital gains and losses. Then, you’ll attach a statement explaining why you believe the transactions qualify for the mark-to-mark rule. Once you’ve filed this form, you’ll be able to calculate your capital gains and losses based on the amount you originally paid for the stocks.

The article above has been prepared by John McGuire of The McGuire Law Firm.  John is a Denver tax attorney and business attorney with the firm and can be reached at John@jmtaxlaw.com