At Buckingham & McGuire, LLC our Denver tax attorneys assist clients in resolving IRS debts, audits and other matters, as well as applying the tax laws to our client’s individual and business issues. All of our tax attorneys have obtained an additional degree in taxation known as an LL.M. Our additional knowledge and education in taxation not only helps resolve IRS issues, but allows us to better assist our clients regarding their business transactions, estate planning and overall tax planning.

Required Minimum Distributions and Charitable Contributions

For those who are required to take a minimum required distribution (“RMD”) from an IRA, charitable donations may be the answer. An individual can offset the tax liability from an RMD by making a qualified charitable donation if he does not need the cash at the time of the distribution.

If an individual takes the RMD in a normal situation, the distribution goes towards taxable income. By using charitable donations, individuals can avoid receiving funds subject to tax while also avoid jumping into a higher tax bracket from the taxable distributions. If the funds are transferred directly to the charity, then the individual does not have to pay tax on the distribution, and the individual’s taxable income does not increase either.

Also, if individuals donate appreciated capital assets, they can avoid paying the capital gains tax and reduce taxable Required Minimum Distributions. Rather than donating plain cash, if individuals donate appreciated securities, they do not have to pay the tax on the gains and still receive the benefit of the fair market value of the donation because this offsets the RMD, and therefore the tax liability associated with the distribution.

There may be timing benefits that could result in major tax savings for 2021 due to COVID-19 that are the exception to the general rule. The government has suspended the requirement for people to take the required IRA payouts for 2020. In other words, you do not have to take your required minimum distribution for 2020 as a way to combat the economic impact of the coronavirus.

This may mean major tax savings for people who typically donate from their IRA to charities. Since there is no RMD for 2020 due to the CARES Act and charitable donations count towards the required distribution, it may be best for individuals to post pone donations until 2021 or later. In other words, rather than donating cash or capital assets in 2020 and having no RMD to offset, individuals could wait and make a larger donation when they are required to take RMD again. This way, taxpayers are able to reduce taxable income when the RMD comes due.

RMD will be required again in 2021 (in all likelihood), but perhaps it may be best to hold off even longer on making qualified charitable donations. For instance, individuals should make the largest donation when the taxable income outside of RMD is the highest. This way, taxpayers are able to take advantage of avoiding an increase in taxable income by offsetting the RMD and avoid reaching an even higher tax bracket.

This strategy to donate a higher dollar value donation may help reduce taxes in 2021 simply by holding off a little bit longer until mandatory distributions kick back in next year.  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.

CARES Act Q&A

President Trump signed the Coronavirus Aid, Relief, and Economic Security Act “CARES Act” into law which provides relief funds to help stimulate the economy from the impact of the COVID-19 pandemic. Small businesses that would like to apply for a loan with reduced interest and potential forgiveness should apply through the Economic Injury Disaster Loan program on the Small Business Association website.  Below is are some of the frequent issues and questions we have received regarding the act.  Please make sure you consult directly with your attorney regarding any specific questions related to your business.

 Who is eligible for the Coronavirus disaster program loan and what is considered a small business?

Small businesses in every state are eligible to apply for a low interest loan due to the impact of Coronavirus. According to the CARES Act, business with fewer than 500 employees are eligible for loans under 7(a) of the Small Business Act.[1] Sole proprietors, independent contractors, and other self-employed individuals are eligible to received covered loans under the CARES Act.[2]

 

What is the maximum loan amount?

The maximum dollar amount for business loans under the CARES act is the lesser $10,000,000 or the following formula. Take the average monthly payments for payroll costs for the year prior to the date the loan is made multiplied by 2.5 and add the amount of outstanding loans made during the period from January 31, 2020 and ending on the date the loans are eligible for refinancing.[3] Note, this formula is slightly different for seasonal businesses, so unless an election is made, these seasonal business use payroll costs averages for the 12-week period beginning February 15, 2019.[4]

 

How may I spend my small business loan from the CARES Act?

According to the CARES Act Sec. 1102, loans provided by the federal government under the stimulus package may be used for payroll, employee salaries, mortgage interest payments, rent, utilities, and interest on other debt obligations that were incurred before the covered period.[5] Note, the covered period is February 15, 2020 and ends on June 30, 2020.[6]

 

Will my loan be forgiven under Section 1105 of the CARES Act?

Section 1106(b) of the CARES Act provides for forgiveness of indebtedness for several costs and payments including payroll, mortgage interest, covered rent obligation payments and utilities.

 

Typically, whenever a loan is forgiven, it is considered as relief of indebtedness and will be included as gross income for that taxable year. Section 1106(c) notes that the forgiven debt for purposes of the CARES Act specifically will be considered canceled indebtedness by lenders but Section 1106(i) will exclude the relief from gross income for tax purposes.

 

Note, the amount of loan forgiveness may be reduced by certain reductions in salaries or layoffs so maintaining the number of employees helps insure maximum loan potential from the Act.

 

What is considered a payroll cost?

Payroll costs are defined in the CARES Act through the Paycheck Protection Program and include payments to employees that are salaries, wages, commissions or other similar compensation, payment for cash tips, payment for vacation/medical/sick leave, group health care payments and insurance premiums, retirement benefit payments, and payments of state/local tax assessed based on employee compensation.[7] Similarly, payroll costs

for sole proprietors include wages, income and net earnings from self-employment that does not exceed $100,000 for 1 year as prorated during the covered period by the Act.[1]

 

How do I apply for the small business loan from the CARES Act?

First, download, the Business Loan Application (Form 5), the Home or Sole Proprietor Loan Application (SBA Form 5C), and the Economic Injury Disaster Loan Supporting Information (Form P-019) from the SBA website. Depending on the specific business, there may be additional forms required but a Disaster Assistance loan officer will request these.

For all non-profit businesses, in addition to the Disaster Business Loan application, you need to file the Tax Information Authorization (IRS Form 4506T). Also, attach a complete copy of the most recent Federal Income Tax return including all schedules for the business. Attach a Personal Financial Statement (SBA Form 413) for each partner, managing member, and principal owner owning 20% or more of the business. Small business also should include a Schedule of Liabilities listing all fixed debts (SBA Form 2202).

For sole proprietorships, you need to file SBA Form 5C and IRS Form 4506T.

Next, fill out the forms and upload the completed forms to the SBA website, email them to disasterloans@sba.gov, or mail them to the following address:

U.S. Small Business Administration

Processing and Disbursement Center

14925 Kingsport Rd.

Ft. Worth, TX 76155-2243

 

You can contact The McGuire Law Firm to speak directly with a tax attorney and business attorney regarding your businesses needs and the taxation issues related to the CARE Act.  We wish everyone the best during the troubling time.



 

IRS Form 8283 and Charitable Contributions

The IRS lays out specific requirements and qualifications in order to properly take the charitable contribution deduction. For taxpayers, including individuals, partnerships, and corporations who want to take a deduction for noncash charitable contributions over $500, they must file Form 8283. Form 8283 should accompany the taxpayer’s return for the year they contributed the property and take the deduction. If a taxpayer fails to attach Form 8283 to his return, then the IRS will typically disallow the charitable contribution deduction completely and readjust the tax liability.

Who qualifies as a recipient of a charitable contribution in order to take the deduction?
One must keep in mind that contributions to an individual are not deductible. Rather, charitable contributions are only deductible if made to a qualified organization. According to the IRS and § 170(c), qualified organizations include a government possession, a corporation, trust, fund or foundation organized or created in the US, church or other religious organization, veteran’s organization, nonprofit fire company, civil defense organization, domestic fraternal society, or a nonprofit cemetery.

What else do I need to include with Form 8283?
According to § 170(f)(8)(A), in addition to filing Form 8283, a taxpayer must include a contemporaneous written acknowledgement of the contribution by the donee organization in order to take a deduction. An acknowledgement is contemporaneous if the taxpayer obtains the acknowledgement on or before the date when the taxpayer files a return for the taxable year in which the contribution was made or the due date for the return.

What information do I need to include on the contemporaneous written acknowledgment?
The contemporaneous written acknowledgement, according to § 170(f)(8)(B), must also contain certain information including the amount of cash and a description of the property contributed, whether the donee organization provided any goods or services in consideration, and an estimate of the value of the goods or services if any were provided.
Typically, more attention is paid to the appraisal procedure and requirements than other aspects of the charitable contribution deduction because the appraisal actually quantifies amount of the deduction. However, the contemporaneous requirement is just as stringent as the appraisal because the tax code specifically lays out each requirement that is procedurally necessary to take the deduction, as discussed below in detail.

What if I fail to comply with the contemporaneous written acknowledgment requirements?
Taxpayers who fail to comply with the contemporaneous written acknowledgement requirements may try to use the “substance over form” argument, but this is unlikely to prevail since the specific elements are clear in the code.

One exception to this argument stems from the case Bond v. Commissioner . Here, the taxpayers technically did not meet all the requirements necessary to obtain the charitable contribution deduction because while they attached Form 8283, they failed to attach the appraisal report to the return. Therefore, the taxpayers argued that they substantially complied with the tax code and were entitled to the deduction. The court applied a “directory and not mandatory” standard and found that by nature of the requirements, the taxpayers were in fact entitled to a deduction because they actually provided all the necessary information but simply failed to attach the document. The court referenced Taylor v. Commissioner in order to highlight the fact that this substantial compliance applies when the taxpayer satisfies the elements necessary that relate to the substance or essence of the law.

In contrast, the court in French v. Commissioner of Internal Revenue acknowledged the importance of following the strict requirements of the tax code. The court in French noted that a taxpayer is not excused from compliance with contemporaneous acknowledgement even if he substantially complied with the law because the requirements are so clearly stated in § 170(f)(8). The fact that the tax code identifies these requirements illustrates the importance of the rule.

In French, the taxpayers failed to attach a required letter at the time the amended return was due. Unlike the taxpayer in Bond where the actual appraisal had been completed, the taxpayers here did not even obtain the letter until nearly two months after the return was due. The key distinction is that the taxpayers in Bond actually performed the requirements whereas the taxpayers in French did not complete the necessary steps in the appropriate amount of time. Therefore, the court in French found that the taxpayers were not entitled to the charitable contribution deduction because they failed to meet the strict requirements of a contemporaneous acknowledgment.

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

Stock Purchase Treated as Asset Purchase

When businesses, whether as a seller or a 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 a an asset purchase and a stock purchase to both the seller and purchaser however, there may be a means by which to treat a stock purchase as an asset purchase and receive the best of both worlds.  The article below has been prepared by a tax attorney and business attorney to discuss certain matters, but please make sure to always discuss your specific issues with your attorney and check for current law and regulations that may have changed.

A stock purchase as a whole is relatively simple as the seller or target corporation’s stock is purchased and the buyer obtains control of the target corporation’s assets with no other action by virtue of 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.

As there 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 the purchase assets.  Therefore, the stepped-up basis in the assets will lead to larger 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 and the realization of the tax benefit may not come until the buyer sells the stock using the basis in the stock to offset capital gain.  Thus, it is likely the buyer will 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 end up receiving the more advantageous step-up in basis of the assets.

Under IRC 338 a 338 election can be made (filing form 8023) on a qualifying purchase of 80% or more of the target corporation’s stock.  The target and buyer corporations can be either C corporations or S corporations and it is highly recommended you consult with your tax advisors regarding the tax consequences as the election could potentially lead to unanticipated double taxation to the target corporation and shareholders.  Under IRC 338(h)(10) a special election can be made for the qualifying purchase of a target corporation’s (C or S corporation) stock when the stock is owned by another corporation.  The election cannot be made if individuals own the C corporation’s stock.

Making the 338 elections is a means by which to structure an acquisition as a stock sale, which certainly may have its benefits, but allow the buyer the tax advantage of an asset purchase agreement.  This article has been prepared by John McGuire, a tax attorney and business attorney at The McGuire Law Firm.  John can be reached at www.jmtaxlaw.com

FIRPTA Common Tax Issues

Many people have questions relating to FIRPTA and the relating withholding tax requirements.  Below are common questions and answers related to FIRPTA, but please remember to consult directly with your tax attorney and other tax advisors.

 What is FIRPTA?

FIRPTA is a withholding tax requirement for the disposition of a U.S. real property interest by a foreign person 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 one who is 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 US Citizen or US national.  Second, in order to qualify as nonresident alien, the individual must not have passed the green card test nor the substantial presence test.

Note, the substantial presence test requires that an individual be physically present in the US for at least 31 days during the current year. Additionally, the individual must be present for 183 days during the 3-year period that includes the current year and the 2 years immediately prior. A key element to FIRPTA requires that the real property is located in the US. An alternative to the real 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. It is the purchaser’s duty to determine whether the purchaser from whom he or she is buying an interest in the property is a foreign person or not. As a purchaser, you need to do your due diligence to insure you do not have to withhold any taxes.

 How much do I need to withhold?

Recently, there has been a major change in the withholding rate under FIRPTA. Currently, the standard rate is 15% of the realized amount, which is typically the purchase price of the real property. However, if you purchased the real property prior to February 17, 2016, the withholding tax rate is 10%.

May I withhold less than the 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 filing 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.

The above article has been prepared by John McGuire of The McGuire Law Firm.  John Is a tax attorney and business attorney and can be reached at www.jmtaxlaw.com

Taxation of Investors Versus Traders & Dealers

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 is 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 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 the terms investors, dealers and traders.  Thus, we will begin with an explanation as to these terms.  An investor would typically buy and sell securities in anticipation of the securities appreciating, as well as 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 for a substantial period of time.  When an investor sells or disposes of the securities, the transactions are reported as capital gain or capital loss on the investors 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 investment property that generated taxable income may be deducted.  The cost of commissions and other 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.

A dealer will differ from an investor in that a dealer will purchase and hold securities for their customers and conduct these activities in the ordinary course of the dealer’s business.  The dealer may hold an inventory of securities.  The dealer will make their money and income by marketing securities to their clients.  A dealer will report gains and losses from the disposition of securities by applying and using market-to-market rules.

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 to be in the business of buying and selling securities for your own account.  Under certain circumstances you could be considered to be 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, and further, the gains and losses from selling securities are not subject to self-employment tax.

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

 

Is a Lawsuit Settlement Taxable?

Is the money I receive in a lawsuit settlement taxable?  If you have received money via a lawsuit settlement, you may be asking yourself this exact question.  Perhaps you were injured in a car accident, or filed suit against a prior employer for wrongful termination and are now receiving a monetary settlement.  The settlement may or may not be taxable depending upon all of the facts and circumstances surrounding your case.  The article below has been prepared by a tax attorney to provide additional information relating to whether or not proceeds from a lawsuit settlement need to be included in gross income on your individual income tax return.  Please remember, this article is for informational purposes only, and should consult your tax attorney or tax advisor regarding your specific facts and circumstances.

If your lawsuit settlement was the result of personal injuries and/or personal sickness you do not need to include the settlement amount, or that portion in your gross income as long as you did not take an itemized deduction of the medical expenses.  If you did previously take an itemized deduction of the medical expenses in prior years (this would likely be taken on a Schedule A) you must include the portion that was deducted and provided a benefit in prior years in your income.

Ok, so what about settlement awards and amounts for emotional distress and/or mental anguish?  If the award or settlement was for emotional distress or mental anguish that originated from personal injury or personal sickness, the proceeds from the settlement would not be taxable and thus not need to be included in your gross income.  However, if you receive a settlement amount for emotional distress or mental anguish that did not originate from personal injury or personal sickness, that portion or amount of the settlement is taxable, and thus would be included in your gross income.  If a portion of your settlement is taxable as emotional distress or mental anguish, the amount can be reduced by the amount that you paid for other medical expenses that are attributed to the emotional distress or mental anguish and that have not been previously deducted and medical expenses you previously deducted for the emotional distress and mental anguish that did not provide an actual tax benefit

What about non-personal injury type settlements?  What about a settlement for lost wages or lost profits?  If you receive money via a settlement for last wages, not only is the amount taxable and included in gross income, but the settlement amount is also subject to self-employment tax.  For example, if you sued a prior employer for discrimination or involuntary termination and requested lost wages, and won a settlement, the portion received for lost wages should be included in income and subject to self-employment tax.  If you filed a suit against a third party for lost profits and received a settlement for lost profits, the proceeds would be taxable, and would included in your business income.  It may depend upon the business structure, plaintiffs in the suit and other related issues as to the further taxation of those settlement proceeds for lost business profits.

What about settlement proceeds for lost property?  Typically, if the proceeds received for lost property do not exceed your adjusted basis in the property, then the proceeds would not be taxable, but rather would reduce your basis in the property.   However, if the amount received was in excess of your adjusted basis, the amount in excess is income.

What if you are paid interest on the settlement amount?  Generally, the interest would be taxable, and would included like normal interest from a savings account.

The above article has been prepared by John McGuire of the McGuire Law Firm.  John is a tax attorney and business attorney in Denver, Colorado.  Please feel free to contact John directly with any questions, comments and concerns.

How and When Does the IRS Begin a Criminal Investigation?

How and when do criminal tax investigations begin?  Many people have heard of persons being criminally indicted or charged with tax-based claims for failing to pay tax or failing to file tax returns, but how does the government begin or initiate the criminal tax process?  The article below has been prepared by a tax attorney to provide additional information regarding these questions and issues.  Please remember this article is for informational purposes and you should consult your tax attorney or a criminal attorney with your specific questions.

The Internal Revenue Service has a Criminal Investigation Division that conducts criminal investigations relating to alleged violations of not only the Internal Revenue Code, but also the Bank Secrecy Act (BSA) and certain money laundering statutes.  The investigators will then provide their findings to the Department of Justice for recommended prosecution.

The information that will lead to a criminal investigation can be obtained by the Internal Revenue Service in many ways.  Perhaps an individual owed tax to the IRS or was being audited by the IRS and the IRS revenue officer or revenue agent noticed issues that appeared illegal, fraudulent or felt the matter needed further review.  The revenue officer or revenue officer could refer the case or issues to the Criminal Investigation Division.  Oftentimes, information could be received by the public such a disgruntled employee, ex-spouse or other whistleblower.  Furthermore, the IRS may obtain information from other law enforcement agencies whether federal, state or local that could inevitably lead to the initial criminal investigation.

Once the criminal investigation has begun, Special Agents will analyze the information to determine if criminal tax fraud or some other financial crime may have occurred.  The preliminary investigation is often referred to as the “Primary Investigation.”  A supervisor of the Special Agents will review the initial information and make a determination as to approve the case for further review and development.  If the supervisor approves, approval can be obtained from the head office and the Special Agent in charge will initiate a Subject Criminal Investigation.  At this point, the investigation would be considered open and ongoing as the Special Agent will work to further obtain facts and evidence needed to establish the necessary elements for criminal activity.  The information, facts and evidence can be obtained in various ways from various sources such as third-party interviews, search warrants, surveillance, subpoenaing bank records, related financial records & tax returns and reviewing any other financial or asset related documentation.  Generally, the Special Agent will work with a criminal tax attorney within the IRS Chief Counsel in an attempt to ensure certain legalities are maintained during the course of the investigation.

At what point is there a charge or prosecution?  Once all evidence has been gathered and analyzed, the Special Agent and their supervisor will make a determination that the evidence does or does not equate to criminal activity.  If the evidence does not substantiate criminal activity and charges, the investigation is discontinued.  If the determination is that the evidence would substantiate a criminal charge and thus prosecution recommended, the Special Agent would move forward with preparing a special agent report.  The special agent report would thereafter be reviewed by multiple parties such as supervisors, review teams etc.

Upon this “final review” if the Criminal Investigation Division determines a criminal prosecution is warranted, the division will recommend prosecution to the Department of Justice (Tax Division) or United States Attorney.  Generally, the Tax Division of the Department of Justice will prosecute the matter if it is a tax investigation, and the United States Attorney would prosecute for other investigations.

If you have been contacted by an IRS Criminal Investigator or know of an ongoing investigation of which you are a witness or target, it is highly recommended you contact a tax attorney or criminal tax attorney.

Can the IRS Take my Passport?

Can the Internal Revenue Service really impact my ability to travel?  If you owe taxes to the Internal Revenue Service, especially “seriously delinquent tax debts” the answer is yes, the IRS can impact your travel plans by impacting your passport as discussed below.

In January of 2018, the Internal Revenue Service announced it will implement new procedures that could impact an individuals ability to obtain or maintain a passport.  The IRS stated these new procedures will impact those individuals that have “seriously delinquent tax debts.”  Under the Fixing America’s Surface Transportation (FAST) Act, the IRS is required to notify the State Department of certain taxpayers owing seriously delinquent tax debts.  The FAST Act also requires the denial of passport applications, renewals of passports and in some cases even the revocation of an individual’s passport.

So what constitutes a seriously delinquent tax debt?  Generally, the IRS has defined a seriously delinquent tax debt as someone who has a tax debt to the IRS of more than $51,000.  The $51,000 threshold would include tax, penalty and interest for periods whereby the IRS has filed a Notice of Federal Tax Lien or issued a levy, and the taxpayer can no longer properly challenge the lien or levy action.

If you are taxpayer with a seriously delinquent debt to the IRS, you can likely avoid the IRS contacting the State Department by taking the following action(s).

 

  • Pay the debt in full;
  • Paying a settlement amount through a tax settlement or offer in compromise with the IRS;
  • Paying the tax debt under a formal installment agreement with the IRS;
  • Paying the tax debt through a formal settlement with the Department of Justice;
  • Suspending collection action by the IRS through an innocent spouse claim; or
  • Requesting a Collection Due Process Hearing with a levy.

 

A taxpayer under the following situations should not be at risk for having their passport rights impacted.

 

  • The taxpayer has filed and is in bankruptcy;
  • Is an identity theft victim;
  • The taxpayer’s account has been determined non-collectible by the IRS;
  • The taxpayer is located in a federally declared disaster area;
  • The taxpayer has a pending installment agreement with the IRS;
  • The taxpayer has a pending offer in compromise with the IRS; or,
  • The taxpayer has an adjustment that with satisfy the IRS debt in full.

 

In short, to prevent any passport issues if you owe taxes to the IRS, if the tax debt is being addressed, your likelihood of having  a passport application denied or a passport revoked is severely lessened.

The above article has been prepared by John McGuire of The McGuire Law Firm.  John is a tax attorney and business attorney and can be reached through www.jmtaxlaw.com

Please remember this article is for informational purposes only and you should consult directly with your tax attorney regarding any tax matters or questions.

Tax Attorney

Denver Tax Attorney

What is an Abusive or Illegal Tax Scheme

What is an abusive tax scheme?  You may have heard of a program or scheme that promises to eliminate or substantially lessen your tax burden and taxes due to the Internal Revenue Service.  A promoter of such a scheme is likely to use financial instruments such as a trust and/or pass through entities such as a limited liability company or limited partnership.  When these programs and schemes are used improperly and to facilitate tax evasion, IRS may criminally investigate the scheme and prosecute the promoters as well as investors.  You should remember that if something sounds too good to be true, it could be, and could lead investigation by the Internal Revenue Service and potential criminal tax charges.  It is recommended that you discuss any potential tax scheme or program with a tax attorney.  The article below will provide more information regarding abusive tax schemes, but this article is for informational purposes only, and please always discuss your specific issues with a tax attorney.

Overtime tax schemes have developed from relatively simple single structure arrangements into more complex and sophisticated overall schemes and strategies that take advantage of foreign jurisdictions and financial secrecy laws.  The Internal Revenue Service Criminal Investigation has a national program to fight these illegal tax schemes and programs and prosecute violators with criminal tax charges.  Our government has and will continue to criminally prosecute the promoters of illegal tax schemes and those who play substantial roles in aiding or assisting the tax scheme, which could include investors into the tax scheme.  The biggest question when initially looking at these issues is, what constitutes an abusive or illegal tax scheme and could lead to criminal tax evasion and criminal tax charges?  In short, an abusive tax scheme that could lead to criminal matters would violate the Internal Revenue Code and related federal statutes.  Furthermore, generally the violations of the federal tax law and related statutes would use domestic or foreign trusts as well as pass through entities such as partnerships as vehicles in violating the federal tax laws.  In recent years, foreign bank accounts and other financial accounts have been used more frequently to accomplish tax evasion because of reporting issues (one may refer to FATCA for further information).  Many foreign banks and financial institutions do not report income such as interest and dividends, and thus there is no record of the income to the trust, entity and individuals.  With no reporting to the federal government, and no reporting on applicable tax returns, the income goes unreported.

As stated above, foreign accounts or trusts may be used frequently in illegal tax schemes.  A common scheme that may have many variations may flow as follows.  A United States citizen has a business in the United States and also forms a foreign corporation and foreign bank account in the same name of their US business.  When checks are received, the checks are processed through the foreign business and foreign bank account.  The foreign account will likely be in a foreign jurisdiction that does not report income and related items to the US government.  Thus, the income goes unreported on the taxpayer’s tax return and there are no 1099s issued to the US government to have any knowledge of the account and thus income going into the account.  Some schemes will involve a foreign business that issues invoices to a United States business.  The invoices are paid to the foreign business and a deduction taken by the US business, but the income of the foreign business is not claimed.  The business are commonly owned and the US citizens involved are not claiming the income of the foreign business.  Again, we have unreported income into a foreign account, and likely interest and/or dividends in a foreign account that would not be reported.  The above examples could go many more layers deep, but provide good examples as to how an illegal tax shelter or abusive tax scheme could be established.

The above article has been prepared by John McGuire of the McGuire Law Firm for informational purposes, and should not be relied on as legal advice.  Mr. McGuire is a tax attorney, representing individuals and businesses before the Internal Revenue Service and can be contacted directly through the McGuire Law Firm.