Posts By: John Paul Krueger, EA; President & CEO

The Facts:
a) The 2016 IRS budget keeps the IRS funded at fiscal 2015 levels.
b) The 10.6 billion in funding is 1.7 billion less than the President’s budget.
c) Since 2010, IRS funding has been reduced by 18%.  

What this means to US taxpayers:
13,000 fewer IRS employees, 10,000 fewer enforcement staff, the lowest individual and business audit levels in 10 years, and an average wait time of 23 minutes to receive assistance via phone when calling  into the IRS.

In direct relation, the IRS now resorts to indirect, ancillary methods to assist with the assessment and collection of tax due.  This article explores one of three such methods identified recently by the National Taxpayer Advocate.


Automated Substitute for Return (ASFR) Program

What is the ASFR Program? When a taxpayer who has a tax return filing requirement fails to file a tax return, the IRS can use third-party information (Forms W-2 and 1099 filed by employers, banks, and other third parties) to determine and assess a tax. This process is the ASFR program. The ASFR program treats taxpayers as single (or married filing separately where there is evidence the taxpayer is married) with no dependents, allows one exemption and only a standard deduction.

What are the selection criteria for the ASFR Program? First, there must be an unfiled tax return with the IRS.  Second, the IRS examines a delinquent filing time period and dollar threshold in its Information Returns Processing (IRP) program.  Finally, the IRS prepares an estimated tax return on behalf of the taxpayer based on available information.  

The IRS collects $2.25 for every $1 spent on this program.  

This is in stark contrast to other IRS collection programs that generate $6 to $1 or $20 to $1 returns on investment.

What types of burdens do taxpayers experience when selected for the ASFR program? Taxpayers receive a statutory notice of deficiency post assessment.  The IRS provides taxpayers of their right to petition tax court in the assessment.  Due to the high tax, penalties and interest assessed in combination with a tax court filing deadline there can be two wildly varying reactions.  

First, the taxpayer may “stick their head in the sand.”  This ostrich type taxpayer will then suffer through a very long and drawn out assessment and collection process.  

The “Head in Sand” Taxpayer

Second, the taxpayer may over-react to the notice and make an uninformed or hurried decision on how to respond.  Thus, the taxpayer incurs costly and unnecessary expenses for representation by a Tax Attorney, CPA or both.

What is the best strategy for a taxpayer dealing with this type of situation?

Here are five steps you can take to achieve success:

  1. IRS Correspondence. 
    • This is the first step that many taxpayers miss.  The IRS loves to riddle correspondence with numbers, codes, statutory deadlines, return correspondence address(es), and crucial information needed to secure the taxpayer’s procedural rights.  Having only page 1 of 7 for a correspondence document can lead to missing valuable information.  
    • Word to the wise, you will need all pages of all correspondence to be successful.
  2. Find a CPA. 
    • Not just any CPA but a CPA that has familiarity with the ASFR program.  This can be harder than you think.  
    • Most CPA’s abhor dealing with tax controversy issues.
  3. Make a checklist. 
    • The best defense to an automated substitute for return is to provide a thoroughly prepared original, true, and correct tax return with strong back-up documents and work papers.  
    • Your CPA will ask you to complete a tax organizer and provide documents to assist in the preparation of the tax return.  This can be a daunting exercise. Make a checklist and work on one or two items a day until it is complete.
  4. Get a calendar.  
    • As indicated in the first step, there are certain deadlines and expectations that must be met when dealing with an ASFR situation.
    • Hopefully your CPA is helping you stay on top of these deadlines, but ultimately it is your responsibility.

Ultimately, you need to know your options.  The statutory notice will be provide you with the last day to petition tax court to resolve the matter.  The majority of taxpayers do not understand what this means or how the process works.  Understanding your options should this deadline come to the forefront is critical to making an informed decision.

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Living abroad can be an adventure, but you could still have taxes back in the States.

Many US citizens look at an opportunity to live and work overseas as an adventure, full of excitement, an opportunity to explore new cultures, languages, foods, and people. Often, the last thing on their mind is how living abroad will affect their taxes. Who wants to think about that anyway? It can definitely be a damper on what would otherwise be a thrilling opportunity. The fact is, if you are considered a US person for tax purposes, e.g. US citizen, Green Card holder, certain work visa holders, etc. then you most likely have a US tax filing requirement, even if you are not earning anything in the United States.

This is because the US taxes its citizens and those deemed as US persons on their worldwide income, regardless of source. Furthermore, you will most likely have some type of tax filing requirement in the foreign country where you are working and living.

It’s not all bad news, though, and definitely not something that should prevent you from looking forward to and enjoying your overseas experience. There are provisions in the US tax code as well as US tax treaties with many countries around the world that help to offset (equalize) some or all of your US tax burden, especially if you are paying taxes to another country. With the IRS offering a variety of exclusions this guide for U.S. Citizens and Resident Aliens residing outside the states is a great thing to have in your back pocket. 

Also, if you physically reside outside the United States for 330 days within a 12-month period, you may be eligible to exclude a big chunk or possibly all of your foreign earnings ($100,800 for 20151). If you earned over the exclusion and paid foreign taxes on your earnings, then you may further be eligible for a prorated foreign tax credit on the earnings in excess of the exclusion.

IRS Seize Passport

Another consideration outside of your tax return filing requirement is that of disclosing ownership, joint or separate, as well as signature authority on financial accounts located outside of the United States. If you had a combined balance of US $10,000 or more during the year then you have a requirement to report those accounts, also known as FBAR (Foreign Bank Account Report2).

In conclusion, it’s not as bad as it might seem. When planning an excursion, you need to do some planning ahead of time for best chance of making it to your destination. It’s no different when it comes to understanding your tax filing requirements while living abroad. There is a lot of misinformation and confusion surrounding this topic and the requirements, making it advisable to seek the assistance of a tax advisor with experience in international taxation matters.

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The Facts:IRS discrimination
a) The 2016 IRS budget keeps the IRS funded at fiscal 2015 levels.
b) The 10.6 billion in funding is 1.7 billion less than the President’s budget.
c) Since 2010, IRS funding has been reduced by 18%.  

What this means to US taxpayers:
13,000 fewer IRS employees, 10,000 fewer enforcement staff, the lowest individual and business audit levels in 10 years, and an average wait time of 23 minutes to receive assistance via phone when calling  into the IRS.

In direct relation, the IRS now resorts to indirect, ancillary methods to assist with the assessment and collection of tax due.  This article explores three such methods identified recently by the National Taxpayer Advocate.


Third Party Contacts

What is third party contact (TPC)? Internal Revenue Code 6103 prohibits the IRS from disclosing taxpayer information unnecessarily.  There is an exception to the rule if the disclosure is necessary for the IRS employee to execute their job duties.  The IRS is generally required to give taxpayers reasonable advanced notice before making a TPC.  Additionally, if a TPC occurs, then upon request by the taxpayer the IRS must provide post-contact reports.

What is the process for providing TPC notice? Example (under the perfect IRS scenario): Taxpayer owns a business.  Taxpayer fails to remit payroll taxes to the Federal Government.  IRS assesses a balance due and begins collection activity.  Taxpayer fails to provide the IRS with the information needed to determine collection potential.  IRS gives advanced notice to the taxpayer of third party contact request.  Taxpayer fails to provide information.  IRS discloses taxpayer’s confidential information to business vendors in an effort to collect information from the vendors.  This is a third party contact.

What are the ramifications to the taxpayer of third party contact?

Senate Committee on Finance that wrote this law explains the ramifications as follows:

“Taxpayers should be notified before the IRS contacts third parties regarding examination or collection activities with respect to the taxpayer.  Such contacts may have a chilling effect on the taxpayer’s business and could damage the taxpayer’s reputation in the community.”

What is the best strategy for a taxpayer dealing with this type of situation?

Third party contact notices normally occur with businesses or self-employed individuals, i.e., sole proprietorships.  The general information requested by the IRS manifests on either IRS Form 433-A or more likely 433-B.

The proverbial fork in the road can categorize the danger with both of these forms:
-What does the IRS consider mandatory information versus discretionary information?
-Secondarily, there are statutory rules that the IRS must follow when issuing TPC notices and conducting a TPC.  

It is important to hold IRS employees accountable to the law.

The best strategy for dealing with a TPC is as follows:

  1. Look Internal
    • If you are a business, how have you been doing your bookkeeping?
      • Do you use QuickBooks? Are your books in order?  
      • Are there any foundational items that need to be corrected?
    • If you are an individual,what does your personal record-keeping look like?
  2. Look External
    • Once you understand your situation internally, obtain representation such as a Tax Attorney or Federally licensed Enrolled Agent.  
    • The right practitioner should be able to act as a strong buffer between you and the IRS.
  3. Discovery with the IRS
    • If third party contacts have been made, then request a detailed breakdown of contacts. 
    • If no contacts have been made, then arrange to produce the requested information based on a reasonable timeline. Your practitioner should also request that the IRS agent or examiner produce their workpapers, i.e. 6103 disclosure.

      You have the legal right to this information.

       

  4. Financial Analysis
    • Conduct a financial analysis review with your practitioner – The discovery phase only gets halfway.
    • The financial analysis of income and assets sets the final strategy for success.
  5. ImplementationThis is always the hard part 
    • The final strategy culminates into a submission to the IRS that takes your “position.”
    • You should always review the submission and have your practitioner explain how it falls within the guidelines of the Internal Revenue Manual (IRM), similar fact scenario tax court cases, private letter rulings or chief counsel advice.
  6. Revise and review  until you are fully comfortable with the end product.

No matter the situation, empower yourself to seize opportunities and take back control from the IRS.

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Debt_OpportunityMost procedural opportunities to stop or delay collections present themselves soon after the tax debt is assessed. As a result, engaging professional help for IRS debt settlement sooner than later is absolutely crucial. When a knowledgeable practitioner intervenes early on, the chance for success in delay or absolute cessation of collection activity is fairly high.

Appealing the assessment is a taxpayer’s first opportunity to stop collection. The right to appeal the assessment arises upon receipt of the “Final Notice of Intent to Levy” (sometimes referred to as a Form 1058). Appealing the assessment is a matter best left to a practitioner. Not only is the appeal time sensitive, but it is also procedurally complex and requires extended discussions with senior collection personnel at the IRS.

Even the most sophisticated taxpayer should not engage in lengthy discussions with IRS personnel without representation.

IRS personnel are trained and motivated to find collection sources and to levy those sources. Navigating this collections process successfully requires a trained professional.

If a taxpayer misses the assessment appeal deadline the range of options for collection delay or cessation narrow considerably. The options also become less effective or more costly. Short of entering whole-heartedly into the settlement process (discussed below) the remaining options include filing what is known as a CAP appeal (Collections Appeal Program), filing for injunctive relief in federal court, or requesting a full pay hold. Each of these options will either delay collection for only a short period of time or are very costly.

Entering whole-heartedly into the settlement process offers delay or cessation periods. For example, upon the filing of a request for an offer in compromise collection stops once the request is received and recorded. Also, once an installment agreement to pay the assessment over time is accepted other collection action stops for as long as the scheduled payments are made. Finally, the filing of a bankruptcy petition stops collection while the automatic stay is in place. Filing bankruptcy is a major decision and it should only be done with the help of an expert attorney. Bankruptcy may not discharge your tax debts, but it will stop IRS collections while the automatic stay is in effect.

Engaging a trained professional early on in the collection process is the most advantageous thing you can do as a taxpayer. The amount and effectiveness of collection delay or cessation options are greater at the beginning of the process than they are further down the line.

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Today, Five Stone received the exciting news that our organization is one of three finalists for the Ethics in Business & Community Award, presented by RecognizeGood, a local nonprofit that sponsors the award.

The Ethics in Business & Community Award is given annually to businesses, nonprofits, and individuals who exemplify ethical practices in their daily operations. Past winners include Habitat for Humanity, Kendra Scott Stores, and IBM.

Ethics in Business and Community Award

Ethics in Business and Community

Five Stone is a unique organization, in that Community & Charity Engagement (CCE) is one of our foundational pillars. Our associates are called to make a positive impact on people’s lives – whether they be clients, partners, or community members in need. For this reason, we donate our time, talents, and treasures to local and national charities.

For every $1 profit Five Stone earns, 33¢ goes to a charity or non-profit. Our CEO John Paul Krueger is passionate about giving big—not just dollars and cents, but also hours. Five times a year, we send associates out of the office and into the community to serve others…on paid office time.

A faith-based tax firm is certainly a rarity in today’s marketplace, but our faith is the driving force behind our desire to serve and hopefully changes some people’s lives in the process.

For additional information on the Ethics in Business & Community Award, please visit www.recognizegood.org/programs/ethics-business-community.

Good luck to all of this year’s finalists!

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IRS

The Facts:

  1. The 2016 IRS budget keeps the IRS funded at fiscal 2015 levels.
  2. The 10.6 billion in funding is 1.7 billion less than the President’s budget.
  3. Since 2010, IRS funding has been reduced by 18%.

What this means to US taxpayers:

13,000 fewer IRS employees, 10,000 fewer enforcement staff, the lowest individual and business audit levels in 10 years, and an average wait time of 23 minutes to receive assistance via phone when calling  into the IRS.

In direct relation, the IRS now resorts to indirect, ancillary methods to assist with the assessment and collection of tax due.  This article explores three such methods identified recently by the National Taxpayer Advocate.


Notices of Federal Tax Lien

What is a notice of Federal Tax Lien (NFTL)?  An NFTL is a legal document that establishes the priority of the Federal government’s interest in a taxpayer’s property.  An NFTL comes into being when a taxpayer owes the Federal government a balance due of tax in excess if certain thresholds.

How does a Federal Tax Lien (FTL) negatively affect a taxpayer?  An FTL normally takes a super-priority position in related to other creditor liens.  Additionally, the credit bureaus list FTLs on taxpayer’s credit report, which causes a severe drop in creditworthiness.  In turn, there is an impact in the ability to obtain financing for a home, secure affordable rental housing, find or maintain a job, even becoming insured could be hindered.  

Thus, a vicious loop begins that almost guarantees unpaid tax debt.  

Finally, FTLs are dischargeable in bankruptcy, but the underlying debt may survive and cause an immediate lien foreclosure on post-bankruptcy assets by the Centralized Lien Unit of the IRS.  

The general rule of thumb is to complete an Offer in Compromise to extinguish FTLs then enter bankruptcy.

What is Meaningful Contact Practice?  

Based on the guidance of the IRS internal manual, the IRS must make reasonable efforts to contact a taxpayer before filing an NFTL.  The IRS allows a very paltry timeline of 10 days for contact and resolution.

The National Taxpayer Advocate released a report indicating that in 2015, the IRS recorded that 62% of contact calls (predictive dialer) from the Small Business/Self-Employed division resulted in no contact with taxpayers.  Even worse, 71% of contact calls from the Wage & Investment division resulted in no contact with taxpayers.

The Advocate indicates that the IRS should adopt best practice methods from private sector creditors.  

For example, the Advocate believes in the use of early intervention pre-collection methods over a 45-day period.

What is the best strategy for a taxpayer dealing with this type of situation?  

On September 30th, 2015, the IRS Joint Operations Center reported that only 37% of taxpayers accessed IRS call centers to make installment agreement arrangements prior to the filing of an NFTL.

This means that roughly two out of three taxpayers will be unable to access the IRS to make proactive arrangements.

The best strategy for dealing with an NFTL situation is as follows:

  1. Gain an understanding of your tax debt.
    • Where does the debt amount stand in relation to the NFTL filing threshold?
  1. Gain an understanding of the different statute of limitations.
    • Assessment Statute Expiration Date (ASED)
    • Collection Statute Expiration Date (CSED)
  1. Gain an understanding of collection alternatives,
    • Installment Agreement
    • Offer in Compromise
    • Currently not Collectible
  1. Gain an understanding of the minimum information needed by the IRS to make a decision on whether or not to file an NFTL.
    • IRS Form 433-A vs. Form 433-D vs. Form 433-F
  1. Gain an understanding of how the FTL work during bankruptcy and post-bankruptcy.
    • If Bankruptcy is part of the fact pattern.

Taxpayers can only make smart decisions when they have actionable data.  The five-part game plan above can place you in a position for success and avoidance of the negative ramifications of an NFTL filing.

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Like the poisoned apple in Snow White, an Offer in Compromise can be a catalyst for a fairy tale ending.

“Once upon a time . . .” is how most fairy-tales begin.  There are generally no fairy-tales to speak of when dealing Negotiation Calculatorwith the federal government, but if there was one, it would definitely be the Offer in Compromise (OIC).

The Internal Revenue Service (IRS) is often considered to be every taxpayer’s big bad wolf, but in the case of the OIC, the IRS is more akin to a fairy godmother.  When a delinquent taxpayer applies for and receives an OIC, the IRS forgives all of their debt in exchange for a one-time payment or several installments of a small portion of the balance.  This fairy tale as assisted many taxpayers in obtaining a fresh-start and a brighter outlook for their financial future.

An OIC is not without limitations.  To qualify, a taxpayer must prove through extensive financial documentation that his/her monthly expenses exceed monthly income, and that paying the debt, even over the course of time, would cause serious financial hardship.  Additionally, the taxpayer must agree to all of the IRS’ proposed deal terms, such as becoming compliant with all IRS reporting regulations for a set number of years, or owing the full balance of the original debt plus interest if default occurs.  

Many taxpayers choose to hire a CPA or tax & accounting firm to assist them in navigating the IRS’ highly mechanized and detailed process.  More information on OICs can be found on the IRS’ website.  The IRS also offers other options for payment and negotiated settlements, depending upon the taxpayer’s specific circumstances.  This article from the Journal of Accountancy gives a great overview of some of the more common programs that the IRS offers.

In short, the OIC is an incredibly useful tool to have in your belt when navigating the inevitable minefield that is created when a taxpayer owes a debt to the IRS.  More information on OICs can be found on the IRS’ website.

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On January 7, 2016, the IRS made two updates to the Streamline Filing Compliance Procedures.

First, the IRS added Frequently Asked Questions 13, 14, and 15 to the Streamline Filing Compliance Procedures (Domestic).  Correspondingly, the IRS added those same questions to the Streamline Filing Compliance Procedures (Foreign) – questions 6, 7, and 8.

These questions and answers detail the following:

  • What facts taxpayers need to provide in their non-willful certification statement
  • What to do if a joint spouse refuses to sign off on the amended returns and certification needed for a Streamline Filing
  • Whom to call if there are questions about the forms

The most interesting out of these three are the facts or issues that taxpayers need to address in their non-willful statements.  The IRS indicates the following topics are most germane:

  • “Specific reasons, whether favorable or unfavorable…that are relevant to the failure to report all income, pay tax and submit FBARs”
  • Source of funds
  • Account contact
  • Schedule B check the box facts
  • Foreign entity disclosure
  • Reliance on a professional advisor
  • If married, then provide individual reasons for each spouse

In regards to the first topic, as a practitioner I can say that from the IRS point of view what they do not want is for taxpayers to raise facts that are only favorable to their position.  The IRS wants a full accounting of the facts and circumstances.  This is in alignment with the history and policy under IRS Voluntary Disclosure Practice.  Taxpayers may argue that this violates the Fifth Amendment right against self-incrimination.  The typical IRS response to this argument is that if you are worried about self-incrimination the taxpayer should probably utilize the Offshore Voluntary Disclosure Program (OVDP) instead of the Streamline Filing Compliance Procedures.  As a practitioner, I would advise that any taxpayer who wants to use the Streamline Filing Compliance Procedures should have a tax attorney familiar with both IRS Voluntary Disclosure Practice and international tax issues draft the factual non-willful certification statement or at a minimum review the certification for potential liability.  Finally, please note that the topics addressed above are not an exhaustive list.  As a practitioner, I generally utilize 27 factors when determining whether a taxpayer is willful or non-willful.  Additionally, I address each taxpayer’s facts separately during a joint disclosure.  I also address each individual tax year for both income (when applicable) and FBAR issues.

The second change comes in the Form 14563 used for Streamline Filing Compliance Procedures (Foreign).  The revised form now includes two new sections:

  • Taxpayer is a U.S. Citizen or Lawful Permanent Resident (Green Card Holder)
  • Taxpayer is not U.S. Citizen or Lawful Permanent Resident (Green Card Holder)

The taxpayer must now choose one of these two sections and complete the required information.  If the taxpayer is a citizen or green card holder, then the taxpayer must list each tax year filed in the income tax disclosure period.  Follow that, the taxpayer must indicate whether or not they qualify for the physical presence test by checking “yes” or “no” next to each tax year.

If the taxpayer is not a citizen or green card holder, then the taxpayer must attach a computation sheet for the income tax disclosure period showing that the taxpayer does not meet the substantial presence test.

Failure to abide by these procedures will lead to a rejection of the Streamline Filing due to incompleteness.  Taxpayers should tread carefully when providing this information and take caution to make sure that this information matches the information disclosed on their tax return.

As with all things tax, you should not rely on this article as tax advice.  Please conduct your own personal due diligence and when in doubt, consult with a Federally Authorized Tax Practitioner about your particular facts and circumstances.

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Serving others has long been a cornerstone of Five Stone Tax Advisers. Whether it be through our tax-resolution services or donating our time and treasures to charities, being others-centered is what we’re about – both as an organization and individually.

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shutterstock_146730020

The City of Austin (“Austin”) is upset with its cousin – the Travis Central Appraisal District  (“TCAD”).  Really upset.  Austin is upset enough that it has filed suit against TCAD in district court.  Austin concluded a study of commercial property values on May 11, 2015.

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