Brand Protection through Trademarking for your Brand

Posted on by katemley

Many producers spend a lot of time creating a marketable image for their products through innovative images, label designs and catch phrases.  As a producer you hope to stand out based on the sensation of taste.  However, to get the consumer to the point of enjoying what you have created, it is likely that you will need to convey your craft through images, designs and marketing tools that create a brand which represents your hard work – namely the wine, beer or distilled spirit that is the ultimate product you sell.

Since your brand image will represent the beverage you create, and ultimately your business, it is important to make sure that it is protected.  In some ways protecting your actual product is a bit easier than protecting your brand because you have the ability to set up procedures that are only known internally for production of your beverage.  Your graphic design, logo, or tagline is intentionally placed into public view.  As a matter of fact, you want it in front of as many people as possible! 

As you become more successful, there is a higher likelihood that an individual or business will seek to “borrow” some of your hard work to create their own success.  However, what you have created as your brand image is actually an intellectual property right that is protected under the law of the U.S. and many foreign countries.  When someone else uses this property without proper permission, which usually comes in the form of a license, they are basically stealing from you and subjecting themselves to liability.

In order to protect your brand, you need to properly register your trademark.  So, what is a trademark?  The U.S. government describes a trademark as a word, phrase, symbol, or design, or a combination of these, that identifies and distinguishes the sources of goods of one party from those of others.

Many may be surprised to learn that a trademark interest is not created when you register with the federal government.  The trademark is established by using the mark in commerce.  The longer that you use it, the stronger your claim to it becomes. However, if you are looking to establish the highest level of protection, then your goal should be to register the mark with the United States Patent and Trademark Office (USPTO). This registration will do the following:

  • Create a legal presumption of your ownership of the mark and your exclusive right to use the mark nationwide on or in connection with the goods/services listed in the registration;
  • Put the public on notice of your claim of ownership of the mark;
  • Place a listing in the USPTO’s online databases;
  • Provide the ability to record the U.S. registration with the U.S. Customs and Border Protection Service to prevent importation of infringing foreign goods;
  • Provide you with the right to use the federal registration symbol “®”;
  • Create the ability to bring an action concerning the mark in federal court; and
  • Create the use of the U.S. registration as a basis to obtain registration in foreign countries.

You will want to begin the process of registering your mark as soon as you know what your mark is and how you want to use it.  It is not necessary for you to be using the mark in commerce at the time you begin the registration process.  As long as you know that you will be using the mark in commerce in the next few years, you will be able to take priority over any other person or entity that files after you, even if your basis for the mark is an intent, rather than actual use in commerce.

It is also important to work through your brand protection issues early because you may be infringing on the intellectual property rights of another business.  Proper registration of a trademark with the USPTO should start with a trademark search to determine if there are any immediate conflicts with your preferred mark.  The USPTO will only register unique marks.  The examining attorneys at the trademark office will not allow for registration unless your mark is unique.  Therefore, it is important to perform a search before submitting your request in case there is an immediate, identifiable conflict.

If in fact there is a conflict, it may still be possible to utilize the mark.  One of two things could happen.  Either you perceive a conflict and proceed to register your mark in the hopes it will be deemed unique and registered. Or, you approach the owner of the mark with a proposition to either purchase the mark from them if they no longer wish to use it, or you could purchase a license from them to use the mark in some manner while paying them a fee to do so.  Should you be able to purchase the mark from them, then you will want to properly record your “Assignment” of trademark with the USPTO.  There is a process for this and it will allow you to become the proper owner of the mark.

When you apply for your mark, it will be necessary for you to determine what good you are trademarking, as each good represents a separate mark. The USPTO will allow you to register one type of good, based on a description from the International Schedule of Classes of Goods and Services, for one fee.  However, the specific item of goods must be listed.  So, for example, you may want your logo to be a registered mark and use it on both your beverage container and also on an item of clothing – these would technically be two separate marks that carry two registration fees.  However, there is the possibility of listing multiple items of goods to be covered in any one class that will have a single fee.  So, if you intend to sell merchandise in your tasting room with your logo and that merchandise falls within the same class – such as shirts and ball caps do for clothing, then you will simply have one trademark to register.  It will be necessary to carefully describe the goods in which you intend to place your mark.

It should be refreshing to know that your business has the opportunity to grow and develop a recognizable brand image that can be protected in the marketplace.  It would be our pleasure to answer any questions you may have about trademarks, or assist you with proper protection of your brand. 

Why do I have to owe over $10,000 to get help with my IRS tax debt?

Posted on by katemley

Everyone has seen on television, or heard on the radio, advertisments for assistance with owing the IRS back taxes.  Turn on the TV late at night to watch reruns of your favorite show and you’re bound to see at least one. But they all have that caveat, saying that you must owe the IRS over $10,000 for them to help you, but why?

The fact of the matter is that you don’t need to owe a certain amount to have representation to assist with your tax debt – at least not from our firm.  If you listen to the television or radio you would think that there is no way to help someone who owes less than this amount.  Most of the businesses that advertise in this way are looking to submit a settlement proposal, known as an Offer in Compromise, to the IRS on your behalf.  This may or may not be possible, but generally that is the only service these businesses provide.  What they know is that due to the manner in which the IRS settles debt, it is nearly impossible to settle a small tax debt.  However, here are several situations that our office sees frequently where taxpayers have a small tax debt, but still need help sorting through their options to come into compliance:

  • Sometimes a client may owe the government a small amount, but has unfiled returns and is preparing to file bankruptcy to discharge health care debt or other obligations.  The bankruptcy code requires the taxpayer to file their last three returns in order to qualify for the bankruptcy.  After filing, the client anticipates owing more.  Perhaps that is a small amount or a large amount.  Regardless, this client needs help with those taxes because they will not be discharged in the bankruptcy.
  • A client may owe a small amount based on a return filed by the government – known as a Substitute for Return (SFR).  However, the client will owe much more later when a proper return is filed.  This can happen when a client is self-employed and receives a few 1099’s that comprise a small amount of the taxpayer’s overall revenue.  Once the return is properly completed, there may be a different picture.
  • Sometimes a client owes tax debt that their spouse created and it is simply unfair for them to be held responsible for the debt.  That client may want to be relieved from the obligation – no matter how small – through the Innocent Spouse Relief process.  Alternatively, a spouse may be harmed because his or her refund was offset to their spouses tax debt.  In this instance, this client may need assistance filing an Injured Spouse claim.
  • A client may have a few thousand dollar tax debt created by automated Exam at the IRS, but if the client merely pays it or sets up a payment agreement to resolve the balance, the taxpayer may be setting himself or herself up for problems with future tax return positions.  If your expense or other deduction is valid and the IRS disallowed it, it may be worth fighting to substantiate it so you do not create a record showing you agreed with the claim or deduction being disallowed.  Therefore, your representative could make arguments to assist in your exam and protect your position for later.
  • Some clients owe less than $10,000 and are interested in relieving themselves from the burdens of a tax lien.  It is now possible to establish a Direct Debit Installment Agreement and apply for a withdrawal of the tax lien.  There are specific procedures for this doing this must be met to qualify, but it is possible.  As a matter of fact, it is now possible to accomplish this if you owe up to $25,000.
  • A client may owe a small tax debt which was originally much larger and triggered the filing of a tax lien.  Though the debt is paid down, it is preventing the sale of a piece of real estate because there is not enough equity to retire the tax debt at closing.  These clients need assistance with a request to Discharge Property from Federal Tax Lien.  This will clear title to the property and allow for the closing, even though the entire tax debt is not being paid off in full.
  • Some of our clients only owe a couple of thousand dollars, but have many years of unfiled tax returns and anticipate owing much more.  A settlement proposal, Offer in Compromise, may be appropriate.  However, it is impossible to know if that is the case until the taxpayer knows the total owed and a financial analysis is performed which includes a review of income, expenses and equity in assets.
  • A client may need assistance when a wage levy is in place, but the balance on their total tax debt is not larger than $10,000.   In those instance, it is very likely that the taxpayer can be moved to a voluntary payment agreement if all returns are filed.  Even if all returns are not filed, substantiation to the IRS of income and expenses could likely result in a partial levy release to relieve the client of some, or all of the wage levy.
  • If any of the above is similar to your situation, or you have some other tax problem, we will be happy to help you, regardless of the size of your debt.  Just give us a call.

Anticipating a shortfall on your 2013 tax return?

Posted on by katemley

Haven’t seen your CPA since you filed your tax return in early 2013?  Paid the minimum in estimated taxes to avoid being penalized by the IRS? Made approximately the same amount of money in 2012 as 2013? You may have a problem – a tax debt problem. Don’t panic, review all your options before taking drastic action to pay that tax bill.

So what happened? A lot. 2013 brings with it many tax increases for those in higher income tax brackets.  Individuals earning over $250,000 and couples earning over $300,000 will start to lose their itemized deductions. Individuals earning over $400,000 and couples over $450,000 hit the new 39.6% top marginal tax rate.  Additionally, they are subjected to the 3.8% medicare surtax on investment income.  Finally, they lose the personal exemption of $3,900 this year.  These quickly add up.  Capital gains rates have taken a “bump” too for those earning more than $400,000 as a single person and over $450,000 as a couple, from 15% to 20%. 

These new changes may cause some to be surprised when they pick up their tax returns.  Taxpayers who have owed little or none before may find themselves in a situation where they don’t have liquid cash to simply write a check the U.S. Treasury. If you don’t have the cash, the last thing you want to do is take action that increases your 2014 tax bill.  In other words, you wouldn’t want to take an early withdrawal from your IRA or 401(k).  These withdrawals could cause you to incur both taxes and penalties. Further, you want to avoid a cash out of non-retirement assets that drive up your capital gains taxes or cause you to incur other ordinary income tax consequences. 

Perhaps you have access to a line of credit to pay your taxes – either secured or unsecured – such as a home equity loan or line of credit through a bank card. These could carry hefty closing costs if you are trying to establish them for the purpose of accessing cash to pay the taxes. And, home equity loans on average carry a 6% interest rate at this time.  Other lines of credit could carry interest rates in the double digits. A problem with using the line of credit, especially if you don’t have it established, is that it could take time to obtain the cash.  Delay in paying the tax bill could cause further penalties and interest.

One option that you can consider, if you need time, is asking the IRS for a “full pay delay.” It is not uncommon for the IRS to place a 120 day hold on collection action while you acquire funds.  Another option is to establish a payment agreement directly with the IRS.  In many cases, the payment agreement can be established without full financial disclosure and without the filing of a tax lien.  The interest rate at the IRS is actually pretty low, currently about 3%.  Additionally, penalties for failure to full pay your tax bill will accrue.  Regardless, this is another viable option that may very well be your cheapest overall option.

When analyzing this type of situation, regardless of what option the taxpayer chooses to resolve the debt, the taxpayer must plan for 2014 current taxes.  This will be necessary to avoid a similar shortfall like the one in 2013.  So, from a cash-flow perspective, the taxpayer will have to balance some mechanism to retire the 2013 taxes while not creating a new balance for 2014. 

If a taxpayer has a $25,000 shortfall for 2013, that will likely also be the case for 2014.  As such, an increase of greater than $2,000 per month in estimated taxes will be required to close the gap.  This type of foresight is necessary when looking at options to deal with the 2013 debt.

If you would like more assistance with resolving your 2013 tax balances and planning for 2014, please don’t hesitate to contact our office.

How Estate Tax Exemption Portability Provides Relief

Posted on by katemley

Over the past decade the effective estate tax exemption has risen from $600,000 to $5.340 million for 2014.  Of course, there is an unlimited marital deduction that allows one to transfer as many assets as is desired to their surviving spouse at death.  That actually created a problem, which created common estate tax planning needs.  The problem was that each spouse had an exemption, but if all assets passed to the surviving spouse at death under the unlimited marital deduction, then the effective exemption of the first spouse to die would be unused and lost.

A common planning technique used by estate planning lawyers for years was to create a “family trust,” also called a “credit shelter trust.”  Assets would be split between spouses so that outright transfer to the surviving spouse would be avoided.  Then assets owned by the first spouse to die would be transferred to a trust for the benefit of the surviving spouse.  The surviving spouse would not have unfettered access to the funds in this trust, however the funds could be used for the health, education, maintenance and support of the surviving spouse.  This was just enough of a limitation to avoid triggering the use of the unlimited marital deduction.  As such, the exemption of the first to die’s estate would be used, rather than lost.  The effect was to basically double the amount of assets shielded from the estate tax.  Additionally, assets held in the credit shelter trust could grow, and even though they might eventually exceed the exemption amount before distribution after the surviving spouse’s death, they would never be subjected to estate tax at that time.

The above was historically very valid planning.  As the estate tax exemption rose from $600,000 to $1.5 million to $3.5 million and now going to $5.34 million, estate planners found it unnecessary to utilize the credit shelter trust technique as often.  If the exemption was $3.5 million and the total estate was $2.0 million, and the clients were elderly, it wouldn’t be worthwhile to separate assets and establish a credit shelter trust as the exemption of even one spouse would adequately shelter the entire estates of both spouses at the survivor’s death.

Even though the exemption rose, many estate plans have not been reviewed to see if the credit shelter technique is necessary.  Further, many practitioners were very hesitant to assume that the exemption would remain as high as it is now.  With the adoption of the American Taxpayer Relief Act of 2012 (the “Act”), we have stability on the exemption amount and it is tied to an inflation adjustment so it will not take an act of Congress to increase it.

Of even greater importance is that the Act adopted “portability” of the exemption between spouses.  Portability is probably one of the most efficient tax tools created in many years, though there is some room for improvement.  The basic concept is that portability allows the surviving spouse to use the deceased spouse’s unused exemption.  It is now no longer necessary to create a credit shelter trust because you can access the first spouse to die’s exemption by timely filing an estate tax return.  This is the only downside, you may have to file a return simply for the sake of portability.  Nevertheless, this is a simpler and cheaper tool than separating assets and administering a trust for the benefit of the survivor’s life.  Ideally, the government would create an easier way to elect portability than filing an estate tax return.  

From a planning perspective, our office is taking advantage of the opportunity to remove the credit shelter provisions from our client’s estate plans.  This allows for a consolidation of assets.  One objective we always have when preparing an estate plan is to seek to reduce the burden of administration at the death of the first spouse.  There is little reason in many cases to preserve the complex credit shelter provisions of an estate plan and the ongoing administration of that plan until the death of the surviving spouse.  A proactive plan is necessary as it is not possible to “un-do” the credit shelter provision after the first spouse dies.  If you have one of these plans, or have a client that has one of these plans, feel free to contact our office for a review to determine if it is possible to amend your documents to streamline estate administration for the surviving spouse and family.

Trust Fund Recovery Penalties

Posted on by katemley

Certain situations can place an individual at risk of personal assessment for business related taxes, including employment taxes and withheld income taxes.  Congress created the Trust Fund Recovery Penalty to discourage misuse of employee’s tax dollars.  An employer is technically expected to set aside income taxes along with Social Security and Medicare taxes in trust for the benefit of the government.  Ultimately, the employer also pays Social Security and Medicare taxes and submits all taxes to the IRS with the employment tax return.  A willful failure to collect or pay over the taxes by a responsible person could result in an assessment of the Trust Fund Recovery Penalty. This penalty equals 100% of the unpaid income tax withheld, plus the employees withheld Social Security and Medicare taxes.

 If the business owner is the individual assessed with this penalty, it is important to note that the penalty is a separate assessment from the employment tax of the business.   Legally, the IRS could collect both, but as a matter of policy the IRS does not. However, it is entirely possible for the IRS to collect on both debts at the same time, requiring the individual and the business each to come into some form of compliance with a payment agreement or other arrangement.  The IRS policy merely means that the IRS will not collect more than the total employment tax owed by the business.

 In order for the government to assess this penalty, it must substantiate that a person is both responsible for collecting and paying over the taxes withheld to the government and that the person responsible willfully failed to collect or pay these taxes.

 When examining a delinquent business taxpayer, the IRS will look for any and all responsible parties – their analysis does not necessarily focus on a single individual.  A responsible person is a person, or group of people, who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

  • an officer or an employee of a corporation, or limited liability company
  • a member or employee of a partnership
  • a corporate director or shareholder
  • a limited liability company manager or member
  • a member of a board of trustees of a nonprofit organization
  • another person with authority and control over funds to direct their disbursement, or
  • another corporation or third party payer

As this list indicates, it is not simply the owner of the business that is at risk for assessment.

 The IRS describes responsibility as a matter of status, duty, and authority. A determination of responsibility is dependent on the facts and circumstances of each case. A responsible person has:

  • A duty to perform
  • Power to direct the act of collecting trust fund taxes
  • Accountability for and authority to pay trust fund taxes
  • Authority to determine which creditors will or will not be paid

The United States Tax Court has ruled that a person can still be held responsible even if he or she has delegated a duty to someone else.  And the Court has ruled that a person may be responsible even though he did not know that the withheld taxes were not being paid over to the government.

 There are certain factors that the Courts have looked at as indicators that a person is likely a responsible person. Here are some examples:

  • Holding the position of an officer or member of the board of directors
  • Having a substantial ownership interest in the business
  • Having the authority to hire and fire employees
  • Managing the day-to-day operations of the business
  • Deciding how to disburse funds and pay creditors
  • Possessing the authority to sign checks or authorize payments on behalf of the business.

Just because a person is responsible, doesn’t mean that they can be assessed.  It is necessary to show that the person acted willfully in failing to collect or pay over the trust fund taxes.  Several Courts have ruled that willfulness does not require a criminal or other bad motive. Rather, the Courts have indicated that a voluntary, conscious and intentional failure to collect, truthfully account for, and pay over the taxes withheld from the employees is enough to be deemed willful for this purpose.  A responsible person acting with a reckless disregard of a known or obvious risk that trust fund taxes may not be remitted to the Government will be deemed willful.  Merely acting negligently however is not enough to meet the required standard of acting willful.

 If you are put in the position of potentially being assessed with a trust fund recovery penalty, you should be aware that the proposal to assess you does come with appeal rights.  If the IRS employee proposing assessment believes you are responsible and acted willfully, you may administratively appeal this proposal to the Appeals Division of the IRS for review. During the appeals hearing, you have an opportunity to show why you were either not responsible or not willful.

 If you lose on appeal, or do not appeal the proposed assessment, the liability is assessed and the IRS will proceed with collection of this debt no differently than any other personal liability.

 If you are undergoing evaluation as a proposed responsible person for assessment of a Trust Fund Recovery Penalty, or if you need assistance with the Appeal of a proposed penalty or avoidance of collection action for an assessment of a trust fund penalty, do not hesitate to contact our office for further assistance.

Innocent Spouse Relief

Posted on by katemley

When spouses file a tax return together, they are held jointly and severally liable for the tax debt. Each spouse is legally responsible for paying the entire liability, including tax, additions to tax, penalties, and interest. Realizing that this may not be appropriate in all cases, the Internal Revenue Service offers “innocent spouse relief” to help spouses in a variety of situations. There are three different types of relief that fall under the umbrella of “innocent spouse relief”:

  1. Innocent Spouse Relief – you may obtain this type of relief if you filed a joint tax return and the return understated tax that is attributable solely to your spouse’s erroneous item. These items could be income received by your spouse, but not reported on the return or, the items could be incorrectly reported deductions, credits, or property bases attributed to your spouse. The effect of these items, the understatement of tax, would not appear on the return when you signed it. In other words, there was no tax due, or if there was tax due, the item left out and its effect was not shown on the face of the return. You must prove that at the time you signed the return, you did not know, and had no reason to know, that the tax was understated. Finally, when looking at the situation, you must prove it would be unfair to hold you liable for the understatement of tax.
  2. The next type of relief is known as “separation of liability” relief. Under this type, the understatement of tax, interest, and penalties is allocated between you and your spouse. In order to qualify for this type of relief you must no longer be married to, or are legally separated from, the spouse with whom you filed a joint return. You qualify under this provision if you are widowed. You must additionally not be a member of the same household as the spouse with whom you filed the joint return during the twelve (12) month period prior to filing your application for relief under this provision.
  3. It is very common for one spouse to seek relief from liability from a tax obligation clearly stated on the face of the return at the time of filing. If the liability is reflected on the face of the return, and not an understatement, then the only way to qualify for relief is through the third type of relief – “Equitable Relief.” In order to qualify for this type of relief, you must establish that taking into account all facts and circumstances, it would be unfair to hold you liable.

There are many factors relevant to relief under this provision. The IRS will consider if you would suffer economic hardship if relief is not granted. The IRS does factor in who is held liable for the taxes under a divorce decree or other agreement to pay the tax – even though the IRS is not bound by these agreements. The IRS will also look at whether or not you received significant benefit from the underpaid or understated tax and whether you knew or had reason to know about the item causing the understated tax or that the tax due would not be paid.

The IRS explicitly takes domestic violence and abuse into account when evaluating claims for innocent spouse relief, especially under the equitable relief provisions. In her most recent report to Congress, the National Taxpayer Advocate explained that “domestic violence and abuse, including economic abuse, have real consequences for tax administration.” See Annual Report to Congress by National Taxpayer Advocate, Most Serious Problems for more details about this issue. The Taxpayer Advocate indicates that about 16% of applicants for innocent spouse relief report that they are victims of domestic violence and abuse. To its credit, the IRS has revised all of its rules regarding review of innocent spouse applications and has expanded the effect abuse will have in determining if relief will be granted to the requesting spouse. The important fact is that domestic violence and abuse is a factor that is being reviewed in more detail than ever by the IRS in the analysis of a request for innocent spouse relief.

By regulation, the Department of Treasury and the IRS established a two year deadline to request Equitable Relief to encourage prompt resolution of liability determinations. Basically, applications for relief under this provision were denied if active collections had been ongoing for more than two years.

On August 8, 2011, the IRS issued Notice 2011-70. The IRS removed the two year rule pending formal alteration of Treasury Regulations. This action was the result of several court rulings that questioned the validity of the provision.

This action by the IRS is important because a somewhat arbitrary rule has now been disposed of and relief can now be granted to otherwise qualified individuals.

It is particularly interesting to note that the IRS included in Notice 2011-70 that those individuals who were previously denied relief under equitable relief provisions solely because of the two year rule, may re-apply for relief.

If you believe that you should be relieved of joint liability with your spouse or former spouse, on a tax return, please contact us. The likelihood for relief is at its highest point given current IRS rules and regulations on this topic.

Under an IRS levy and think there is nothing you can do about it?

Posted on by katemley

Unfortunately, this feeling of hopelessness is an all too common feeling of clients in this situation.  This blog intends to provide educational articles about tax topics, rather than playing on emotions as many firms do in the tax controversy area.  The reality is that these issues are emotional.  Unfortunately, an emotional issue can trigger irrational decisions.  One irrational decision is buying into the promise of a solicitor that your tax problems are easily resolved because you “qualify” for a settlement.  The fact is that everyone can “qualify” for a settlement.  That’s the wrong analysis to start with.  And, when a firm is approached with a levy situation, it is premature to analyze whether or not a client qualifies for a settlement.

At the time a taxpayer is under levy, the proper analysis is whether or not the taxpayer can get immediate relief of some sort from the levy.  If the levy is affecting the taxpayer’s wages, then the taxpayer’s representative should work through a detailed and documented financial analysis to determine if there is an opportunity for either immediate relief from the entire levy or partial levy relief.  If a taxpayer substantiates that the levy creates economic hardship, then relief may be possible.

Sometimes clients under levy have not prepared all of their tax returns and as such, believe that there is no way to remove the levy until their tax returns are filed.  This simply is not true.  While it may or may not be possible to acquire full relief, an analysis of income and expenses utilizing IRS standards will allow for the taxpayer to obtain at least partial relief to pay for many expenses.  These expenses can include basic necessities such as food, clothing, medicines and health insurance premiums.  Payments for housing and utilities will be allowed up to a maximum amount based on county of residence and household size.  Additional expenses such as car payments and vehicle operational expenses, like gas and insurance, will also be allowed up to a standardized amount.

After seeking partial levy relief, it is then appropriate to file tax returns as soon as possible.  Once the taxpayer has filed all outstanding tax returns, the IRS then makes available a variety of options that are not available when a taxpayer has failed to file all returns.  At that point, the representative can assist the taxpayer with an analysis of their income, expenses and equity in assets to determine if the taxpayer is a good candidate for an installment agreement, a partial payment installment agreement, an Offer in Compromise (settlement), or currently not collectible status.  It is ALWAYS best to go through this analysis as there are opportunities to come into compliance with the tax laws, move yourself out from under the enforcement action, such as a wage levy, and still address the old tax debt.  Many would be surprised to learn that the IRS does work with taxpayers to resolve many issues in a way that isn’t nearly as traumatic as believed.

Obviously, the best case scenario is to take action before a levy is in place, however, once that occurs, there is always something that can be done to make the situation more bearable.  We encourage you to contact our firm if you have any questions or concerns about these matters.

Tax Responsibilities during government shutdown

Posted on by katemley

Government shutdown does not relieve tax responsibilities of individuals and businesses.

Some individual and business taxpayers are wondering if they still need to meet their tax obligations, even though the federal government is shut down.  The easy answer is absolutely. The IRS has had to dramatically reduce its workforce during the shutdown, but the extension date of October 15, 2013 remains for individual return filers of Form 1040 who timely filed for an extension to file their returns.   Additionally, employment tax returns due October 31, 2013 for 3rd Quarter remain due on that date.  Businesses that are required to deposit their employment taxes remain obligated to deposit timely.  So, for example, the next monthly deposit due date for Form 941 is October 15, 2013.  That date will be the due date, regardless of whether or not the federal government is open or closed.

Failure to meet proper filing and payment deadlines could result in significant penalties.  It is unclear if the IRS would waive penalties based on reasonable cause.  It is presumed that the argument for failure to file or pay while the government is shut down would be that the taxpayer assumed there would be no federal employees to accept the return or payment. IRS automated phone lines and the official IRS website make it very clear that the taxpayer is required to continue filing and paying taxes during the government shutdown.  It is believed that there would be limited relief for late filers and payers based on this argument.  First time penalty abatement requests may very well be honored, however.

Taxpayers should note that penalties associated with non-payment and non-filing can be significant.  An individual or corporate taxpayer that fails to properly deposit will be assessed with a failure to deposit penalty that could be as high as 10% of the amount of underpayment.  Additionally, late payment penalties could apply that equal ½% of the unpaid tax for each month, or part of a month, that the taxpayer doesn’t pay a balance.  This penalty maxes out at 25%.

Failure to timely file penalties are some of the fastest accruing penalties the IRS assesses.  The IRS will assess a penalty equal to 5% of the unpaid tax for each month or part of a month that you file late.  This penalty will accrue monthly until is maxes at 25%.  This can happen quickly – in only five months.  If a taxpayer is on extension for his or her 1040 and has a due date of October 15, 2013, but assumes it is not necessary to timely file because the government is not open, then the taxpayer would be assessed a 5% penalty, at a minimum, even if they file their return on October 16, 2013 – assuming the government re-opened on that day. 

Heed the advise on the IRS website: “Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law” during the current lapse in appropriations which has resulted in the current federal government shutdown.

If you have any questions regarding these issues, please don’t hesitate to contact our office. 

Why the use of a General Durable Power of Attorney is superior to Joint Ownership with Rights of Survivorship

Posted on by katemley

It may be easy to add someone as an owner with survivorship rights to your real estate or other property, but the simplicity of this action does not offset the risks associated with co-ownership. Many individuals either make the decision on their own, or with the advice of someone with practical knowledge about re-titling assets, to add a child or another intended beneficiary as the owner of their real estate, bank account, or other asset. The premise is rather simple: ownership with someone who has a right of survivorship, known as joint tenants with rights of survivorship, avoids probate at the death of the first owner, thereby leaving the surviving owner, (typically the younger intended beneficiary), with full ownership rights and no court involvement. Additionally, the objective of many is to make sure that someone, usually an adult child, has access to the original owner’s assets so that they can handle their financial affairs if that person is unable to do so on their own.

The objectives of avoiding probate at death and providing someone with access to financial means for care can be met by adding an individual as an owner to an asset. But the risks are far too high to approach these objectives in this way.

Probate avoidance at death generally involves planning that either utilizes a trust adopted by the individual owner of the asset, along with funding through transfer of assets to the trust, or, an individual may use non-probate transfer tools to make sure each asset transfers to its intended beneficiary outside of probate. Think of Transfer on Death (TOD), Pay on Death (POD), life insurance beneficiaries and beneficiary or transfer-on-death deeds. There are times when planners will utilize both a trust and a series of non-probate transfers. The point is that there are alternative methods of avoiding probate at death. These methods are used for a variety of reasons, many of which are illustrated below in a conversation about General Durable Powers of Attorney.

Adoption of a General Durable Power of Attorney (DPOA) is one of the most powerful probate avoidance tools available. Utilized during one’s life, the DPOA can authorize someone to act on another person’s behalf to make financial decisions. So, if you are incapacitated or disabled, your Attorney in Fact under the DPOA could access your checking account to pay your bills, sell your house if you were going into a nursing home, and make other financial decisions for you without a formal court order or the costs associated with that proceeding.

The General Durable Power of Attorney is a superior option to joint ownership for a variety of reasons. To begin with, when you add a person as owner of your property, that person will have equal rights to the property. This is a loss of control for you. This ownership option provides either owner with total access to the property. So, for example, if your pension or other income is deposited into a jointly owned bank account, the joint owner could legally remove 100% of that deposit for his or her individual use. Naming the same individual as your Attorney in Fact under a DPOA merely gives them rights to use your property for your benefit only. They are statutorily prohibited from using your property for their benefit. They merely have access to your property for your use and benefit, rather than acquiring any form of ownership interest allowing them to use the property for their own benefit.

From a tax perspective, it is more advantageous to continue to own the entire property in the name of the person who is thinking of transferring title. When you add an individual as a co-owner, you are actually giving them a gift equal to one-half of the value of the property at that time. If the value of the property exceeds the annual gift tax exclusion, (currently $14,000 for 2013), then you are required to file a gift tax return. Additionally, at your death, any built in gain from that part of the gifted asset will be subject to capital gains at the time your intended beneficiary sells it. This is due to the fact that the gift provides a carry over basis equal to the basis of the donor, while a death time transfer equates to a stepped-up basis to fair market value at date of death. So, if you have owned your home for 40 years and you deed half to your child, you have a basis equal to the cost of the home 40 years ago plus a variety of increases for certain improvements, etc. Likely the price has appreciated over the years and there is a built-in gain. That built-in gain merely transfers to your intended beneficiary at the time of the gift and when the home is ultimately sold, a tax will be paid by the intended beneficiary on this built-in gain. This could be avoided if the house remained in the donor’s name until death, at which point the intended beneficiary received a stepped-up basis to date of death value. This benefit most likely eliminates tax consequences presuming the home is sold shortly after date of death A similar analysis would occur for other assets, such as securities.

From a risk management perspective, joint ownership is objectionable because your assets become subject to creditors of the co-owner. So, if you add a child as owner of your home or bank account and that child is going through a divorce or has judgments outstanding to creditors, your asset could be used to satisfy those creditors. Furthermore, as joint owners, you could be held responsible for the other owner’s actions while using a jointly owned asset. Probably the most common example here would be a car accident where you get sued for being a co-owner of a car you weren’t even driving.

From a business owner’s perspective, joint ownership is particularly problematic for risk management. If the business operates as a sole proprietorship, adjusting ownership so that an intended beneficiary is a co-owner creates many negative tax consequences and the entire business operations could become subjected to the liabilities of the new co-owner. Should that new co-owner file for bankruptcy, the bankruptcy trustee will have a high level of interest in the operations of the business venture to determine how it’s cash flow and assets can satisfy the new co-owner’s debtors. Fundamentally, it is also possible to alter ownership interests in corporations, limited liability companies and other business organizations. Similar risk is involved in that new co-owners bring a whole host of potential creditors and liabilities that could affect the viability of the business in an unintended way.

The adoption of a General Durable Power of Attorney, in combination with a review of business operation documents, such as bylaws, operating agreements, buy-sell agreements, etc., could effectively protect the business from involvement by the Court if an owner is incapacitated and can’t function on their own. It would likewise eliminate concern for the above issues as created by a joint ownership situation.

Should you have questions about General Durable Powers of Attorney for your personal or business situation, please don’t hesitate to contact our office.