In major news for tax professionals, the United States District Court for the District of Columbia has ruled that recent regulations imposed on tax return preparers are not permissible under current federal statutes. This ruling does not affect professionals such as attorneys, CPAs, or Enrolled Agents who were already regulated under Circular 230. The complete Memorandum Opinion is available here:
Any business that has more than one owner has an opportunity to use contract law to create expectations for how the business will operate in the event of major life transitions for its owners. All businesses spend time planning how they will generate revenue to maintain their existence. Most businesses even plan for catastrophe through the purchase of a variety of insurance products that can prevent the failure of the business if certain things occur. Many businesses are missing the chance to address several lifetime events that could dramatically affect the operation of the ongoing business. These events are many times a virtual certainty, such as death or retirement, and therefore taking the time to plan should not be perceived as being overly cautious, but rather simply an exercise in prudent long-term business planning.
Many advisors will suggest that executing a buy-sell agreement to create mechanisms to deal with issues such as death, disability, retirement, bankruptcy, forced buy-out, etc. is best done as soon as the business is formed. This advice certainly has credibility and yet is problematic. It is best to draft at least some form of buy-sell agreement to address as many issues as possible early in business operations. However, this document should not be set aside and forgotten until a triggering event occurs. Rather, it would be most useful to review the agreement once a year in the first several years of business operations. If the business is viable, it will grow rapidly in the first few years and decisions made at the outset of operations may make little sense as the business begins to function at a more complex level. Ideally the agreement will be regularly reviewed by the business owners as long as the business continues to function.
Drafting of a buy-sell agreement is essentially a game of “what if?” Discussions regarding what happens when a partner dies, wants to retire, wants to sell his or her ownership interest to an outside party, becomes disabled and cannot continue to contribute to the business in the same way, gets divorced, or files bankruptcy, can all be addressed in the buy-sell agreement. There are endless options for how to deal with each situation and the partners in the business have the opportunity to come to a consensus of personal preference in the contract.
Probably one of the most powerful aspects of the buy-sell agreement is the ability to address the practical issue of funding. Many authorities will suggest that a buy-sell really only works if the instrument is “funded.” In other words, if a partner is required to sell because of certain triggering events, the other partners or the business itself may or may not be able to acquire lending to fund the transaction. The buy-sell agreement creates the opportunity to address this situation by allowing the parties to draft the ability of the buying partner to utilize the selling partner as the lender. The selling partner may be put in a position, either because the buying partner can’t get financing or simply because the agreement calls for the selling partner to providing the financing, to carry a note for payment of the value of the ownership interest. Depending on the circumstance, the parties may not be able to come to an agreement of this sort at the time of the triggering event. The buy-sell effectively acts as pre-nuptial agreement of sorts in that disagreeing owners have made decisions with “cool heads” at contract drafting time, rather than in the heat of a potentially problematic situation. There is no doubt that this creates a beneficial situation for all concerned.
Other funding options may involve the purchase of life or disability insurance that could provide the cash necessary to fund a buyout based on the triggering events of death or disability. A variety of tax and legal issues are associated with the purchase of these insurance products, but all of these issues can be addressed with legal and accounting counsel at the time of drafting to determine what is in the best interest of all contracting parties.
The buy-sell agreement can also be an opportunity to set a value on the ownership interest at the death of an owner for estate tax purposes. If sales of ownership interest will be to family members at death, there will be heightened scrutiny by the IRS of the valuation placed on the ownership interest. Nevertheless, if planned properly, the valuation portion of the buy-sell agreement can have a beneficial effect for estate tax purposes.
If you require a review of your existing agreement or would like to discuss the drafting of a buy-sell agreement for your business, please don’t hesitate to contact us.
The airwaves are inundated with television and radio ads promising delinquent taxpayers an easy solution to their tax problems: the Offer in Compromise. What these ads fail to disclose is that this program has rigorous guidelines for calculating a proper offer amount, and that in recent years, few offers have been accepted by the Internal Revenue Service. Often, taxpayers believe these slick sales pitches and find themselves no closer to a real resolution after hiring an “offer mill” that does not do the proper analysis to determine a correct offer proposal.
Despite the misleading advertisements of offer mills, the Offer in Compromise is a valid program. Fortunately, the Internal Revenue Service has made changes to the financial analysis required by the program to make it easier for taxpayers to participate in the program and settle their outstanding tax debt. These changes include:
Reducing the calculation for taxpayers’ future income
Previously, the IRS would look at 48 months of future income potential for lump sum offers and 60 months of future income for short-term deferred offers. The “Fresh Start” changes have reduced these timeframes to 12 months and 24 months, respectively. The bottom line is that the calculation of an offer has been reduced substantially. For example, a taxpayer with a monthly “ability to pay” of $500 previously would have this amount multiplied by 48 months as part of a lump sum calculation, totaling $24,000. Now, the same $500 ability to pay is multiplied by 12 for the same offer, totaling $6,000. In this example, this change reduces the required offer amount by $18,000—a substantial difference!
Allowing taxpayers to repay their student loans
One of the most common misconceptions taxpayers may have about the Offer in Compromise program is that the Internal Revenue Service will consider all of a taxpayer’s current expenses. This is simply not true. The IRS only considers necessary and allowable living expenses in the calculation of an offer. Often, this results in the IRS having a very different view of what a taxpayer can afford in the context of an offer! By allowing taxpayers to repay their student loans, the IRS is making a concession that student loans may be necessary and allowable, and these payments can be considered to determine a taxpayer’s future ability to pay.
Allowing taxpayers to pay state and local delinquent taxes
Frequently, when a taxpayer is unable to pay their federal taxes, they are also unable to pay their state taxes as well. Because state and local taxing entities do not halt their collection activities when a federal tax debt is present, coordinating resolutions of multiple tax debts can create unique problems for taxpayers seeking to come into compliance with all levels of government. By allowing taxpayers to pay state and local delinquent taxes when calculating an offer amount, the IRS now considers the difficulty of paying federal, state, and local taxes simultaneously. The result is that many taxpayers requesting an offer with the IRS will see a reduction to the final calculation of their offer.
Expanding the Allowable Living Expense allowance category and amount
Previously, the IRS did not allow for credit card payments or bank fees and charges to be allowed as living expenses in the calculation of an offer amount. Recent changes not only allow for these payments to be claimed, but also expand the “miscellaneous” category of living expenses to further account for these common expenses.
These changes to the Offer in Compromise program will give many delinquent taxpayers new hope for resolving their tax matters in a quick and affordable manner.
Over the last few years, the IRS has made numerous efforts to assist individuals and small businesses that are struggling to meet their tax obligations. The IRS intends to provide taxpayers with a “Fresh Start,” as these initiatives have come to be known. The Fresh Start Program is in the “best interest of both taxpayers and the tax system,” reports IRS Commissioner Doug Shulman. The IRS has issued new guidance for lien filings, lien withdrawals, more flexible installment agreements and an expanded offer in compromise program.
Nina Olson, National Taxpayer Advocate, believes that the program has produced real results. In a recent report to Congress she explained that “components of the ‘Fresh Start’ initiative have produced significant changes in IRS collection actions, which in turn have had positive, meaningful results for many taxpayers.”
Major changes were made by the IRS to its lien filing practice. A federal tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an upaid tax debt. A lien informs the public that the U.S. government has a claim against all property, and any rights to the property, of a taxpayer. This includes property owned at the time the notice of lien is filed and any property acquired thereafter.
A lien will negatively affect a taxpayer’s credit rating. Therefore, the IRS made a decision to reduce the negative impact on taxpayer’s credit by adjusting the level at which the government generally files liens.
Another aspect of the Fresh Start program is a modification of the lien withdrawal guidelines. The IRS realizes that there are significant effects on taxpayer credit when a taxpayer is under an IRS lien. Lending in these circumstances is either extremely difficult or impossible. The effect of the lien on lending was even more detrimental as lending standards tightened during the economic downturn.
Liens will now be withdrawn upon payment in full of the taxes if the taxpayer requests the withdrawal. The IRS has also internally authorized additional personnel to withdraw liens for taxpayers.
If a taxpayer still owes the government delinquent taxes, it may still be possible to obtain a lien withdrawal. If an individual or small business owes the IRS $25,000 or less in unpaid assessments, the IRS will allow the taxpayer to obtain a lien withdrawal if the taxpayer enters into a Direct Debit Installment Agreement (DDIA). A DDIA is essentially an installment agreement where the IRS is authorized to make automatic debits from a taxpayer’s bank account, rather than waiting for the taxpayer to initiate submission of the payment on their own – for example, mailing a check to the IRS.
Likewise, the IRS will withdraw a lien if the taxpayer is already on an installment agreement and authorizes the government to convert their agreement to a DDIA. Some taxpayers already have a DDIA. In this case, they need to merely ask the IRS to withdraw the lien. The withdrawal will occur if the taxpayer meets the criteria above.
Once the DDIA is established, the IRS verifies that the payments will actually be made through the DDIA, then it withdraws the lien. The IRS will not withdraw the lien at the time the DDIA is established – there is a probationary delay.
At the time the IRS established the guidance above, they also expanded some of their criteria for streamlined installment agreements for businesses. Historically, it was only possible to obtain a streamlined payment agreement for a business that owed less than $10,000. This type of agreement generally avoids full financial disclosure to the government and the involvement of a field officer. Now if the business is willing to establish a DDIA they will qualify for a streamlined agreement if they owe up to $25,000. If a business owner owes more than $25,000 in assessed, they could pay their balance down with a lump sum payment to qualify.
More recent guidance has benefited individual taxpayers. In the past, a taxpayer could establish a payment agreement over a 5 year period and avoid full financial disclosure if the taxpayer owed less than $25,000. This cap has now been increased to $50,000 and payments are allowed over a 6 year period. Not unlike the old agreements, the payment timeframe is shortened if the IRS collection statute is less than 6 years. Additionally, in order to qualify for the above, the taxpayer must enroll in a Direct Debit Installment Agreement. These changes will save the taxpayer a significant amount of money and time.
Finally, the Fresh Start program expanded the Offer in Compromise program. The IRS has historically had a streamlined Offer in Compromise program available to taxpayers with lower incomes and debts below $25,000. The IRS expanded the income cap on this to taxpayers with up to $100,000 in income and IRS debts of up to $50,000.
More recently, the IRS adjusted the analysis of Offers in Compromise in favor of taxpayers. They have provided greater flexibility in determining equity in assets. There is also greater flexibility in determining allowable living expenses and a reduction in the amount of future income that must be included for an acceptable offer.
As the National Taxpayer Advocate explained, these changes by the IRS are significantly affecting how taxpayers are subjected to IRS collection efforts. If you are interested in learning whether or not any of theseprograms could help you, we welcome you to contact our office.
Has your business recently undergone an examination by the state unemployment office? Did that examination result in independent contractors being recharacterized as wage earners? If so, you likely are facing a new tax debt for unpaid unemployment contributions with the state agency. Many businesses are finding themselves in this situation. However, the problem does not end there. The recharacterization will be shared with the federal government, and the IRS will also assess a new debt for unpaid Social Security, Medicare, and income taxes for these employees.
If your business has concerns about the status of independent contractors, there is an opportunity to be proactive and avoid the problems of federal reclassification by examination. Additionally, you can dramatically reduce the overall debt owed to the federal government. The Voluntary Classification Settlement Program (VCSP) was created by the IRS to resolve worker classification issues and provide certainty to taxpayers.
The basic concept of the program is simple: if a business is willing to voluntarily reclassify independent contractors as employees, then the IRS will allow the business to pay a greatly reduced amount for any unpaid Social Security, Medicare, and income taxes for previous periods. The important point is that the business will be required to pay all Social Security, Medicare and income taxes for all future periods after the reclassification has been completed.
When a business applies to the VCSP, the IRS will calculate a fee equal to approximately 1% of the amount paid to reclassified workers in the last calendar year. No further assessment will take place by the IRS if accepted into the program and the employer begins treating the reclassified workers as W-2 employees.
This program has very specific criteria. However, the program is broadly available to businesses, not for profit entities, and governmental entities. In order to be accepted in the program, the taxpayer must meet the following criteria:
Finally, there is a provision of the
agreement that extends the statute of limitations for assessment of
employment taxes for three years for the first, second, and third
calendar years beginning after the date the taxpayer elects to begin
treating the workers as employees under the program.
The good news
is that there is a high level of certainty upon completing this program.
Once the proper form is submitted to the IRS, the IRS will review the
request and if accepted, enter into a closing agreement with the
taxpayer.
To put the importance of this program into perspective, if
an employer requested reclassification of workers previously reported
on Forms 1099 that totaled $200,000 in the prior calendar year, and the
IRS accepted the employer into the program, the employer would pay a fee
of approximately $2,000 to address the periods of questionable
classification. Absent this program, the employer would pay $26,600 in
delinquent Medicare and Social Security taxes alone! This amount would
also be increased by unpaid employee income taxes, penalties, and
interest.
The Voluntary Classification Settlement Program is part of
the IRS Fresh Start program and a wonderful window to avoid burdensome
delinquent taxes, penalties, and interest. If you have questions about
the VCSP, please feel free to contact our office to learn more.
Caraker Law Firm, P.C. 