The Tax Court ruled in Warren Keith Jackson and Barbara Ann Jackson v. Comm’r of Internal Revenue, T.C. Memo 2022-50, filed May 12, 2022 that it is not an abuse of discretion for IRS Appeals to sustain a proposed levy and deny a proposal of an installment agreement for a taxpayer that has failed to make required estimated tax payments. Taxpayers timely filed and failed to pay multiple years of 1040 income tax liabilities that totaled $128,095 as of 2018. Taxpayers submitted a proposal for an installment agreement. A field Revenue Officer rejected the proposal of $556 per month for the installment agreement and cited that the taxpayers had “sufficient cash or equity in assets to fully or partially pay the balance owed.” Further, that rejection stated that taxpayers needed to make estimated tax payments to qualify for an installment agreement. Given the amount of the debt and monthly proposal, this was a Partial Payment Installment Agreement which requires the IRS to address equity prior to establishment of the payment agreement. After the IRS rejected the agreement, a levy notice with appeal rights was issued. On Appeal, the IRS noted that the taxpayers did not appear to be current on estimates and that they had equity equal to $98,000 in real property. Ultimately Appeals sustained the levy because of non-response. The Tax Court in its review made clear that it has consistently held that an Appeals officer does not abuse their discretion by declining a collection alternative for taxpayers that fail to remain compliant with current taxes. The fundamental take away is that the taxpayer must fix the problem by showing they are capable of paying their current taxes, prior to seeking a collection alternative.
Final Regulations Issued for Use of Truncated Taxpayer Identification Numbers
New IRS Regulations Aim to Fight Identity Theft Through Use of Truncated Taxpayer Identification Numbers
This week, in an effort to safeguard taxpayers from identity theft, the IRS issued its final regulations regarding the use of Truncated Tax Identification Numbers or (TTINs). The final regulations, published on July 15, are amendments to the Income Tax Regulations and Procedure and Administration Regulations, which allow the tax filer to truncate a payee’s identification number on certain documents. The Service states that the amendments are specifically targeted at reducing the risk of identity theft, which can stem from the use of an employee’s entire identification number on documents.
A “Truncated” identification number simply takes an existing nine-digit identification number and replaces the first five numbers with either asterisks or “X”s so that only the last four digits remain. (i.e. A tax identification number of 99-9999999 would become XX-XXX9999). Because a TTIN is merely a method of masking taxpayer identification numbers that already exist, use of a TTIN does not require the Service to issue any new identification numbers or expend any funds for the taxpayer to be able to use a TTIN. The new regulations allow for TTIN to be used for a taxpayer’s social security number (SSN), IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or employer identification number (EIN) on payee statements and certain other documents.
Before issuing their final regulations, the IRS ran a pilot program, which allowed certain qualified filers to truncate an individual’s payee identification number on a paper payee statements for Forms 1098, 1099, and 5498. This program ran from 2009 to 2010. In 2011 the IRS extended the pilot program for two more years and modified it by removing Form 1098-C from the list of eligible documents.
In January of 2013, the US Treasury and the IRS issued proposed regulations, in response to the growing threat of identity theft and associated tax fraud. The proposed regulations largely mirrored the pilot program, with TTINs permitted on electronic payee statements in addition to paper statements.
The final regulations became effective on July 15, 2014 and permit the use of TTINs “on any federal tax-related payee statement or other document required to be furnished to another person….” TTINs may not be used (1) on any return or statement filed with, or furnished to, the IRS, (2) where prohibited by statute, regulation, or other guidance by the IRS, or (3) where a SSN, ITIN, ATIN, or EIN is specifically required. Further a TTIN cannot be used by an individual to truncate their own identification number on any statement or other document that they give to another person. This includes an employer’s EIN on a W-2 or Wage and Tax Statement that they might give to an employee, and also an individual’s identification number on either a W-9 or Request for Taxpayer Number and Certification.
If you have questions about the use of TTINs, please contact our office.
Income Tax Consequences of Terminating a Whole Life Insurance Policy
The United States Tax Court just handed down a decision in Black v. Commissioner of Internal Revenue, T.C. Memo 2014-27, that explains what the income tax consequences are when this situation occurs. In the opinion, the taxpayer had been the owner of a whole life insurance policy for over twenty years. The policy had both cash value and loan features. The policy allowed the taxpayer to borrow up to the cash value of the policy. Loans from the policy would accrue interest and if the policy holder did not pay the interest then it would be capitalized as part of the overall debt against the policy.
The taxpayer had the right to surrender the policy at any time and receive a distribution of the cash value less any outstanding debt, which could include capitalized interest. If the loans against the policy exceeded the cash value, the policy would terminate. In this case, the taxpayer invested $86,663 in the life insurance policy, his total premiums paid for the policy. Prior to the termination the total the taxpayer had borrowed from the policy was $103,548, however with capitalized interest over time the total debt on the policy was $196,230. The policy proceeds retired the policy debt at termination.
The taxpayers in this case were issued a 1099-R showing a gross distribution of $196,230 and a taxable amount of $109,567. The non-taxable difference of $86,663 was the taxpayers’ investment in the policy – premiums paid. None of the information was included on the taxpayers’ return. The taxpayers eventually amended their return and included as income the amount of $16,885 which represented the difference between the loan principal amount borrowed of $103,548 and the amount of premiums paid of $86,663. Ultimately, the IRS disagreed with the taxpayers’ representation of the tax consequences of the life insurance policy termination.
The primary issue in the case then centered around whether or not the capitalized interest from the outstanding policy loans should be included in income. The Court explained that the money borrowed from the policy was a true loan with the policy used as collateral. There were no income tax consequences on distribution of loan proceeds from the insurance company to the taxpayers. Further, the Court explained that this is true of any loan as the taxpayers’ were obligated to re-pay the insurance company the debt owed.
The Court explained that when a policy is terminated then the loan is treated as if the proceeds were paid out to the taxpayers and the taxpayers then retired the outstanding loan by paying it back to the insurance company. The Internal Revenue Code provides that proceeds paid from an insurance company, when not part of an annuity, are generally taxable income for payments in excess of the total investment. The insurance policy at issue treated the capitalized interest as principal on the loan. Therefore, when the policy is terminated, the loan, including capitalized interest, is charged against the proceeds and the remainder is income. This outcome makes sense or else the return on investment inside of the policy would never be taxed.
The taxpayers ended up with a large tax bill and a tough pill to swallow. Ultimately, the result is logical in the context of capturing deferred income tax consequences. Clearly, it would have been beneficial for the taxpayers to have consulted with counsel prior to preparing their tax return in order to avoid an unwelcome tax bill, penalties and interest.
Should you have transactions that you are unsure of when it comes to their income tax consequences, feel free to contact our office. If you find yourself in receipt of an adjustment to your tax return based on exam action that you disagree with, or an assessment has been made and you have simply decided you were incorrect in your analysis, call us, we can help.