The Federal District Court for the Western District of Washington in USA v. Elmer Buckardt, Case No. 2:19-cv-00052-RAJ, entered an order on September 18, 2020 that a tax liability cannot be avoided with frivolous arguments and the IRS may foreclose property for tax liens when the entity owning the property is a taxpayer’s alter ego. Though a W-2 earner until retirement, the taxpayer created a religious society for the purpose of transferring property to his family. It was meant to be a trust, of sorts. The taxpayer and his wife transferred properties they purchased to the entity without consideration. They personally paid the mortgage on these properties. Around the same time, the taxpayer ceased filing tax returns because of the belief that the tax system was not valid. The taxpayer began reporting his tax liability as zero. After a variety of litigation in the Tax Court, the taxpayer ultimately ended up owing around $739,000. The government then filed the instant action seeking to foreclose the tax liens and set aside the transfers to the religious society that the taxpayer executed years before. The Court ruled that it was clear Mr. Buckardt owed the taxes. The taxpayer offered no argument other than his belief that he was not required to pay federal income taxes, along with a variety of well-known arguments the Courts have deemed frivolous over the years. The Court ruled those arguments were without merit. The Court concluded that the religious society the taxpayer created and transferred property to was his alter ego. It based its decision on Washington law recognizing the nominee or alter-ego doctrine where one individual so dominates and controls a corporation that such corporation is the individual’s alter ego, and therefore, one in the same. The fact that the taxpayer had complete control over the entity, that he and his wife were the only ones making decisions for the entity, that the taxpayer and his wife live in a home owned by the entity, but do not pay rent, were all determining factors. They maintained the properties with personal funds. The taxpayer allowed his children to reside in the properties rent free. The Court deemed the lien to be a valid lien against the properties of the entity and authorized the Government to foreclose.
The National Taxpayer Advocate has reported in its Fiscal Year 2016 Objectives report to Congress that a proposal by the IRS to expand collection efforts against retirement plans of federal employees “infringes on taxpayers’ rights to a fair and just tax system.” Federal employees have the ability to participate in the Thrift Savings Plan (TSP), which is similar to a private sector 401(k) plan in that employee savings are tax deferred and qualify for some level of employer, (in this case the federal government), matching.
Taxpayers, including federal government employees, who owe taxes are subject to IRS levy on their property and rights to property. This power extends to retirement accounts, including the TSP. However, given the importance of retirement savings to an individual’s welfare during old age, the IRS has historically regarded a levy on retirement funds as a special case that requires additional scrutiny and a manager’s approval.
Essentially, before a field Revenue Officer can levy a retirement benefit, the agent would determine what property is available to levy – both retirement and non-retirement, determine if the taxpayer has acted in a flagrant manner, and finally determine if the retirement funds are required for necessary living expenses. There are distinct problems with these factors, but that has been partially mitigated by other requirements prior to issuance of the levy. The field Revenue Officer must either secure the signature of the Area Director of Field collections, or secure a manager’s approval.
In order to obtain a collection manager’s approval in this instance, the field Revenue Officer is required to draft a detailed memo that sets out a summary of all information provided to the agent by the taxpayer, whether the taxpayer has exhibited any flagrant behavior, and more importantly, other collection alternatives that have been considered and rejected. In other words, the retirement account falls into a secondary level of collection after the field Revenue Officer reviews other property or income to levy.
Recent activity at the IRS has created a pilot program to levy TSP accounts. Most importantly, and of greatest concern, this program will be administered by ACS employees. ACS is the Automated Collection System unit. When a taxpayer’s account is in ACS, it is not assigned to a single employee for collection, rather, there are various employees in functions and units that work on similar matters. These employees do not receive the same level of financial analysis training as a field Revenue Officer.
In addition to the reduced training received by ACS employees, the pilot program calls for ACS employees to document any information that a retirement is impending and that the taxpayer will be relying on funds from the TSP for necessary living expenses. This lacks any analysis regarding other property the taxpayer may have that would be available to collect from, or if the taxpayer acted in a flagrant manner, all requirements of a field Revenue Officer.
Finally, the pilot program requires managerial approval prior to levy on retirement accounts – but that is a requirement of many collection actions by ACS employees – hardly elevating these situation to a special case status. What is not referenced is the required memo to the manager detailing information provided by the taxpayer and collection alternatives considered and rejected before proposing levy to the retirement account – all requirements of the field Revenue Officer.
In summary, the IRS is targeting one type of retirement account, the TSP, for increased collection activity, over all others. ACS does not have the ability to levy any other retirement accounts at this time. The National Taxpayer Advocate believes that this pilot program undermines both taxpayer rights and retirement security policy. As such, the National Taxpayer Advocate is going to continue to push the IRS to abandon the Thrift Savings Plan levy pilot program If the IRS adopts the program, the National Taxpayer Advocate is prepared to accept all TSP levy cases coming from ACS. Taxpayers should take advantage of this opportunity to protect their retirement income. Additionally, where possible, taxpayers should seek assistance from the Appeals division in order to entertain collection alternatives through Appeals’ Collection Due Process hearing procedures. Feel free to contact Caraker Law Firm, P.C. with any questions you may have.
IRS Announces 2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments
The IRS recently announced annual inflation adjustments for several tax provisions, which will apply to the 2015 tax year. Some of the affected provisions include: income tax rate schedules, the estate tax exemption, long-term care adjustments, and retirement adjustments. Below is a summary of those adjustments.
Tax Rates. Beginning in the 2015 tax year, the following tax rates will apply:
If the Taxable Income Is:
The Tax for Married Individuals Filing Jointly is:
Less than or equal to $18,450
10% of the taxable income
Over $18,450 but not over $74,900
$1,845 plus 15% of the excess over $18,450
Over $74,900 but not over $151, 200
$10,312.50 plus 25% of the excess over $74,90010% of the taxable income
Over $151,200 but not over $230,450
$29,387.50 plus 28% of the excess over $151,200
Over $230,450 but not over $411,500
$51,566.50 plus 33% of the excess over $230,450
Over $411,500 but not over $464,850
$111,324 plus 35% of the excess over $411,500
Over $464,850
$129,996.50 plus 39.6% of the excess over $464,850
If the Taxable Income Is:
The Tax for Heads of Households is:
Not over $13,150
10% of the taxable income
Over $13,150 but not over $50,200
$1,315 plus 15% of the excess over $13,150
Over $50,200 but not over $129,600
$6,872.50 plus 25% of the excess over $50,200
Over $129,600 but not over $209,850
$26,722.50 plus 28% of the excess over $129,600
Over $209,850 but not over $411,500
$49,192.50 plus 33% of the excess over $209,850
Over $411,500 but not over $439,000
$115,737 plus 35% of the excess over $411,500
Over $439,000
$125,362 plus 39.6% of the excess over $439,000
If the Taxable Income Is:
The Tax for Unmarried Individuals is:
Not over $9,225
10% of the taxable income
Over $9,225 but not over $37,450
$922.50 plus 15% of the excess over $9,225
Over $37,450 but not over $90, 750
$5,156.25 plus 25% of the excess over $37,450
Over $90,750 but not over $189,300
$18,481.25 plus 28% of the excess over $90,750
Over $189,300 but not over $411,500
$46,075.25 plus 33% of the excess over $189,300
Over $411,500 but not over $413,200
$119,401.25 plus 35% of the excess over $411,500
Over $413,200
$119,996.25 plus 39.9% of the excess over $413,200
If the Taxable Income Is:
The Tax for Married Individuals Filing Separate Returns is:
Not over $9,225
10% of the taxable income
Over $9,225 but not over $37,450
$922.50 plus 15% of the excess over $9,225
Over $37, 450 but not over $75,600
$5,156.25 plus 25% of the excess over $37,450
Over $75,600 but not over $115,225
$14,693.75 plus 28% of the excess over $75,600
Over $115,225 but not over $205,750
$25,788.75 plus 33% of the excess over $115,225
Over $205,750 but not over $232,425
$55,662 plus 35% of the excess over $205,750
Over $232,425
$64,989.25 plus 39.6% of the excess over $232,425
If the Taxable Income Is:
The Tax for Estates and Trusts is:
Not over $2,500
15% of the taxable income
Over $2,500 but not over $5,900
$375 plus 25% of the excess over $2,500
Over $5,900 but not over $9,050
$1,225 plus 28% of the excess over $5,900
Over $9,050 but not over $12,300
$2,107 plus 33% of the excess over $9,050
Over $12,300
$3,179.50 plus 39.6% of the excess over $12,300
Estate Tax Exemption.
The Estate Tax is a tax imposed on the transfer of property at a
person’s death, for any portion of the decedent’s gross estate that
exceeds the Federal Estate Tax Exemption. This year the estate tax
exclusion has increased from a total of $5,340,000 to $5,430,000. This
means that decedents who die in 2015 have an estate tax exclusion that
has increased by $90,000 from the previous year.
Long-term Care. Deductions for Long Term Care Insurance Premiums have increased slightly from 2014. The 2015 deductible limits under §213(d)(10) for eligible long-term care premiums are as follows:
Attained Age Before Close of Taxable Year
Limitation on Premiums
40 or less
$380
More than 40 but not more than 50
$710
More than 50 but not more than 60
$1,430
More than 60 but not more than 70
$3,800
More than 70
$4,750
Retirement Adjustments.
The elective deferral (contribution) limit for employees who
participate in 401(k), 403(b), most 457 plans, and the government’s
Thrift Savings Plan has increased from $17,500 to $18,000. In addition,
if you are 50 or over you can contribute an additional $6,000 as a
catch-up contribution. However, the limit on annual contributions to IRA
accounts remains unchanged at $5,500 with the catch-up contribution
limit remaining $1,000.
The deduction for taxpayers making
contributions to traditional IRA accounts is phased out gradually
starting at an Adjusted Gross Income (AGI) of $61,000 for single
taxpayers and heads of households, $98,000 for married couples filing
jointly (when the spouse who makes the IRA contribution is covered by a
workplace retirement plan), and $183,000 for an IRA contributor not
covered by a workplace retirement plan but who is married to someone who
is covered.
The deduction for taxpayers making
contributions to a Roth IRA is phased out gradually starting at an AGI
of $183,000 for married couples filing jointly and $116,000 for singles
and heads of households.
Lastly, the AGI limit for the saver’s
credit (retirement savings contribution credit) for low and moderate
income workers has also increased slightly for 2015. The credit is now
$61,000 for married couples filing jointly, $45,750 for heads of
household, and $30,500 for singles and married couples who file
separately.
If you have any questions about how these
adjustments might affect your tax situation, please feel free to contact
our office for further assistance.
Caraker Law Firm, P.C. 