Missouri Legislature Overrides Vetoes on Taxpayer Friendly Bills

Posted on by katemley

Missouri Legislature Overrides Vetoes on Taxpayer Friendly Bills: An Overview of Senate Bills 829 & 727

This past week the Missouri Legislature voted to override the governor’s veto on several bills including Senate Bill 829 regarding the burden of proof in taxpayer liability cases, and Senate Bill 727 regarding sales taxes for farmer’s markets. Both of these bills are effective retroactively beginning August 28, 2014.

Senate Bill 829 repeals and replaces section 136.300 of the Missouri Revised Statutes, amending the burden of proof requirements in taxpayer liability cases. Although Senate Bill 829 was signed by both the house and senate earlier this year, it was vetoed by Governor Jay Nixon on June 11. While the governor’s veto was in place, the Department of Revenue (DOR) only had the burden of proof in tax liability disputes if the taxpayer met certain threshold requirements. Such requirements included whether (1) the taxpayer was a partnership, corporation, or trust, (2) the taxpayer’s net worth did not exceed $7 million and (3) the taxpayer had less than 500 employees.

On September 10 the legislature overturned the governor’s veto, enacting Senate Bill 829. The bill replaces the threshold requirements mentioned above, and places the burden of proof on the DOR with respect to any factual issue relevant to ascertaining the liability of the taxpayer as long as the taxpayer has (1) produced evidence that shows that there is a reasonable dispute with respect to the issue and (2) has adequate records of its transactions and provides the DOR reasonable access to the records. Now because the burden of proof is on DOR, they have to prove liability for claims stating that a taxpayer owes additional taxes (this act includes issues regarding the applicability of an exemption but excludes issues regarding the applicability of any tax credit). In addition, by placing the burden of proof on DOR, the bill mirrors current Internal Revenue Service procedure concerning federal tax liability. Overall the bill is favorable to the taxpayer and creates consistency between the state and federal tax liability procedures.

Senate Bill 727 amends Chapters 144 and 208 of the Missouri Revised Statutes by adding three new sections, the first of which, section 144.527, is related to sales taxes at farmer’s markets.

Section 144.527, specifically exempts “all sales of farm products sold at farmer’s markets” from sales and use taxes as defined in Chapter 144. In addition, the section states that in order to qualify as a “farmer’s market,” the individual farmer, group of farmers, nonprofit, or cooperative must (1) consistently occupy a given site throughout the season, (2) operate as a “common marketplace” for farmers to sell farm products directly to consumers, and (3) be a marketplace where the sole intent and purpose of the farmers is to generate a portion of their household income. While section 144.527 limits farmer’s markets to the “sale of farm products,” it defines “farm products” very broadly so as to encompass almost any type of food that one might find at a farmer’s market (including baked goods made with farm products). However, the term “farm products” would exclude any third party goods or other non-farm product goods that a farmer may want to sell. Lastly, the exemption does not apply to persons or entities with total annual sales of $25,000 or more from farmer’s markets participating in the tax exempt program. 

If you have any questions regarding how these bills may affect your tax matter or farmer’s market, please feel free to contact our office.

Final Regulations Issued for Use of Truncated Taxpayer Identification Numbers

Posted on by katemley

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

Posted on by katemley

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.

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.