IRS Use of Private Collection Agency Guidance

The IRS released Program Manager Technical Advice 2016-02, which discusses the new IRC 6306(c) rules.


Under IRC 6306(c)(1), "Notwithstanding any other provision of law, the Secretary shall enter into one or more qualified tax collection contracts for the collection of all outstanding inactive tax receivables."


Inactive receivables are any inactive, outstanding assessment that the Service includes in potentially collectible inventory.


The following cannot go to a private collection agency: receivables subject to a pending or active OIC or IA, innocent spouse cases, any case under exam, litigation, criminal investigation or levy, receivables where there is an availability to appeal, receivables of dead taxpayers, taxpayers under age 18, taxpayers in combat zone, or a tax related ID theft victim.


Under the technical advice, IRS Chief Counsel believes the IRS has the power to determine which cases are best suited for immediate assignment to private collection agencies.


With this in mind, we should be seeing more private collection agency action in the near future.


Relevant Citations:
Program Manager Technical Advice 2016-02

Quick Hitters For New Tax Practitioners - Confirming Individual Client's Estimated Federal Income Tax Payments

My friend, Billy Barber, CPA wanted to contribute to the blog. Billy is a new CPA and just learning the ropes of tax controversy cases. We're looking at doing a regular post to discuss challenges and tips for new tax practitioners"

My name is Billy Barber.  I am a 2011 alumni of the University of Richmond with a bachelor's in business administration.  I have three years work experience as a book keeper in the private sector for a real estate investment company and more recently close to two years experience as a staff accountant for a public accounting firm based in Virginia.  I was also recently licensed as a CPA in Virginia on September 15, 2015.

This past tax season I met with several individual tax clients who were unable to provide, with 100% accuracy, the date and amount of their 2015 federal estimated income tax payments.  Obviously, this information is critical and needs to be entered correctly on each client's tax return in order to calculate an accurate refund or tax payment due.  

As a new CPA I learned that I was eligible to represent clients before the IRS.  By submitting a power of attorney form 2848 I could quickly and easily gain access to client account transcripts and determine the exact date and amount of any estimated tax payments.  The form can be completed in a matter of minutes following the instructions on the IRS website. 

Once I had a client signed form in hand I would call the IRS practitioner priority line and wait on hold to speak with an agent usually no more than 15-20 minutes.  Then I would ask for the agent's direct fax number and place them on hold to send the fax.  When I returned to the line the agent would confirm receipt of form 2848 and the tax year(s) in question and disclose the client's account transcript information right over the phone.  I was even able to request the account transcripts be faxed to me so documentation could be provided to the client. 

This process was much quicker than the alternative of waiting for CAF to process a submitted Form 2848 and pulling the transcripts via the transcript delivery system (TDS) 5-7 business days later.  It was also a task I could manage on my own without having to rely on others in the office.

It is important to note with tax resolution client's contacting the IRS directly to request tax transcripts may bring unwanted attention to a client versus the "soft" contact achieved by submitting form 2848 to CAF and pulling the transcripts through the TDS.  However, if the client is in good standing and you are looking to simply clarify estimated tax payments the "hard" method of contacting the IRS outlined above is a great way to expedite the process!

-Billy Barber, CPA

** IMPORTANT UPDATE** For Practitioners Dealing with EITC and ACTC

Starting in 2017, a new law has passed requiring the IRS to hold all refunds for people receiving a refund due to the Earned Income Tax Credit and the Additional Child Tax Credit.


Refunds will not be issued until February 15 for these individuals. A lot of people rely on these refunds, so you should make your clients aware of these changes for next tax year.


Relevant Citations:
https://www.irs.gov/for-tax-pros/new-federal-tax-law-may-affect-some-refunds-filed-in-early-2017

Code Sections Form 1040 Schedule C Page 2

Below is the last of my annotated Form 1040 posts, the Form 1040 Schedule C page 2.

Code Sections for Form 1040 Schedule C

Below is the Form 1040 Schedule C Page 1 code sections. If anyone is interested in any other forms, just let me know.

Code Sections for Form 1040 Schedule A

Below is the annotated Form 1040 Schedule A with all applicable code sections. I'll post the Schedule C tomorrow. If any other forms are wanted, just let me know and I can put those together too.

Internal Revenue Code Sections All Tax Controversy Practitioners Need to Know

This is from my own personal toolbox. I like to keep this list handy for when dealing with auditors.


IRC 6001 - Allows the IRS to expand scope of an audit
IRC 274(d) - Receipts and Records that are required for verification
IRC 7602(a)(1) + (2) - Examination of books and records + summons authority
IRC 7605(a) + (b) - Time and the place of the audit
IRC 7606(a),(b),(c), IRC 7342 - Entry of premise to search for taxable items
IRC 7801 + 7804 - Auditors authority to audit
IRC 446(b) + (c), also  see Holland vs United States 348 U.S. 121, 148 (1954) - authority to use method of accounting to clearly reflect income if no books and records are available
IRC 7602(e) - limits exam techniques
IRC 7491(b) - Allows the use of Bureau of Labor Statistics to help reconstruct income, however the burden of proving income is on the IRS (I'll get more into this subject in a future post)


Summons:
IRC 7602 - Summons Authority
IRC 7402 + 7604 - Summons Enforcement/Failure to Obey Summons
IRC 7210, 7603, 7604, 7608 - Service of a Summons
IRC 7609 - Third Party Recordkeeping


Assessment:
IRC 7203 - Willful failure to supply information
IRC 6201(a) - IRS assessment authority
IRC 6203 - Method of assessment
IRC 6212(a) - Notice of Deficiency

Code Sections Form 1040 Page 2

Here is the second page in my code sections for the Form 1040. I'll also be adding Schedule A tomorrow (Thursday) and Schedule C on Friday. If anyone has any requests for other forms they want done, just leave a note in the comments and I'll try to get to it.

Code Sections Form 1040 Page 1

I put together the following image. It details the code section used for every line on Form 1040 Page 1. I will be adding more pages in the future!

Tax Court Review After CDP Hearing

Another case released on May 26, 2016 is TC Memo 2016-105. There's not much great information in the case. However, there is one good point that practitioners should be aware of when helping a client with a Collection Due Process Hearing. If you go to a Collection Due Process Hearing and do not bring up an argument for your client, then you are barred from bringing up that same argument in a Tax Court review of the CDP hearing.


The court really stresses this at the end of TC Memo 2016-105.


Relevant Citations:
TC Memo 2016-105

New Case on Statute of Limitations for Refunds

TC Summary Opinion 2016-25 was filed on May 26, 2016, McAuliffe v. Commissioner. The main takeaway from this case is probably do not let your parole officer (who works part-time at H&R Block) handle your taxes. But there are several other interesting points.


The taxpayer went to jail in 2003 for mail fraud and money laundering. He believed his parole officer/H&R Block employee had filed his 2003 tax return. In 2007, he received a notice of deficiency for 2003 when the IRS filed an SFR under 6020(b).


The court did not believe that his return was filed in 2004, so the date of the taxpayer's claim for refund was in 2008, when he challenged the notice of deficiency.


During 2003, his only taxes paid were withholdings from an employer. These are deemed paid on April 15, 2004. Since the claim for refund was in 2008, this is more than two years from the date tax was paid. As such, the taxpayer could not get a refund.


The taxpayer brought up one final argument, that not getting his refund is not fair. Per the court, "Suffice it to say that the Supreme Court of the United States has clearly instructed that limitations on allowance of refunds and credits prescribed by section 6511 and 6512 shall be given effect, consistent with congressional intent, without regard to an individual's perceived notion of fairness. Commissioner v. Lundy, 516 U.S. 235." So, when client want refunds when it has past the SOL, this is a great case to cite for them.


Relevant Cites:
McAuliffe v. Commissioner, TC Summary 2016-25

IRS Audit Technique Guides

The IRS publishes guides that help auditors audit certain industry segments. These are known as ATGs. The people over at Uncle Fed Tax Board have all the old ones which are no longer available. These are a great resource.

You can find these here.

My favorite one is the Sports Franchise ATG. One of the little known facts about sports franchises is that when they trade a player, it is actually a tax free like kind exchange under IRC 1031.

From the ATG: "Player contracts constitute intangible personal property. As addressed in Chapter 9, if the player contract has a useful life of more than a year, it must be capitalized and amortized over the life of the player contract under IRC section 167.

Gains and losses on the sale or exchange of player contracts held by the sports franchise for more than a year constitute IRC section 1231 gains and losses. However, to the extent of amortization claimed under IRC section 167, player contract gains are subject to IRC section 1245 ordinary income recapture.

In general, player contract trades qualify for IRC section 1031 nonrecognition treatment for like kind exchanges. Gains recognized on player contract trades are limited to the amount of boot and, if applicable, non-qualifying property received by the transferor.

Rev. Rul. 67-380, 1967-2 C.B. 291 and Rev. Rul. 71-137, 1971-1 C.B. 104, specifically address these general provisions for sports franchise player contracts.

IRC section 1031(a) provides that no gain or loss is recognized if property used in a trade or business is exchanged solely for like kind property. Under IRC section 1031(b), any realized gain is recognized to the extent money or property that is not like kind is received in the exchange. Treas. Reg. section 1.1031(b)-1(c) provides:

Consideration received in the form of an assumption of liabilities (or a transfer subject to a liability) is to be treated as "other property or money" for the purposes of section 1031(b). Where, on an exchange described in section 1031(b), each party to the exchange either assumes a liability of the other party or acquires property subject to a liability; then, in determining the amount of "other property or money" for purposes of section 1031(b), consideration given in the form of an assumption of liabilities (or a receipt of property subject to a liability) shall be offset against consideration received in the form of an assumption of liabilities (or a transfer subject to a liability). See section 1.1031(d)-2, examples (1) and (2).

To the extent of IRC section 1245 recapture, gains recognized on player trades are ordinary gains. The IRC section 1245(a)(4) amalgamation rule for player contracts (addressed in chapter 10) only applies to player contracts transferred in connection with the purchase/sale of an entire sports franchise. Accordingly, the IRC section 1245(a)(4) amalgamation rule does not apply to the sale or trade of two or more player contracts by a sports franchise to another sports franchise. This means the IRC section 1245 recapture provisions are applied on an individual player contract basis versus an aggregate player contract basis.

Accordingly, the tax treatment to the transferor on the sale or exchange of a player contract is the same as the tax treatment given the sale or exchange of tangible personal property, such as machinery, used in any trade or business.

In the sports franchise’s tax year in which a player is cut, the sports franchise is entitled to an ordinary deduction under IRC section 165 for its adjusted basis in the player contract.

Generally, a sports franchise does not have an ascertainable tax basis in future draft picks given up in a player trade (treated as an inseparable part of the franchise intangible asset). Accordingly, in determining the sports franchise’s basis in player contracts acquired in trades, a zero adjusted basis should be used for future draft picks given up in the trade. To the extent a gain on a future draft pick given up in a trade is recognized under IRC section 1031, the gain is an IRC section 1231 gain."

As you can see, they go into really great detail about transactions.  The Sports Franchise ATG is available here.

21 Questions You Need to Know About a Client's Business in an Audit

The following are 21 questions every practitioner should know an answer to before heading into an business audit with the IRS:

 

1. Chart of Accounts Used?
2. Accounting Method? 
3. How was Income Determined? 
4. Is a double-entry accounting system used? 
5. Individual Responsible for: 

• General Bookkeeping 
• Cash Receipts 
• Accounts Receivable 
• Accounts Payable 
• Sales 
• Purchases 
• Reconciling Bank Statement

 

6. Who adjusts and closes book? 
7. Who handles deposits? How often are deposits made? 
8. Who opens the mail? 
9. How are credits memos and returns handled? 
10. Are personal funds of shareholders and officer kept completely separate from business funds
11. Are sales orders, work orders, and invoices pre-numbered? Are all numbers accounted for and used in sequence? What happens to voided orders and invoice?
12. How do you handle month-end and year-end cut-offs?
13. Are there policies covering the aging of accounts receivable? Are they followed?
14. Who authorizes write-offs of receivables?
15. Who authorized write-off of obsolete inventory? What guidelines are used? Who authorizes the write-off of other assets?
16. How are cash sales handled? Are duplicate deposit slips kept? Is cash deposited intact?
17. Who authorizes purchases of major items?
18. How are payrolls handled? Example: Separate payroll account?
19. How much petty cash is kept on hand? Who has access?  Is a voucher system in use?
20. How often are bank reconciliation’s prepared?
21. Are physical counts of inventories made? How often? Are the records available?
     

Employment Tax Audits: Section 3509 Relief

Another quick hit on employment tax audit relief options is section 3509, detailed below:

IRC section 3509 provides that if an employer fails to deduct and withhold any tax under chapter 24 (income tax withholding) or subchapter A of Chapter 21 (employee portion of FICA) with respect to any employee by reason of treating an employee as not being an employee, the employer's liability is 1.5 percent of the employee's wages plus 20 percent of the employee's portion of the FICA tax. The employer's liability is doubled in cases where the employer failed to meet the reporting requirements of IRC section 6041(a) or IRC section 6051 consistent with the treatment of the employees as independent contractors.

IRC section 3509(c) provides that the reduced rates of IRC section 3509 do not apply in cases of an employer's intentional disregard of the requirement to deduct and withhold such tax.

IRC section 3509(d)(1)(C) provides that if the amount of liability for tax is determined under 3509, then sections 3402(d) (regarding credit for tax paid by the worker) and 6521 (regarding offset for payment of SECA tax) do not apply. IRC section 3509(d)(2) provides that section 3509 rates do not apply where the employer withholds income tax withholding but not FICA.

Employment Tax Audits - Worker Classification Rules

Making the proper determination on whether to treat a worker as an employee or independent contractor can have significant tax implications. A lot of taxpayers feel they can just classify the worker how they want, however there are numerous situations that you need to look at. The following is a law section on a memo I drafted detailing the rules of how to classify a worker. Most of the information can be found in the IRM too:

IRC section 3121(d)(2) of the Internal Revenue Code provides that the term "employee" means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of employee. See also IRC sections 3401(c) and 3306(i).

 

The question of whether an individual is an independent contractor or employee is one of fact to be determined upon consideration of the facts and application of the law and regulations in a particular case. With certain limited statutory exceptions, the classification of particular workers or classes of workers as employees or independent contractors, for purposes of Federal employment taxes, must be made under common law rules. Guides for determining the existence of a worker's status are found in three substantially similar sections of the Employment Tax Regulations; namely sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1 relating to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and federal income tax withholding on wages at source, respectively.

 

Section 31.3121(d)–1(c)(2) of the regulations provides that generally, the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the results to be accomplished by the work, but also as to the details and means by which the result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done, but also as to how it shall be done. In this connection, it is not necessary that the employer actually control or direct the manner in which services are performed; it is sufficient if he or she has the right to do so. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished and not as to the means and methods for accomplishing the result, he or she is an independent contractor. Similar language is found in regulation sections 31.3306(i)–1(b) and 31.3401(c)–1(b).

 

In determining whether an individual is an employee under the common law rules, a number of factors have been identified as indicating whether sufficient control is present to establish an employer– employee relationship. These factors have been developed based on an examination of cases and rulings considering whether an individual is an employee. The degree of importance of each factor varies depending on the occupation and the factual context in which services are performed. See Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318 (1992) and Weber v. Commissioner , 103 T.C. 378 (1994), aff'd 60 F.3d 1104 (4th Cir. 1995). See also Breaux and Daigle, Inc. v. U. S.. 900 F.2d 49 C.A.5 (La.),1990. Also see Rev. Rul. 87–41, 1987–1 C.B. 296.

 

Section 3121(d)–1(a)(3) of the regulations provides that if the relationship of an employer and employee exists, the designation or description of the parties as anything other than that of employer and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, co-adventurer, agent, independent contractor, or the like. Similar language is found in regulation sections 31.3306(i)–l(d) and 31.3401(c)–1(c).

 

Because there are elements of controls as well as autonomy in all cases, regardless of whether an employment relationship or an independent contractor relationship exists, all evidence of both control and lack of control or autonomy must be evaluated in determining whether there is a sufficient degree of control to establish an employment relationship. In doing so, one must examine the relationship of the worker and the business. Facts which illustrate whether there is a right to direct or control how the worker performs the specific tasks for which he or she is hired, whether there is a right to direct or control how the business aspects of the worker's activities are conducted, and how the parties perceive their relationship provide evidence of the degree of control and autonomy.

 

Factors which influence if a worker is an independent contractor or an employee include:

 

Behavioral Control:

 

Behavioral control factors establish if an employer can control how a worker performs a task.

 

                       Instructions: Does the worker perform the required services:

                

Instruction focuses on how a job gets done and does not factor in the end result of the job. If a person needs to comply to instructions about, when, where and how he has to work is ordinarily an employee. Not all employees need instructions, such as highly proficient employees. Even with these employees, only the right to enforce instructions matters, not if the employer actually provides instructions. (Rev. Rul. 68-598, 1968-2 C.B. 464; Rev. Rul. 66-381, 1966-2 C.B. 449;   Silverstone et al. v U.S., USTC 66-1 P 9468.)

 

                 Training:

 

Training is when methods, procedures or skills need explanation before they are used to complete a job. This helps complete a job in a particular manner. Factors that highlight training are required meetings, correspondence or experience employees working with inexperienced trainees. This training demonstrates an employer wants control over how a job is done.

 

Financial Control:

 

Financial controls occurs when the company can direct economic aspects of worker’s activities.

                

                 Significant Investment:

                

If an individual has a significant investment in the business, then an independent contractor relationship may exist. The investment must only have substance; it does not need to meet any dollar threshold. This investment is seen in the facilities in which the individual has the investment. A lack of investment in the facilities will show an employee-employer relationship. Facilities are equipment or a work premise. These include machinery and office furniture, but not tools, instruments, clothing, etc.

 

The investment is only a significant factor if it is real, essential and adequate. The investment cannot be in facilities a normal employee will normally maintain for an employer. Rev. Rul. 71-524, 1971-2 C.B. 346,  Avis  Rent  A Car  System,  Inc.  v.  U.S. [74-2 USTC, 9725], 503 F2d 423, 429 (2nd Cir. 1974).

                

                       Unreimbursed Expenses:

 

Unreimbursed expenses is when a worker incurs their own expenses in relationship with the job. Having unreimbursed expenses show the worker has the right to direct and control financial aspects of business operations.

 

Most independent contracts incur business expenses. These expenses are either direct expenses or pro rata portions of several other expense. Typically included in these expenses are tools, equipment, training, advertising, wages for assistants, licensing, certification, supplies, travel, leasing equipment and inventory.

 

An employer furnishing tools, materials, etc for a job tends to show an employee-employer relationship. The control aspects originates in that the employer can determine which tools a worker uses, in what order and how to use the tools. Independent contractors normally have their own tools. This is how the independent contractor may show control. If an employee provides their own tools in an occupation where this is a customary practice, then such a practice does not demonstrate lack of control by the employer. Rev. Rul. 71-524, 1971-2 C.B. 346.

                

When an employer pays business or traveling expenses for a worker, then the worker is an employee. Rev. Rul. 55-144, 1955-1 C.B. 483. 

                

                 Services Available to the Relevant Market:

 

Independent contractors can seek their own business opportunities. Doing so incurs expenses such as advertising and a business location. If a person makes services available for the public, then they are normally an independent contractor. (Rev. Rul. 56-660, 1956-2, C.B. 693).

 

                 Method of Payment:

 

If a worker is compensated hourly, daily, weekly or in such other similar manner is guaranteed a return for the labor performed, then this is generally evidence of an employer-employee relationship. A task for a flat fee, however, tends to show an independent contractor relationship. Rev. Rul. 74-389, 1974-2 C.B. 330.

 

                 Opportunity for Profit or Loss:

 

A worker making decisions that affect his own bottom line indicates the presence of an independent contractor. The ability to affect one’s own bottom line is not present if the only way to affect the amount of money made is by working more or less hours. To the contrary, by only affecting the worker’s bottom line by changing work schedules indicates the presence of an employer/employee relationship. If the person can receive either a profit or loss due to the services he performs, then that person is seen as an independent contractor. Rev. Rul. 70-309, 1970-1 C.B. 199.

 

Relationship of Parties:

 

                         Intent of Parties through Written Contracts:

 

If a contract describes a worker as an independent contractor, then each party had intent for an independent contractor relation. This is not sufficient evidence of the worker’s status. This designation is immaterial and only the substance of the relationship determines the law. Reg. Sec. 31.3121(d)-1(a)(3)

                  

                   Employee Benefits:

                              

Any benefits received by a worker, such as a pension, health insurance, paid sick days can only be provided to employees, not to independent contractors.

 

                   Discharge:

 

It is harder for a company to discharge an employee than it is an independent contractor. This is due to the company being liable for items such as severance pay and notice. Therefore, the inability to discharge a worker shows the worker is more likely an employee. However, the right to discharge shows control over the worker. An independent contractor cannot be discharged unless he produces at a quality less than contractually agreed. Rev. Rul. 75-41, 1975-1, C.B.323.

 

Termination:

 

A worker may terminate his relationship with an employee usually on an easier basis. However, an independent contractor cannot merely terminate a relationship due to a legal obligation to complete the work. Rev. Rul. 70-309, 1970-1, C.B. 199.

 

Business Activity:

 

The services a worker performs and how integral the worker is to the company shows he is a key aspect to the company. This level of integration into the company shows the worker is an employee since he is subject to more direction and control. This test relies on the scope and function of the business and how the worker functions within it. If the company needs to rely on a person for company success, then that company will want more direct control over the individual. U. S. v. Silk 331 U.S. 704 (1947), 1947-2 C.B. 167.

 

Miscellaneous Factors to Consider:

 

                   Continuing Relationship:

 

A permanent relationship between the worker and the company is relevant evidence for an employer-employee relationship. Businesses may engage a worker with the intent of a continuing relationship instead of a specific project. This shows intent of an employee-employer relationship. Continuing relationships are shown through frequent recurring, even if irregular, intervals. U.S. v. Silk, 331 U.S. 704 91947, 1947-2, C.B. 167. 

 

                   Work Hours:

 

If the employee sets hours a worker must work, then there is control over the worker. The workers can no longer work as he sees fit but needs to conform to the employers arrangements. Rev. Rul. 73-591, 1973-2 C.B. 337.

                  

                   Full Time:

 

Working full time for the business shows the employer has control over the worker because he restricts access to the worker from finding other employment.  Rev. Rul. 56-694, 1956-2 C.B. 694.

Employment Tax Audits - Employee Reclassifications and Section 530 Relief

When your client is facing a possible worker reclassification, practitioners should try utilizing 530 relief for their client. Qualifying for 530 relief will severely limit the amount of employment taxes the IRS can impose on your client. The following is a law analysis section on Section 530 relief:

Section 530(e)(3) of the Revenue Act of 1978, as amended by the Small Business Job Protection Act of 1996, clarifies that the first step in any case involving whether the business has the employment tax obligations of an employer with respect to workers is determining whether the business meets the requirements of section 530. If so, the business will not have an employment tax liability with respect to the workers at issues.

 

Section 530(a)(1) provides, in part, that if, for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, then for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee, unless the taxpayer had no reasonable basis for not treating the individual as an employee.

 

This relief applies only if both of the following consistency rules are satisfied: 1) all federal tax returns (including information returns) required to be filed by the taxpayer are timely filed on a basis consistent with the taxpayer's treatment of the individual as not being an employee ("reporting consistency"), and 2) the taxpayer (and any predecessor) has not treated any individual holding a substantially similar position as an employee for purposes of employment taxes for periods beginning after December 31, 1977 ("substantive consistency rule").

 

Section 530(a)(2) sets forth three safe havens in determining whether a taxpayer has a reasonable basis for not treating an individual as an employee. They are reasonable reliance on: (A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer; (B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or (C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged. A business which fails to meet any of three safe havens may nevertheless be entitled to relief, if the business can demonstrate, in some other manner, any other reasonable basis for not treating the worker as an employee.

 

In Bruecher Foundation Services, Inc. v. U.S. (484 F.Supp.2d 600), a case where the taxpayer’s filed 1099’s two days before the court date, the court held, “taxpayer's filing of its returns only after the IRS challenges the classification of its workers fails to demonstrate the good faith that Congress sought to require by demanding that a taxpayer file the appropriate tax returns. See, e.g. Boles Trucking v. United States, 77 F.3d 236, 239 )8^th Cir. 1996), (identifying legislative intent to protect taxpayers misclassifying workers in “good faith”); Gen Inv. Corp. v. United States, 823 F2d337, 340 (9^th Cir. 1987) (“[w]ithout question, Congress intended to protect employers who exercised good faith in determining whether their workers were employees or independent contractors” ); Cf. Med. Emergency Care Assocs., S.C. v. Comm'r, 120 T.C. 15, (2003) (granting Safe Harbor relief where taxpayer filed untimely information returns but mailed returns before audit commenced). Interpreting a late filing such as Bruecher's as satisfying the filing requirement would thus defeat the purpose of such requirement.”

 

“Individuals… who may not be reclassified are those whom the taxpayer has treated in good faith as independent contractors for employment tax purposes. The taxpayer shall be deemed to have acted in good faith only if all Federal tax returns (including information returns) required to be filed by the taxpayer were filed on a basis consistent with a taxpayer’s treatment of such individuals as independent contractors and the taxpayer treated such individual contractors in reasonable reliance…” S.REP No. 95-1263 at 210 (1978)

 

As such, filing 1099’s must be filed in good faith.

Relevant Citations:

Publication 1976

Free CPE: Foreign Earned Income Exclusion

IRS is putting on CPE on the Foreign Earned Income Exclusion on June 29 at 2 PM eastern. You can register here.

They always put on great presentations.

Hobby Loss Rules - Urology and Airplanes Don't Mix

This is probably one of the most interesting Tax Court cases of the year so far. The taxpayer is a urologist. While he was a licensed doctor, he was also a licensed pilot. Mixing his passions, he formed a company called Air Urology, LLC. This was a rental airplane activity (one that was never advertised to the general public). The activity had several large losses each year in question.


Ultimately, the leasing of the airplane was determined to be not engaged in for profit. If you want a quick break down of the factors for such determination, the court lays them out nicely:

Those factors include: "(1) the manner in which the taxpayer carries on the activity, (2) the expertise of the taxpayer or his advisors, (3) the time and effort expended by the taxpayer in carrying on the activity, (4) the expectation that assets used in the activity may appreciate in value, (5) the success of the taxpayer in carrying on other similar or dissimilar activities, (6) the taxpayer's history of income or losses with respect to the activity, (7) the amount of occasional profits, if any, which are earned, (8) the financial status of the taxpayer, and (9) whether elements of personal pleasure or recreation are involved. Sec. 1.183-2(b), Income Tax Regs. No one factor is determinative."

Where the taxpayer gets really creative is in 2008. In 2008, he decided to group his urology practice and airplane rental together for the purposes of IRC 183 (hobby loss rules). Here, the court looks at three things: (1) are they economically intertwined, (2) the business purposes served by carrying on the undertakings separately or together, and (3) the similarity of the undertakings. The court rules that the urology practice and airplane rental were not connected and could not be grouped.

Two of the best lines from the judge was: the urology practice "did not benefit from Dr. Steinberger's use of the airplane because he could have just as easily driven..." and "When his travel time to the airpark and the time to ready the airplane for flight are added to the stipulated flight times, Dr. Steinberger saved no time by flying to Wellington - in fact it took longer than driving.."

Definitely an interesting case for those who are interested in Hobby Losses.


Relevant Citations:
Steinberger v. Commissioner TC Memo 2016-104

Statute of Limitations - Tax Court

An interesting case just came out on the statute of limitations to file in Tax Court. When the Tax Court is closed or inaccessible on the last date of the statute of limitations, the statute of limitations is extended to the next day (unless the next day is a weekend or holiday)


Relevant Cites:


Guralnik 146 TC 15

Odds of Being Audited - Individuals

For anyone who has not looked through the IRS Data Book, I highly recommend it. It is packed with a ton of information.





As you can see, for 2014 of all the returns filed (192,000,000) only 0.7% were actually audited. However, actual audit chances are based on where your income is for the year. This table is from the IRS Data Book. The first column represents a persons adjusted gross income. The second column is how many returns were filed in that group divided by total returns filed. The last column shows how many returns were audited in that group.


So, if you had $10,000,000 or more of adjusted gross income, the IRS audited 34.69 percent of your group. The $50,000 to $70,000 group had the lowest chance of being selected at just 0.47 percent.


It is interesting to see such a high coverage on people who had no adjusted gross income.

All returns [4]	100.00	0.84
No adjusted gross income [5]	1.76	3.78
$1 under $25,000	38.51	1.01
$25,000 under $50,000	23.23	0.50
$50,000 under $75,000	13.13	0.47
$75,000 under $100,000	8.42	0.49
$100,000 under $200,000	11.15	0.64
$200,000 under $500,000	3.08	1.54
$500,000 under $1,000,000	0.48	3.81
$1,000,000 under $5,000,000	0.21	8.42
$5,000,000 under $10,000,000	0.01	19.44
$10,000,000 or more	0.01	34.69

Do You Have a TEFRA Partnership

TEFRA (named after the Tax Equity and Fiscal Responsibility Act) deals with larger partnerships. If you have a partnership that is a TEFRA partnership, you need to appoint a Tax Matters Partner and the partnership will fall under the "strange" TEFRA audit rules
** Note - If you do not have a TEFRA partnership, you do not appoint a Tax Matters Partner.
The Internal Revenue Code calls a non-TEFRA partnership, a small partnership. This means the partnership has less than 11 partners. If at any time during the year, the partnership has more than 10 partners, then the partnership is a TEFRA partnership.
If the partnership has 10 or fewer partners, it can still be a TEFRA partnership if any of the following are partners:

• Partnership;
• Limited liability Company (LLC) which files a Form 1065 or is treated as a disregarded entity (see Revenue Ruling 2004-88) for federal tax purposes;
• Trust (any type, including Grantor Trusts and grantor type trusts, even if the Schedule K-1 contains the SSN of the grantor);
• Nominee;
• Nonresident alien individual; or
• S corporation.

If the partnership has 10 or fewer partners, and does not have any of the above as a partner, it is a small partnership unless it filed Form 8893 to elect to be treated as a TEFRA partnership. This form, if filed, should become part of your client's permanent file.

We will go into the more complicated TEFRA audit rules later. Keep in mind, TEFRA is going away in two years, but the determination of if a partnership is a small partnership will still matter for the new partnership audit rules.

Relevant Citations:

Partnership Audit Technique Guide

Form 8893

IRS FOIA Request Locations

I have been getting questions the last couple of days on where to send a Freedom of Information Act (FOIA) Request to the IRS. The IRS has two addresses to send the request to depending on the type of documents you need.


If you need information from IRS Headquarters, that is not in the electronic reading room yet, then send the request to:
Fax: 877-807-9215
Mail: IRS FOIA Request
HQ FOIA
Stop 211
PO Box 621506
Atlanta, GA 30362-3006


If you want your own records or your client's records, send the request to:
Fax: 877-891-6035
Mail: IRS FOIA Request
Stop 93A
Post Office Box 621506
Atlanta GA 30362-3006


That IRS has put together a great source for FOIA requests here.

Statute of Limitations - Trust Fund Recovery Penalties

One of the most common mistakes that I see practitioners and the IRS make is incorrect assessments of Trust Fund Recovery Penalties (TFRP). This is partially due to an old IRS idea that TFRP did not have a statute of limitations. However, that idea was quickly shot down when it was taken to court. IRM Section 5.19.14.1.5 is a great place to look when you have TFRP issues.
As practitioners, one of the first steps in exercising due diligence for our clients is to check all applicable statutes of limitations to see if any apply to your client.
This chart is a great breakdown of when a TFRP must be assessed. Any assessment outside of this range would be an incorrect assessment:

Withholding or Federal Insurance Contribution Act (FICA),	Three years from the succeeding April 15th or three years from the date return was filed; whichever is later.
Excise or Railroad Retirement Tax Act (RRTA),	Three years from the due date of return, without regard to any extension; or three years from the date return was filed; whichever is later.
Withholding, FICA, Excise or RRTA returns that are: filed under IRC 6020(b)(1), Returns Executed by Secretary false or fraudulent willful attempt to evade tax; or not filed	No limitation period.

IRS Third Party Notices

IRS released Chief Counsel Advice 201621012 today, which discussed third party contacts. While the actual situation is not all that interesting, it is good to note the laws discussed in the advice.
Under IRC 7602(c), the IRS is required to provide reasonable notice that they will contact third parties when auditing or attempting to collect taxes from a taxpayer. This is usually done during the initial meeting with the taxpayer.
Practitioners need to remember IRC 7602(c)(2), which states the IRS is required to periodically provide a list of the third party contacts. The practitioner can also request the list at any time. While most of the IRS does a good job of keeping practitioners informed and following the Internal Revenue Manuel, in longer audits or situations where third party contact has occurred, it is usually good practice to keep an eye on the list of third party contacts.
The only third party contacts that do not need to be disclosed are: when the taxpayer authorized the contact, if notice would jeopardize collection of tax or threat of a reprisal against any person, and in criminal investigations.


Relevant Cites:
IRC 7602