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What is an Installment Agreement?

Posted on: March 13th, 2014 by sashworth No Comments

 

Written by Peter McFarland, Esq. on 10/3/2013

 

As a practitioner, I often meet with clients who have received notices from the IRS stating that they owe several thousands of dollars and must pay it by a certain date.  These clients feel overwhelmed, stressed, and feel like they are out of options because they can’t possibly pay the full amount due.

The great news is that the IRS knows taxpayers often cannot come up with the funds to simply pay their unpaid taxes right away.  There are several options available to address this reality such as installment agreements, offers in compromise, and a special currently not collectible status.  This article will focus on a monthly payment plan, which the IRS calls an Installment Agreement.

A quick note: there are several types of installment agreements.  To figure out which one is best for your situation, I highly recommend you contact Estill & Long, LLC to discuss your case with an experienced attorney.  This article will focus on the use of a Form 433-A to request an installment agreement, but other methods are available.

 

Installment Agreement Defined

An installment agreement is exactly like it sounds.  The taxpayer agrees with the IRS to pay either all or some of his or her unpaid taxes over a series of installments.  The advantage of this type of agreement is that the IRS will work with taxpayers toward some semblance of an affordable monthly payment.  The disadvantage, however, is that penalties and interest will continue to accrue while the outstanding balance remains unpaid.

 

Before Requesting an Installment Agreement

Before the IRS will work with a taxpayer toward any collection alternative such as an installment agreement, the taxpayer must first have filed all tax returns.

 

How to Request an Installment Agreement

When negotiating nearly any collection alternative, the IRS will first ask to see a collection information statement.  This statement often takes the form of a Form 433-A for an individual taxpayer or a Form 433-B for a business.

These forms generally will ask a taxpayer to list all of their assets, including bank accounts, investment accounts, 401(k)s, IRAs, safe deposit boxes, credit cards, life insurance, real property owned, vehicles owned, and a breakdown of monthly income and expenses.  In the end, whatever income is not outpaced by “necessary expenses” will generally be the amount of the monthly payment.  Sometimes equity in assets needs to be addressed, but often the IRS will accept the leftover monthly income in lieu of forcing the sale of an asset.

Here’s an example of the monthly income and expense breakdown taxpayers must provide: Monthly income and expense breakdown

 

“Necessary Expenses”

Regardless of your actual financial situation, the IRS will only allow “necessary expenses” when determining the payment amount.  That means that even though you may live paycheck to paycheck in reality, the IRS may still try to collect much more of your paycheck than you believe you can afford because it will decide that not all of the expenses you pay are “necessary.”  It is crucial, therefore, to discuss a potential installment agreement with an attorney to ensure you are maximizing your allowable “necessary expenses” and agreeing to a monthly payment you can really afford.

 

Conclusion

Installment agreements can be a handy tool to prevent more aggressive collections by the IRS such as levies.  It also allows a taxpayer to satisfy the outstanding unpaid taxes through more affordable payments.

In the end, however, the IRS will only allow monthly income to be offset by “necessary expenses.”  Often the IRS’ proposed payment amount is not what you can afford.  It is important to speak to someone experienced with IRS collections to ensure you negotiate an agreement that you can live with.  The attorneys at Estill & Long, LLC have negotiated hundreds of these agreements and can help you with yours.

 

About Peter McFarland, Esq.

Peter earned his Juris Doctor (J.D.) degree at the University of Denver. After becoming licensed to practice law in the State of Colorado, he earned his Master of Laws (LL.M.) in Taxation at the University of Denver. In his current role, Peter represents taxpayers before the IRS and in the United States Tax Court. He gained valuable experience as an attorney with the University of Denver’s Low Income Tax Clinic during his graduate school studies and has been representing clients at Estill & Long, LLC since his arrival in early 2013.

 

Obtaining Relief from IRS Penalties

Posted on: February 27th, 2014 by sashworth No Comments

 

Written by Peter McFarland, Esq.

If you find yourself with a notice in hand from the IRS, you will likely see a penalty or two assessed on your account. Often IRS penalties will add a significant portion to the total amount you need to pay. Relief from these penalties can be obtained and it is best to consult with a professional to discuss the particulars of your case and see if you qualify to receive a lessened penalty or if the penalty may be removed entirely.
A quick note, there are some programs available from the IRS for first-time issues and other situations. This article will focus on reasonable cause defenses, but it’s best to consult with a professional to determine if there’s a better way to obtain relief from a particular penalty.

Reasonable Cause
The Tax Code sections that create penalties will normally, but not always, include exceptions to provide relief from those penalties. Normally the language states that a penalty is properly assessed as long as the failure was due to reasonable cause and not willful neglect.

Often when discussing penalties with my clients, they have done a little research and say that because they didn’t willfully neglect paying or filing their tax return, it should be a done deal. They are convinced this requirement is an easy win.

Unfortunately, it’s just not that easy. Reasonable cause is a phrase that has a special meaning in the context of penalty assessments. It basically requires that a taxpayer act as a normal business person would under the same circumstances.

So What, Specifically, is Reasonable Cause?
Several situations satisfy the reasonable cause rubric. If a taxpayer, for instance, relied on a professional to assist them with their tax obligations, the IRS will sometimes abate the penalty. Fires, floods, and other natural disasters can also, under some circumstances, provide a basis for relief. Death and serious illness are also factors the IRS will consider.

Generally, a taxpayer attempting to obtain relief due to one of these explanations will be required to rectify the situation as soon as the underlying reason is no longer an issue. For instance, if the taxpayer was in the hospital and could not satisfy his or her tax obligations, he or she would need to file and pay the taxes very soon after getting out of the hospital to qualify for penalty abatement.
What is not Reasonable Cause?
Some clients ask me to help them get these penalties abated, but the facts surrounding their case disqualify them. Some examples I have seen include: forgetfulness, ignorance of the law, or simply that a mistake was made.
While everyone makes mistakes and not everyone is familiar with the details of the Tax Code, the IRS nonetheless will stand firm on any penalties if these defenses are offered. The IRS reasons that being forgetful or making a mistake is not acting as a normal business person would have acted under the same circumstances. The taxpayer, in other words, has not shown reasonable cause for the failure.

Conclusion
Is this clear as mud? As I mentioned in another article, the IRS could assess 14 penalties in the 1950’s. Today they can assess more than ten times that number. Unfortunately, the rules surrounding penalty abatements are just as complex as the rules that create the penalties themselves.

If you are interested in pursuing relief from penalties you should discuss your case with an experienced professional. After learning the details of your situation, a professional should be able to assess the potential success of one of these requests with the IRS and inform you whether it is worth exploring. At Estill & Long, LLC we routinely ask for penalty abatements in conjunction with handling other matters such as setting up a monthly installment agreement or offer in compromise. I highly recommend you reach out to one of our experienced attorneys to discuss your specific situation.

Contact us today!

About Peter McFarland, Esq.
Peter earned his Juris Doctor (J.D.) degree at the University of Denver. After becoming licensed to practice law in the State of Colorado, he earned his Master of Laws (LL.M.) in Taxation at the University of Denver. In his current role, Peter represents taxpayers before the IRS and in the United States Tax Court. He gained valuable experience as an attorney with the University of Denver’s Low Income Tax Clinic during his graduate school studies and has been representing clients at Estill & Long, LLC since his arrival in early 2013.

Overview of IRS Penalties – Individual Income Taxes

Posted on: February 19th, 2014 by sashworth No Comments


Written by Peter McFarland, Esq. on 10/9/2013

In 1955 there were only 14 penalties that the IRS could assess. Today, there are more than ten times that number! With this huge increase in the types of penalties the IRS can assess, clients are constantly asking what can be done to lessen the effect of these penalties.
In this article, I will focus on describing the most common penalties for individual income taxes only. If there is interest in this topic generally, I will write an overview of penalties applicable to businesses, including employment taxes. Also, keep an eye out for an upcoming article explaining penalty abatements.

Failure to File Penalty
Section 6651 of the Tax Code gives the IRS the authority to assess a penalty for any failure to file a tax return by the due date. Basically, if you owe tax and don’t file on time, the total failure to file penalty is usually five percent of the tax owed for each month that your return is late, up to five months. If your return is over 60 days late, the minimum penalty for late filing is the lesser of $135 or 100 percent of the tax owed.

Failure to Pay Penalty
Section 6651 of the Tax Code also gives the IRS the authority to assess a penalty for the failure to pay a tax obligation. If you file a return but fail to pay all amounts due on time, you’ll generally have to pay a penalty of one-half of one percent of the tax owed for each month that the tax remains unpaid until the tax is paid in full or the 25% maximum penalty is reached. The exact percentage can change based on certain specific circumstances, but this is the penalty calculation for the majority of taxpayers.

Estimated Tax Penalties
Section 6654 of the Tax Code further gives the IRS the authority to assess a penalty for the failure to pay estimated taxes. If you must pay estimated taxes but fail to pay enough through estimated tax payments, you may be charged a penalty. Further, if you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return. Certain exceptions exist, and you may want to speak to a professional if you believe you will be assessed a penalty.

The calculation of the penalty depends on several variables, including the amount of the underpayment, the application of a statutory rate, and the length of time the estimated tax was unpaid. For assistance with this penalty, it’s best to speak to a professional to determine the extent of your tax liability.

Conclusion
There are a massive amount of penalties the IRS can and will use to attempt to gain compliance out of taxpayers. I have only explained three, and I’m sure the dry nature of the explanations made more than a few eyes glaze over. If you receive a notice that the IRS has assessed a penalty on your account I highly recommend you discuss your situation with a professional. At Estill & Long, LLC we have successfully abated penalties for clients for years and can help you get relief today!

Contact us today!

About Peter McFarland, Esq.
Peter earned his Juris Doctor (J.D.) degree at the University of Denver. After becoming licensed to practice law in the State of Colorado, he earned his Master of Laws (LL.M.) in Taxation at the University of Denver. In his current role, Peter represents taxpayers before the IRS and in the United States Tax Court. He gained valuable experience as an attorney with the University of Denver’s Low Income Tax Clinic during his graduate school studies and has been representing clients at Estill & Long, LLC since his arrival in early 2013.

Choosing a Business Entity for your Real Estate Activities

Posted on: January 14th, 2014 by sashworth No Comments

By: Scott Estill, Esq. and Stephanie Long, Esq.

There are many different business entities that a real estate investor should consider when starting their real estate company. However, there is no “one size fits all” entity for every investor. Each entity has its advantages and disadvantages, and it is only with careful planning that a decision should be made. We will describe the 3 basic entity types in this article and some things you should consider when forming one.

C-CORPORATION

A C-Corporation is simply a separate business entity (sometimes called an “artificial person”) that is organized under the laws of a state and is completely distinct from its owners.  A C corporation is basically any for-profit corporation that did not make an election to be treated as an S corporation.  It is called a “C” corporation because it is governed by Subchapter C of the Internal Revenue Code.  All C-Corporations are treated as separate entities for tax purposes and must file an income tax return (Form 1120) each year.

 

A C-corporation must file its own tax return (Form 1120) every year and it is taxed on its net profit (after business expenses have been deducted).  Depending upon the net income of the business, it may be advantageous for the business to be taxed at the corporate level, as the tax rate may be lower than it would be at the individual shareholder’s tax rate level. C-Corporations can also have a medical reimbursement plan for its employee/owners, which can provide a very nice tax benefit for those who have high medical expenses.

 

One of the other big advantages of a C-Corporation is that it provides personal liability protection for all of its shareholders. The disadvantages are potential double taxation to the corporation and its shareholders, potential accumulated earnings taxes and reasonable compensation issues.  We generally look to a C-Corporation for our real estate investor clients who are real estate dealers (i.e. those who are in the business of fix and flips), management companies, and real estate brokers.

 

S CORPORATION

An S corporation is identical to a C corporation except that it makes an election with the IRS on Form 2553 to be treated as an S corporation. The main difference between a C and S corporation is the way the corporation is taxed.  An S corporation is required to file a tax return (Form 1120S) but it does not pay any income tax on its net business income.  Instead, the shareholders pay tax on the corporate income based upon their percentage of ownership in the corporation (i.e. an S-Corporation is a “flow-through” entity).

Some of the advantages of an S-Corporation are that the S-Corporation provides personal liability protection for its shareholders, it avoids the double taxation problems of a C corporation, and there are no accumulated earnings tax issues with S corporations. An S-Corporation is also a viable entity for saving employment tax dollars for employee/owners of the company required to take out a reasonable salary. The disadvantages include being limited to 100 shareholders in the corporation, only having the ability to issue one class of stock, the lack of the ability to have a medical reimbursement plan like a C-Corporation, passive activity loss restrictions, and reasonable compensation issues. We recommend using an S-Corporation for real estate dealers, real estate brokers and management companies.

 

LIMITED LIABILITY COMPANY (LLC)

A limited liability company, or LLC, is a mix between a corporation and a partnership.  It is similar to a corporation because it limits the personal liability of its members but is taxed like a partnership. An LLC is very flexible in that the company can elect taxation depending on the needs of the owners. An LLC can be taxed as a C-Corporation, and S-Corporation, a Partnership or a Disregarded Entity. An LLC is also a “flow through” (with the exception of an LLC taxed as a C-Corporation) business entity, meaning the LLC itself does not pay any tax on its profits, the individual owners do.

The advantages of an LLC include personal liability protection for its members, no double taxation issue if the LLC is taxed as a partnership, no accumulated earnings tax problems, and no reasonable compensation issues. The disadvantages include having to pay self-employment taxes on earned income generated through the LLC, lack of the ability to have a medical reimbursement plan like a C-Corporation, and certain passive loss restrictions on passive investment losses passed down to the owners of the company. We usually recommend using a LLC for real estate rental businesses, long term investment property (i.e. property held a year or more), and as holding companies for investors with multiple rental properties or significant assets.

As you can see, the three main entity types have their advantages and disadvantages. It is important that you work with your legal professional to help you decide which entity is right for you, as the formation of such an entity is dependent on the owner’s individual facts and circumstances. The formation of these entities can be costly in both formation costs and ongoing maintenance. For example, most of these entity types will require a separate tax return be prepared each year. Additionally, different Secretary of State offices charge different fees to have an entity formed. There also may be additional fees such as for bookkeeping for the entity and transfer taxes. Although such costs can be looked at as part of doing business (and in most cases tax deductible), each owner should understand the pros and cons of adding such a structure to their current real estate business.

 

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New Tax Laws for 2013

Posted on: January 7th, 2014 by sashworth No Comments

The wait for some certainty in tax planning for 2013 has ended (finally) as Congress passed (and the President signed into law) the American Taxpayer Relief of Act of 2012.  Here are the major provisions as they affect individuals and small business owners:

  • The 39.6% tax bracket is revived (from 2002 and pre-Bush tax cuts) and will impact any taxpayers who earn over $400,000 per year (single) or $450,000 (married filing joint).
  • The 2% reduction in payroll taxes that was in effect for 2011 and 2012 will NOT be extended for 2013.  This will increase the payroll taxes for all US employees by 2%, up to a maximum wage base of $113,700.
  • Long-term capital gains taxes will increase from 15% to 20%, but only for those in the top 39.6% tax bracket.  Thus, if your income is under $400,000 per year, you will not experience this 5% increase.  The same tax increase is present for qualified dividends in 2013 (15% rate increases · to 20%), again for only the top 39.6% bracket.   The 0% capital gain tax rate for those in the 10% and 15% tax brackets was also retained, giving us some additional tax planning opportunities for those in these two tax brackets.
  • The phase out of itemized tax deductions (Schedule A) and personal exemptions (for dependents) has been reinstated.  These 2 changes will affect taxpayers who earn more than $250,000 (single) or $300,000 (joint) and will have a significant tax impact in that it is possible that a very high income taxpayer will lose up to 80% of the total itemized tax deductions.
  • The Section 179 deduction for small business owners has been retained at the same levels as was the case for 2011 and 2012.  This is a major win for small business owners as the maximum amount for 2013 is $500,000 (thus covering all business asset purchases in 2013 for the average small business).
  • Bonus depreciation (at 50%) was also extended through 2013.  This applies only to business purchases of new assets.  This is another nice win for small business owners as it will help to increase tax deductions and provide additional tax planning opportunities.
  • Tax credits (via the Work Opportunity Tax  Credit) are still available for businesses that hire veterans and other “targeted” groups in 2013.
  • Fortunately, Congress made “permanent” changes to the Alternative Minimum Tax to prevent it from affecting millions of additional taxpayers.  The AMT changes include increasing the maximum exemption amount on income to prevent more income (and more taxpayers) from coming within the grasp of AMT.  In addition, this exemption will be indexed for inflation annually.   This change also affects the 2012 tax returns and will be one of the primary reasons why taxes will be filed later this year (as the IRS now needs to get the forms ready given that this tax legislation was passed on January 1, 2013).
  • Major changes were made to the estate and gift taxes for 2013.  First, the exemption was set at $5 million for 2013 and future years and will be indexed annually for inflation.  Second, the top rate was raised from 35% to 40%.  But perhaps the biggest change was making the “portability” provisions permanent.  What this means is that a married couple, with proper tax planning, can now shelter up to $10 million of assets from the estate tax.  With these changes now made, it is important that you review your current estate plan to make sure you are taking advantage of all recent changes to maximize the planning and reduce the potential of any estate taxes being owed after death.
  • The Research and Development tax credit was also extended for 2013 and was also made retroactive for 2012.
  • The child tax credit, earned income credit, adoption credit and child/dependent care credits all were extended, at least through 2013.
  • Many other 2012 tax credits and deductions expired December 31, 2012, and were extended for 2013.  In no particular order, here are a few of these changes that were impacted and extended:  teacher expenses, research credits, alternative fuel credits, mortgage insurance premiums, tuition and related education expenses, state and local sales tax deductions for individuals, tax-free distributions from retirement plans if used for charity and many other provisions.
  • If you have a trust that files a tax return for 2013, you will definitely need to look at the tax planning to make sure distributions are made to eliminate any trust taxable income.  The reason for this is that the top tax rate of 39.6% applies to trusts as well as individuals, but the maximum tax bracket for trusts is very low ($11,950) and thus nearly any taxable income from a trust will be hit hard.  Tax planning in this area is critical to tax reduction.

Understanding Your IRS Collection Notice

Posted on: December 6th, 2013 by sashworth No Comments

 

IRS collection notices can be a source of stress and sometimes even embarrassment.  Taxpayers fall behind, it happens. The problem is that when a taxpayer owes the IRS money, a flood of notices come to the mailbox and often it’s hard to tell how serious any threats found within the letters are.  Some correspondence appears threatening on its face but lacks any real serious bite.  Other notices appear innocent, yet can result in serious legal ramifications if left alone.

As a practitioner, I receive sometimes dozens of letters in a single day meant for my clients and I have learned to quickly identify what notices require immediate action.  This article, while not exhaustive by any means, is intended to give you a quick primer on the different notices the IRS sends out when the IRS believes it is owed money.

A quick note: If you owe the IRS money and are receiving these notices, please don’t hesitate at all.  Waiting only makes dealing with the IRS more stressful and difficult.  If you wait, you will receive more threatening letters and eventually face enforced collections.  You should call the IRS to explore your options or hire a professional to represent you.

 

Notices

Now that that’s out of the way, let’s get to our first notice:

The CP14 Notice

Often the first notice that taxpayers will receive is a CP14 notice.  The CP stands for computer paragraph, and it is an automated notice created by a centralized computer system at the IRS.

Here’s an example of the first page of a CP14 notice:

If you find yourself with a CP14 notice in hand, the good news is that this is the least serious of the notices.  That being said, you should be proactive and either call the IRS to discuss your options or hire a professional to negotiate with the IRS on your behalf.  If left alone, other notices will be sent soon with more serious ramifications.

The CP504 Notice:

The next notice you may receive is the CP504 notice.  This is a more serious notice than the CP14, as it proposes to levy your property if you do not pay the liability in full.  A levy, to be clear, is not the same as a garnishment or lien.  A levy will attach to your bank accounts and your banking institution will be required to pay any amount that you have deposited in your bank account to the IRS.  Essentially, the IRS wipes out your bank account to pay your liability in part or in full.

Here’s an example of a CP504 notice: CP504 or CP504B Notice

With the CP504 letter, the IRS means business.  The IRS is ready to begin enforced collection activity and it is giving you notice that it intends to seize your property.  If you find yourself with a CP504 in hand, call the IRS to discuss your options or call our office immediately to speak to one of our experienced attorneys.

Under some circumstances, this CP504 notice is the last notice you receive before the IRS begins levying.  If you have had an opportunity previously to request a Collection Due Process Hearing, it will likely be the last notice you receive.  If you have not had the opportunity to request a Collection Due Process Hearing, then there will be one more notice you will receive.

The CP90/297 notice:

The CP90/297 notice, under some circumstances, is the final notice given to a taxpayer before the IRS employs levies to collect an outstanding liability.  It is the “triggering event” to be able to request a Collection Due Process Hearing, which is a very powerful tool in a taxpayer’s arsenal.

If you receive a CP90/297 notice, time is of the essence.  You have 30 days to request a Collection Due Process Hearing, otherwise the IRS will employ levies to collect the liability.  Special forms are required to request the Hearing, so it may be best to consult with one of our experienced attorneys.

Here is an example of a CP90/297 notice: CP90/297 Notice

 

What if a Taxpayer Can’t Pay the Full Liability Shown on the Notice?

The IRS realizes that paying the liability in full is not possible for many taxpayers, or even if paying in full is possible on paper it would actually create a hardship.  The IRS has several programs in place to address this reality, including monthly installment agreements, offers in compromise, and a currently not collectible status.

If you cannot pay your liability in full, speak to a licensed tax professional immediately and bring any notices you have received to the initial consultation.  Estill & Long, LLC’s tax attorneys are well-versed in negotiating with the IRS and can help you set up a plan to avoid enforced collections by the IRS.

 

Conclusion

The IRS sends many other notices, and the format of any particular IRS notice is subject to change in the future.  This article is only meant as a short primer to get you familiar with what IRS notices look like and may give some insight into a notice that you have already received.

In any event, collection action by the IRS can be aggressive and for some taxpayers catastrophic.  If you have received an IRS notice listed above (or any other notice not discussed in this article) I implore you to reach out to Estill & Long, LLC to assist you.

 

About Peter McFarland, Esq.

Peter earned his Juris Doctor (J.D.) degree at the University of Denver. After becoming licensed to practice law in the State of Colorado, he earned his Master of Laws (LL.M.) in Taxation at the University of Denver. In his current role, Peter represents taxpayers before the IRS and in the United States Tax Court. He gained valuable experience as an attorney with the University of Denver’s Low Income Tax Clinic during his graduate school studies and has been representing clients at Estill & Long, LLC since his arrival in early 2013.

 

IRS Scam Warning

Posted on: November 25th, 2013 by sashworth No Comments

Recently, the IRS has confirmed that a scam exists where a fake IRS agent makes contact with taxpayers and intimidates them into paying taxes that they don’t actually owe.

The IRS confirmed a few details of what to look for in relation to this scam:

  • Scammers will use common names and surnames to identify themselves
  • Scammers may be able to recite the last 4 numbers of a taxpayer’s social security number.
  • Scammers sometimes send e-mails to support the phone call.
  • Victims have reported hearing background noise during these calls, similar to those in a call center.
  • Scammers will threaten jail time and driver’s license revocation, and will often hang up and follow up the first call with a second call from a fake policeman or other authority.

We would also add to this list that it is very rare for the IRS to contact the taxpayer directly, but it does occasionally happen. We take our client’s security and peace of mind very seriously here at Estill & Long, LLC. If you are contacted by someone claiming to be from the IRS, do not release any information or make any payments before speaking to an attorney at Estill & Long. We can follow up on your behalf and determine if the telephone call really came from an IRS agent or if this scam has targeted you.