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Category Archives for IRS Disputes

IRS Notices – What should you do?

Time is not on your side when dealing with the IRS. If you received an IRS Notice, then view this video and call our office at 480-776-6055 today!


“I received an IRS notice. They want to lien and levy and garnish my wages. What should I do?” The first answer is you’ve got to respond immediately. Don’t wait, don’t put your head in the sand on this. Certain options that you may have expire in 30 days, so what you can do is you can stop the liens and garnishments if you go forward and get into an installment agreement. This is where you say, “I’ll make monthly payments and pay off the liability over a certain period of time.” The problem is the process for getting into an installment agreement and getting your agreement accepted by the IRS is a little bit more difficult than one would think. So you need to know what to file, what forms to file, who to file them with, and when.

This is something we help clients with on a regular basis. Of course, I was an IRS agent for five years, I understand this process, and we can help you. So give us a call at (480) 776-6055 and we can help you stop those liens and levies before they hit.

IRS News and Tax Updates

Basis Consistency Reporting by Estates – Extension Deadline Approaching!

IRS issues Notice 2016-27, giving estate executors until the end of this month, June 30—to meet a new reporting obligation on estate basis consistency. “The Treasury Department and the IRS have received numerous comments that executors and other persons have not had sufficient time to adopt the systemic changes that would enable the filing of an accurate and complete Form 8971 and Schedule A,” the IRS says. See Notice 2016-27, 2016-15 IRB 362. The IRS stated that it has received many comments that executors, among others, have not had sufficient time to, “adopt the systemic changes that would enable the filing of an accurate and complete Form 8971 and Schedule A.” Therefore, the IRS added, statements required under §6035(a)(1) and §6035(a)(2) to be filed with the IRS or furnished to a beneficiary before June 30, 2016, do not need to be filed with the IRS and furnished to a beneficiary until June 30, 2016.

IRS Uses Indirect Methods to Prove Tax Deficiency

The IRS used the bank deposits method to determine that a computer consultant providing services to a bank (IADB) understated his income by $70,671. U.S. Tax Court Judge Lauber sustains most of the $56,063 deficiency the IRS assessed against Luis Alejandro Rey after the agency used Rey’s statements from multiple IADB accounts to determine Rey omitted $70,671 of income. Rey was also unable to substantiate $106,918 in claimed business expenses.  The IRS’ use of such indirect methods was once widespread but had more recently been criticized. From my personal experience as an IRS Agent, the IRS can back into income and expenses through a variety of indirect methods.  For example, analysis of purchases and costs of goods sold can provide insight into true sales. Analysis of water bills can predict sales for a laundromat. Under IRS audit, the first documents analyzed are bank statements. The IRS will add up deposits and deem it all income unless the taxpayer can prove that it is a non-taxable transfer, such as loan proceeds, a transfer from another account, a re-deposit, a non-taxable refund, etc. For this reason it’s important for clients to understand how use of their bank account is viewed by the IRS.  Keep records of non-taxable deposits!

Prohibited Use of IRA Funds Results in $180,000 Tax Deficiency

Two taxpayers used funds from their IRA account to purchase a metal fabrication business and now owe $180,000 in tax deficiencies and penalties for participating in a prohibited transaction. U.S. Tax Court Judge Marvel rules that James E. Thiessen and his wife, Judith T., were prohibited from guaranteeing a loan for the business purchase under tax code Section 4975, and says that because the couple hadn’t reached the statutory age for using the individual retirement account monies, they owe additions to their tax deficiency.

Stupidity Award Goes to Terry DiMartino

A Connecticut insurance salesman is convicted of tax fraud after a jury finds that he filed three false returns, including one requesting a $14 million refund. The Justice Department says Terry DiMartino used nominee entities to divert insurance commissions and hide his assets to prevent the IRS from collecting on his tax liabilities. DiMartino also “sent false and threatening correspondence to the IRS in an attempt to defeat the IRS’s assessment, collection and investigative efforts” and threatened insurance companies that sought to cooperate with the IRS investigation, the DOJ says.  Just goes to show you, requesting a $14M refund after engaging in affirmative acts to hide your income and assets is a sure bet to get you three square government meals per day, plus room and board.

Transfers of Non-Voting Stock to Grantor Trust Worked for Carmex

In a second stipulated decision, the heirs of Carmex lip balm magnate Alfred Woelbing again owe no estate or gift tax deficiencies under a settlement reached with the IRS. U.S. Tax Court Judge Kerrigan signs the stipulated decision in the case, which was the companion case to Estate of Donald Woelbing v. Commissioner, settled March 25. The case involves whether Woelbing’s heirs should pay $32 million in gift taxes on each of two estates resulting from the transfer of nonvoting stock to a grantor trust.

Young, Broke and Scared of the IRS: The Millennial Tax Trap

The IRS doesn’t keep track of how many millennials incur tax debt, but a survey by personal finance adviser NerdWallet found they are more afraid of filing their taxes than any other generation. Eighty percent of millennials, defined by the survey as 18 to 34 years old, fear they will make a mistake, underpaying or overpaying. Digging their tax trap deeper, fewer than 10 percent of millennials go to the IRS when they have a tax question, and only about a quarter seek help from a tax professional. Instead, most young people turn to friends and family, a largely unreliable if well-meaning group. Millennial taxpayers in particular bemoan the long wait times on the phone with the IRS and the agency’s weird penchant for mail (like, mail).

Fewer Audits Mean $5 Billion Annual Revenue Loss: IRS Chief

The government is losing as much as $5 billion a year in tax revenue as budget constraints shrink the number of audits the IRS can do, Commissioner Koskinen says. As the agency fights for funding on Capitol Hill, lawmakers need to realize that less money for the IRS means less money for the country, Koskinen says at the National Press Club. In a speech spanning a broad range of issues, including the treatment of conservative groups and the ability to fight inversions, the commissioner says his agency has lost more than 5,000 key enforcement personnel since 2010.

5 Easy Tips to Simplify Your Year End Charitable Giving

Are you planning on making charitable donations before the end of the year?  The IRS reminds us that you must itemize deductions on your tax return to claim a deduction for these gifts.  In addition, the following five tips can help make those year-end charitable gifts count.

Tip #1 – Give to a Qualified Charity.  Only gifts to a “qualified charity” are deductible on your income tax return.   The IRS offers a handy website, the Select Check tool, to determine whether your favorite organizations are qualified.  You can also deduct donations made to churches, synagogues, temples, mosques, and government agencies even if they are not listed in the Select Check database.

Tip #2 – Give Some Cash.  Gifts of money can be made by check, electronic funds transfer, credit card, or payroll deduction.  In order to be able to deduct a monetary gift on your tax return, you must have a bank record (cancelled check, bank statement, credit card statement) or written document from the charity (listing the organization’s name and date and amount given), regardless of the dollar amount donated.  For payroll deductions, keep your pay stub(s), W-2, or other document from your employer which shows the total amount withheld along with the pledge card showing the name of the charity.

Tip#3 – Give Some Stuff.  You can take a tax deduction by giving away your gently used stuff, including household items (furniture, furnishings, electronics, appliances, linens) and clothing (shirts, blouses, pants, skirts, shorts, shoes).  If possible, get a receipt from the charity which includes the organization’s name, date of the contribution, and a detailed description of your donated items.  If you leave your stuff at an unattended drop site, make a written record of the donation.

Tip #4 – Give Before the End of the Year.  Donations are deductible on your tax return in the year they are made.  Gift checks count on your 2015 income tax return as long as they are postmarked in 2015 and credit card donations charged before the end of 2015 still count this year even if you do not pay the bill until 2016.

Tip #5 – Keep Good Records.  Always keep accurate records of charitable gifts you make – list the date of the contribution, a detailed description of the donation, the name and address of the organization, the fair market value of the property at the time of the donation, and the method used to determine the value.  You must obtain an acknowledgment from the organization if a donation (either cash or stuff) is valued at $250 or more.  If the donation consists of an automobile, boat or airplane, special rules apply which can be found on the IRS website.

Have Questions About Deducting Charitable Gifts?

If you have questions about making deductible charitable donations, please call our office at 480-776-6055 to arrange for a convenient time for us to speak!

How Will the 2015 Supreme Court Decisions Affect You and Your Family?

While approximately 10,000 cases are appealed to the U.S. Supreme Court each year, only 75 to 80 make it to oral argument.  Of those cases, only a handful grab the media’s attention.  Below is a summary of three landmark decisions handed down in 2015 that could affect how you are taxed, pay for healthcare, and plan your estate.


Comptroller v. Wynne – A State Can’t Double Tax Income Earned Outside of the State

Legal Issue:  Does Maryland’s state income tax scheme violate the U.S. Constitution by “double taxing” a resident’s income earned from economic activity in another state that also taxes the same income?

Decision, 5 – 4:  In a taxpayer-friendly ruling, the Supreme Court ruled that, yes, Maryland’s “double taxation” scheme violates the dormant Commerce Clause.

The Wynne case involved a Maryland couple who owned stock in a Maryland S corporation that did business in 39 states.  Since income generated by an S corporation is passed through to its shareholders, the Wynnes paid income taxes in Maryland as well as their pro-rata share of taxes on the income the corporation earned in the other states.

In Maryland, residents are subject to a state income tax as well as a “local tax” based on the city or county in which they live.  Prior to the Wynne case, the state allowed residents to take a credit against the Maryland state tax to offset a similar tax paid to another state, but it did not allow a credit to be taken against the local tax.  Thus, income of a Maryland resident earned outside of the state was “double-taxed” by being subject to (1) out-of-state taxes, and (2) the local city or county tax.  The Court struck down this “double taxation” scheme, holding that because the dormant Commerce Clause gives Congress power over interstate commerce, Maryland could not hinder interstate commerce by offering a credit against state income taxes but not against local income taxes.

Planning Tip:  The Wynne decision will potentially affect hundreds of cities, counties and states other than Maryland, including Indiana, New York, and Pennsylvania.  If you pay income taxes in your home state and other states, you should seek qualified tax advice regarding filing protective claims (such as amended returns or requests for refunds) for tax years in which the statute of limitations has not run.

King v. Burrell – Obamacare Subsidies Are Available to All

Legal Issue:  Can the IRS provide tax-credit subsidies to healthcare coverage purchased through the federal healthcare exchange under the Patient Protection and Affordable Care Act (the “ACA,” commonly referred to as “Obamacare”)?

Decision, 6 – 3:  Yes, Obamacare subsidies are available to individuals who obtain their healthcare coverage through a federal exchange.

Buried in the 2,700-page ACA is a provision which states that tax-credit subsidies are available to individuals who sign up for healthcare coverage “through an exchange established by the state.”  After the ACA was passed, 34 states did not establish exchanges, leaving their residents to use the federal exchange to obtain their coverage.  The King case challenged the validity of federal subsidies given to these residents since the ACA appeared to limit subsidies only to individuals who relied on a state-established exchange.  Writing for the majority, Chief Justice John Roberts stated, “We doubt that is what Congress meant to do.”  Thus, the validity of subsidies claimed by residents of the 34 states that use the federal healthcare exchange was upheld.

Planning Tip:  Despite the King decision, the Obamacare debate will continue to be hashed out in the political arena as the 2016 presidential election fast approaches.

Obergefell v. Hodges – Same Sex Marriage is Legal Everywhere in the United States

Legal Issue:  Does the Fourteenth Amendment of the U.S. Constitution require a state to license same sex marriages and recognize same sex marriages that are legally licensed and performed in another state?

Decision, 5 – 4:  Yes, same sex marriages are legal and must be recognized everywhere in the United States.

The Obergefell case consolidated four cases that challenged state-banned same sex marriages in Kentucky, Michigan, Ohio and Tennessee.  Relying on the Due Process and Equal Protection Clauses of the Fourteenth Amendment, the Court held that marriage is a fundamental liberty and denying the right of same sex couples to wed would deny them equal protection under the law.

Planning Tip:  Same sex couples who are considering marriage need to decide if commitments regarding how to handle money, debt, and related matters should be formalized in a prenuptial agreement.  Same sex couples who are already married need to determine if their prenuptial agreement should be fine-tuned and if their estate planning documents need to be amended in view of the King decision.

The Bottom Line on the Wynne, King and Obergefell Decisions

There are constant changes in the law from judicial, legislative, or regulatory action. These selections from the recent Supreme Court session are just a small example of the numerous changes that occur every year. How the Wynne, King and Obergefell decisions will affect your planning options has yet to be fully determined.

Sorrell Law Firm, PLC is available to answer your questions about these landmark cases and how they may affect you and your family.