IRS TAX PROBLEMS – Personal Liability of Executor For Taxes

IRS TAX PROBLEMS – Personal Liability of Executor For Taxes

In a recent case of United States v. David Stiles in the United States District Court for the Western District of Pennsylvania, the Court held that “the federal insolvency statute, 31 U.S.C. § 3713, provides that when a person is insolvent or an estate has insufficient assets to pay all of its debts, priority must be given to debts due the United States.”

Personal liability may be imposed upon a fiduciary (Executor) of an estate in accordance with the federal statutes, 31 U.S.C. § 3713(b) and 26 U.S.C. § 6901(a)(1)(B). Under the federal priority statute, a fiduciary (Executor) “paying any part of a debt of . . . [an] estate before paying a claim of the Government is liable to the extent of the payment for unpaid claims of the Government”.

Personal liability can attach, to the extent of the distribution, if the Government establishes Three (3) elements:

(1) the fiduciary distributed assets of the estate;

(2) the distribution rendered the estate insolvent; and

(3) the distribution took place after the fiduciary had actual or constructive knowledge of the liability for unpaid taxes.

As stated by the Court, “the purpose of imposing personal liability on estate representatives ‘is to make those into whose hands control and possession of the debtor’s assets are placed, responsible for seeing that the Government’s priority is paid.” “Of course, [i]n order for liability to attach, the executor must have knowledge of the debt owed by the estate to the United States or notice of facts that would lead a reasonably prudent person to inquire as to the existence of the debt owed before making the challenged distribution or payment.

The Third (3rd) Circuit Court of Appeals also stated:

In recognition of the insolvency statute’s “broad purpose of securing adequate revenue for the United States Treasury, courts have interpreted it liberally.” With respect to “the type of payments or ‘distributions’ from the estate for which an executor may be held liable,” “a fiduciary, e.g., an executor, may be held liable under the federal insolvency statute for a distribution of funds from the estate that is not, strictly speaking, the payment of a debt.” Id. (alteration and internal quotation marks omitted). He may, for example, be held liable for “stripp[ing]” an otherwise solvent estate “of all of its assets and render[ing] it insolvent” by “provid[ing] for the distribution of all of the estate assets” to the heirs of the estate. Id. (internal quotation marks omitted).

IRS TAX PROBLEMS – “Post-Appeals Mediation” for “Offer-in-Compromise” (OIC) & “Trust Fund Recovery Penalty” (TFRP) Now Available Nationwide

IRS TAX PROBLEMS – “Post-Appeals Mediation” For “Offers in Compromise” (OIC) and “Trust Fund Recovery Penalty” (TFRP) Now Available Nationwide

The Internal Revenue Service (IRS) will release Revenue Procedure 2014-63 on December 29, 2014 providing rules for the nationwide rollout of “Post-Appeals Mediation” for “Offer in Compromise” (OIC) and “Trust Fund Recovery Penalty” (TFRP) cases. The IRS Office of Appeals originally launched Post-Appeals Mediation for OIC and TFRP cases as a pilot program available in certain cities in December 2008.

Post-Appeals Mediation is available to help resolve disputes after unsuccessful negotiations with the IRS Office of Appeals and is available for both factual and legal issues. The mediator’s role is to assist the parties in reaching their own agreement collaboratively, but the mediator does not have settlement authority over any issue. Appeals Officers trained in mediation techniques will serve as mediators at no cost to taxpayers. Taxpayers also have the option of paying for a qualified non-IRS co-mediator.

Taxpayers or the IRS Office of Appeals may request nonbinding mediation for eligible cases, but the taxpayer may decline the IRS Office of Appeal’s request for mediation. The goal is to complete the process within Ninety (90) days after the mediation request is approved.

Eligibility criteria and complete procedures for initiating a Post-Appeals mediation request for both examination and collection issues are in Revenue Procedure 2014-63.

When is a “Notice of Federal Tax Lien” (NFTL) Invalid?

When is a Notice of Federal Tax Lien (NFTL) Invalid?

 Internal Revenue Code (IRC) Section 6323(b)(3) provides that a “Notice of Federal Tax Lien (NFTL)” “shall not be valid” against a purchaser of tangible personal property purchased at retail in the ordinary course of the seller’s trade or business unless, at the time of purchase, the purchaser actually intends the purchase to (or knows that it will) “hinder, evade, or defeat” the collection of tax.

Treasury Regulation Section 301.6323(b)-1(c)(2), Proced. & Admin. Regs., defines “retail sale” to mean “a sale, made in the ordinary course of the seller’s trade or business, of tangible personal property of which the seller is the owner.”

In Budish v. Commissioner (2014 T.C. Memo 239), that definition would appear to cover the sculptures sold on petitioner’s behalf by his corporation. As such, the IRS’s Lien would not be valid as against a purchaser’s interest in petitioner’s sculptures, which would mean, that a Lien would do little to protect the IRS’s interests and, therefore, might not be necessary.

As such, the IRS should weigh the impact of IRC Section 6323(b)(3) on the need to file a Notice of Federal Tax Lien (NFTL) in a tax collection matter.

Is the IRS Required to File a “Notice of Federal Tax Lien” (NFTL)?

Is the IRS Required to File a Notice of Federal Tax Lien (NFTL)?

 It is clear that Internal Revenue Manual (IRM) Section 5.12.2.4 (Oct. 30, 2009) lists circumstances under which an “NFTL filing determination must be made“, not circumstances under which a Notice of Federal Tax Lien (NFTL) must be filed. Thus, pursuant to IRM Section 5.12.2.4, an IRS Appeals officer is required to make a lien filing “determination” in a Collection Due Process (CDP) Hearing; but the IRS Appeals officer is not required, by that IRM provision, to determine that a Federal Notice of Federal Tax Lien (NFTL) be filed (Budish v. Commissioner, 2014 T.C. Memo 239).

 Also, IRM Section 5.12.2.4.2 (Oct. 30, 2009) states, in paragraph #4, that “[a] decision may be made to defer the filing of a[n] NFTL when the revenue officer can document a reasonable certainty that filing the NFTL will hamper collection.

 “There is no reason to assume that the quoted language does not apply to Appeals officers as well as to revenue officers, i.e., we assume that it applies to all IRS personnel required to determine the need to file a notice of lien” (Budish – Footnote #6).

 

Federal Tax Levy & IRS Collection Due Process (CDP) Hearings.

Federal Tax Levy and IRS Collection Due Process (CDP) Hearings.

Internal Revenue Code (IRC) Section 6331(a) authorizes the Internal Revenue Service (IRS) to Levy upon property and property rights of a taxpayer liable for taxes who fails to pay those taxes within ten (10) days after notice and demand for payment is made.

IRC Section 6331(d) requires that the IRS give at least thirty (30) days’ written notice to the taxpayer of its intent to Levy, and IRC Section 6330(a) requires the IRS to send the taxpayer written notice of the taxpayer’s right to a “Collection Due Process (CDP)” Hearing before IRS Appeals at least thirty (30) days before any Levy begins.

If the taxpayer requests a CDP Hearing in response to a Notice of Levy, the taxpayer may raise at the hearing “any relevant issue relating to the unpaid tax or the proposed levy“, including challenges to the appropriateness of the Levy and collection alternatives such as an “Installment Agreement” or an “Offer-in-Compromise (OIC)”. IRC Section 6330(c)(2)(A).

The taxpayer may also challenge the existence or amount of the “underlying tax liability” if the taxpayer did not receive a statutory “Notice of Deficiency” for such tax liability or did not otherwise have an opportunity to dispute the tax liability. IRC Section 6330(c)(2)(B).

Following the CDP Hearing, the IRS Appeals officer conducting the CDP Hearing must determine whether the collection action is to proceed, taking into account:

  • the Appeals officer’s verification of the IRS’s compliance with “the requirements of any applicable law or administrative procedure“,

  • the issues raised by the taxpayer at the CDP Hearing, and

  • whether the collection action “balances the need for the efficient collection of taxes with the legitimate concern of the * * * [taxpayer] that any collection action be no more intrusive than necessary.” IRC Section 6330(c)(3).

The United States Tax Court has jurisdiction to review such CDP Hearing determinations by the IRS Appeals officer. IRC Section 6330(d)(1).

Where the “underlying tax liability” is properly at issue, the United States Tax Court can review the CDP Hearing determination “de novo” (e.g., Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). Where the “underlying tax liability” is not at issue, the United States Tax Court can review the CDP Hearing determination for “abuse of discretion” (Goza at page 182). In reviewing for “abuse of discretion”, the Tax Court must uphold the IRS Appeals officer’s determination unless it is “arbitrary, capricious, or without sound basis in fact or law”. See Murphy v. Commissioner, 125 T.C. 301, 308, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

When to Appeal an IRS Collection Due Process (CDP) Determination to Tax Court?

When to Appeal an IRS Collection Due Process (CDP) Determination to Tax Court?

JAMES B. BUDISH v. COMMISSIONER OF INTERNAL REVENUE – T.C. Memo. 2014-239 (UNITED STATES TAX COURT – Docket No. 4243-12L – Filed November 24, 2014).

Budish, a sculptor who works in cast bronze and sells his artwork through a wholly owned “S” corporation, filed a Federal income tax return for 2007 on which he self-reported a tax due of $163,928 that he failed to remit with his return. IRS assessed the unpaid tax plus certain additions to tax and interest, which totaled more than $200,000 and, thereafter, issued a notice of intent to levy.

Budish requested and received a Collection Due Process (CDP) hearing, which resulted in his agreeing with the IRS Appeals officer on the terms of an Installment Agreement for full payment of his assessed liability. On the basis of her interpretation of relevant provisions of the Internal Revenue Manual (IRM), the IRS Appeals officer insisted upon the filing of a Notice of Federal Tax Lien (NTFL) as a condition of entering into the Installment Agreement.

Budish argued that a Notice of Federal Tax Lien (NTFL) would destroy his sculpting business, rendering him unable to satisfy the terms of the Installment Agreement, and he rejected the Appeals officer’s proposal.

IRS Appeals then issued a notice of determination sustaining the Notice of Tax Levy and authorizing collection by Levy of the assessed liability.

Budish filed a petition the United States Tax Court pursuant to I.R.C. Section 6330(d)(1) alleging that the IRS Appeals officer abused her discretion by misinterpreting the requirements of the IRM and believing she had no choice but to require that a Notice of Federal Tax Lien (NFTL) be filed in conjunction with the Installment Agreement.

The Tax Court ruled as follows:

  1. Held: The IRS Appeals officer erroneously concluded that the IRM required the filing of a Notice of Federal Tax Lien (NFTL) in the circumstances of this case.

  1. Held, further, as a result, the IRS Appeals officer failed to properly balance the need for the efficient collection of Budish’s liability with the IRS’s legitimate concern that collection action be no more intrusive than necessary as required by I.R.C. Section 6330(c)(3)(C).

  1. Held, further, IRS Appeals’ determination to sustain the Notice of Tax Levy and proceed with collection by Levy is rejected and the case will be remanded to IRS Appeals for a supplemental CDP hearing with directions to perform the balancing of factors required by I.R.C. Section 6330(c)(3)(C) before determining the appropriate collection action.

2014 Year-End Reminders for Individual Retirement Accounts (IRA)

Individual Retirement Accounts (IRA) 2014 Year-End Reminders

 

Individual Retirement Accounts (IRA) are a great way to save for retirement. Here are some reminders for 2014.

Contributions Limits

 

Review the 2014 IRA contribution and deduction limits to make sure you’re taking full advantage of the opportunity to save for retirement. You can contribute up to $5,500 ($6,500 if you are age 50 or older by the end of 2014) or your taxable compensation, if less, to a traditional or Roth IRA. However, you may not be able to deduct your traditional IRA contributions if you or your spouse is covered by a retirement plan at work and your income is above a certain level. If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. You have until April 15, 2015, to make an IRA contribution for 2014.

  • Excess contributions If you’ve exceeded the 2014 IRA contribution limit, you should withdraw the excess contributions from your account by the due date of your 2014 tax return (including extensions). Otherwise, you must pay a 6 percent tax each year on the excess amounts remaining in your account.

 

Tax credit

 

You may be able to take a retirement savings contribution tax credit (Saver’s Credit) of up to $2,000 ($4,000 if filing jointly) for your contributions to either a traditional or Roth IRA. The amount of the credit you can get is based on the contributions you make and your credit rate. Your credit rate can be as low as 10 percent or as high as 50 percent. Your credit rate depends on your income and your filing status. To determine your credit rate and claim the credit, complete and attach Form 8880, Credit for Qualified Retirement Savings Contributions, to your 2014 tax return.

 

Required minimum distributions

If you’re 701⁄2 or older, you must take a required minimum distribution from your traditional IRA by Dec. 31, 2014 (April 1, 2015, if you turned 701⁄2 in 2014). You can calculate the amount of your RMD by using these RMD worksheets. You must calculate the RMD separately for each of your traditional IRAs, but can withdraw the total amount from one or more of them. You face a 50 percent excise tax if you don’t take your RMD on time. Roth IRAs do not require withdrawals until after the death of the owner.

New IRA one-rollover-per-year rule

Beginning in 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. You can, however, continue to make as many trustee-to-trustee transfers between IRAs as you want. You can also make as many rollovers from traditional IRAs to Roth IRAs (“conversions”) as you want. In calculating the 12-month period, IRA distributions rolled over to another (or the same) IRA in 2014 will not prevent a 2015 distribution from being rolled over if the 2015 distribution is from a different IRA than those involved in the 2014 rollover.

What are Defenses to “Accuracy-Related Penalty”?

WHAT ARE DEFENSES TO “ACCURACY-RELATED PENALTY”?

 

INTRODUCTION – ACCURACY RELATED PENALTY

Internal Revenue Code (IRC) Section 6662(b)(2) authorizes the Internal Revenue Service (IRS) to impose a penalty if an underpayment exceeds a computational threshold called a “substantial understatement”.

Pursuant to IRC Section 6662(d)(1)(A), for Individuals, the “understatement” of tax is “substantial” if it exceeds the greater of $5,000 or Ten percent (10%) of the tax that must be shown on the return.

Pursuant to IRC Section 6662(d)(1)B), for Corporations (other than S corporations or personal holding companies), an “understatement” is “substantial” if it exceeds the lesser of Ten percent (10%) of the tax required to be shown on the return (or, if greater, $10,000), or $10,000,000.

INTERNAL REVENUE MANUAL Section 20.1.5.3.5  (01-24-2012)

Examination Penalty Assertion

In proposing the penalty to the taxpayer or taxpayer’s representative, the examiner will:

  1. Fully explain the proposed penalty.
  2. Document the reasons why the penalty assertion is appropriate.
  3. Consider and document any possible exceptions to the penalty provided by the taxpayer or the taxpayer’s representative whether or not they are accepted.

Note:

The level of taxpayer cooperation is not grounds for asserting or not asserting a penalty.

BURDEN OF PROOF – Pursuant to IRC Section 7491(c), in court proceedings, the IRS bears the initial burden of production regarding the accuracy-related penalty. The IRS must first present sufficient evidence to establish that the penalty is warranted. The burden of proof then shifts to the taxpayer to establish any exception to the penalty, such as reasonable cause.

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PENALTY DEFENSE #1 – SUBSTANTIAL AUTHORITY

 

Pursuant to IRC Section 6662(a), the amount of an accuracy-related penalty equals Twenty percent (20%) of the portion of the underpayment attributable to a substantial “understatement”. An “understatement” is the difference between (1) the correct amount of tax and (2) the tax reported on the return, reduced by any rebate.

Pursuant to IRC Section 6662(d)(2)B) and Treasury Regulation Section 1.6662-4, understatements are reduced by the portion attributable to an item for which the taxpayer had “substantial authority” for the tax treatment of the item.

TREASURY REGULATION Section 1.6662-4(d)Substantial authority

(1) Effect of having substantial authority. If there is substantial authority for the tax treatment of an item, the item is treated as if it were shown properly on the return for the taxable year in computing the amount of the tax shown on the return. Thus, for purposes of section 6662(d), the tax attributable to the item is not included in the understatement for that year.

(2) Substantial authority standard. The substantial authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts. The substantial authority standard is less stringent than the more likely than not standard (the standard that is met when there is a greater than 50-percent likelihood of the position being upheld), but more stringent than the reasonable basis standard as defined in § 1.6662-3(b)(3). The possibility that a return will not be audited or, if audited, that an item will not be raised on audit, is not relevant in determining whether the substantial authority standard (or the reasonable basis standard) is satisfied.

 

(3) Determination of whether substantial authority is present

(i) Evaluation of authorities. There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. All authorities relevant to the tax treatment of an item, including the authorities contrary to the treatment, are taken into account in determining whether substantial authority exists. The weight of authorities is determined in light of the pertinent facts and circumstances in the manner prescribed by paragraph (d)(3)(ii) of this section. There may be substantial authority for more than one position with respect to the same item. Because the substantial authority standard is an objective standard, the taxpayer’s belief that there is substantial authority for the tax treatment of an item is not relevant in determining whether there is substantial authority for that treatment.

(ii) Nature of analysis. The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority. For example, a case or revenue ruling having some facts in common with the tax treatment at issue is not particularly relevant if the authority is materially distinguishable on its facts, or is otherwise inapplicable to the tax treatment at issue. An authority that merely states a conclusion ordinarily is less persuasive than one that reaches its conclusion by cogently relating the applicable law to pertinent facts. The weight of an authority from which information has been deleted, such as a private letter ruling, is diminished to the extent that the deleted information may have affected the authority’s conclusions. The type of document also must be considered. For example, a revenue ruling is accorded greater weight than a private letter ruling addressing the same issue. An older private letter ruling, technical advice memorandum, general counsel memorandum or action on decision generally must be accorded less weight than a more recent one. Any document described in the preceding sentence that is more than 10 years old generally is accorded very little weight. However, the persuasiveness and relevance of a document, viewed in light of subsequent developments, should be taken into account along with the age of the document. There may be substantial authority for the tax treatment of an item despite the absence of certain types of authority. Thus, a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.

(iii) Types of authority. Except in cases described in paragraph (d)(3)(iv) of this section concerning written determinations, only the following are authority for purposes of determining whether there is substantial authority for the tax treatment of an item: Applicable provisions of the Internal Revenue Code and other statutory provisions; proposed, temporary and final regulations construing such statutes; revenue rulings and revenue procedures; tax treaties and regulations thereunder, and Treasury Department and other official explanations of such treaties; court cases; congressional intent as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill’s managers; General Explanations of tax legislation prepared by the Joint Committee on Taxation (the Blue Book); private letter rulings and technical advice memoranda issued after October 31, 1976; actions on decisions and general counsel memoranda issued after March 12, 1981 (as well as general counsel memoranda published in pre-1955 volumes of the Cumulative Bulletin); Internal Revenue Service information or press releases; and notices, announcements and other administrative pronouncements published by the Service in the Internal Revenue Bulletin. Conclusions reached in treatises, legal periodicals, legal opinions or opinions rendered by tax professionals are not authority. The authorities underlying such expressions of opinion where applicable to the facts of a particular case, however, may give rise to substantial authority for the tax treatment of an item. Notwithstanding the preceding list of authorities, an authority does not continue to be an authority to the extent it is overruled or modified, implicitly or explicitly, by a body with the power to overrule or modify the earlier authority. In the case of court decisions, for example, a district court opinion on an issue is not an authority if overruled or reversed by the United States Court of Appeals for such district. However, a Tax Court opinion is not considered to be overruled or modified by a court of appeals to which a taxpayer does not have a right of appeal, unless the Tax Court adopts the holding of the court of appeals. Similarly, a private letter ruling is not authority if revoked or if inconsistent with a subsequent proposed regulation, revenue ruling or other administrative pronouncement published in the Internal Revenue Bulletin.

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PENALTY DEFENSE #2 – REASONABLE CAUSE

Pursuant to IRC Section 6664(c)(1) and Treasury Regulation Section 1.6664-4, the accuracy-related penalty does not apply to any portion of an underpayment where the taxpayer acted with “reasonable cause and in good faith”. A “reasonable cause” determination takes into account all of the pertinent facts and circumstances. The most important factor is the extent to which the taxpayer made an effort to determine the proper tax liability.

 

INTERNAL REVENUE MANUAL (IRM) Section 20.1.5.6.1 (01-24-2012)


Reasonable Cause

  1. No accuracy-related penalty under IRC 6662 is imposed if it is shown that the taxpayer had reasonable cause for the position taken and that the taxpayer acted in good faith.
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  3. IRC 6664(c) provides an exception to the imposition of any accuracy-related penalty if the taxpayer shows that there was reasonable cause and the taxpayer acted in good faith.
  4. The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the relevant facts and circumstances.
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  6. Generally, the most important factor in determining reasonable cause is the taxpayer’s effort to report the proper tax liability. Other factors to consider are the taxpayer’s experience, knowledge, education, and the taxpayer’s reliance on the advice of a tax advisor.
  7. All relevant facts, including the nature of the tax investment, the complexity of the tax issues, the competence of the tax advisor, the education of the taxpayer, and the quality of the opinion relied upon must be developed to determine whether the taxpayer was reasonable and acted in good faith.

INTERNAL REVENUE MANUAL (IRM) Section 20.1.5.6.2  (07-01-2008)


Taxpayer’s Effort to Report the Proper Tax Liability

  1. Generally, the most important factor in determining whether the taxpayer has reasonable cause and acted in good faith is the extent of the taxpayer’s effort to report the proper tax liability.

COURT FINDINGS – The courts abate the accuracy-related penalties, partially or in full, where the taxpayer showed a reasonable and good faith attempt to ascertain the correct amount of tax due. The courts most commonly find reasonable cause on the bases of maintenance of adequate records to substantiate deductions and reasonable reliance on a competent tax professional.