June 11, 2010

IRS Summons

In general, the IRS issues summonses only when the taxpayer (or other witness) will not voluntarily produce the information or other records. When a taxpayer or third person is willing to testify and produce documents voluntarily, a summons may not be required. With limited exceptions, the IRS has the power to issue an IRS summons without court approval. The Service should only issue a summons when it is prepared to seek judicial enforcement if the summoned party fails to fully comply.

The IRS typically asks that taxpayers provide information to the IRS. These IRS requests usually involve an "information document request." The IRS summons is the primary means for enforcing these information requests.

Internal Revenue Code Section 7602 provides the Service with summons authority.

Once served, the taxpayer must act to comply with the IRS summons or act to quash the summons. If the taxpayer fails to act, the IRS will seek to have a court enforce the IRS summons. If the taxpayer fails to act after a court has ordered enforcement, the court can and does impose sanctions on the taxpayer.

The summons does not require the witness to do anything other than appear on a given date to give testimony or produce existing books, papers and records or both. A summons cannot require a witness to prepare or create documents, including tax returns, that do not currently exist.

If the IRS issues an IRS summons, it is imperative that the taxpayer immediately contact an experienced tax attorney.

June 7, 2010

Bankruptcy And Your Taxes

Some tax liabilities are dischargeable in bankruptcy.

Usually older federal income tax debts are dischargeable in bankruptcy. The tax must be more than three years old. The tax return which reported the tax debt must have been filed with the Internal Revenue Service and if it was filed, then it must have been filed more than 240 days before filing the bankruptcy petition.

Some tax penalties may also be discharged in bankruptcy and you may be able to halt the accrual of interest during the bankruptcy proceeding. If the tax debt and penalties are not dischargeable in bankruptcy then it is still possible that the tax debt and penalties can be restructured in bankruptcy.

Many tax experts believe that unpaid payroll tax which has been converted into a personal liability of the responsible person who willfully failed to pay the tax is not dischargeable in bankruptcy.

In addition to being able to discharge federal income taxes in bankruptcy, filing a bankruptcy petition may stop the IRS’s collections activities. Therefore, bankruptcy may be an option to prevent the IRS from levying on bank accounts, wages or other assets.

If your tax debt is dischargeable in bankruptcy, it may be possible that the threat of filing bankruptcy can persuade the IRS to settle your debt on more favorable terms for you.

But there are disadvantages to filing bankruptcy. For instance, IRS liens may survive the bankruptcy process and to the extent that the tax debt is not discharged in bankruptcy, the IRS may view you (who now has fewer debts) as being in a better position to pay the IRS.

Call an experienced tax attorney to help you determine if bankruptcy is an option for resolving your tax debt.

June 3, 2010

Tax Deduction For Alimony Payments

As high as the divorce rate in California is, the tax rules regarding alimony payments become increasingly important. Not following the tax law may result in the IRS assessing significant taxes, penalties and interest. Preventing or solving this tax problem can easily be done with the proper advice from your tax lawyer.

Alimony payments may be included in gross income to the payee spouse and tax deductible by the payor spouse. If under federal tax law the payments do not qualify as alimony, the payments may be excluded from gross income of the payee spouse and may not be tax deductible by the payor spouse.

Recharacterizing alimony payments is very common for the IRS on audit. For the payor spouse, this may result in the IRS disallowing tax deductions for the alimony payments. For payee spouse, this may result in the IRS finding that the spouse failed to report alimony income.

These problems are avoidedable with proper tax planning. Separating and divorcing spouses can recognize significant federal income tax savings when aware of what payments do not qualify as alimony. Generally, payments do not qualify as alimony for purposes of federal tax law if:

• the spouses are members of the same household at the time the payments are made,

• the divorce decree or separation agreement designates the payments as non-alimony,

• the payments are not made pursuant to a divorce decree or separation agreement,

• the spouses are married and file a joint tax return (married couples who file a joint tax return may qualify for innocent spouse relief),

• the payments are child support,

• the payments consist of property rather than money,

• the payments are for the payee spouse’s bills (such as mortgage payments and real estate taxes),

• the payments call for significantly larger payments in the first three years following separation or divorce, and

• there is an obligation to continue the payments after the death of the payee spouse (either in the decree or agreement or in state law).

Divorce decrees or separation agreements should be written in a way that addresses these rules. As with other major financial transactions, taxpayers should consult with their tax attorney if they have any doubt about the taxation of their alimony or other payments.