California tax attorney Blog

Using a common estate planning device in California, Anna Smith created a pourover will which provided that all her property not already in her living trust would be transferred to her living trust to be distributed under the terms of her trust. Anna died in 1991 and the trust provided that after all expenses and taxes of the trust were paid, a residual distribution to certain named beneficiaries would occur. A significant asset of the estate was shares of stock in a corporation. Anna’s fiduciaries elected to defer a portion of her estate taxes under Internal Revenue Code §6166.

In 1992, the trustees of the trust distributed assets of the trust to the beneficiaries. Because of the deferral under §6166, the estate taxes were not yet paid in full and the beneficiaries agreed to be responsible for the unpaid estate taxes.

In 2002, the corporation went bankrupt. The beneficiaries received nothing on their shares beyond some minimal amounts received. The next year, after having paid only $5 million of the $6.871 million in taxes due, the estate defaulted on its unpaid estate taxes . The IRS then sought to collect the unpaid taxes from the personal representatives of Anna’s estate (who were also trustees of the Trust), and from the beneficiaries.

I know that there is a lot of mediocre advice in California about how to stop the IRS collection process. So that’s why I am here. To provide real-world information based upon my years of experience.

How to stop the IRS from filing a tax lien

If you are looking for information on stopping or removing a tax lien, perhaps one of these links will be helpful:

The IRS has an Office of Professional Responsibility (OPR) said “To be the standard-bearer for integrity in tax practice” and whose mission is to “Interpret and apply the standards of practice for tax professionals in a fair and equitable manner”. Its strategic goals and objectives are to support effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law.

To improve ethical standards for tax professionals and to curb abusive tax avoidance transactions, the Internal Revenue Service and Treasury Department issued regulations amending Treasury Department Circular 230.

Circular 230 is applicable to attorneys, accountants and other tax professionals who practice before the IRS. The August, 2011 revisions to Circular 230 provide standards of practice for written advice that reflect current best practices and are intended to restore and maintain public confidence in tax professionals. These revisions ensure that tax professionals do not provide inadequate advice, and increase transparency by requiring tax professionals to make disclosures if the advice is incomplete.

Now that tax season is over, what should you do? You would have lots of paper documents – bank and credit card statements, cancelled checks, check stub, invoices, receipts, dividend and bonus statements, payment slips, tax forms, mileage records etc – you would have used or referred to for your income tax filing.

The IRS provides answers to this question in one of its publications at this link. This publication does not discuss the records you should keep when operating a business. For information on business records, see Publication 583, Starting a Business and Keeping Records.

Some of the topics covered in the IRS’s publication are about the following:

The federal tax gap imposes an unfair burden on many taxpayers, and the Department of the Treasury and the IRS are committed to narrowing the gap between what is owed and what is paid. The tax gap is defined as the aggregate amount of true tax liability imposed by law for a given tax year that is not paid voluntarily and timely. In a report prepared by the IRS, new initiatives to improve tax revenue collection, both through improved voluntary compliance and through effective enforcement were proposed.

The IRS collects 96 percent of the government’s total receipts, approximately $2.7 trillion in FY 2008. The vast majority of those revenues come from taxpayers who voluntarily report and pay the taxes that they owe. The IRS has estimated the overall voluntary compliance rate to be approximately 84 percent.

Despite the voluntary compliance rate and vigorous enforcement by the IRS, a significant amount of revenue remains unreported and unpaid. In 2005, the IRS estimated this gross tax gap to be approximately $345 billion. After subtracting revenue obtained through enforcement actions and other late payments, the IRS estimated the net tax gap to be approximately $290 billion. These estimates, which remain the most recent estimates available, were conducted using data collected in tax year 2001 and before.

The IRS announced the other day that it is offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past. In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The new guidelines are announced in a news release by the IRS (IR-2012-53, May 21, 2012). More details are available in Attachment 1 to Internal Revenue Manual (IRM) 5.8.5 Financial Analysis. The changes are extraordinary.

The IRS recognizes that many taxpayers are still struggling to pay their bills so it has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

Withdrawals to pay education expenses from your employer’s retirement plan before you turn age 59 1/2 are NOT subject to the 10% early withdrawal penalty. Withdrawals for the same reason before age 59 1/2 ARE subject to the 10% additional tax when taken out of your IRA which you funded with a rollover from your employer’s retirement plan.

On May 9, 2012, the Seventh Circuit Court of Appeals in the case of Young Kim vs. Commissioner of Internal Revenue ruled in favor of the IRS that the taxpayer owes the 10% tax and, because he had not paid it, also owes a penalty for substantial underpayment of taxes.

Here’s the opinion in its entirety:

Here are seven of the most common forms of guidance in the form of documents and publications that provide assistance to charitable groups, business firms and taxpayers.

Notice

A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

The IRS faces a 28% increase in the number of requests for Offers In Compromise. The requests by Californians and others behind in their tax payments to pay “pennies on the dollar” has reached almost 60,000 for 2011 when the data was last analyzed.

Why are Offers up? In part the struggling U.S. economy is responsible, and in part it’s the IRS’ own doing. Since the National Taxpayer Advocate labeled the offers in compromise program as one of the most serious problems facing taxpayers from 2001 through 2009, the IRS has been trying to improve and promote the program. It made the OIC form (Form 656) simpler, created a YouTube informational video and began a “streamlined” process for taxpayers with incomes of $100,000 or less and liabilities of $50,000 or less to make deals. A “Fresh Start” initiative is also bringing in more taxpayers to the OIC program.

At the end of last month, the U.S. Treasury published a report entitled “Increasing Requests for Offers in Compromise Have Created Inventory Backlogs and Delayed Responses to Taxpayers” which is available by clicking here.

When Is a Power of Attorney Not Required?

A power of attorney is not required in some situations when dealing with the IRS. The following situations do not require a power of attorney.

Representing a taxpayer through a nonwritten consent.