Latest Tax News & Updates

JK Harris & Co. plans to seek bankruptcy protection in Charleston to head off an attempt by the Texas attorney general’s office to force the company into receivership, said company founder John K. Harris. The company, a national tax-debt-resolution service based in Goose Creek, has been dogged by cash-flow problems and the cost of large settlements related to claims that it misled consumers.

The bankruptcy filing is aimed at selling the business quickly while writing off debt. The company would continue operations in the meantime.

Consumers who were to get millions of dollars in compensation from previously agreed-upon settlements, from a class-action suit and from complaints by multiple attorneys general, could receive dimes on the dollar, as could JK Harris’ creditors. About 30 employees of the company who were laid off last week also are owed wages.

Texas is one of about 20 states — South Carolina is not among them — where attorneys general have pursued such claims against JK Harris. Texas is now suing Harris personally, alleging that he “was fully aware that the company would not perform its obligations” when he signed the agreement.

The filings follow years of cash-flow problems, a large class-action lawsuit settlement, and settlements with 20 attorneys general related to claims that the company misled consumers, typically by taking fees from consumers who did not qualify for the type of tax debt relief they were primarily seeking.

The IRS has issued a reminder to employers who outsource their employee payroll processing to a third party, to be careful about the due diligence performed on the payroll company.  Third party payroll processors receive tax deposits and then forward those tax deposits on to the IRS.  Recent IRS prosecutions of individuals and companies who act under the guise of a payroll service providers, have stolen funds intended for payment of employment taxes, leaving the employer left holding the bag for the tax deposits that were stolen, as well as the penalties and interest on those deposits assessed by the IRS.  Typically, we see this scenario with small businesses that keep the task of processing payroll in-house, but recently according to the IRS, companies and individuals offering payroll services have been caught stealing tax deposits and informing their clients that those tax deposits have been remitted to the IRS on time.

When using an outside source for payroll services, verify from time to time that the payments are being received by the IRS, as well as utilize the services of well established providers that use the Electronic Federal Tax Payment System (EFTPS).  If your provider is using the EFTPS system, it will be very easy for you to verify that the deposits are in fact being remitted.  If the IRS suspects an issue with your payroll deposits, they will send a notice to the “address of record” for the company.  Do not ever change the “address of record” with the IRS, this way you will know when there is a potential problem with the payroll deposits.

Last week, the House Democrats proposed an unofficial summary of revenue raising provisions to the Joint Select Committee (Super Committee) of Congress, most of which are not new at all, but some of the main proposals for individual taxpayers and businesses are listed below.

Tax Changes for Individuals: A surtax which would reduce a taxpayer’s savings from “expenditures” by 5% of the amount by which AGI exceeds some threshold amount.  Tax expenditures would include special exclusions, exemptions, or deductions from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.

* A new proposal would also authorize the government to DENY the application for a new US Passport application or renewal of an existing passport if the individual owes more than $100K in unpaid federal income taxes.  The government can also revoke a passport upon reentry into the US for such individuals.

Tax Changes for Businesses: Proposed changes for businesses would repeal the depreciation method (MACRS) or accelerated cost recovery system, and instead, allow only the slower alternative depreciation system (ADS).  Corporate business jets would depreciate over seven years rather than five as they do currently.

* A crackdown on service professionals who are avoiding Medicare and Social Security taxes by routing their self-employment income through S corporations and paying themselves a nominal salary, with remaining earnings paid as dividends.  The proposal would address this abuse where: (1) an S corporation is engaged in a professional service business that is principally based on the reputation and skill of three or fewer individuals; or (2) an S corporation is a partner in a professional service business.

The US Tax Court has ruled in a recent case, Rosenbloom v. Commissioner of Internal Revenue, (U.S.T.C. 2011), that the IRS cannot arbitrarily decide to cancel an Installment Agreement, and criticized their “Heavy Handed” collection action levy after the cancellation of the Installment Agreement as an “abuse of discretion”.  The tax court held that the statute of limitations to collect had expired, and the IRS determination to continue collection was an abuse of discretion.

The taxpayer, an attorney, had entered into one or possibly two installment agreements (the opinion acknowledged confusion over this point). Then, at a point when the IRS decided the installment agreement was canceled, it persuaded the taxpayer to sign an extension of the statute of limitations.

Several years later, the IRS commenced collection again on the ground that the taxpayer had agreed to extend the statute of limitations on collection. The taxpayer argued that the request was made while his installment agreement was still in effect, and was therefore void. Thus, there had been no extension of the period of limitations.

The taxpayer persuaded the court that when the IRS requested an extension of the statute, he was still in a valid installment agreement. The court agreed that a request that a taxpayer extend the statute while he/she is in an installment agreement violates IRS CSED policy, and that there is no authority permitting termination of an agreement because the taxpayer refuses to extend the statute.

The procedure requires that the IRS give notice of its intention to terminate an installment agreement. 26 U.S.C. § 6159(b)(5).

The IRS had sent a notice threatening to cancel because of the taxpayer’s failure to provide requested financial information, one of the statutory grounds for termination. 26 U.S.C. § 6159(b)(4). But, they could not establish that they sent the other required notice.

The court noted that the “transcripts” (which appear to be TXMOD or similar format) failed to indicate, as they would, that a termination had occurred.

The court said “These transcripts are troves of information, but they are also almost completely incomprehensible to one not skilled at interpreting the various numerical codes …”

Notwithstanding, the court found that had the installment agreement been terminated, it would have been indicated on the transcripts by Collection Status Code 064, “Defaulted Installment Agreement,” which did not appear on the transcripts.

Accordingly, the signed extension of the statute of limitations was invalid, and the IRS attempt to collect after expiration of the period was invalid.

The court concluded “We find … that the bank levy is better explained as another example of the heavy-handed manner in which that particular revenue officer was pursuing [the taxpayer].”

The footnotes in the case indicate that under the RRA 1998, Congress added section 6304 to the Code requiring that the IRS not communicate with a taxpayer who has representation.

The IRS has announced a few new items regarding the eligibility requirements surrounding the filing of an Innocent Spouse claim for relief from a joint tax liability.  The IRS has stated that they are eliminating the 2-year time limit that now applies to file the claim, along with easing the evaluation of claims.  The IRS commissioner Doug Shulman has said, “In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief, this change is a dramatic step to improve our process to make it fairer for an important group of taxpayers.  We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present, and the future.”

Under the law, taxpayers who file joint returns are generally liable for the tax debt of their partners.  However, spouses may qualify for relief if they didn’t know their partner was cheating on their taxes, or didn’t participate in the scam.  In some cases, spouses can elude the responsibility if they can prove they were in an abusive relationship, and did not believe they had an option not to sign a return.

In the past, obtaining tax relief for innocent spouses was likened to moving mountains with the IRS, so hopefully this acknowledgement by the commissioner will have meaning through the depths the IRS staff, and not just be ear candy.

Most individuals, 8 out of 10,  now rely on software or a paid tax preparer to file their tax returns because of the increasing complexity of the U.S. tax code, but the preparers often make mistakes, and some have criminal backgrounds. The IRS wants to set up a system to regulate them, but the program won’t be fully in place until 2013. This has Congress worried because of the rapidly growing number of preparers and errors found on returns. For example, errors related to refundable tax credits have led to an estimated $106 billion in improper payments over the last decade.

In response, the IRS in 2010 launched an oversight program to aid in limiting or stopping completely, the intentional abuses and unintentional mistakes. It wants preparers to register with the IRS, pay an application fee, and be assigned a unique identification number (PTIN). To date, the service has registered more than 717,000 preparers. Next year the IRS will start requiring a competency test and annual continuing education for many preparers who are not a CPA, attorney, or enrolled agent.  The intentions is to produce meaningful results that benefit taxpayers and protect the integrity of the tax system.

The US Military personnel have some very unique duties, expenses and transitions throughout their service.  Special tax benefits may apply when moving to a new base, traveling to a duty station, returning from active duty and more. These tips may help put military members a bit at ease when it comes to preparing, and filing, their taxes.

1. Moving Expenses If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving you and members of your household.

2. Combat Pay If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, all your military pay received for military service that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

3. Extension of Deadlines The time for taking care of certain tax matters can be postponed. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.

4. Uniform Cost and Upkeep If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.

5. Joint Returns Generally, joint returns must be signed by both spouses. However, when one spouse may not be available due to military duty, a power of attorney may be used to file a joint return.

6. Travel to Reserve Duty If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.

7. ROTC Students Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

8. Transitioning Back to Civilian Life You may be able to deduct some costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.

9. Tax Help Most military installations offer free tax filing and preparation assistance during the filing season.

10. Tax Information IRS Publication 3, Armed Forces’ Tax Guide, summarizes many important military-related tax topics. Publication 3 can be found by clicking here.

If you use a tax preparer, make sure they are aware of these items above, and that you get full advantage of the tax breaks available.