Tax FAQs - Frequently Asked Tax Questions

The US Tax System is Voluntary tax protester found Guilty

Irwin Schiff, an anti-tax crusader, and an associate were found guilty on October 24, 2005 of multiple charges including conspiracy, tax evasion and tax fraud.

Mr. Schiff, 77, who argues that paying taxes is voluntary, was handcuffed and led from United States District Court after a jury found him guilty of all 13 charges. Schiff has written books and maintained a lucrative business convincing gullible people that his convoluted ramblings were valid legal research. 10/28/05

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The IRS is hiring private debt collectors.

The Internal Revenue Service plans to turn over the names of people who owe $7.7 billion to debt collection agencies starting in June. If the extra heat pays off, the agency gradually will add to the list as it whittles away roughly $50.7 billion in unpaid taxes.

The move will give many Americans one more reason to hate the IRS.

"It's hard enough making it as it is, and then you're going to have a government agency hiring collectors to hound people?" said Christina Hess, 24, a catering administrative assistant who doesn't owe any back taxes. "It just seems like another way to screw us any way they can."
IRS officials say turning over the names of deadbeat taxpayers to professional collectors is necessary to slow the growing debt of the most recalcitrant taxpayers. Their overdue taxes grew 86 percent to $13 billion between 2000 and 2003.

"We believe that many of these taxpayers have simply chosen not to pay, even though they have the means to do so," IRS Commissioner Mark Everson said in congressional testimony. "This is unfair to every hard-working taxpayer who has paid his or her fair share."
Congress voted to allow the IRS to use debt collectors last year as a way to generate more income in light of the ballooning budget deficit.

The agency is reviewing bids and plans to pick between one and three collection agencies by March.

To minimize scams, IRS employees will send letters notifying taxpayers that a debt collector will be contacting them.

A similar plan failed miserably when it was tested about a decade ago, costing the government about $21 million to collect just $3.1 million, according to a Government Accountability Office report. 1/2/06

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Is Debt Discharged in Bankruptcy Taxable Income?

===========Question: We have recently had our bankruptcy discharged. We are giving back the house, will the discharged debt be considered income? If so how are we supposed to be able to pay those taxes when we are broke?thanks,Josh
===========Reply: Normally, Cancellation of Indebtedness is considered Taxable Income. The exception is if the taxpayer is bankrupt or insolvent. Since you filed a Chapter 7 Bankruptcy Liquidation, you will not be taxed on the COD income.

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A Telecommuter Can be Taxed in the Employer's State

The US Supreme Court refused to hear an appeal from a Tennessee resident who telecommuted for a New York company. Even for the time the worker was not in NY, the Empire State taxed his wages. This certainly discourages telecommuting for NY companies and suggests that subsidiaries should be established in more tax friendly states. Huckaby v. New York State Division of Tax Appeals, 04-1734  11/2/05

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IRS Audits are now focusing on Executive Fringe Benefits. The purpose is to deny the deduction for the business and to include the expenses as income for the Executive. Areas scrutinized in the audits include:

• Athletic Skyboxes and Cultural Entertainment Suites Awards
• Bonuses Club Memberships
• Corporate Credit Cards
• Employee Discounts
• Paid Vacations
• Employer-Paid Parking
• Loans Executive Dining Room
• Relocation Costs
• Financial Planning
• Outplacement Services
• Chauffeurs
• Transportation/ Company Cars
• Spousal/ Dependent Travel
• Private Jet Use
• Transfer of Property (such as real estate, stock, computers, furniture and cell phones)
• Personal Use of "Listed" Property (such as computers, cell phones, and home office items)  10/25/05

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Reporting Foreign Bank Accounts to the IRS

Taxpayers must use Form 8300 (see TD F 90-22.1) to report transactions over $10,000 in cash and to report a foreign bank account.

TD F 90-22.1 requires insurance companies to report if a taxpayer has cash surrender value in a insurance policy over $10,000 if the company is foreign company.

The policy could have been purchased in the USA with a foreign company or with a USA company that later got brought out by a foreign company or you may actually live out of the USA and brought your policy from a foreign insurance company.

This is part of the continuing attempt to by the IRS to tax all worldwide income of taxpayers.

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The IRS Defines a Qualifying Child for Tax Purposes

Beginning in 2005, the Internal Revenue Service (IRS) defines a qualifying child as someone who meets the same four tests: the relationship test, the residency test, the age test and the support test. The qualifying child designation applies to the:

• Dependency exemption
  
• Head of household filing status
  
• Earned income credit
  
• Child tax credit, and
  
• Credit for child and dependent care expenses.

To meet the relationship test, the child must be the taxpayer’s child (including an adopted child, stepchild, or eligible foster child) brother, sister, stepbrother, stepsister, or a descendent of one of these relatives.

The child must live with the taxpayer at least half of the year to meet the residency test, with the exceptions of a child who was born or died during the year, or who was absent for special reasons, including attending school, or for medical care, etc. Certain exceptions are made for children of divorced parents.

The age of the qualifying child will differ depending on the tax benefit. The child must be under 19, or a full time student under age 24 at the end of the year, to be a qualifying child for the dependency exemption, head of household filing status, and the earned income credit. The child must be under the age of 17 for the taxpayer to claim a child tax credit, and under the age of 13 for the credit for child and dependent care expenses.

A child cannot have provided over half of his or her own support during the year to meet the support test.

In addition, the qualifying child must also be a U.S. citizen, U.S. national, or a resident of the United States, Canada, or Mexico. An exception applies for certain adopted children.

When a child can be the qualifying child of more than one person, only one person can treat the child as a qualifying child. When individuals cannot agree on who will claim the child, the IRS uses the Tie-Breaker Rule.

If the qualifying child is married, he or she cannot file a joint return unless the return is filed only as a claim for refund. No tax liability would exist for either spouse it they had filed separate returns.

Additional information about children of divorced or separated parents is found in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. For additional rules that apply to child tax credit and dependent care expenses, the taxpayers and practitioners may refer to Publication 972, Child Tax Credit and Publication 503, Child and Dependent Care Expenses, and the IRS website

What Happens if the IRS Rejects an Offer In Compromise?

An OIC rejected by Appeals can be challenged in Tax Court - see section 6330(d) and _Fowler v. Commissioner_, T.C. Memo 2004-163. The standard of review in Tax Court is "abuse of discretion."


Section 6630(d) states that a person shall have 30 days to file with the Tax Court.

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IRS Levy

Question from another Attorney:

I would really appreciate any guidance on this question as it's out of my
area --

Facts:  Real Estate Broker receives a Notice of Levy from the IRS against an
individual Agent.  Agent is not an employee of the Broker, and Agent's
commissions are not paid to Agent but are paid to Agent's corporation. 

Question:   Should Real Estate Broker STILL turn over to the IRS the
commissions that are due to the Agent's corporation?

I am inclined to advise that the Broker has no obligation to turn over the
commissions to the IRS b/c the commissions are NOT due to the Agent but are
due to the Agent's corp.

Answer:

 The Broker must comply with the SPECIFICS of the levy. If the levy is not against the agent's corporation, then there is no problem paying the money to the corporation. Have the broker note no $ are being paid to the agent in the response to the Revenue Officer. I have an article about this on my web site.