Friday, September 7, 2007
More double speak
As a weapon in their fight against tax shelters, the IRS has created something called "Transactions of Interest". In short they aren't saying these are illegal or bad, merely that the IRS will scrutinize such transactions.
Additionally if the taxpayer doesn't disclose their involvement in a Transaction of Interest, then they could be subject to some hefty fines.
During a recent tax luncheon, an IRS attorney was asked how long something could be considered a transaction of interest, the IRS attorney replied, "For a transaction of interest, we know there's something interesting going on here, but we may not have all the information."
I don't know about you, but that sounds awfully vague. Speaking of vague, someone then asked about if the IRS was ever going to issue some regulations on what exactly they meant by "substantially similar".
By way of background, when the IRS puts the world on notice that the IRS will consider a transaction s a tax shelter transaction, they always state that the described transaction and anything "substantially similar".
Thus the question about any guidance on what exactly is "substantially similar". I think you already know the answer to the question.
No further guidance will be coming from the IRS.
How exactly are people supposed to follow the rules when they are full of vague, amorphous concepts such as substantially similar and transactions of interest?
Additionally if the taxpayer doesn't disclose their involvement in a Transaction of Interest, then they could be subject to some hefty fines.
During a recent tax luncheon, an IRS attorney was asked how long something could be considered a transaction of interest, the IRS attorney replied, "For a transaction of interest, we know there's something interesting going on here, but we may not have all the information."
I don't know about you, but that sounds awfully vague. Speaking of vague, someone then asked about if the IRS was ever going to issue some regulations on what exactly they meant by "substantially similar".
By way of background, when the IRS puts the world on notice that the IRS will consider a transaction s a tax shelter transaction, they always state that the described transaction and anything "substantially similar".
Thus the question about any guidance on what exactly is "substantially similar". I think you already know the answer to the question.
No further guidance will be coming from the IRS.
How exactly are people supposed to follow the rules when they are full of vague, amorphous concepts such as substantially similar and transactions of interest?
Spoken like a true politician
The tax planning community is up in arms about the ability to patent a tax idea.
Now, if someone decides to do some innovative planning, they have to be concerned they they are infringing upon someone else's patent.
Its really mind boggling that someone can get a patent for interpreting and applying the code, but the patent office is currently allowing it.
Well, the White House, via the Office of Management and the Budget decided to finally do something about it. On 9/6 they issued the following profound statement,
"The administration understands the concerns surrounding patent protection for tax planning methods and will work with Congress to address those concerns,"
Huh?
What exactly did they say? Whoever thought up that statement needs to be promoted to chief speechwriter.
Now, if someone decides to do some innovative planning, they have to be concerned they they are infringing upon someone else's patent.
Its really mind boggling that someone can get a patent for interpreting and applying the code, but the patent office is currently allowing it.
Well, the White House, via the Office of Management and the Budget decided to finally do something about it. On 9/6 they issued the following profound statement,
"The administration understands the concerns surrounding patent protection for tax planning methods and will work with Congress to address those concerns,"
Huh?
What exactly did they say? Whoever thought up that statement needs to be promoted to chief speechwriter.
Tuesday, September 4, 2007
Embezzled Payroll Taxes
Nobody ever said the tax system is fair, and this case proves it.
In Paris v. IRS, the taxpayer hired his brother as his accountant. Bad brother proceeded to embezzle the money that amongst other things was used to pay the payroll taxes of the business.
Good brother ultimately finds out, but seeing as this is a bankruptcy case, it doesn't look like there is a good ending.
Not only that, but now the IRS is going after good brother for the payroll taxes, and trust fund recovery penalties (100% penalties, ouch!).
BK judge determined that good brother knew payroll taxes were due to the IRS, and yet good brother paid other creditors before the IRS. Because good brother knew taxes were due, and didn't pay them, BK didn't wipe out the debt to good brother.
Morale to this story? Never do payroll for yourself. Hire someone, trustworthy, to take care of it for you. The downside risk is just too great.
In Paris v. IRS, the taxpayer hired his brother as his accountant. Bad brother proceeded to embezzle the money that amongst other things was used to pay the payroll taxes of the business.
Good brother ultimately finds out, but seeing as this is a bankruptcy case, it doesn't look like there is a good ending.
Not only that, but now the IRS is going after good brother for the payroll taxes, and trust fund recovery penalties (100% penalties, ouch!).
BK judge determined that good brother knew payroll taxes were due to the IRS, and yet good brother paid other creditors before the IRS. Because good brother knew taxes were due, and didn't pay them, BK didn't wipe out the debt to good brother.
Morale to this story? Never do payroll for yourself. Hire someone, trustworthy, to take care of it for you. The downside risk is just too great.
IRS Employee denied Deductions
We all know the old adage, "Those who can't teach." In this case, it should be "Those who can't audit."
In DARRYL F. ROYSTER, v. IRS, the taxpayer, an IRS employee (he wasn’t actually an auditor, instead he was a computer equipment analyst/information technology specialist) seemingly had a heart of gold and wanted to start a basketball school/ motivational business for kids in urban Chicago.
The challenge is that he took a number of business deductions for the ”business”, a “business” that ran losses of $20K, give or take a few thousand, for every year over a 3 year period. Evidently he didn’t charge his students fees to attend his school.
Can’t say this enough. If you want to have a business respected by the IRS, you have to treat it as such yourself.
Would a non related investor be happy with, and invest in a business that generated losses of 20K a year? A business that didn’t charge its clients a fee for its services?
Probably not. Thus the business deductions were disallowed.
In DARRYL F. ROYSTER, v. IRS, the taxpayer, an IRS employee (he wasn’t actually an auditor, instead he was a computer equipment analyst/information technology specialist) seemingly had a heart of gold and wanted to start a basketball school/ motivational business for kids in urban Chicago.
The challenge is that he took a number of business deductions for the ”business”, a “business” that ran losses of $20K, give or take a few thousand, for every year over a 3 year period. Evidently he didn’t charge his students fees to attend his school.
Can’t say this enough. If you want to have a business respected by the IRS, you have to treat it as such yourself.
Would a non related investor be happy with, and invest in a business that generated losses of 20K a year? A business that didn’t charge its clients a fee for its services?
Probably not. Thus the business deductions were disallowed.
Recent Trader Advice
A recent case came down showing how not to obtain traders status. Stanley C. Cameron v. Commissioner emphasized what most tax advisers know about active trader status, you must treat your “trading” as a business.
In this case, the taxpayer received an insurance settlement of $71,000 and decided to quit their day job to make it as a trader. The challenge is that they weren’t active enough in their trading to convince the IRS that they truly were a business.
In 2002, Mr. Cameron had 46 purchases and 12 sales of securities. Hardly the 300 trades that the IRS has mentioned in previous advice. In 2003, he completed 109 purchases and 103 sales, never traded more than 5 days a week, and in fact only traded 10 days in a month twice.
Because of the lack of activity, the court denied his status as a “trader in securities” and thus disallowed his business expenses.
Bottom line: Previous cases tell you all you need to know. You need substantial trading activity, (Probably more than 300 trades a year), the trading needs to be continuous, not just 2 days out of the week, and it needs to be the pursuit of profit from short term trades.
In this case, the taxpayer received an insurance settlement of $71,000 and decided to quit their day job to make it as a trader. The challenge is that they weren’t active enough in their trading to convince the IRS that they truly were a business.
In 2002, Mr. Cameron had 46 purchases and 12 sales of securities. Hardly the 300 trades that the IRS has mentioned in previous advice. In 2003, he completed 109 purchases and 103 sales, never traded more than 5 days a week, and in fact only traded 10 days in a month twice.
Because of the lack of activity, the court denied his status as a “trader in securities” and thus disallowed his business expenses.
Bottom line: Previous cases tell you all you need to know. You need substantial trading activity, (Probably more than 300 trades a year), the trading needs to be continuous, not just 2 days out of the week, and it needs to be the pursuit of profit from short term trades.
Wednesday, August 29, 2007
Even the IRS doesn't understand the Tax Code
The Inspector General for the IRS recently released a report on help that the IRS provides to taxpayers. In particular, the IG sent in undercover auditors to check out the info that IRS staff was providing. Unfortunately most of us already knew what the results were going to be without reading the report.
Unknown to most people, the IRS will actually help you file your "simple" tax return, in theory for free. In the recent audit, the IG tried two different methods of free filing: using humans at the IRS service centers, and the free filing software provided by IRS "partners".
The results were hilarious. Using humans at the IRS service centers generated 75% correct returns.
Of the 25% incorrect, the results were all over the place, from an overpayment of $1,808, to an underpayment of $5,000.
Then the "auditors" tried creating returns with the free software provided by the various tax software companies. In this case only 57 percent of the returns were correct, with once again the results being an underpayment of a little over $1,000 to overpayments of over $5,000.
Something to keep in mind about these results. These were relatively simple returns, just think how much of a mess would have resulted if the sample returns were more complicated.
The bottom line is the tax code is way too complicated. When even agents of the IRS can not file a proper tax return it is time for Congress to take action.
Unknown to most people, the IRS will actually help you file your "simple" tax return, in theory for free. In the recent audit, the IG tried two different methods of free filing: using humans at the IRS service centers, and the free filing software provided by IRS "partners".
The results were hilarious. Using humans at the IRS service centers generated 75% correct returns.
Of the 25% incorrect, the results were all over the place, from an overpayment of $1,808, to an underpayment of $5,000.
Then the "auditors" tried creating returns with the free software provided by the various tax software companies. In this case only 57 percent of the returns were correct, with once again the results being an underpayment of a little over $1,000 to overpayments of over $5,000.
Something to keep in mind about these results. These were relatively simple returns, just think how much of a mess would have resulted if the sample returns were more complicated.
The bottom line is the tax code is way too complicated. When even agents of the IRS can not file a proper tax return it is time for Congress to take action.
Subscribe to:
Posts (Atom)