Tax Law Blog | IRS Tax Attorneys

IRS problems and divorce often come bundled together.  Here is my response to a question I recieved about how a divorce decree impacts the IRS in the collection of an unpaid tax liablity:

My ex was self-employed when we were married, and he never paid his taxes. I made the mistake of signing joint returns. When we got divorced, we signed papers stating he would pay our back taxes, but the IRS coming after me.  Will my divorce decree help?

The decree may have value to you if you believe you are an innocent spouse. The IRS does consider the decree as one of several factors in reviewing your claim.  Those factors include abuse, what you knew about the unpaid taxes, involvement in family finances, and whether you benefited from the unpaid taxes.

Bear in mind that your divorce decree does not, standing alone, bind the IRS. When you signed the return, the liability became “joint and several.”  You became responsible for the accuracy of the return and for the payment of the liability on it, even if it was not yours.  The decree will not automatically make it go away or cause the IRS to shift their attention to your ex.

If you can prove to the IRS your signature on the joint return was forged or you signed the return under fraud or duress, the IRS will convert your joint liability to a separate one.  This relieves you of paying your ex’s taxes.

You may also have solutions to the collection of the liability against you: Bankruptcy, offer in compromise, uncollectible, or the statute of limitations on collection.

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The I.R.S. finally published Form 8804, Annual Return for Partnership Withholding Tax (Section 1446).  Form 8804 is used by partnerships with U.S. effectively connected income that is allocable to foreign partners.  Although the 2008 form is now completed, the instructions to this year’s form have not yet been released.

It is remarkable that the I.R.S. is still publishing forms for the 2008 year that are due April 15, 2009.  If a tax preparer uses software to complete Form 8804, he/she must now wait until the software provider updates its software to include the new form.  Presumably, updating the form should not take much time, given that there were no law changes this year related to the form and it is virtually identical to last year’s form.  Of course, this brings up the question as to why it took the I.R.S. so long to change the “2007” at the top of the form to “2008.”

On March 18, 2009, the I.R.S. also updated Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax.  Form 8805 is filed separately for each foreign partner, and if taxes have been withheld, the foreign partner must attach a copy of the Form 8805 to their U.S. income tax return to claim credit for the taxes paid on their behalf.

It is possible to extend the filing date for Forms 8804 and 8805.  However, it is astounding that the I.R.S. has delayed the publishing of these forms until less than one month before their due date.

Fight the IRS today.

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All recent indications are that the IRS is plowing ahead in its collection efforts under a weakening economy.  Revenue Officers continue to push hard, and there are no signs that Automated Collection Service has backed off its levy and lien filings.

The unfortunate result of this pressure is that more and more clients are turning to a tax bankruptcy to resolve IRS problems.  The advantages of a tax bankruptcy are often significant.  Here are a few:

1.     Bankruptcy stops the IRS and releases levies and seizures.

A tax bankruptcy immediately secures the release of an IRS levy on bank accounts and wages, and stops seizures of assets like houses, cars and business equipment.  This is absolute under bankruptcy law - once bankruptcy is filed, all collection actions must stop, including those of the IRS (this is referred to as a “stay”).  In most cases, bankruptcy frees property from the IRS the same day it is filed.

2.     Bankruptcy ends IRS discretion in its case handling.

Once bankruptcy is chosen, it is no longer just up to the IRS.  IRS personalities and procedures yield to bankruptcy law.  Installment agreements that could not be agreed to under IRS standards may be obtained in a Chapter 13 repayment plan.  Chapter 13 adds the benefit of stopping the accruals of interest and penalties while payments are made, a virtual impossibility with direct IRS negotiations.  Taxes that could not be solved by an administrative IRS offer in compromise can be eliminated in a Chapter 7.

3.     Bankruptcy eliminates taxes, interest and penalties.

Income taxes owed on returns that were actually filed with the IRS more than 2 years before the bankruptcy and were due to be filed with the IRS more than 3 years before the bankruptcy can be wiped out in a Chapter 7.  Bankruptcy is a powerful means of IRS resolution on these older income taxes.  If the bankruptcy rules are met, all the taxes, interest and penalties will be gone after a Chapter 7 bankruptcy is completed (usually 4-6 months).

4.     Bankruptcy is an alternative to an offer in compromise.

The IRS is accepting only 25% of compromises.  The IRS offer in compromise program has historically been an good source for resolving unpaid taxes.  With the current low acceptance rate, the reality is the IRS offer program is now broken.  Because of that, filing a tax bankruptcy on the government has become a viable option for a fresh start with the IRS.

5.     Bankruptcy is a complete solution to all debt problems.

A tax bankruptcy solves IRS problems, but it also can eliminate state taxes, overwhelming credit card debt, well-intentioned medical bills, debt from a failed business - and it stops foreclosures.  With the present state of the economy, a comprehensive “all in one” solution to financial problems can take priority.

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Tax ignorance disease afflicts both the general public and politicians. It knows no bounds, and can be curtailed only through reform of high school and undergraduate education, coupled with an effective public service campaign by the apppropriate authorities.

Turning first to the general public, consider this letter to the editor of the Philadelphia Inquirer with respect to taxation:

A letter-writer Wednesday (”Whose taxes to cut?”) has a fundamental misunderstanding of what taxation is. Income belongs to those who’ve earned it. The government doesn’t give tax cuts to people; it simply takes away less of their earnings.

The left wing’s conception of income and taxation often seems more like the actions of the schoolyard bully who steals $4.50 of your lunch money while leaving 50 cents in your pocket, and then asks for your thanks because you can still buy milk.

The analogy fails, because unlike the writer of the letter to whom the writer in question is responding, the writer in question has a fundamental misunderstanding. The schoolyard bully who steals the lunch money gives nothing in return. In contrast, the government provides something in return for taxes that are paid. Though it is possible to argue about the value of what is taken and given, on both a macro and micro level, the letter writer in question surely cannot think that when he pays taxes he gets nothing in return. He, like most other Americans, don’t necessarily see what they are getting in return. Their homes have not been invaded by foreign nationals because the military provides a deterrent. When they fly on an airplane, ride a train, drive a car, or jump into a taxi, tax dollars make it possible. Airplanes don’t collide because the FAA supervises and cares for airspace. Trains operate because they receive tax subsidies in the absence of which they would cease running. Tax dollars provide resources to ensure that the gasoline purchased at the pump is unadulterated, that the pumps properly record quantity and price, and that the roads on which the car is driven are maintained. By paying taxes, the citizen funds the commissions that oversee taxi drivers, with the goal of keeping bad drivers from behind the wheel and protecting the rider from being cheated on fares. Taxes fund the CDC’s monitoring of sickness outbreaks to fend off epidemics. These are but a few examples of what people are getting for their tax dollar without being conscious of the benefit.

The flaw in the letter writer’s reasoning is the notion that “Income belongs to those who’ve earned it.” That statement is correct only if “income” means income net of the cost of producing the income. One reason I support user fees is that it highlights the cost of services, benefits, privileges, and protections that otherwise go uncharged against the person earning income. Without user fees or taxes, a person’s income is overstated because the person is shifting costs to the general public. There may be administrative reasons that make it impractical to get the charges measured down to the penny, but the refusal to accept taxation as a cost of civilized society is not so much the cause of the ignorance but a symptom of a deeper culture of self-centeredness. Where in our educational systems do we teach that so many things that are taken for granted indeed have a cost, and that someone will bear that cost?

Turning now to the politicians, consider this snippet from the latest Kevin Ferris Back Channels column, in which he summarizes the economic and budget plan put forth by Paul Ryan, ranking Republican on the House Budget Committee. According to Ryan, one alternative is to “Simplify the tax code down to two lower rates, 10 and 25 percent, depending on income.” Setting aside the “same old, same old, tried-and-failed” qualities of this nonsense, let’s turn to the thoroughly ignorant notion that reducing the number of tax brackets to one or two somehow “simplifies” the tax law. It’s a simple sound bite for simple minds. It thrives on tax ignorance. A closer examination of the tax law illustrates the misleading quality of the proposal.

The number of tax brackets affects the computation of tax liability, a task undertaken after taxable income has been computed. It is purely computational. It is built into tax software. It has been done for most taxpayers by the IRS, so that a person not using tax software merely looks at a tax table, finds the row with his or her taxable income and easily spots his or her tax liability. That process is awfully simple. Even creating the tax table isn’t rocket science.

What’s complicated is the determination of taxable income. Determining taxable income requires determining gross income, adjusted gross income, and deductions. Whereas determining regular tax liability is a one-step matter, determining gross income requires dozens, hundreds, and even thousands of steps. The same, or worse, can be said of determining deductions. It is in the gross income inclusion provisions, the exclusion provisions, the deduction provisions, the deduction limitation provisions, and the deduction denial provisions that one finds thousands of exceptions, thousands of defined terms, and hundreds, if not thousands, of complex computations. The flow charts for each provision can fill multiple pages in fine print, and there are thousands of provisions. Further complicating the tax law are timing issues, questions with respect to identifying the taxable year in which a particular item of gross income must be reported or in which a particular deduction is allowable. More complications arise when dealing with the identification of the taxpayer obligated to report a particular item of gross income or entitled to a particular deduction. Changing the number of tax brackets or adopting a so-called “flat tax” does absolutely nothing to reduce this complexity. But it sounds good and suckers in the tax ignorant.

There are several things that could be done with tax rates that would simplify tax liability computation, but they have nothing to do with the tax brackets. One would be elimination of special low rates for capital gains and qualified dividends. Eliminating these rates would not only jettison multiple-page capital gains tax liability worksheets, it would also permit ditching the numerous Internal Revenue Code provisions that define capital gains and qualified dividends or focus on attempts to make something that is not a capital gain or qualified dividend appear to be eligible for special low tax rates. Eliminating these rates would reduce tax compliance costs, IRS audit expenses, tax litigation, and taxpayer confusion. It is estimated that eliminating these preferences would remove one-fourth to one-third of the substantive provisions in the Internal Revenue Code. Yet the “nice sounding” two-rate sound bite completely ignores these special low rates, because there is no intention whatsoever on the part of flat taxes or two-rate taxation advocates to repeal the good deal put in place for those with sufficient wealth to benefit from special low rates for capital gains.

Another change that would reduce complexity is the elimination of the alternative minimum tax. It has its own rates, designed to take away the tax-lowering benefits of particular deductions and exclusions. Why the game? Why not one tax system, instead of two, with rates, deductions, exclusions, and credits structured in a sensible way? The answer is that by clearing away the tax underbrush, there are fewer places in which to hide special interest tax breaks. Someone benefits from complexity, and it isn’t the tax return preparer, and it isn’t the majority of tax lawyers. It’s the tax camouflager.

So long as steps are not taken to eradicate tax ignorance, one must ask why it is permitted to exist. The answer is simple. Tax ignorance benefits those who are trying to pull the tax wool over the revenue eyes of the nation and its honest taxpayers. The advocates of reduced taxation manage to gather together people who get their hopes up thinking that their taxes will be reduced, when in fact what happens is a wicked combination: (1) their taxes are reduced ever so slightly, (2) their incomes are reduced significantly, especially in real-dollar terms, leaving them worse off net of taxes, and (3) the proponents of lower taxes see to it that taxes are reduced for themselves and their friends. Now that the truth is being uncovered, the culprits are stepping up their efforts to take advantage of others’ tax ignorance, making them think that it is the tax of the working-class laborer or middle-income manager that will be hiked. They make this effort in order to strike up a chorus of petitioners seeking relief from tax hikes that don’t threaten them, so that in the end, the repeal of unwise tax reductions for the wealthy will be blocked.

Perhaps the time is nigh for a coordinated attack on tax ignorance. The nonsense that is being circulated, as evidenced by the letter to the editor and the two-rate sound bite but including many more foolish items, is a rerun of claims made in years past. Those claims found buyers, those buyers cried for adoption of the plan, and then their worlds collapsed while the designers of the tax nonsense pocketed their tax breaks. While the wealthy gambled the money in a variety of high risk markets, and while the people who wanted to be wealthy or simply tried to stay upright on the economic treadmill borrowed money in a futile attempt to get the promised benefits of the plan, the economy tanked. What further proof is there that the nation was fleeced? Why would anyone continue to support the policies and tactics that promised jobs and delivered unemployment, that promised home ownership and delivered foreclosures, that promised prosperity and brought economic disaster? The answer is simple. Ignorance persists. So long as it does, we’re in for a horrific economic ride.

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Last week, the IRS suddenly announced that it is cancelling its debt collection contracts with private vendors:

After conducting an extensive review of the private debt collection program, including the cost effectiveness of the effort, the Internal Revenue Service will not renew its contracts with two private debt collection agencies, the agency announced today.

The IRS determined that the work is best done by IRS employees who have more flexibility handling cases, which is particularly important with many taxpayers currently facing economic hardship.

The current one-year IRS contracts expire Friday.

“After a thorough review of this program, I have decided not to renew the contracts,” IRS Commissioner Doug Shulman said. “I believe this work is best done by IRS employees, and I believe we have strong support from the Administration and the Congress for increased IRS enforcement resources going forward.”

Shulman also noted that the IRS anticipates hiring over 1,000 new collection personnel in FY 2009. These new employees would give the IRS the flexibility to make assignments based on the areas of greatest need rather than filtering which cases can be worked using contractor resources.

Thousands of people across the U.S. are entitled to a piece of about $1.3 billion in tax refunds from 2005, but since those taxpayers have yet to file their taxes from that year, the windfalls remain uncollected, the Internal Revenue Service (IRS) announced this week. And anyone entitled to a refund had better act fast, because 2005 returns must be filed (and refunds claimed) by this year’s April 15 filing deadline, or the money will be lost.

In a Press Release issued Tuesday, IRS Commissioner Doug Shulman declared: “Especially in these tough economic times, people should not lose out on money that is rightfully theirs . . . People should check their records. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets.”

Some people may not have filed a return in 2005 because their income level didn’t require them to file, even though taxes were withheld by their employers, so a refund may be waiting for them. In any case, the IRS reminds taxpayers that there is no penalty for filing a late return that qualifies for a refund, but 2005 returns must be filed by April 15 in order for taxpayers to collect their part of the $1.3 billion in unclaimed refunds from 2005.

Find a IRS Tax Lawyer who can represent you if you are facing IRS penalties that you want to be freed of.

Tax penalties present taxpayers with unique issues to consider.  Wilson v. Commissioner, T.C. Summary Opinion 2008-91, describes the situation where a tax attorney represents a taxpayer with a tax penalty that was imposed for a tax return prepared by the attorney’s firm. The issue that the case describes is the conflict of interest that the tax attorney has in representing taxpayers in this situation.

In Wilson, the taxpayers failed to report their Social Security income on their federal tax return. The taxpayers had their tax return prepared by Tax Help, Inc. The IRS sent the taxpayers a notice that it intended to increase the taxpayers’ tax liability to account for their Social Security income. The taxpayers submitted an amended tax return to reflect this income and the IRS assessed an accuracy related penalty. The taxpayers filed a petition to redetermine the tax, apparently, arguing that the penalty should be abated.

There are several defenses that taxpayers may assert to ward off accuracy related penalties. The most common defense is that there was no understatement of tax. If there was an understatement, another common defense is that the taxpayer acted in good faith in relying on a professional tax return preparer.

In these difficult economic times, repaying the IRS is becoming harder than ever.  Installment agreements may be entered into in good faith, but while payments are being made, interest and penalties continue to run.  Every five years, interest and penalties double the original tax.  Most attempts to repay the IRS result in the amount owed increasing, not decreasing, because of this.

Very few people that owe money to the IRS want to be there.  For most, it is a life situation that puts them there - a failed business venture, divorce, medical problems.  But the weight of IRS interest and penalties often makes it impossible to get a fresh start - purchase a home, get remarried, start a new profession.  This economy amplifies the impact.

For those that are out of the system and who come forward, and for those that are in the system but are treading water, forgive interest and penalties if the tax can be repaid over an agreed upon payment plan.

This would bring people back into the system, close the tax gap and stimulate the economy by helping taxpayers get out of debt.

An IRS Tax Attorney will be able to help you escape the wrath of the IRS once and for all.

If you are unsure of what medical expenses you can deduct on your taxes check out this great list from the tax girl:

1, Abortion
2, Acupuncture
3, Alcoholism treatment
4, Ambulance service
5, Artificial Limb
6, Artificial Teeth
7, Bandages
8, Breast Reconstruction Surgery (following a mastectomy for cancer)
9, Birth Control Pills
10, Braille Books and Magazines
11, Capital Expenses for home improvements and modifications if their main purpose is medical care.
12, Car modifications for persons with a disability.
13, Chiropractor
14, Christian Science Practitioner (whew, good for Tom Cruise, Katie Holmes and Suri, no?)
15, Contact Lenses
16, Crutches (buy or rent)
17, Dental Treatment (X-rays, fillings, braces, extractions and dentures but not teeth whitening)
18, Diagnostic Devices (such as glucometers)
19, Drug Addiction Treatment (so, Lindsay Lohan gets a break)
20, Drugs - the prescription kind
21, Eyeglasses
22, Eye Examinations
23, Eye Surgery
24, Fertility Enhancement (including in vitro fertilization)
25, Guide Dog or Other Animal for persons with disabilities
26, Health Maintenance Organization (HMO) payments
27, Hearing Aids (including batteries)
28, Home Health Care
29, Hospital Services
30, Insurance Premiums
31, Laboratory Fees
32, Lead-Based Paint Removal from your home (scraping is okay, repainting is not deductible)
33, Legal Fees (only for authorization of treatment for mental illness)
34, Lifetime Care—Advance Payments
35, Lodging for medical care
36, Long-Term Care premiums
37, Qualified Long-Term Care Services
38, Qualified Long-Term Care Insurance Contracts (note that there are limits)
39, Medical Conferences primarily for and necessary for medical care
40, Medical Information Plan
41, Medicines (prescribed only - except for insulin which need not be prescribed)
42, Nursing Home (medical care - not for lodging or personal care)
43, Nursing Services
44, Operations if medically necessary (elective cosmetic surgery is not deductible - poor Joan Rivers)
45, Optometrist
46, Organ Donations and Transplants
47, Osteopath
48, Oxygen
49, Psychiatric Care
50, Psychoanalysis
51, Psychologist
52, Special Education for children with disabilities
53, Stop-Smoking Programs (does not include nicotine gum or patches)
54, Surgery
55, Telephone equipment for hearing impaired (includes TTY and TDD equipment)
56, Television equipment for hearing impaired
57, Therapy
58, Transportation (includes bus, taxi, train, or plane fares or ambulance service for patients, parents and nurses)
59, Trips (if the trip is primarily for, and essential to, receiving medical services)
60, Vasectomy
61, Vision Correction Surgery
62, Weight-Loss Program (only for a specific disease diagnosed by a physician)
63, Wheelchair
64, Wig (upon the advice of a physician for the mental health of a patient who has lost all of his or her hair from disease)
65, X-ray

So what’s NOT deductible?

1, Baby Sitting, Childcare, and Nursing Services for a Normal, Healthy Baby
2, Controlled Substances (no tax deduction for buying pot)
3, Cosmetic Surgery which is elective
4, Dancing Lessons, even if for improving health (so sorry, Marie Osmond)
5, Diapers or Diaper Service
6, Electrolysis or Hair Removal
7, Funeral Expenses
8, Hair Transplant
9, Health Club Dues
10, Household Help, even if recommended by a doctor
11, Illegal Operations and Treatments
12, Insurance Premiums
13, Maternity Clothes
14, Medicines and Drugs From Other Countries (including Canada and Mexico)
15, Nonprescription Drugs and Medicines
16, Nutritional Supplements such as vitamins unless they are recommended by a medical professional for a specific medical condition
17, Personal Use Items such as toothpaste and tampons
18, Swimming Lessons, even if for improving health
19, Teeth Whitening
20, Weight-Loss Program unless it is a treatment for a specific disease diagnosed by a physician (Valerie Bertinelli and Kirstie Alley are both out of luck)

Hope this helped you! From the Tax Girl

With irate property owners clamoring for relief, Illinois lawmakers passed a law in 1991 to cap skyrocketing real estate tax bills.

At the time, no one anticipated that more than 17 years later, the rate of inflation—the key measure used in the legislation to limit tax increases—would be less than 1 percent.

In 2008, the annual bump in the rate was an unprecedented 0.1 percent. That means most taxpayers can expect only slight increases in their 2009 tax bills, which are paid in 2010.

But it also means that many school districts and other government agencies will see only tiny increases in the property-tax revenues they will collect next year. And that has sent shock waves around the state, as school districts scramble to adjust their budgets and plan for cuts as early as next school year.

With tax referendum measures unlikely to succeed in the current recession, suburban districts are moving to eliminate everything from staff to band programs and sports teams as they try to cover teacher salaries and other costs that are going up by far greater than 0.1 percent.

“Property taxes are huge for us. They comprise about 56 percent of our revenue stream,” said Tom Hernandez, director of community relations for Plainfield Community Consolidated School District 202.

The tax cap as a theory works exactly as intended for taxpayers, he said, and municipalities and other home-rule communities can offset the cap through gas taxes and sales taxes.

“But we can’t do that,” he said. “We are limited to the rate of inflation and we are now taking a big hit from it.”

John Reiniche, assistant superintendent for business services at Orland School District 135, said his district and others have been closely watching the Consumer Price Index. While there have been no cutbacks in District 135 in personnel or programs as a direct result of the economy and tax cap, the situation will be front and center in setting a tentative budget by June.

“That will definitely be a point of conversation with our board coming down the road in 2010,” he said.

Most districts rely on local property taxes to cover the majority of their budgets and don’t anticipate the state coming to the rescue. The state already is behind on sending money to districts for special education, transportation and other costs.

The unease has reached Springfield, where lawmakers have begun filing legislation to change the so-called tax-cap law and provide relief for school budgets.

Taxpayer advocates are wary of any changes.

An expert Chicago Tax Attorney is only a click away.