Tax Law Blog | IRS Tax Attorneys

It just got a little easier for taxpayers to plan around two thorny bits of the Internal Revenue Code: the estate tax and the alternative minimum tax.

The Obama administration budget resolution Congress approved on Wednesday for fiscal 2010 outlines changes for these controversial levies.

It extends the estate-tax top rate of 45% on estates over $3.5 million for the next five years. That gives much-needed certainty; without change, the tax will be repealed for one year in 2010 and reinstated with a $1 million exemption in 2011.

A patchwork of changes over the past several years has made it harder for many of the wealthy to complete estate plans.

One concern (and the source of much gallows humor among tax advisers) has been that repeal for just one year in 2010 could prompt heirs to postpone or hasten the demise of wealthy relatives.

The $3.5 million exemption at the 45% rate may prompt people to rework their plans “primarily for the surviving spouse, perhaps without the use of trusts, and leave estate planning until the second death,” says Diana S.C. Zeydel, a shareholder in the Miami office of law firm Greenberg Traurig.

The budget also adjusts the AMT to keep millions more Americans from falling into it over the next three years.

AMT planning is notoriously difficult. A complicated set of rules makes it hard for taxpayers to guess whether or not they will be subject. A single big item on the tax return or a combination of others can throw one into or out of AMT.

Budget resolutions aren’t binding on Congress, but they indicate strongly the majority party’s spending priorities for the coming fiscal year.

While it may be difficult for the administration to push through multi-year estate-tax reform, many tax experts predict lawmakers will at least reverse the repeal in 2010.

“There is zero chance we’ll have no estate tax next year,” says Clint Stretch, managing principal for tax policy at Deloitte Tax in Washington.

Democrats have been “very, very” clear that there will be an estate tax in 2010, and a majority of them are “comfortable with something in the range of a $3.5 million exemption and 45% rates,” Stretch adds.

Similarly, final details of AMT reform are yet to come, but “nobody in the Democratic party wants to impose AMT, and the patch is going to happen,” says Stretch.

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The IRS has updated Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). I know, you’re thinking “So what?”

Well, the “So what?” is the updated worksheet for determining insolvency, found on page 6 of the Pub (and at the bottom of this post). The worksheet is a handy resource for taxpayers who have been trying to determine whether and to what extent their canceled debts are excluded from gross income.

You see, canceled debt (like credit card debt after it is forgiven) is reportable - and taxable - as income to the IRS unless you meet an exception. Insolvency is one of those exceptions. The definition of insolvency is debt that exceeds your assets. But many taxpayers find that difficult to quantify. So the IRS has a handy worksheet to help you figure it out. To view the insolvency worksheet as a pdf, click here.

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The home mortgage interest deduction is probably the single most sacred provision in the Internal Revenue Code. I remember when, in 1986, Congress flirted briefly with the idea of repealing it. The secretaries at my law firm – normally an apolitical bunch – marched through the halls yelling revolutionary slogans. Congress backed down the next day.

So I’m taking a bit of a risk suggesting that the home mortgage interest deduction and other tax subsidies for home ownership may be a bad idea.

First, an important but nonobvious point. Economists agree that home buyers do not actually receive any net financial benefit from such subsidies. In the long run, home buyers would be just as well off financially if the subsidies were eliminated.

What!! How could this possibly be true?

Because home ownership is tax-advantaged, economists tell us that buyers are forced to pay more for homes than they otherwise would. Indeed, tax subsidies should cause housing prices to rise to the point where the new home buyer gets no net subsidy at all. Economists say that such subsidies are “internalized” in housing prices.

As a practical matter, what this means is that if tax subsidies for home ownership were eliminated, we’d all pay less for our housing – substantially less. More affordable homes. Lower home mortgages. Fewer financial eggs in a single basket. Less risk of financial catastrophe, either individual or nation-wide.
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The IRS whistleblower program allows taxpayers to obtain payment from the IRS for providing information about alleged tax wrongdoing by other taxpayers. According to the new guidance issued by the IRS, there has been a significant increase in the number and quality of informant claims. The guidance sets out a three-step process for handling whistleblower claims.

First, according to the guidance, the IRS Whistleblower Office will review the claims. This will involve adding the claim to the IRS’s tracking system. This will also involve verifying that the claims meet the dollar thresholds set out in the Code. Smaller claims will be forwarded to the IRS’s Ogden Informant Claims Examiner Unit and sent directly to the field for possible audit. The larger claims will be scanned and forwarded to a subject matter expert for a particular Industry.

Second, according to the guidance, the subject matter experts, along with the IRS attorneys, will evaluate the claims and determine how the IRS will handle the claims. In this step, the focus is on reviewing the evidence submitted to determine whether the evidence can be considered or used by the IRS. The IRS is directed to limit contact between the persons reviewing the evidence and anyone that later conducts the IRS audit. This step will also involve screening the claim for fraud issues and the potential for referring the claim to the criminal investigation division.

Third, according to the guidance, the expert and IRS attorney will recommend a course of action to the IRS Industry Director. The Industry Director will then decide whether to proceed with the audit examination. When the case is sent to the field for audit, the IRS Whistleblower Office will continue to monitor the status of the audit.

The guidance does not provide a fourth step to explain how the Whistleblower Office will process payments to the informants. I am guessing that this missing fourth step is the one that many would-be informants have the most questions about.

Presumably, the Whistleblower Office will monitor the audits close enough so that they are able to make payments to informants in a timely manner. Just in case this doesn’t happen, it might be helpful if the guidance had required the IRS audit personnel to notify the IRS Whistleblower Office of the resolution of the audit for claims involving informants.

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The IRS takes the decision to use employee tax withholdings to pay business operating expenses rather than the IRS quite seriously.  The owners and managers of the business who make these decisions will find the IRS coming not only to the business, but to them, to recover a portion of the withholdings.

This is an exception to the usual rule that the business debts of a corporation or limited liability company do not extend to its owners.  These actions in paying creditors, not the IRS, put the assets of the owners and managers at risk.  The IRS calls this a trust fund recovery penalty because the employee taxes should be held in trust by the business for payment to the IRS.

The IRS is aggressive in investigating and holding business owners and managers responsible for the repayment of these withholding taxes.

But it is important to understand this: the investigation and assessment of the business taxes against owners and managers is often the end of IRS activity against them.  Collection enforcement of a trust fund liability is often light after the fact, with little or no contact afterwards.

The IRS Taxpayer Advocate reported that the IRS collected 3% of the withholding taxes it assessed against business owners and managers in 2007. Consideration of the extent of IRS active enforcement is an important factor in determining the best way out for those that cannot personally repay these trust fund withholding taxes.  Sometimes it is best to know when - and how - to hold tight.

The IRS is aware of the problem, but it remains reality nonetheless. A request should always be made during an IRS withholding tax investigation for an upfront collectibility determination before these taxes are laid on those behind the business.  But note that these requests are rarely taken to heart by the IRS.

Without an upfront collectibility determination, these taxes are put on the books against those running the business, and the IRS then has 10 years to collect the taxes from them.  At this point, time is often the best healer for ownership and management. Time often works best for those that cannot repay as trust fund taxes are generally harder to compromise than a straight income tax liability and are not dischargeable in bankruptcy.

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A Charlotte minister has been indicted for income tax fraud, mail fraud and lying to federal agents.

According to the IRS Criminal Investigation Division in Charlotte, Anthony L. Jinwright was charged on April 21, with five counts of tax evasion, five counts of tax perjury, one count of lying to federal agents, and three counts of mail fraud.

According to the indictment, Jinwright attempted to evade his federal tax obligations by failing to report more than $800,000 in taxable income, including at least $75,000 in income earned by his wife between 2001 and 2006.

The IRS also alleges that Jinwright owes between $200,000 and $400,000 in additional taxes for those years alone.

Jinwright has been the Senior Pastor at the Greater Salem Church in Charlotte since 1981.  He also owns and operates AL Jinwright Funeral Services in Charlotte.  He is also the founder of AL Jinwright Ministries.

The federal indictment says Jinwright has lived a lavish lifestyle.  WBTV discovered he’s been living in a Cornelius mansion once owned by NFL legend Reggie White.  The indictment says Jinwright has been leasing the home for $21,000 a month.

Jinwright owns another big home nearby in Cornelius.  It’s not occupied and has a for sale sign.  Neighbors say when Jinwright and his wife lived there, they kept to themselves and wouldn’t even wave at them when they drove by.

The indictment says Greater Salem Church gave Jinwright tens of thousands of dollars a year to rent fancy cars.  In all he received an average of over half a million bucks a year in salary and perks for six years.  The indictment says his wife also received over $800,000 from the church during the same period.

While Jinwright is the head of a church in Charlotte, he grew up in Wilmington where much of his family still lives.

Family said faith is a huge part of their upbringing and the Jinwrights believe faith is what will get them through these allegations.

Ruby Jinwright Jacobs is an elder in her congregation and was a pastor for many years.  She was shocked to hear the news that her relative has been indicted for tax evasion.

“He’s always worked in the church and he knows what is good and what is bad and I just don’t believe that he would have done things that way,” said Ruby.

Ruby and the rest of Jinwright’s extended family say they are praying for him.

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Anthony L. Jinwright, a native of Wilmington, NC (just outside my hometown) was indicted this week on charges of tax evasion for the years 2001-2005. A federal grand jury in Charlotte, NC indicted Jinwright on 14 counts, including tax evasion, filing false tax returns, mail fraud and making false statements to federal agents. He allegedly evaded more than $200,000 and $400,000 in federal and state taxes by not reporting over $875,000 in income.

So, just another tax evasion case, right?

Not really. What sets Jinwright apart from many other tax evaders is his occupation: he claims to be a man of God. Specifically, Jinwright - who goes by the designation of Bishop - pastors Greater Salem City of God Church in Charlotte and a church in Cornelius, NC. The congregations of the two churches total about 2,000.

Jinwright has been pastor of the church since 1981. In 2001, he incorporated A.L. Jinwright Ministries, which has been a springboard for his radio show and book activities. Jinwright also leads the Pastors International Consortium.

The indictment lays out a pattern of spending that far exceeded income which was reported on Jinwright’s tax returns from 2001-2006. And Jinwright received a lot of income from the church including, for 2006:

* $303,000 in salary
* $151,000 in housing allowances
* $54,000 in car allowances

That’s quite a bit of compensation. And let me be clear… I don’t for a minute believe that it says anywhere in the Bible that all pastors have to be poor. And I don’t think that being the leader of any charitable organization - whether through a church or a more “traditional” nonprofit like the Red Cross - means that you should be compensated less than a similarly sized organization. So this isn’t about his income (and keep reading, there’s a lot of it). It’s more about the lifestyle that he flaunted, all while crying poor to the IRS, claiming taxable income of as little as $15,000.

In addition to traditional compensation, Jinwright also received annual bonuses, Christmas bonuses, the use of a $83,000 Mercedes owned by the church and the use of a credit card to pay personal expenses. The church also paid for Jinwright’s daughter’s education.

All total, Jinwright received about $3.1 million from the church from 2001-2006. This doesn’t include gifts made to Jinwright, speaking fees (at least $437,000 for Jinwright and his wife) and salary paid by the church to Jinwright’s wife as Co-Paster (about $835,000), all of which push Jinwright’s income, together with his wife, to about $1 million per year. By comparison, the median income for a family in NC is about $55,000.

Jinwright spent some of the money on cars. Lots and lots of cars. The indictment lists ownership in a BMW 530i, a Mercedes-Benz S550V, five (yes, five) Lexus vehicles, a Bentley GT and a Maybach 57 (worth $250,000). Leases during that same time included a Cadillac, an Acura, a Volkswagen, a Maxima, a Durango, a Neon and a Toyota. No doubt the Neon boasted a “My other car is a Maybach” bumper sticker.

Jinwright also owned a million dollar residence in Charlotte and a second home worth about $200,000. Maintenance expenses alone for the homes totaled about $100,000, not including the cost to take care of his three new horses, worth about $25,000.

And it didn’t stop there.

Once Jinwright became aware of the investigation into his finances, he continued to flaunt his cash. He leased two more expensive cars, including a $350,000 Rolls Royce and a 2009 Lexus LX570, as well as a new house worth $3.7 million.

Federal officials allege that Jinwright lied about his income not only to the IRS (where he reportedly deflated his income) but on several loan applications (where he reportedly inflated his income). Three of the federal charges against him involve mail fraud for making false statements to banks on loan applications.

If convicted, Jinwright faces five years on each count of tax evasion, three years on each count of filing false tax returns, five years for making false statements to federal agents and up to 30 years for each count of mail fraud. I’m guessing he was planning on seeing pearly gates before he saw iron bars.

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Prime Minister Gordon Brown’s government laid out plans on Wednesday for more than $1 trillion in deficit spending over the next five years, a scale of public debt that critics say is without precedent in Britain, and ordered a 5-percentage-point increase, to 50 percent, in the top marginal rate of income tax for the country’s highest earners.

The government’s annual budget statement in the House of Commons offered a new measure of the scale of the financial crisis gripping Britain, which many economists have described as the most severe in any major industrialized country. New figures provided by Alistair Darling, the chancellor of the Exchequer, forecast that the economy would shrink by 3.5 percent this year, the sharpest drop since 1945 and nearly three times the 1.25 percent drop he predicted in November.

Mr. Darling forecast a return to modest growth of 1.25 percent next year, an outlook not shared by the International Monetary Fund, whose gloomy estimates on the British economy have included a continuing recession in 2010. But the British finance minister acknowledged that the government was not expecting the years of deficit spending to end before 2018.

For this year and next year alone, the government expects a deficit of more than $500 billion at current exchange rates, with overall government debt expanding from 59 percent of gross domestic product this year to 68 percent in 2010 and 79 percent in 2013-14.

This would not be exceptionally high by global standards, however. Total federal debt in the United States is projected to rise to around 70 percent of G.D.P. by 2011, according to estimates from the Congressional Budget Office, and Japan’s is threatening to exceed 200 percent.

Nevertheless, some have warned that if the recession is longer and deeper than the Brown government is predicting, the level of debt could lead to Britain’s facing a run on the pound and the possibility of having to turn to the monetary fund for emergency loans, a contingency last resorted to by a Labor government in the 1970s.

The growing public debt was highlighted in Parliament by David Cameron, leader of the opposition Conservatives, who said the government’s borrowing for 2009 and 2010 would exceed all of the borrowing by British governments since the Bank of England was founded in the late 17th century. He said the scale of the debt being taken on would burden British taxpayers for decades.

The political sparring over the budget appeared to prefigure the battle lines in a general election that must be held before June 2010. Mr. Cameron, whose Conservatives are far ahead of Labor in opinion polls, described the Brown cabinet as “a government of the living dead,” and said it was “running out of money, moral authority and time.”

He said that every Labor government since the 1930s had created chaos in the public finances. While Mr. Brown often claimed to have ended the cycle of “boom and bust” in Britain’s economy while he was chancellor of the Exchequer under Tony Blair, Mr. Cameron said that Mr. Brown had earned his own chapter in British history, one that would be written in red ink.

“As of today, any claim they have ever made to economic competence is dead, over, finished,” he said of Labor.

Mr. Darling, presenting the budget, said that Britain was the victim of a worldwide recession and that the government, building “on the strengths of the British economy and its people,” would lead the country out of the slump with its deficit spending. He offered a hint of Labor’s plans for fighting the election with his announcement of a 50 percent top income tax rate beginning in 2010, up from the current top rate of 40 percent. In last year’s budget, Mr. Darling announced an increase to 45 percent that was to have begun in 2011, but the new plan supersedes that.

By government calculations, the 50 percent rate, for all those who earn more than £150,000 a year, about $216,750, will raise about $2.6 billion in additional revenues, a relatively small amount compared with the size of the deficits. To many critics, the new top rate, and other tax increases for high earners, suggested that Labor planned to emphasize its populist traditions and move away from the posture of the Blair years, when “New Labor” said it had turned away from its old hostility toward the wealthy.

When Labor came to power in 1997, it vowed to keep income tax rates at the relatively low rates set during the 18 years of Conservative rule that began with Margaret Thatcher’s first election in 1979. Mr. Brown renewed that pledge in the last election in 2005, and those pledges repudiated the pattern of Labor’s previous stint in power in the 1970s. Then, a top income tax rate of more than 90 percent contributed to high emigration levels among British professionals.

The 50 percent rate would be among the highest in any developed nation, and attracted harsh criticism in London’s financial district. Many critics saw the move as a further blow to London’s claim in recent years to be a rival to New York as the world’s leading financial center.

The new income tax rate marked “the final return of old Labor policies attempting to soak the rich,” said Howard Wheeldon, a senior strategist at BGC Partners in London.

The British Chambers of Commerce said the new rate would be a disincentive for financial professionals considering basing themselves in London.

“If the government was serious about the U.K. remaining a global player, they would not be throwing away such an important advantage for a relatively small return,” said David Frost, the organization’s director general.

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There is quite a bit of movement in this week’s list of the Top 5 Recent Tax Paper Downloads, with a new #1 paper and new papers debuting on the list at #4 and #5:

1.  [250 Downloads]:  2008 Developments in Connecticut Estate and Probate Law, by Jeffrey A. Cooper (Quinnipiac) & John R. Ivimey (Reid & Riege, Hartford)

2.  [186 Downloads]:  Huford:  Family Limited Partnership Practice Pointers, by Wendy C. Gerzog (Baltimore)

3.  [144 Downloads]:  The Case for the Carbon Tax: How to Overcome Politics and Find Our Green Destiny, by Roberta F. Mann (Oregon)

4.  [131 Downloads]:  Hdden Taxes, by Brian D. Galle (Florida State)

5.  [125 Downloads]:  Choice of Entity: Considerations and Consequences, by Ellen P. Aprill (Loyola-L.A.) & Sanford Holo (Musick Peeler & Garrett, Los Angeles)

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Helio Castroneves, the two-time Indianapolis 500 winner and Dancing With the Stars champ, will be back on the race track this weekend. A Miami federal jury acquitted him of six tax evasion charges this afternoon.

Castroneves’ sister, Katiucia, was cleared of the same charges. The siblings’ lawyer, Alan Miller, also left the courthouse a free man.

Jurors did, however, deadlock on the conspiracy charge against the brother and sister. There’s a chance that federal prosecutors could push for another trial on that charge. But don’t bet on it.

Helio, Katiucia and Miller had been accused of using Panamanian and Dutch companies from 1999 to 2004 to conceal $5 million that the Brazilian-born racer received from the Penske Racing Team, as well as another $530,000 he got from a former sponsor in Brazil.

If he had been convicted on all counts, Castroneves could have faced at least six years in prison.

Now, however, a happier Helio — and that’s saying a lot, because he’s one of the most ebullient athletes I’ve ever seen — is on his way to Southern California. He’ll be back behind the wheel of his  No. 3 IndyCar in time for practice and qualifying tomorrow for the Toyota Grand Prix of Long Beach.

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Chicago Tax Attorneys are here.