You Have Rights When Dealing with the IRS!

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When dealing the the U.S. Government, you have rights such as the right against unreasonable search and seizure and the right to free speech as guaranteed by the Bill of Rights. Dealing with the IRS is no different but in addition to the rights guaranteed to you by the Constitution you have certain additional rights, aptly named the Taxpayer Bill of Rights. Nina Olsen, the National Taxpayer Advocate, advocated for years to have the IRS explain in plain simple terms the rights that each taxpayer has when dealing with the IRS and so in 2014, the IRS published the aforementioned rights, grouped into ten broad categories, such as the Right to be Informed.

While most of these rights tend to be aspirational, such as language used by the IRS to explain the Right to Quality Service which states that the IRS will provide taxpayers with “prompt, courteous, and professional assistance in their dealings with the IRS….” Still the idea is sound, which is to provide taxpayers with an understanding of what they can expect when dealing with the IRS and in that regard it works. Listed below are the Rights and a brief description of each:

The Right to Be Informed. You have the right to know what is required to comply with the Tax Code. To that end, you are entitled to clear explanations of the tax laws by the IRS, to include IRS procedures, forms, instructions, publications, notices and correspondence. Finally, the IRS must inform you about any decisions it makes regarding your account and to receive a clear explanation of the outcome of their decisions.

The Right to Quality Service. You have the right to prompt, courteous and professional assistance from IRS staff. Similar to the Right to Be Informed, you have the right to receive communications from the IRS that is clear and easily understood; if you receive inadequate service, you have the right to speak to a supervisor.

The Right to Pay No More than the Correct Amount of Tax. You have the right to pay the right amount of tax (to include penalties and interest) and no more. You also have the right to expect the IRS will apply all of your tax payments properly.

The Right to Challenge the IRS’s Position and Be Heard. You have the right to challenge any IRS determination in your case. You are to be provided an opportunity to provide additional documents in response to any formal or proposed action by the IRS. If you do object, the IRS needs to consider your timely objections and additional documentation in a prompt and fair manner; if the IRS disagrees with your objection, you have the right to receive a response from the IRS.

The Right to Appeal an IRS Decision in an Independent Forum. You have the right to appeal an adverse IRS decision, whether it be to the IRS Office of Appeals or to court.

The Right to Finality. You have the right to know how long you have to challenge an IRS decision. Conversely, you have the right to know how long the IRS has to audit your tax return or collect any taxes, interest and penalties due; if the IRS is auditing your return, you have the right to know the audit is finished.

The Right to Privacy. You have the right to expect the IRS will respect your privacy. The IRS’ inquiry, examination or enforcement action must comply with the law and be no more intrusive than necessary.

The Right to Confidentiality. You have the right to be protected from unauthorized disclosure of your tax information unless authorized by you or by law. If the IRS or third parties disclose your tax information you should expect the IRS will take appropriate action to punish wrongful disclose or misuse  your information.

The Right to Retain Representation. You have the right to be represented when dealing with the IRS, whether it be by an enrolled agent, CPA or attorney.

The Right to a Fair and Just Tax System. You have the right to a tax system which considers all of the facts and circumstances in your situation fairly and which provides for a just result. If you are having difficulty dealing the IRS, you have the right to seek assistance from the Taxpayer Advocate Service.

While this explanation does not put much meat on the bone, you can see in a nutshell what rights you can assert if the IRS takes an aggressive position in your case or unnecessarily delays action on your matter. I will leave a more in-depth exploration of these rights to a future post but if you want to know more about each of these rights you can follow this link to the Taxpayer Advocate’s website and read about each in more detail.

If you feel you are not being treated fairly by the IRS, you should contact my office to learn about your rights. You can call my office at 207-299-0515 or by email using my contact form.

Photo courtesy of Eugene Chan at flickr.

Tax Tips for Year-End Charitable Giving

Give and you shall receive, as the saying goes. If you are considering a year-end gift of money or property to a worthy charity, here are some tips on maximizing your charitable tax deduction:

  1. Keep good records! Regardless of the amount of money given, meaning from dollar $1 up, the taxpayer must maintain a record of the donation made at or near the time of the donation. You can meet this requirement with a bank statement, a cancelled check, a credit card statement or a statement from the charity. Regardless of the form of the record, such record needs to show the name of the charity, the date of the donation, and the amount of the donation.
  2. If you make a single donation, of money or property, and it is worth more than $250 then you must get a written acknowledgement from the charity to deduct this donation. The written acknowledgement needs to contain the name of organization; the amount of cash contribution, if applicable; a description of any non-cash contributions, if applicable; a statement that no quid pro quo goods or services were provided in return for the contribution or, if goods or services were provided, a description and good faith estimate of the value of goods or services provided to the donor.
  3. If you make a gift using a credit card before midnight on the 31st than it is deductible in 2016 even if you do not pay your credit card until 2017. Similarly, if you properly mail a check on the 31st than it will also count as deductible in 2016 even if the check clears in 2017.
  4. If you are 70 ½ or older and you hold an IRA account, you may be required to take what are called required minimum distributions from a traditional IRA account. You can make a donation, up to $100,000, directly from your IRA to an eligible charity tax free. While you will not get a tax deduction for the contribution, the distribution is not taxable to you and qualifies as a required minimum distribution.
  5. If you are going to make a gift of household goods or clothing than such items must be in good used or better condition to be deductible. Damaged or stained goods and clothing will not be acceptable and hence deductible. Household goods includes such things as furniture, furnishings, electronics, appliances and linens. Items worth over $500 do not have to meet this “good used or better condition” if a qualified appraisal is done.
  6. If you are making a gift of property with substantial worth than you may need to have an appraisal to provide a proper value to use for your charitable donation. There are some complicated rules in this area so I won’t go into detail but if you intend to donate artwork, antiques or collectibles than you may need to meet other requirements to get full advantage of your deduction.

I hope you and yours have a wonderful New Year’s Eve and best of wishes in 2017!

Gifts Can Be Taxing: Tax Consequences of Making a Gift

Gifts are a part of everyday life. Birthdays, holidays and special occasions. Who doesn’t love getting gifts! This includes Uncle Sam. You may not be aware of this but when you make a gift you are engaging in a taxable transaction. This gift tax is an excise tax assessed on individuals who make a gift and it is based on the fair market value of the property transferred. Now just because you make a gift and it is taxable does not mean you will owe anything to Uncle Sam. I intend to give you the broad strokes of how the gift tax works so you know before you make a gift the potential tax consequences of your actions.

First things first. What is a gift? A gift is a transfer of property or an interest in property for less than fair market value. Simple enough. The gift tax applies to lifetime gifts, whereas the estate tax only applies to gifts made after death. While I am only discussing the gift tax today, it is important to point out that both types of gifts share what is called an applicable exclusion amount. The idea is that even though a gift may be subject to tax, the tax should only be paid if the total gifts, during life and post-mortem, exceed the exclusion amount, currently $5.45 million in 2016. If the total gifts exceed the applicable exclusion amount then it will be subject to tax. Right now the tax rates range from 18% to 40%, with the 40% bracket starting when taxable gifts made during life equal to or exceed $1 million dollars.

Before you start worrying that every gift you make is a hidden tax trap, not all gifts are treated as taxable gifts. For example, gifts to political organizations, gifts made directly to an education institution for tuition, gifts made to medical institutions on behalf of another and gifts that qualify for the annual exclusion are excluded from the IRS definition of gift and there is no requirement to report such gifts. Similarly, gifts to charity and gifts to spouses are allowed a deduction equal to the fair market value of the transfer (though there are some small exceptions) so while they are treated as taxable, in essence these gifts will not reduce the applicable exclusion amount.

Let me focus in a bit on the annual exclusion (this is different than the applicable exclusion) because it comes up quite frequently. When an individual makes a gift of a present interest, the gift will be treated as non-taxable up to the annual exclusion amount, currently $14,000 per recipient. Theoretically, this means an individual can gift an unlimited number of people $14,000 and he or she would never use a penny of their applicable exclusion. Now the rub here is that the gift must be of a present interest, which means the recipient has the right to use, possess and enjoy the property or income generated by the property without restriction (think gifts of cash or tangible property like a car or home).

Closely related to the annual exclusion is gift splitting. Married individuals can double up the annual exclusion by agreeing to treat a gift as being made by both individuals. So let’s use an example. Joan and her husband Earl are well off but Earl wasn’t as thrifty as Joan and as such most of the wealth is owned by her personally. Their son David has just graduated from school and they would like to give him a gift of some stocks Joan has bought over the years (worth $20,000). Now if the gift-splitting rules did not apply, if Joan makes a gift of the stock, her gift would be treated as part taxable and part non-taxable. The first $14,000 of the gift would be covered by the annual exclusion, leaving $6,000 to be treated as a taxable gift. Now if Earl consents to gift-splitting, the gift can be treated as if made equally by both parents (even though Joan owns 100% of the stock) which means that none of the gift will be taxable because the combined annual exclusion amount of $28,000 exceeds the fair market value of the stock. Used wisely, gift-splitting can be a very powerful tool in estate planning. Imagine if Joan and Earl want to move assets to their son over time; over the course of five years, the couple can gift David $140,000 worth of assets without incurring any gift tax consequences.

One of the big caveats of making a gift is that individuals need to consider the potential future income tax consequences of making a gift. The recipient receives the same basis in the gift as it had in the hands of the gift giver. So returning to our earlier example, if Janet gives her son, David, stock worth $20,000, which she purchased 15 years ago for $5,000, then if David later sells the stock his gain will be calculated using a basis of $5,000. Now if Janet had died, David’s basis would be $20,000 rather than $5,000 because assets received from an estate get a step up in basis. So with highly appreciated assets there may be a good reason to keep the asset in the estate rather than gifting it during life but that really depends on an individual’s circumstances.

So in summary, a gift tax is assessed on the fair market value of taxable gifts made during a person’s life. No tax will be due unless the taxable gifts, in total, exceed the applicable exclusion amount, currently $5.45 million. Not all gifts are taxable and so you need to check if certain exclusions apply, such as gifts that qualify for the annual exclusion. You also need to see if the gift qualifies for a deduction such as gifts to charity or to a spouse. Finally, remember that the applicable exclusion amount is shared with the estate tax and so taxable gifts will reduce the applicable exclusion amount available to the individual’s estate when he or she passes.

Whether or not planned gifting can benefit your estate depends on your particular circumstances, so if you have questions you should speak with an estate planning attorney or tax planner.

High Flying Attorney Gets His Wings Clipped by the IRS

T.C. Memo. 2015-1 Tulane Meredith Peterson v. Commissioner of Internal Revenue (Issued January 5, 2015)

The Story

Arcadia, California resident Tulane Peterson loved to fly. While licensed as an attorney since 1997, his first true and abiding love was flying; by the time of this court opinion he had been an amateur flyer for forty years. Specializing in personal injury law, in 2005 Peterson decided to upgrade his practice and so he purchased a new chariot: a 2005 Cessna Turbo Skylane. At $332,000, it was reasonably priced and available for only $10,000 down and $1,400 a month thereafter. It was also around this time that Peterson decided to up his game by becoming “instrument rated” as a pilot, which means that he becomes certified to fly solely by relying on his instruments rather than by sight and thus enabling him to handle more diverse weather conditions.

As can be imagined, the expenses of purchasing and maintaining the aircraft and obtaining the certification added up. For tax years 2006 and 2007, Mr. Peterson claimed 100% of his costs as being for business, totaling $115,620 and $123,012, respectively. Peterson maintained a list of trips he took in the plane as well as the business purpose of the trip. The court, helpfully, provided a list of Peterson’s various “business” flights; here is a sampling:

• 17 trips to Big Bear, a resort only 90 miles from his home. The ostensible purposes for these flights were: purchasing aviation fuel; business development; informal law office marketing (as opposed to formal law office marketing); reconnoitering an office location; entertaining for business; practicing high-altitude landings; AND attending FAA pilot safety meetings. Wow! That is a lot of business in only 17 trips!
• Flights to and from his parents’ home in Bismarck, North Dakota. The taxpayer said the purpose of the trip was to provide his parents with estate planning advice, for which he never charged them, and to resolve a “mold complaint.” Such a good boy.
• Flights with his son to take aerial photographs related to several personal injury cases he was working on; the court notes that no evidence was submitted by the taxpayer as to how these photos were necessary for litigating those cases (or even what the photos were of, for that matter).
• A Flight to Santa Monica, California, to “return a defective portable bike purchased for use with aircraft.” Ok, you got me there.
• Flights to various airports to discuss complaints regarding the price of aviation fuel at meetings of the Five County Pilots Association. A problem to be sure.

The IRS was understandably skeptical of Peterson’s claim that 100% of airplane expenses were for business and so it conducted an audit on his taxes for both years. In 2006, the IRS denied all of Peterson’s aircraft related expenses as being personal and not business. 2007, ended up a bit better, and a new IRS agent allowed Peterson to claim 27% of his expenses as being business related; subsequently, the IRS conceded that 18% of Peterson’s airplane expenses were deductible for 2006. Unhappy with the results, Peterson appealed to the United States Tax Court but the tax court was no more sympathetic to Mr. Peterson’s arguments. If the IRS had not conceded that some of the airplane expenses were business, the court appeared ready to deny his expenses in full. The court rightly pointed out that most of the trips were to locations within 100 miles of his home office, close enough to justify the use of a car over an airplane.

Here the court make it clear that it was the taxpayer’s love of flying that motivated him to incur those expenses rather than a business reason. While the taxpayer here was likely a bit greedy, the mere fact that you derive some enjoyment from a business expense does not make it non-deductible but it does mean that taxpayer will need to do more to show that the expense was ultimately motivated by a business purpose. This case was about an aviator who flew too close to the sun and got burnt (forgive the pun).

Business Expenses

While this case had some interesting facts, it actually has a good discussion of what constitutes a business expense and how a taxpayer goes about substantiating such expenses. If you want the crib notes, here is a quick summary:

A taxpayer can deduct the ordinary and necessary expenses incurred or paid in furtherance of running a business, where the expenses can be properly substantiated by the taxpayer, on whom the burden rests.

Ordinary expenses are those expenses that are normal, usual, or customary in the business in which the taxpayer operates while necessary expenses are those expenses that are appropriate or helpful in a taxpayer’s business.

Proper substantiation requires some proof that an expense was incurred or paid in furtherance of a taxpayer’s business, usually through documentary evidence such as invoices, statements, and receipts; if the taxpayer cannot substantiate the exact amount of the expense then other evidence can be submitted to prove that expense, unless the Internal Revenue Code provides for a specific means to substantiate an expense.

Postscript

I did a Google search on Tulane Peterson and it appears that Peterson now works with a law firm rather than in solo practice; no word on what happened to the Cessna.