I HAVE MY DOUBTS ABOUT WHETHER THIS TAX AVOIDANCE STRATEGY WILL WORK – SOUNDS LIKE FORM OVER SUBSTANCE TO ME
Taxpayer operates a business that is not eligible for a favored tax treatment because of the nature of the services performed. Taxpayer creates two entities, one of which does the work that is not eligible for favored treatment, and the other of which claims all of the profit from that work. That way, all of the profit supposedly qualifies for the favored tax treatment.
Will that work? I think that falls into the category of form over substance. I don’t think it will work.
The National Taxpayer Advocate’s 2017 Annual Report to Congress discusses several topics of interest, including the denial of passport applications by individuals who have a “seriously delinquent federal tax debt.” The Advocate says that she has made “several recommendations to ensure taxpayers receive adequate advance notice and an opportunity to be heard” before the IRS makes the determination that the debt is “seriously delinquent.”
That sounds like it should address some of the criticism of that law.
STRANGE THAT I SAW NO MENTION WHATSOEVER OF THIS WHEN IT WAS ANNOUNCED: SENATE DEMOCRATS HAVE PROPOSED AN ESTATE TAX INCREASE
I didn’t learn about it until this morning when I read the estate planning update that I receive weekly from Thomson Reuters/RIA. According to that update, Senator Schumer introduced on March 7 “a $1 trillion infrastructure proposal, to be financed by tax increases, including, among other things, elimination of the increased estate tax exemption under the Tax Cuts and Jobs Act of 2017."
The update from Thomson Reuters/RIA links to a subscription only service, but I did find a story about it that elaborates on the proposed tax increases, which would apparently reverse many of the cuts that were just enacted by the Tax Cuts and Jobs Act.
MORE CRITICISM OF THE LAW ALLOWING THE STATE DEPARTMENT TO DENY YOUR PASSPORT APPLICATION IF YOU OWE MORE THAN $51,000 IN BACK TAXES
This time the commentator suggests that limiting the ability of U. S. citizens to travel abroad is a liberty interest that implicates due process. I agree that you should be afforded due process before your passport application is denied, but it doesn’t sound to me like that’s an issue with seriously delinquent tax debts. If you’re in that kind of hock to the IRS, you have probably had plenty of opportunity to work it out.
Here’s how the latest tax refund theft scheme works, as described by an IRS agent I heard on a talk show:
Thieves steal your identity and file a fraudulent tax return claiming a refund, but instead of telling the IRS to direct deposit the refund to the thieves’ bank account, they tell the IRS to direct deposit the refund to your bank account. The thieves then call you pretending to be the IRS and tell you you’re in trouble for getting a fraudulent refund and you better send it to them right away. Of course, the place where the thieves tell you to send the refund give it to them, not back to the U. S. Treasury.
It sounds like it would be a lot easier for the thieves if they just directed the fraudulent refund to an account they set up instead of to your account, but I suppose that having the refund sent to your account (and then stealing it from you) puts them one step further away from the IRS.
Anyway, the news item about this scheme that appeared the same day I heard about it on the radio doesn’t explain the scheme as well as the IRS agent did on the radio, so I thought I’d help out. The news item does at least emphasize what I have said numerous times before: if the IRS thinks you have a problem with them, the first contact you receive from them will not be a telephone call.
The concept of cancellation of debt (sometimes referred to as discharge of indebtedness) as income that must be reported on your tax return is, to me, not at all intuitive. A TaxProf Blog post that discusses reported cases on the subject illustrates some of the ins and outs of the concept, and when cancellation of debt is, or is not, reportable as income on your federal income tax return.
WHY IS THE SECTION OF THE IRS WEBSITE ABOUT ESTATE AND GIFT TAXES UNDER THE HEADING “SMALL BUSINESS AND SELF-EMPLOYED?”
Businesses don’t pay estate and gift taxes, nor do they file estate tax or gift tax returns. Individuals pay estate and gift taxes and file estate tax returns (Form 706) and gift tax returns (Form 709). So why is the section of the IRS website about estate and gift taxes under the heading “Small Business and Self-Employed,” where no one who knows those basic facts is going to think to look? Is it because the IRS thinks that most taxpayers have the (mistaken) impression that only business owners need to be concerned about estate and gift taxes?
Most government agency web sites are poorly designed, but this is a particularly egregious example.
I guess there has been some criticism of the law that allows the State Department to deny your passport application if you have an unpaid federal tax liability of more than $51,000. I could be wrong, but I don’t think it’s a violation of anyone’s constitutional rights. I don’t think you have a constitutional right to a passport. It seems to me that Congress can put limitations on who gets a passport, and that’s what happened here. IF you think it’s objectionable, persuade Congress to change the law.
Via TaxProf Blog.
Unless it’s a family member, in which case my caller ID tells me that’s who it is, I just plain don’t answer the phone at home, period (that’s at home; at the office is different). If it’s important, the caller will leave a message on my answering machine identifying themselves and leaving a number for me to call back.
That approach means that the scammers that Coyote is talking about in his recent post on scammers posing as IRS collection agents (I have written about those scammers as well, more than once) have no opportunity to get through to me, although it has occasionally in the past resulted in them leaving some creepy messages on my answering machine.
The larger lesson here is this: how often do government agencies, and particularly taxing authorities, initiate contact with individual taxpayers by telephone? The answer is almost never. They communicate with taxpayers in writing (and I don’t mean email). That’s why I can confidently say: if you don’t know who is calling, don’t answer the phone.
DID YOU KNOW THAT THE GOVERNMENT CAN DENY YOUR PASSPORT APPLICATION IF YOU OWE MORE THAN $51,000 IN BACK TAXES?
I’m just trying to keep you informed. Read the details about the circumstances under which the State Department can deny your passport application due to “seriously delinquent tax debts,” and what you can do about it, in the IRS news release on the subject, IR-2018-7.
The contents of this blog, this web site, and any writings by me that are linked here, are all my personal commentary. None of it is intended to be legal advice for your situation.