FEDERAL TAX TODAY N E W S F L A S H : T H E I R S C A N N O W G O A F T E R Y O U R O F F - S H O R E A C C O U N T S! JANUARY 2009 Volume 4 Issue 1

Transcription

1 LAW OFFICES OF ST EPHEN MOSKO WITZ, LLP 180 MONTGO MERY ST REET, S UITE 1950, SAN F R ANC ISC O, C A w.s tevemos kowi tz.com (415 ) FEDERAL TAX TODAY JANUARY 2009 Volume 4 Issue 1 I N S I D E T H I S I S S U E 2 Deduct Job Hunting Expenses 3 Disagreeing with the IRS 5 Deduct Unlimited Losses from Real Estate Individual Tax Returns 7 Financial Stress, Facing Foreclosure help from the IRS 8 Personal Note, Tax Tip job-hunting expenses may be deductible for income tax purposes. EDITOR S NOTE This newsletter provides information related to current legal issues. However, the information contained in this newsletter should not be construed as legal advice or an opinion as to the matter discussed in the newsletter. In addition, the information in this newsletter is not intended as a substitute for consultation with an attorney. Specific conditions always require consultation with appropriate legal professionals. N E W S F L A S H : T H E I R S C A N N O W G O A F T E R Y O U R O F F - S H O R E A C C O U N T S! By Anthony Diosdi On June 30, 2008 a federal court in Fort Lauderdale authorized the IRS to serve a civil summons on the Swiss banking giant UBS, demanding the names of approximately 19,000 U.S. clients who apparently hold offshore bank accounts. UBS has yet to comply with the court order. However, the banking giant has notified many of its US and foreign clients that their secret bank accounts will be terminated. The forced elimination of these bank accounts has left many U.S. holders of Swiss bank accounts with apparently two harsh options. First, they could transfer their funds to other banks beyond the borders of Switzerland. Second, they could repatriate the funds to the U.S and come clean with the IRS. The first option creates a paper trail that could be discovered by the IRS. It also creates the possibilities that the IRS may seek additional criminal and civil sanctions against such an account holder. The second option involves participating in the so-called voluntary disclosure program. Attorneys throughout the country have apparently advised countless holders of Swiss accounts to participate in the program. The voluntary disclosure program allows taxpayers to come forward to the IRS and report income that was omitted from a tax return. The voluntary disclosure program typically requires a taxpayer to amend his or her tax return for the period at issue and disclose the income omitted from the tax return. The taxpayer must then pay all applicable tax, penalties, and interest in exchange for avoiding criminal prosecution. The problem with this strategy is there is no law binding the IRS to the program. There are several reported cases where taxpayers have entered into a voluntary disclosure program with the IRS and the agency refused to abide by the terms of the program. Please see more on Newsflash on page 2

2 Page 2 More on Switzerland has lost Tax Haven Status from page 2 These individuals were later convicted of tax evasion. The Federal Court of Appeals in this circuit has indicated that taxpayers and their attorneys cannot rely on the program to avoid prosecution for tax evasion. To compound matters, the voluntary disclosure program was designed only to assist taxpayers avoid prosecution for not reporting income. It was not designed to assist U.S. citizens with undisclosed offshore accounts. Even if they did not evade taxes, U.S. citizens with foreign bank accounts, which were not disclosed to the IRS, could face criminal prosecution. What is the holder of a UBS bank account or holder of an undisclosed foreign bank account to do? Given the uncertainty of entering into the voluntary disclosure program, it seems foolish to blindly file amended tax returns with the IRS in hopes of avoiding criminal prosecution. Instead, a holder of UBS account should have their attorney contact the local IRS district office. Without disclosing the account holder s name, the attorney should explain the facts and circumstances to the IRS to determine if the IRS will not agree not to prosecute. This disclosure should only be done with a high-level IRS official or counsel. If approved at this level, a disclosure may be made to the IRS. It should be noted that a disclosure at this level would not guarantee that the IRS would not seek criminal consulting with your tax attorney to discover the best strategy to handle your situation So You Just Lost Your Job. Can I Now Deduct My Job Hunting Expenses? By Anthony Diosdi In these difficult economic times more and more of us are forced to look for a new job. However, many of our readers will be surprised to learn that their job-hunting expenses may be deductible for income tax purposes. However there are two limitations our readers should be aware of before claiming a deduction for job-hunting expenses. First, the expense must be associated in looking for a new job in your present line of work. But, the deduction may be allowable even if you do not find a new job. However, the associated expense of looking for a new job in a new trade or business, even if a job is found, is not deductible. For example, if an attorney sought a position as an elementary school teacher, his associated job expenses would not be deductible. On the other hand, if an attorney decided to seek a position in a law firm, his jobhunting expenses may be deductible. The IRS has following job related expenses: 1) fees paid to employment agencies; 2) cost of mailing resumes; 3) legal fees related to reviewing an employment contract; 4) transportation costs to job interviews; 5) fifty percent of meals and entertainment expenses directly related to job search; and 6) out of town travel expenses including meals, lodging, and transportation, if the trip is primarily to look for a new job. If you are considering claiming your job related expenses as a deduction, it is very important you keep all documentation related to your job search. In addition, you should keep a detailed log of all job expenses incurred and the purpose of the expense. Documentation and logs will go a long way in substantiating the loss in the event of an IRS audit. The second limitation on Job expenses is the miscellaneous deduction rules imposed by the Internal Revenue Code. These rules limit deductions to the extent they exceed more than two percent of a taxpayer s adjusted gross income. In other words, job-hunting expenses are deductible only to the extent they total more than two percent of your adjusted gross income.

3 Page 3 I Disagree With the IRS Now What? By Anthony Diosdi and Anita Steburg The Internal Revenue Service (IRS) audits thousands of tax returns every year. In many cases, the IRS will make adjustments to a taxpayer s tax returns, which will result in an assessment of a tax liability. In many cases, this adjustment is substantial. If this situation happens to you, you essentially have two options. You can either pay the IRS assessment or you can litigate the IRS determination in a federal court. Most taxpayers are surprised to learn they can litigate their tax bill in one of three federal courts. These three courts are the United States Tax Court, Court of Federal Claims, and United States district court. In order to litigate a tax controversy before the United States Tax Court, the IRS must issue you a statutory notice of deficiency. A notice of deficiency consists of a letter stating the amount the IRS believes that you owe and a statement how the liability was computed. If you receive a notice of deficiency from the IRS, in most cases, you will only have ninety days to petition the United States Tax Court to review the IRS proposed assessment. If this is not done, in most cases, the IRS will likely assess and collect they re proposed assessment from you. Conversely, if you voluntarily pay the tax that the IRS claims is due before the issuance of a notice of deficiency, the Tax Court will be deprived of jurisdiction. However, you may make a deposit of the asserted deficiency to stop the running of interest without depriving the Tax Court of jurisdiction. The Tax Court is unique among the federal trial courts available for civil tax litigation. The Court consists of nineteen judges. These judges hear solely tax cases. As such, these judges are considered well qualified to hear and decide cases involving complex and technical tax issues. The Tax Court is located in Washington, D.C. However, the Tax Court travels to many cities across the United States to hold trials. The cases are tried before a judge and without a jury. If more than ninety days have lapsed since the issuance of the notice of deficiency, or a taxpayer has satisfied the liability in full, the Tax Court will be deprived of jurisdiction. In these cases, the only recourse of the taxpayer is to litigate their tax controversy in either a United States district court of Court of Federal Claims. It should be noted; no suit for refund of tax or penalties may be maintained in either of the aforementioned courts until the entire assessment is satisfied. In other words, a taxpayer cannot own even own one cent of back tax liability, interest, or penalties before filing a claim for refund. The exception to rule is in the case of employment taxes and responsible officer penalty assessments. In these cases, the entire deficiency need not be paid. Rather a divisible portion of the tax need only be satisfied. In these cases, the payment of the assessment with respect to a single employee for a single taxable period (a quarter) will be adequate payment on which to base a claim for refund. Once, the liability is satisfied in part or in full, a formal claim for refund must be filed with the IRS. Depending on the characterization of the tax liability at issue, a refund claim must be filed on a Form 1040X, 1120X, or Form 843. The claim must set forth in detail, verified under penalties of perjury, each ground upon which a credit or refund is claimed, and facts sufficient to apprise the IRS of the exact basis of the claim. Finally, no suit may be commenced until six months has elapsed of the filing of the claim for refund unless the IRS has rendered a decision. Once the above-mentioned time has elapsed, a taxpayer may commence suit in either the district court or the Court of Federal Claims within two years. If a taxpayer elects to have his or her case heard by the district court, it will be heard by a judge that hears a broad range of civil and criminal cases. The primary benefit of electing to have a case heard in district court is that the taxpayer may request a jury trial. If a taxpayer decides to have his or her case heard in the Court of Federal Claims. The taxpayer will not have the benefit of making an election for a jury trial. Continued on page 4

4 Page 4 More on when you disagree with the IRS from page 3 At first glance, most taxpayers would elect to have the United States Tax Court hear their case. This is because they do not want to satisfy the tax liability at issue prior to commencing litigation. Others may want to have the district court hear their case because of the ability of electing to have a jury trial. While these are factors that are important in deciding the proper forum to hear a controversy, precedent should be the predominant factor in choice of forum. In this regards, if the Court of Appeals for the taxpayer s Circuit has favorably addressed the question at issue or has a demonstrable approach to the type of case, this should determine which forum the case is brought before. In the absence of clear precedent at the appellate court level, precedent at the trial court level becomes controlling. Favorable precedent in any trial courts is obviously of primary importance. Nowhere has this become more apparent than with tax shelter litigation. In recent litigation of the Son of Boss Tax Shelter cases, there has been a wide range of different opinions in the circuits. For example, the Court of Federal Claims has stated that individual taxpayers who have participated in the Tax Shelter are liable for the penalties assessed by the IRS. On the other hand, various district courts throughout the country have held to the contrary. Clearly, a taxpayer litigating a penalty associated with a Son of Boss tax shelter would want a district court to hear the matter. The courts are divided in many other matters as well. For example, in the past, the IRS was able to assess a much higher interest rate on tax liabilities that was imposed on taxpayers participating in tax shelters. Taxpayers that want to contest the assessment of this interest are out of luck in the Tax Court and the district court in the Ninth Circuit of Appeals. (The Ninth Circuit Court of Appeals Court hears appeals from federal courts in California). These courts have stated that a taxpayer cannot contest the IRS assessment of this penalty interest. On the other hand, the Federal Court of Claims has determined that a taxpayer may litigate the assessment of the penalty interest. This split of authority in these cases demonstrates the importance of carefully researching a matter before deciding which court an action should be filed. In the absence of favorable case law, taxpayers should consider the temperament of the forum. Tax Court judges have a background in tax law and only hear tax cases. As such, they are accustomed to dealing with complex issues and rules comprising tax law. While they demand good faith compliance with the Court s rules, Tax Court judges are not unaccustomed to taxpayers representing themselves in court and will generally tolerate not experienced trial attorneys. On the other hand, district court judges hear a broad range of cases. However their calendars are overloaded. Thus, district court judges are becoming increasing impatient with inexperienced trial counsel or taxpayers without trial counsel. Finally, Court of Federal Claims judges tend to have backgrounds in tax. However, holdings of tax cases from this Court suggest it is more likely to consider equity issues. As such, this Court may be better suited to try cases, which are unusual. A taxpayer should also consider settlement procedures before moving forward with a case. A majority of the tax cases that start in litigation are settled without trial. However, the settlement procedures between the United States Tax Court, United States district court and the Federal Court of Claims differ greatly. In Tax Court, an IRS Appeals Officer and IRS counsel have the authority to settle cases prior to trial. The United States Department of Justice has sole authority to settle cases brought before the district court and the Federal Court of Claims. The advantage to attempting to settle a case with the IRS is the taxpayer s ability to work with the Appeals Division. The Appeals Division of the IRS may move more quickly and efficiently in settling a case. The Appeals Division is particularly efficient in cases involving reviewing documentation purported to substantiate deductions claimed on tax returns. As with any endeavor, the best results usually come with the application of the most relevant knowledge that is well thought out and planned to deliver the desired result. As such, it is recommended that a taxpayer discuss their options with an attorney before proceeding with a tax controversy.

5 Page 5 Deduct unlimited losses from Real Estate. By Anthony Diosdi The Law Offices of Stephen Moskowitz, LLP has seen a major increase in audits and one of the common red flags we are seeing are taxpayers deducting real estate losses against ordinary income. The Internal Revenue Code places constraints on netting real estate loss against income from other sources. As a general rule, a taxpayer cannot offset passive losses against wage, interest, or dividend income. The rental of real estate is generally a passive activity. However, Congress has promulgated special tax laws for passive losses associated with real estate rental income. Federal tax law provides that up to $25,000 of losses associated with real estate rental activities can be netted against ordinary income. The key to claiming real estate losses from rental property is to qualify by actively participating in rental activity. Active participation standards are met if you own at least ten percent of the rental property and have substantial involvement in managing the rental (defined as you spending more than 500 hours at the activity and no one else spending more hours in that particular real estate activity than you). If you are a limited partner in the real estate rental activity, you will not qualify for the deduction. The $25,000 special loss allowance is phased out by fifty percent if your modified gross income exceeds $100,000. It reaches zero by the time your income hits $150,000. The ideal scenario may be to take unlimited losses against ordinary income. For tax purposes, people who meet eligibility requirements are able to deduct against ordinary income (wages, dividends, interest, etc) real estate losses in unlimited amounts, a departure from the general rules, which would prohibit this. To qualify for this unlimited tax deduction a taxpayer must meet the tax requirement known as being a real estate professional. For tax purpose, qualifying as a real estate professional means that either you or your spouse: Must materially participate rental real estate activities. in the More than fifty percent of your time spent working during a calendar year must be performed in a real estate trade or business in which you materially participate. Must spend more than 750 hours of service during a calendar year performing real estate rental activities. It is extremely important that you keep a timely log of all activities performed in real estate. The IRS will likely challenge logs prepared after the fact with ballpark estimates. Therefore, detailed logs are extremely important to substantiate your participation in the real estate rental market to the IRS in the event of an audit.

6 Page Individual Income Tax Preparation We hope that your 2009 is off to a good start. We now invite you to take a proactive approach to your tax obligations in light of our personal and business goals Tax Preparation Financially volatile 2008 is over and the tax season is rapidly approaching. The deadline to file your individual income tax returns, barring an extension, is April 15, During the coming weeks, you will be receiving various tax forms from your employers, banks, mortgage company, etc, that will be needed to prepare your 2008 income tax returns. Further, as you may know, Congress passed the Emergency Economic Stabilization Act of 2008 after the initial three-page bail-out bill ballooned to more than 400 pages with the inclusion of provisions on energy, disaster relief, the alternative minimum tax, and expiring tax breaks. The tax portion of the new law increases the 2008 exemption amounts for the alternative minimum tax, extends through 2009 the deductions for state and local sales taxes, tuition expenses, and teacher s out-of-pocket expenses, and extends the provision allowing older taxpayers to make tax-free contributions of IRA funds to charity. Credits and deductions for energy-saving investments are extended, and the business credit for research and development expenses is modified and extended through Please contact our tax department administrator, Erin Meadors at (415) or emeadors@stevemoskowitz.com to make arrangements to retain our firm for 2008 tax preparation and future tax planning services. Statute of Limitations regarding Individual Tax Refunds Federal: If you believe that you are due a tax refund from the Internal revenue service for tax year 2005, you have until April 15 th, 2009, to file your 2005 tax return and still get a federal tax refund. If you file your 2005 return after April 15 th, 2009, your refund expires. As such, you will never receive it and it will not be credited to any other year. State of California: If you believe you are due a tax refund from the state of California for tax year 2004, you have until April 15 th, 2009 to file your state return to be eligible for the state refund. Generally, the California statute of limitations to collect the refund expires four years after the tax return was due. Please contact our tax department administrator, Erin Meadors at (415) or emeadors@stevemoskowitz.com to make arrangements to retain our firm for back tax preparation and tax planning services.

7 Page 7 Financial Stress, Facing Foreclosure. There may be help coming from the IRS. By Internal Revenue Service: WASHINGTON The Internal Revenue Service said Tuesday it would try to make it easier for homeowners in financial straits to refinance or sell their homes. The plan announced by IRS Commissioner Doug Shulman would speed up a process where financially distressed homeowners may request that a federal tax lien be made secondary to liens by the lending institution that is refinancing or restructuring a loan. Taxpayers will also be able to ask the IRS to discharge, or remove, its claim to a property in certain circumstances where the property is being sold for less than the amount of the mortgage lien. "We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," Shulman said, stressing, "We don't want the IRS to be a barrier to people saving or selling their homes." He said the program would focus on those people who ordinarily pay their taxes in full but "because of these extraordinary times are getting behind in their tax payments." A tax lien occurs when the government makes a legal claim to property as security or payment for a tax debt. The government thus notifies other creditors that it has a claim on the property. The IRS can rule that its lien will be secondary to another lien, such as that of a lending institution, if it determines that taking a subordinate position will ultimately help with the collection of the tax debt. Taxpayers or their representatives may apply for a "subordination" of a tax lien if they are refinancing or restructuring their mortgage. Lending institutions generally want their lien to have priority on the home being used as collateral. Taxpayers may also request a certificate of discharge if they are giving up ownership of the property at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. A discharge does not relieve a person of the tax that is owed, but it does remove the lien on a particular property such as a home. The IRS would still maintain its lien on other possessions of the taxpayer. Normally it takes about 30 days to rule on a request for a discharge or subordination of a tax lien, but Shulman said the IRS will work to speed up that process so there would be no delays for people trying to obtain new mortgage loans. The IRS urged people to contact the agency's Collection Advisory Group early in the home sale or refinancing process. The agency said it issues more than 600,000 federal tax lien notices annually and that currently there are more than 1 million outstanding tax liens tied to both real and personal property.

8 Page 8 P e r s o n a l N o t e f r o m S t e v e M o s k o w i t z : We have the skill and expertise to advise everyone from individuals to large corporate clients in matters of tax planning; civil and criminal tax controversy, litigation, and all other tax matters. Intelligent tax planning requires a long-term strategy, with frequent reviews and adjustments along the way. For guidance that can help you keep your taxes as low as the law allows, call us now. I hope that 2009 and the future brings you good health and prosperity. Please keep me in mind should you have any legal issues troubling you. I would be happy to speak with you in person or on the telephone and put my thirty-five years of experience to work for you. We appreciate your business and We look forward to working with you in T a x T i p For 2008, the regular annual contribution limit to a Traditional or Roth IRA (if eligible) is $5,000. If you are age 50 or older) as of December 31, 2008), you can make an additional catch-up contribution of up to $1,000, for a total contribution of $6,000. All contributions must be postmarked by Wednesday, April 15, LAW OFFICES OF STEPHEN MOSKOWITZ, LLP 180 MONTGOMERY STREET, SUITE 1950 SAN FRANCISCO, CA Phone (415) Fax (415)