The Downside on the IRS Using Private Collection Agencies (PCA)

The IRS was to begin using PCA’s on a limited basis starting in April of this year. Our firm has yet to run across anyone who has had direct contact with one of the PCA’s. The National Taxpayer Advocate, Nina Olson, expressed her concern to congress in July about the IRS straying too far from the intent of the original legislation: IRC §6306 that was enacted in 2004 and amended in 2015 to restrict the IRS to outsourcing only inactive tax debts, and only those collections authorized by congress.

Under §6306, PCA’s are allowed to do three things; locate and contact a delinquent taxpayer, try to collect the full balance or enter the taxpayer into an installment agreement not to exceed five years, or obtain financial information from the taxpayer. Nina Olson believes that the IRS’s current Private Debt Collection (PDC) initiative is exceeding the authority of §6306 by allowing PCA’s to stretch the installments period to seven years, and allowing the PCA’s to monitor the six or seven year agreements and to receive commissions from the payments. “This is not authorized by IRC §6306,” Nina Olson, Private Debt Collection Program, July 5, 2017.

Of particular interest are the commissions arrangements included in the IRS’ PDC initiative. Under the current program the IRS can keep up to 25% of these collections without depositing the amounts into public coffers. The PCA’s can also be authorized to keep up to 25% for themselves. This effectively keeps up to 50% of the collections from this program out of the public coffers. One must also consider that when a tax debt ages, the total debt including penalties and interest will be at least twice the original unpaid tax amount.

Another major departure from protocol is that the IRS is not requiring the PCA’s to gather financial information before attempting to collect, which is standard procedure used by the IRS Collections unit. By not first gathering financial information, the PCA might end up pressing taxpayers into making installment payments, when the taxpayer may be experiencing an economic hardship; having trouble meeting basic living expenses. Some PCA scripts guide their collectors to encourage liquidation of assets or retirement accounts, or suggesting ways to borrow from other sources to repay the tax debts. Those encouragements, when made by an IRS specialist who has already evaluated the taxpayer’s financial status, are within the rules, but without PCA’s being held to the same standards, there is bound to be some abuse of taxpayer rights.

The answer on the demand side would appear to be to train and monitor the PCA employees. Whether that will happen is unclear at this time. If you, or someone you know is approached by a Private Collection Agency working for the IRS, it would be wise to contact a firm such as ours that specializes in representation so that the rights of the taxpayers can be upheld, because the PCA is not out to help anybody but themselves.

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Important Benefits for Employers in Qualified Hurricane Zones

Under Internal Revenue Code Section 139, employers can provide tax-free disaster assistance to employees. “Gross income shall not include any amount received by an individual as qualified disaster relief payment.” That means the employee will not pay withholding or employment taxes on the amounts received. The employer is allowed to expense the qualified disaster relief payments. Qualified payments would be for reasonable and necessary personal, family, living or funeral expenses incurred as a result of the qualified disaster.

Recent legislation included in the Disaster Tax Relief and Airport and Airway Extension Act of 2017 https://www.congress.gov/bill/115th-congress/house-bill/3823 also provides for a 40% “Employee retention,” tax credit on the first $6,000 of disaster wages, for a credit of up to $2,400 per employee. The regulations and specific guidance has not yet been made public.

If you are an employer within the disaster area, and your employees reside within the disaster area, and your business lost power for a week, yet you continued to pay the salaries of your employees, the legislation affords you the opportunity to take a tax credit for 40% of each employee’s salary for the period the business was impacted by the disaster up till the date operations were resumed, or until January 1, 2018, whichever comes first.

There are always exceptions, special circumstances, and restrictions where the affected employee has already taken advantage of another employment-related benefit. Contact your licensed tax professional or Payroll Company for more details as this legislation works its way to regulation and IRS guidance.

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Hurricane Relief for Casualty Losses

On September 29th President Trump enacted the Disaster Tax Relief and Airport and Airway Extension Act of 2017 https://www.congress.gov/bill/115th-congress/house-bill/3823. Among many other benefits, the act provides for relaxed rules pertaining to Casualty Losses. The IRS has not yet issued specific guidance on all of these matters. This blog focuses on claiming Casualty Losses under the relief rules.

In short, be sure to save any receipts for repairs that are a direct result of the storms because more generous Casualty Loss regulations will come into effect.

Normally, to claim a casualty loss the amount of out-of-pocket expenses that exceed insurance reimbursements must be greater than 10% of your adjusted gross income, plus an additional $100. Under the Act the 10% of AGI requirement is eliminated. The $100 floor is raised to $500.

The old rule is: 10% of AGI + $100 = floor for claiming a casualty loss as an itemized deduction on Schedule A. Assume you spent $10,000 on hurricane repairs and the insurance company gave you $7,000. That leaves $3,000 – $100 floor = casualty loss of $2,900. The $2,900 must now be greater than 10% of your AGI to make a claim on Schedule A.

The act makes it legal to make the claim as long as your casualty loss is greater than the new floor of $500. In our example, the taxpayer can claim $2,500 ($3,000 – $500 floor = $2,500 claim) regardless of their AGI.

The act also eliminated the need for the taxpayer to itemize deductions on Schedule A in order to get the special relief. The casualty loss is supposed to raise the standard deduction by the amount of calculated loss. Exactly how the IRS will regulate that has not yet been made clear.

What is clear is that, like money in the bank, you need to keep all records of hurricane-related expenses because the IRS guidance will be forthcoming. Provide your casualty loss numbers to your licensed tax professional with your other 2017 tax information.

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What is and Enrolled Agent (EA)?

Many CPA and tax offices employ Enrolled Agents but few outside of the tax industry understand what an EA is.

An Enrolled Agent is the only federally licensed tax professionals who are able to practice before the IRS in all matters. Attorneys and CPA’s are licensed by their states. EA’s can also represent clients before the US Tax Court after passing a procedural examination. The EA program is promulgated by the IRS. Although many EA’s work at the IRS, most do not. According to the National Association of Enrolled Agents there are approximately 48,000 practicing EA’s in the United States.

The position of Enrolled Agent was created after the Civil War as a response to rampant fraud involving war claims; mostly for horses lost in the war. It seems that claims for lost horses were substantially more than the entire US population of horses, alive or dead. Once citizens found out they could file a claim for a lost horse they sought out someone who could help them. Offices of make-shift claims preparers became common; not unlike crooked tax preparers today who pad tax returns with false claims.

The catchier phrase for the legislation is the “Horse Act of 1884;” signed into law by President Chester Arthur. After the proper training an agent could now be enrolled to be trusted to at least complete tax claims accurately.

The Revenue Act of 1913 greatly expanded the scope of the Enrolled Agent from that of clerk to include the authority to make claims for monetary relief for citizens who were having tax problems. As the tax codes grew and became more complex the expertise and responsibilities of the Enrolled Agent grew to keep pace. In many tax-related situations today’s EA’s exhibit skills on par with CPA’s and Attorneys.

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Upswing in Tax-related Scams

We read it in the industry blogs, get warnings in IRS notifications but it’s still surprising at how pervasive tax scams have become. When you get one, recognize it for the scam it is, and delete it immediately. Go about your business and unless they somehow get some of your money, informing the authorities will likely do little good.

In the last two weeks telephone scams have hit my wife twice, me once and last Friday one of our business office numbers was contacted and threatened. They use words like Income Tax Evasion, Warrant, Indictment, Summons, and that you had better call now, (or tap the attachment for your court date – in the case of an email) or “The cops,” will be coming for you.

All of these latest messages used automated voice technology, probably to hide their accents and sound official, but their diction still gives them away; “We will send the cops,” sounds like something they learned from TV.

The IRS will use a mailed Notice or Letter to make first contact with you if they have questions. Tax Evasion is a very serious and criminal offence which is difficult to prove in most cases. Because it is difficult to prove, smaller operators who fail to report income and get caught usually get the Civil Fraud penalty; 75% of the tax due on the income not reported. Civil Fraud requires much less work on the part of the IRS and achieves most of the same objectives; collects unpaid tax, punishes, and encourages future compliance. If you are a high-roller and the IRS has reason to believe there is a pattern of income tax evasion you might receive a visit from the criminal investigation division prior to any phone calls.

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Hurricane Hardship Withdrawal from 401K Warning

If any of our Florida clients are planning to, or have withdrawn money from your employer-sponsored retirement account under the hardship provisions as a result of Hurricane Irma, please consider what it means to withdraw money that is taxable. Although the early withdrawal penalty will not apply in the case of a hardship withdrawal, the amount will add to your taxable income; thus increasing your 2017 tax amount.

If you are using the Obamacare Advanced Premium Payments, making a hardship withdrawal from your 401k or other employer-sponsored retirement account will increase your family income for the year, and may result in you having to return some of your Obamacare money; called an Excess Advance Premium Repayment. Many of our clients already know what an unwelcome surprise this is. If you do not plan accordingly, you may owe both a higher tax, and have to return some of your Obamacare Premiums too.

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Ruling on Inversions

Friday, a Texas court ruled against Obama Treasury Department efforts to punish US companies that move overseas to reduce their US taxes; known as an inversion.

The argument brought by the US Chamber of Commerce and the Texas Association of Business asserted that the IRS rule was “Arbitrary and capricious,” because there was no opportunity for comment and that violated standards required for rulemaking. Because the rule would have been substantive or legislative, a notice and comment period is required.

Like a wrench into the gears, the rule, however temporary, did have the effect of ruining the $160 billion combination of Ireland’s Allergan and US drug maker Pfizer.

The Treasury continues to take measures intented to discourage inversions that often involve a US company buying a smaller company in a foreign country that has lower corporate taxes.  It also remains to be seen whether President Trump’s efforts at corporate tax reform will pass in some form, or what impact those efforts will have in the US.

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IRS Issues Final Regs for Gambling Reporting and Withholding

If you win $5,000 or more, or your winnings are at least 300 times as large as the amount you bet, you will get a W-2G, have taxes withheld, and be required to report your winnings as taxable income.

Multiple wagers on a single ticket are combined as one amount for tax purposes. This change is intended to reduce fraud because winning bets on a single ticket are reduced by the losers on the same ticket, and in the case of electronic tickets, losing tickets collected from others can not be combined with the winners. In the past, with paper tickets, payers collected information reflected on multiple tickets.

The statute does not however determine the amount of the wager for exotic bets like a Straight, Perfecta or Trifecta. This represents a small change that may actually result in lower withholding than in the past.

Gambling losses are an itemized deduction and can only be claimed up to the amount of your winnings. If you do not itemize, then your losses must be larger than your standard deduction before they make any difference in your taxes; $6,300 for single, $12,600 for married or qualifying widower, $9,300 for head of household. That means if you do not itemize, win $5,000 and hand your tax professional $5,000 of losing tickets, it won’t do you any good unless you have other itemized expenses to add.

If you try to game this, you’ll want to reference IRS Reg. § 31.3402(q)-1, Reg. § 31.3406(g)-2.

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IRS Relaxes Rules for Using IRA Money for Disaster Victims

The IRS has relaxed rules for borrowing from employer-sponsored plans like 401(k)s and similar plans like 403(b) and 457(b) for victims of the recent hurricanes. You may also qualify to take advantage of a hardship distribution. Participants who live or work in disaster areas should be able to access their money with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affect employees who take hardship distributions will not apply.

Details and criteria can be complex. If you need to free up some of your retirement money for recovery start by contacting your plan administrator. For more information from the IRS go here: https://www.irs.gov/newsroom/like-harvey-retirement-plans-can-make-loans-hardship-distributions-to-victims-of-hurricane-irma

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IRS Announces Hurricane Irma Extensions

Hurricane Irma victims in parts of Florida and elsewhere have until January 31, 2018 to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out on October 16, and businesses with extensions that run out September 15.

The IRS is offering this relief to any area designated by the FEMA as qualifying for individual assistance; currently includes Broward, Charlotte, Clay, Collier, Duval, Flagler, Hillsborough, Lee, Manatee, Miami-Dade, Monroe, Palm Beach, Pinellas, Putnam, Sarasota and St. Johns Counties. Parts of Florida, Puerto Rico and the Virgin Islands are currently eligible, but taxpayers in localities added later to the disaster area, including other states, will automatically receive the same filing and payment relief. You can go to the Disaster Relief page at irs.gov for more information; https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

The tax relief postpones various tax filing and payment deadlines that occurred starting on September 4, 2017 in Florida and September 5, 2017 in Puerto Rico and the Virgin Islands. As a result, affected individuals and businesses have until January 31, 2018 to file and pay any taxes that were originally due during this period.

This includes the September 15 and January 16 deadlines for quarterly estimated tax payments (for Form 1040). Please note that because your 2016 individual tax was technically due on April 18, 2017, that those payments are not eligible for this relief – you can file late (Jan. 31 instead of Oct. 15) and not receive a late filing penalty, but you will still receive the late payment penalty if it turns out that you owe.

Businesses should refer to the IRS Disaster Relief page or contact your licensed tax practitioner because a variety of tax returns and tax deposits are affected. Of major concern and relief, the corporate, partnership, tax exempt, quarterly payroll and excise tax returns are extended.

The IRS is waiving late deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period. Check out the Disaster Relief page for the time periods that apply to each jurisdiction. If you are able to make these deposits we strongly advised that you do so as soon as you are able because if you get behind the bills just pile up and can become a crippling liability. In our industry we say, “It’s the easiest loan to take out, and the hardest to pay back.”

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. You do not need to contact the IRS to get this relief. If you receive a Notice pertaining to a filing or deposit affected by this relief you should call the number on the Notice to have the penalty abated.

Keep all records of expenditures related to your Irma related repairs for the Casualty Loss claim on your 2017 tax returns. Unfortunately the cost of evacuating does not qualify as replacement. Form more information see IRS Publication 547; Casualties, Disasters, and Thefts available here: https://www.irs.gov/pub/irs-pdf/p547.pdf and pay special attention to the “main home in disaster area,” part on page 11/18.

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