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What is a 1099-A?

February 16, 2015 by admin

Steven A. Leahy
What is a 1099-A?

By Steven A Leahy

For the last several weeks we have been discussing 1099-Cs on The IRS Radio Hour. Any discussion of 1099-Cs naturally leads to the question – What is a 1099-A? This post will address that question.

As we discussed, 1099-C is a tax record sent by financial institutions to debtors when the lender forgives or cancels a debt in excess of $600.00. A 1099-A Acquisition or Abandonment of Secured Property is a related document for “[c]ertain lenders who acquire an interest in property that was security for a loan or who have reason to know that such property has been abandoned.” Generally, a taxpayer will receive this form in the mail after losing a property to foreclosure, or an automobile to repossession. Often, a taxpayer will receive both a 1099-A and 1099-C.

There is a lot of confusion out there on exactly which tax document a lender should send out. That’s why there isn’t consistency. Some lenders will send out a 1099-A after a foreclosure; others will send out a 1099-C; still, others will send out both forms, just to cover themselves. Some lenders may send a 1099-A first, to report the foreclosure to the IRS, and a 1099-C later, to document the decision to cancel the debt. It is vital that these documents are treated correctly for tax preparation purposes. A mistake may result in tens of thousands of dollars in IRS liabilities.

1099-As contain three important pieces of information, found in Boxes 2, 4 and 5. First, Box 2 reports the principal loan balance. Box 4 reports the fair market value (FMV) of the foreclosed property (generally, the price the house sold for at the foreclosure auction). Finally, Box 5 reports whether the taxpayer is personally liable for repayment: recourse vs. non-recourse. The very same exceptions and exclusions available for 1099-C income, are available for 1099-A income. Notably, Title 11 (bankruptcy), “Insolvency Exclusion,” and the exclusion offered by the Mortgage Forgiveness Debt Relief Act (MFDRA).

Some important information regarding the tax implications are not included on Form 1099-A. If the property that was lost was an investment property, rather than the taxpayers principle residence, the taxpayer will also need to supply the basis for the property ((Cost + improvements) – depreciation) in order to calculate the tax implications. Investment property losses may be fully deductible.

The key to excluding or exempting 1099-C debt forgiveness, and 1099-A property abandonment, from taxable income lies in tax preparation. If a taxpayer qualifies for an exception or exemption and fails to prepare the appropriate IRS forms, the IRS will complete an examination and assess a deficiency for that tax year. In addition to attaching the 1099-A or 1099-C to the taxpayer’s tax return, often IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness is also required. Form 982 is used to determine the amount of discharged indebtedness that can be exempted or excluded from gross income.

If you are considering hiring a tax professional to complete your 2014 tax return, consider giving Opem Tax Resolutions and The Law Office of Steven A. Leahy, PC a call. We prepare old unfiled tax returns, as well as current returns. So, if you are a number of years behind in your filing, we can help get you in compliance with the IRS. Call (312) 664-6649 today and ask Bonnie to set up a time to talk me about your tax returns.

If you have an ongoing IRS problem – installment agreement, recent offer-in-compromise or currently not collectible status I recommend the IRS Protection Plan offered by Opem Tax Resolution and the Law Office of Steven A. Leahy, PC. This program anticipates the tax compliance requirements including, timely tax preparation, on-going IRS monitoring, resolution of IRS actions (cancellation of installment agreements or currently not collectible status and defaulting an offer in compromise). In addition, developing a relationship with a tax team will give you access to tax planning to avoid IRS problems in the future and minimize your tax burden.

Three Tax Preparer Scams

February 4, 2015 by admin

Steven A. Leahy
Three Tax Preparer Scams

By Steven A Leahy

My last several posts addressed who should and shouldn’t prepare their own tax returns. Remember, for the majority of people, preparing your own return makes sense; it may save you money, allows you to maintain control and may increase your understanding of your financial situation. But preparing a return isn’t right for everyone.

In my office we have run into three common tax preparer scams that can raise red flags with the IRS. First, the most common: promises of large refunds. Second, the 1099 OID scam and finally, the ID theft scam.

The most popular tax preparation scam involves the tax preparer promising larger returns than other tax preparers. Many of these preparers charge a very high fee, or a percentage of the refund. Both of these fee structures should alert you that something is amiss. They achieve these high refunds by playing with your tax return numbers. They may include income that was never earned, claiming expenses you did not pay, or otherwise manipulating the tax return to qualify for earned income tax credits you are not qualified for.

The second scam involves filing false 1099 OID (Original Issue Discount) forms. The scam artist convinces the taxpayer that there is a secret fund held by the Treasury Account for an amount equal to the face amount of any debt they hold, including credit card and mortgage debt. To lend legitimacy to the scam, the scammer contends the government went bankrupt in 1933 and made all Americans chattel of the government’s creditors at birth, evidenced by their birth certificate. The scammer alleges that the government guarantees all your debts and the taxpayer need only apply through their tax return to access the hidden account.

By completing their tax returns and including 1099 OID for the full amount of all debt, including tax debt, sometimes amounting to hundreds of thousands of dollars. The real problem with this scam is – it works! The IRS sends the taxpayer a large refund check. The check tends to confirm the legitimacy of the scam. After much of the funds have been spent, the IRS comes looking to the taxpayer and the funds received from the fraudulent scheme.

Taxpayers will be on the hook for these first two scams, because they sign the return under penalty of perjury. These scams can lead to significant penalties and interest, and the possibility of criminal prosecution. So, before you sign a return, review your tax return, ask questions about entries you don’t understand – and NEVER sign a blank return. A reputable tax preparer will sign the tax return and provide you a copy.

Finally, let’s review identity theft and tax return preparation. There are two forms of identity theft to worry about: tax fraud through the use of identity theft and the tax return preparer using your personal information after preparing your tax return. Tax fraud through the use of identity theft tops the IRS’s list of top tax scams. This type of fraud occurs when someone uses a taxpayer’s personal information to fraudulently file a tax return and claim a refund.

The second type of identity theft is when your tax preparer uses your personal information to obtain credit in the taxpayer’s name, after the taxpayer willing provided the tax preparer with all the information they need to commit fraud. The IRS has more than 3,000 employees working on identity related cases.

The lesson here is to know your tax return preparer. If you are considering hiring a tax professional to complete your 2014 tax return, consider giving Opem Tax Resolutions and The Law Office of Steven A. Leahy, PC a call. We prepare old unfiled tax returns, as well as current returns. So, if you are a number of years behind in your filing, we can help get you in compliance with the IRS. Call (312) 664-6649 today and ask Bonnie to set up a time to talk me about your tax returns.

If you have a ongoing IRS problem – installment agreement, recent offer-in-compromise or currently not collectible status I recommend the IRS Protection Plan offered by Opem Tax Resolution and the Law Office of Steven A. Leahy, PC. This program anticipates the tax compliance requirements including, timely tax preparation, on-going IRS monitoring, resolution of IRS actions (cancellation of installment agreements or currently not collectible status and defaulting an offer in compromise). In addition, developing a relationship with a tax team will give you access to tax planning to avoid IRS problems in the future and minimize your tax burden.

IRS – Fresh Start Initiative

November 26, 2014 by admin

Steven A. Leahy
IRS – Fresh Start Initiative

By Steven A Leahy

In 2011, the IRS implemented a new program to help taxpayers pay back taxes and avoid tax liens. The IRS calls this new program the Fresh Start Initiative. “This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,” Said former IRS Commissioner Doug Shulman. “It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”

The “Fresh Start” initiative changed several important IRS programs. The program was directed to help taxpayers with installment agreements, Offers-in-Compromise & tax liens. The Fresh Start initiative expanded streamlined installment agreements. Installment agreements allow taxpayers to pay the IRS over time. Streamlined agreements remove the cumbersome disclosure requirements that normally apply to IRS installment agreements. The IRS program increased the threshold for total tax debt from $25,000.00 to $50,000.00. The number of installments acceptable from the IRS was increased from 60 months to 72 months. These two changes provide much relief to a very large number of taxpayers.

The Fresh Start initiative also changed the Offer-in-Compromise program. An Offer-in-Compromise is an agreement that allows taxpayers to pay less than the full amount due in order to settle their IRS obligation. The initiative gave the IRS more flexibility when calculating a taxpayer’s “reasonable collection potential.” The amount the IRS will accept for an Offer-in-Compromise depends on three major factors – the taxpayer’s monthly disposable income, the multiplier, and the taxpayer’s assets. The reasonable collection potential is calculated: (taxpayer’s monthly disposable income) x (the multiplier) + (value of assets).

Disposable income is the difference between a taxpayer’s income and their expenses. The IRS uses national standards when calculating expenses, not the taxpayer’s actual expenses. Historically, the IRS did not consider many of the taxpayer’s actual debts. Under the initiative, the IRS will now allow taxpayer’s to deduct student loan payments and monthly payments for state and local delinquent taxes. The national standards now also include a “miscellaneous” allowance. The miscellaneous allowance can be used for credit card payments and other debts that were previously not considered. The additional expenses will reduce the calculated monthly disposable income.

The biggest change concerns the multiplier used to calculate the amount the IRS will settle the debt. Once a taxpayer’s disposable income is calculated, the IRS uses the multiplier to calculate the cash component. If the taxpayer can pay the lump sum in five or fewer months, the IRS multiplier was 48 (4 years). Now, that multiplier is 12 (1 year). If the taxpayer can pay in 6 to 24 months, the multiplier was reduced to 24 (2years) from 60 (5 years). The decreased multipliers significantly reduce the reasonable collection potential calculated to settle an IRS obligation.

The asset calculation has also been reduced. The IRS will use 80% of the value of assets, overlook some dissipated assets and forego any equity in income producing assets in calculating the asset portion of the offer-in-compromise. All of these changes have the effect of lowering the calculated “reasonable collection potential.”

Finally, the Fresh Start initiative changed IRS policy concerning Tax Liens. A Federal Tax Lien secures the IRS’s interest in property when a taxpayer fails to pay their tax obligation and alerts creditors of the government’s claim. The initiative increased the tax obligation to $10,000.00, from $5,000.00 before the IRS will file a federal tax lien (in most cases). The initiative also made it easier to remove a lien. For example, if the outstanding tax obligation is less than $25,000.00 (even if you paid down your obligation to under $25,000.00) and you agree to an installment agreement to pay the full amount through a direct debit agreement, the IRS will agree to withdraw the Federal Tax Lien. But, the taxpayer must be in full compliance with other filing requirements, made 3 consecutive monthly payments and there wasn’t a previous default.

The IRS Fresh Start Initiative may be just what you need. To find out if this program will work for you, you should give me a call. We can discuss your all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

IRS Madness – Reefer Rules

November 21, 2014 by admin

Steven A. Leahy
IRS Madness – Reefer Rules

By Steven A Leahy

On Tuesday, November 4, 2014, Oregon, Alaska and the Washington D.C. made recreational use of marijuana legal. Twenty-one other states allow medical use of marijuana. Illinois now accepts applications from patients for the “Medical Cannabis Pilot Program.” Businesses have sprung up around the country to accommodate the new demand. But the federal government has laws against marijuana – and the IRS enforces those laws through our tax policy. This article will examine our tax laws as applied to those in the “Canabusiness.”

IRS Code Section 280E “prohibits taxpayers[] from deducting any expense of a trade or business that consists of the trafficking of a controlled substance such as marijuana.” Section 280E was drafted in response to a 1974 case involving a Minneapolis drug dealer. After his arrest, the IRS audited him and assessed taxes based on his drug deals. The convicted drug dealer reduced his tax burden by deducting his drug dealing expenses. He included traveling expenses, rent, telephone, equipment, etc. Congress decided to close the drug dealer loop hole and adopted 280E.

Now that states and jurisdictions have legalized the recreational use of marijuana and have permitted medical use of marijuana the tax laws have changed, right. Well not exactly. Under the federal Controlled Substances Act, Marijuana is still a “controlled substance.” The United State Supreme Court has held that “no exception in the Controlled Substances Act exists for marijuana that is medically necessary.”

A number of cannabis dispensaries have found out what this apparent contradiction means. Early on, the IRS interpreted the prohibition to mean that cannabis dispensaries are not permitted any deductions for income tax purposes, including the cost of goods sold. That means dispensaries would be taxed on the gross sales rather than net sales. In a 2012 case heard by the Tax Court in California, Judge Kroupa narrowed that interpretation, holding that the cost of goods sold (COGS) “is not a deduction [] but is subtracted from gross receipts in determining a taxpayer’s gross income.” Therefore, COGS can be used by cannabis dispensaries to reduce taxable income. Other expenses (wages, rent, utilities, etc), however, are deductions and prohibited to cannabis dispensaries under the code. Obviously, the loss of any deduction can make a big difference at tax time.

To add to the burdens of cannabis dispensaries, the IRS assesses a 10% penalty on businesses that pay their federal employee withholding taxes in cash, according to the Denver Post. The Controlled Substances Act also prohibits banks from doing business with cannabis dispensaries. The Justice Department and Treasury have changed some regulations to address the concerns of the banking industry. But the banks are still not comfortable with the change of regulations without a change in the law.

Frank Keating, president of the American Bankers Association said “While we appreciate the efforts by the Department of Justice and FinCEN, guidance or regulation doesn’t alter the underlying challenge for banks.” He continued, “as it stands, possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.”

The banking rules create other problems for cannabis dispensaries. For example, dispensaries can’t get credit card processing accounts, checking accounts or saving accounts. The lack of banking services means the dispensaries deal as a cash business. The large amounts of cash create security problems and IRS reporting concerns.

Those in the canabusiness have been struggling with these IRS problems. If you have IRS problems, you should take action. You need an attorney to help you sort through your options and choose the best remedy. Before you do anything, you should give me a call. We can discuss all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

IRS Bankruptcy Chapter 7

August 27, 2014 by admin

Steven A. Leahy
IRS Bankruptcy Chapter 7

By Steven A. Leahy

There are six things you can do if you owe the IRS money. First, you can simply write the IRS a check for the full amount. For many, that is simply not a realistic option. Often, if the tax obligation is not too significant, borrowing money from another source (friends, family, bank loan, credit cards, etc.) may be a less costly alternative than an installment agreement with the IRS. Second, you can enter into an Installment Agreement; pay the IRS over time. Third, you can obtain an Offer-in-Compromise: A lump sum settlement for less than the tax owed. Fourth, you can be declared Currently Not Collectible; pay the IRS nothing (for a period of time). Fifth, you can file for protection under the bankruptcy code. And the last option – you can do nothing, and let the IRS do what they will to you, your family and your assets.

This article addresses the fifth option – Bankruptcy. The Bankruptcy Code is found in United States Code: Title 11. Think of the Bankruptcy Code as a book, and like other books, it is divided into chapters. That’s why you hear so much about Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, or Chapter 15. Each chapter has a different remedy for a different situation. Chapter 7 is titled “Liquidation,” Chapter 9 “Adjustment of Debts of a Municipality,” Chapter 11 “Reorganization,” Chapter 12 “Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income,” Chapter 13 “Adjustment of Debts of an Individual with Regular Income,” and Chapter 15 “Ancillary and Other Cross-Border Cases.” Generally, individual taxpayers rely on Chapter 7, Chapter 11 or Chapter 13.

This article will focus on the first kind of bankruptcy available for individual taxpayers, IRS Bankruptcy Chapter 7 “Liquidation.” Taxpayers who file Bankruptcy are referred to as “Debtors.” Under IRS Bankruptcy Chapter 7 all the Debtor’s assets, above a certain level of exemptions allowed by law, are sold and the proceeds of that sale are used to pay their creditors all or a portion of what the creditor’s claims are. In a vast majority of cases, there are not any assets above the exemptions allowed by law. So, most Debtors don’t lose any assets, but most of their debts are discharged. Not all debts are dischargeable – for example, past due child support, student loans, government fines and recent taxes are not dischargeable in bankruptcy, but most other debt is.

While recent taxes and some specific types of taxes (e.g. Trust Fund Recovery Penalty, excise taxes, etc.) are never dischargeable, some tax debts are dischargeable. There are three important dates to remember if you are trying to discharge IRS tax debts in bankruptcy. First, the due date for filing the tax return in question must be more than three years before the date of the bankruptcy filing. Second, the tax return in question must have been filed at least two years before the date of bankruptcy filing. Finally, the tax claim must have been assessed more than two-hundred and forty days before the date of the bankruptcy filing.

The taxpayer’s conduct may also come into question. In order to discharge taxes in bankruptcy, in addition to the time criteria, the Debtor must not have filed a fraudulent return or willfully tried to evade taxes.

Discharging taxes in bankruptcy can be very complicated. For example, there are events that may extend the dates discussed here; there may be questions about exactly when a return was “filed” or when a tax was “assessed.” Objections may be raised about whether the document filed meets the technical definition of “Tax Return,” or whether the taxpayer’s conduct to evade taxes was “willful.”

This is just a general overview. If you owe the IRS and are unable to pay the full tax obligation immediately, bankruptcy may be your best option. Never hire a firm to help you with your IRS problem unless the firm is experienced in helping taxpayers use the bankruptcy code to protect them from the IRS. Before you do anything, you should give me a call. We can discuss your all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

What is a 1099-A?

Three Tax Preparer Scams

IRS – Fresh Start Initiative

IRS Madness – Reefer Rules

IRS Bankruptcy Chapter 7

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