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IRS 1099-A 1099-C Confused Yet?

by

Steven A. Leahy

IRS 1099-A 1099-C Confused Yet?

It’s tax season. Each year, at tax time, many taxpayers receive a 1099 A or a 1099 A and have no idea how to handle them. So, many just ignore the forms and go about filing (or not filing) their tax return. This is a BIG mistake!

Form 1099 C – Cancellation of Debt – is a form used by financial institutions to report cancelled debt to the IRS. “Cancelled Debt” is debt that has been cancelled or forgiven for less than the full amount.

Form 1099 A – Acquisition or Abandonment of Secured Property – is a form used by lenders if they acquire secured property in full or partial satisfaction of a debt, or they have reason to know that the property has been abandoned. Does that make it clear? Who must file? When do you “reasonably know” the property is abandoned? Trying to decipher these definitions is the subject of many Judges’ opinions.

As the borrower, you receive these forms and must respond. But how? Often, a lender will send a 1099 A and a 1099 C. What happens then? If there are multiple borrowers, each may receive a form for the full amount. Whom must report? A borrower may receive multiple forms, if there are multiple lenders to the same piece of property. All good questions – without straight forward answers.

First, Form 1099 A. Typically, a homeowner will receive a 1099 A from a lender(s) after a piece of property is foreclosed. For tax purposes, a foreclosure is treated as a sale. The borrower must calculate capital gains or losses. Since the property wasn’t sold, there isn’t a selling price. Instead, the borrower uses the information on 1099 A as the date of sale [Box 1] and the selling price of the property. The borrower may use the fair market value [Box 4], or the outstanding balance [Box 2]. How to report the foreclosure on your tax return depends on the nature of the property (primary residence?), the state the property is located, and the purchase price.

Next, Form 1099 C. If you receive a 1099 C for a foreclosed property, you should not (but may) receive a 1099 A. Because the 1099 C has the same information as 1099 A, and also includes the additional information that the debt has been cancelled. Cancelled debt may require the borrower to report the cancelled amount as income. That’s right – you couldn’t pay the debt, but the IRS may add the cancelled amount to your gross income and require you to pay income tax on that amount. Talk about kicking you when you’re down.

The good news is, sometimes there are exceptions and often the borrower may exclude the forgiven debt from income. For example, if the debt was discharged in Title 11 Bankruptcy, if the borrower was technically insolvent for an amount greater than the forgiven debt, or if the debt was forgiven on a qualified principal residence.

All this can get VERY complicated! If you receive one or more of these forms in any tax year, I suggest you find a good tax preparer. Do not ignore the forms AND do not prepare your own return. I help people get out of the trouble caused by those you take care to this matter themselves. Get help! Here’s an idea – Call Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

Are You In A Vicious IRS Circle?

by

Steven A. Leahy

Are You In A Vicious IRS Circle?

By Steven A Leahy

Here is the problem I see all the time. Someone has an IRS problem. They work to solve the IRS problem themselves. While they work on fixing their problem, instead of going away, the problem grows. It grows because they fail to address their current IRS obligations.

I helped a family who owed the IRS more than $60,000.00. The father ran his own business. He was very good at his profession – but the paperwork got to be a problem. Several years ago, the April 15th deadline to file his tax return was approaching and he needed more time to complete his tax returns. So, he filed IRS Form 4868 – Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. As the name of the form indicates, the extension is automatic. The filing date is then extended to about October 15 of the same year (depending on the Washington DC holiday schedule).

Problem solved, right? Wrong. His first mistake was he failed to estimate his tax liability and send a check with Form 4868. His next mistake was he didn’t file his tax return by the October due date. Once he filed the extension, he forgot about his tax returns. The beginning of the next year, he realized his mistake, he sent a portion of the tax he thought he would owe and promised himself to complete last year’s tax return and that year’s tax return by the April 15th deadline.

Now, completing the previous tax return became a big task. Many of the records were now hard to locate. So, as the April 15th deadline approached – you guessed it – he filed IRS Form 4868 for an automatic extension. This went on for several years. He would send some money to the IRS every so often to pay his back taxes he knew he would owe had he filed his tax return, but those payments left him no extra money to pay his current IRS obligation.

This family was in the Vicious IRS Circle, or a cascading tax problem. Instead of going away, the problem was growing because of the penalties and interest were growing, and becoming a real danger to their financial future. The problem was growing because they didn’t know how the IRS worked, so they couldn’t come up with a strategy to solve it. That’s when they heard me on the radio and decided to visit my office for a free consultation.

I explained to them that the first step to solving any IRS problem is getting into compliance. In this case, compliance meant filing past tax returns and paying current quarterly estimated taxes as they came due. Those with IRS problems need to focus on the future, rather than worrying about the past. If a taxpayer allows their current IRS obligations to be put aside in favor of paying the older taxes, the vicious circle begins and it becomes nearly impossible for taxpayers to solve the problem by themselves.

If you feel trapped by your IRS problem and want to stop the Vicious IRS Circle, you should contact me right away. My name is Attorney Steven A. Leahy and I help people solve their IRS problems Call me at 312-664-6649. Call now!

Unpaid Payroll Taxes?

by

Steven A. Leahy

Unpaid Payroll Taxes?

By Steven A Leahy

This week I had the pleasure of meeting a very nice couple. They ran a business that was started by his parents more than 30 years ago. The business has provided a comfortable living for this couple and their family – until last year. Last year they had a big contract that was completed, but their bill went unpaid. This is how financial problems of a customer can spill over to just about any business.

Well, to complete the project required lots of manpower. That manpower required a big payroll. When a business has a payroll, that business is required to deduct federal and state taxes, Medicare and social security obligations, union dues, insurance and perhaps other expenses. The business is then mandated to turn that money, and the business’ own contributions, over to the various government and other entities on behalf of their employees. When that money is not turned over, the IRS will take action to collect the tax portion of those funds.

What happens when the business goes under and is unable to pay the outstanding obligations? Well, if the business was a corporation, or other limited liability entity, the owner may have some protection from the business taxes. However, the portion of the tax obligations that was deducted from the employee’s paycheck was the employees’ property, and the business held that money in trust for the employee.

So, the IRS will look to the person or persons responsible for collecting, accounting and paying over the taxes to the IRS. The IRS defines a “responsible person” as:

One who had the duty to perform or the power to direct the act of collecting, accounting for, or paying over trust fund taxes.

The owner of a business is almost always a “responsible person.” These “trust” taxes include three components: Federal Income tax withheld from the employee; social security and Medicare taxes withheld from the employee; and, the employer’s contribution to social security and Medicare. The “trust” portion is that portion deducted from the employees’ pay check – Federal Income Tax and the employees’ contribution to social security and Medicare. The employer’s contribution to social security and Medicare is not part of the trust taxes, because this tax was not paid by the employee and held in trust by the employer.

When the IRS looks to a responsible person individually to recover this tax, it is referred to as the Trust Fund Recovery Penalty (TFRP). If there is more than one responsible party, the obligation is joint and several – that means the IRS can collect all or part from any or all of the parties. However, the IRS can only recover once. So if the TFRP obligation is satisfied by one responsible party, the obligation of the other parties is also satisfied. Complicated, right?

It gets more complicated, because TFRP are never dischargable in bankruptcy and are difficult to walk away from. But, sometimes, it can be done. If you are having IRS problems you should seek help early. Better yet, you should call me, Steven A. Leahy of Opem Tax Resolutions and The Law Office of Steven A. Leahy, PC. I will sit down with you and explain how this all works and what you can do to protect yourself. Call me today at 312-664-6649. Tell Bonnie I asked you to call to set up a FREE consultation.

My Ex Claimed the Child Deduction – Now What?

by

Steven A. Leahy

My Ex Claimed the Child Deduction – Now What?

By Steven A Leahy

It’s August, and the IRS is starting to go after taxpayers who listed a child as a dependent, when another party listed that same child as a dependent. Who gets the deduction? This is the most common question I get around this time of year.

Here is the typical scenario. Parent A and Parent B live apart. The child lives with Parent A, but Parent B has joint custody. Parent A claims a dependency exemption on their tax return. Later, Parent A discovers Parent B has already claimed a dependency exemption on their tax return. Because a child’s social security number is necessary to claim a dependency exemption, the IRS’ computer system flags both returns and sends a notice of deficiency to each parent. The question rises, “Which Parent is entitled to claim a dependency exemption for tax purposes?”

First, let’s talk about what is at stake. The IRS provides as a deduction an exemption from taxable income ($4,000 for 2015) for each “dependent.” A dependent is defined as either a “qualifying child” or a “qualifying relative” of the taxpayer. To be considered a “qualifying child” of the taxpayer, the child must (among other things) have the same principal place of abode as the taxpayer for more than one-half of the taxable year. In addition, a qualifying child may enable a taxpayer to claim other benefits. Benefits like Head of Household, the child tax credit, the child and dependent care credit, and an earned income tax credit. In total, these benefits amount to thousands of dollars.

Generally, when parents are legally separated or divorced, the dependency exemption is awarded to the custodial parent. The custodial parent is the parent with whom the child lived for the greater number of nights during the year. But there are exceptions. If the custodial parent “signs a written declaration” releasing his or her claim to the exemption and the noncustodial parent “attaches such written declaration to the noncustodial parent’s return for the taxable year” the non-custodial parent can claim the exemption. The declaration by the custodial parent must be made on Form 8332 or in a signed document substantially similar to Form 8332.

Often, the non-custodial parent has a divorce decree, separation agreement, or some other agreement that spells out the rights of the non-custodial parent to claim the deduction. If the decree or agreement went into effect before 2009, the non-custodial parent can attach certain pages to the tax return instead of Form 8332. However, if the decree or agreement went into effect after 2008, the decree or agreement can’t be attached and the non-custodial parent must use Form 8332.

You can see how this can become a problem – parents at odds with who gets the tax benefits. The IRS has sided with the custodial parent; even if the divorce decree or agreement says the custodial parent has agreed to waive the right to claim an exemption for the child. If the custodial parent released a claim to exemption and signed Form 8332 granting the right to the non-custodial parent, the custodial parent can complete Part III of Form 8332 and revoke that waiver, as long as they provide a copy of the form (or make a reasonable effort to provide actual notice) to the non-custodial parent and attach the revocation to their own tax return for each year.

Yes, I know it is complicated. Dealing with the IRS is ALWAYS complicated. If you need help with the IRS, you should work with a local law firm. Better, you should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

What Organization is Tougher Than The IRS?

by

Steven A. Leahy

What Organization is Tougher Than The IRS?

By Steven A Leahy

Remember, there are only 6 things you can do if you owe the IRS money. Before you hire someone to help you resolve your IRS problem, make sure they offer you every option possible. Many (most) tax resolution companies are not law firms – even if they have an attorney working for them. That means they can’t offer you all your options.

Let us review the six things you can do. First, you can pay the IRS everything you owe them. Second, you can set up an installment agreement with the IRS. Pay them over time. Third, you can submit an Offer-in-Compromise, to pay a lump sum to settle the debt. Fourth, you can be declared currently not collectible – prove to the IRS you don’t have any disposable income after you pay all your monthly bills. Fifth, you can file for protection under one of the Chapters of the Bankruptcy laws. And, finally, you can continue to do nothing and let the IRS have their way with you.

Sometimes, the very best option – clearly – is filing for protection under the bankruptcy code. Unless the tax resolution company you talk to is a law firm experienced in bankruptcy – and non-attorneys can never be qualified to offer you advice about bankruptcy – you may never even be exposed to that option.

Most of my clients owe the IRS a sizable amount of money – and many are what can be defined as “above-median debtors.” That means their monthly income exceeds the median (average) income for the household of the same size as the debtors’ in the same state of residence. For these taxpayers, working out a solution with the IRS can be very difficult because, often, the IRS will not allow all of their actual expenses when determining a remedy. If their mortgage is higher than the IRS allows, their payments or settlement with the IRS will be too high to allow both payments. This may force the taxpayer out of their home or cause a default with the IRS agreement.

The only organization stronger than the IRS is the Federal Court System. That is why bankruptcy is sometimes the best option. If the IRS is insisting that you give up your home, they won’t release a levy or they insist on an unreasonable monthly payment, bankruptcy may be the answer.

For example, I have an above-median couple who has a large IRS obligation, a very high mortgage payment and find themselves behind on their mortgage payments. The IRS insisted on full payment over a short period of time; a payment that would not allow them to keep their home.

Under Chapter 13, the federal bankruptcy law changes the focus of their repayment plan from repayment of the IRS debt, to keeping their home. Under their Chapter 13 plan, these taxpayers will pay their monthly mortgage, pay down the mortgage arrears and pay the IRS a small portion of the IRS claim.

I had another client who came to see me after the IRS levied his employer – leaving him with zero income. We negotiated with the IRS Revenue Officer for a time, put he would not relent and release the levy. My client was concerned that he would be evicted from his apartment if he missed his rent payment. The day he filed for protection under the bankruptcy code, the IRS was forced to release the levy, my client received his pay check, paid his rent and proposed a plan to pay his creditors over five years.

These remedies aren’t possible in many (most) tax resolution firms. Taxes under the bankruptcy laws can get very complicated. That is why it is vital that you seek help from someone who can offer all available remedies, including bankruptcy. So, if you find yourself with an IRS Problem, call Opem Tax Resolutions and The Law Office of Steven A. Leahy at 312-664-6649.

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