advanced tax resolution seminar - amazon s3 · advanced tax resolution seminar presented by: dan...

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Advanced Tax Resolution Seminar

Presented by:

Dan Henn, CPA &

Jassen Bowman, EA

IRS Program Number: SDQJW-T-00043-16-I

Sponsored By:

Sponsor ID #137128.

Before We Get Started…

• For proper CPE tracking, please sign in and out.• No need to sign in/out for breaks and lunch.

• Please sign out if you are going to miss a particular session, also.

• Acronyms: Don’t hesitate to ask what they mean.

• Questions: Feel free to ask questions during the presentations. This makes for better learning for everybody.

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Partial Pay Installment Agreements

Course Objectives

• Understand the Installment Agreement process.

• Define the requirements for pending IA status.

• Understand the requirements for a Partial Pay Installment Agreement.

• Understand conditions for CSED extension under a PPIA.

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Mechanics of Collections Case Work

• Mechanics of working IRS cases• Investigation of Liability

• Financial Review/Analysis

• Resolution Options

• The IRS side of the process

• Resolution• Appeals

• Penalty Abatement

• Monitoring

Resolution Pathways

• Assets Access the equity• Loan applications/denials

• Lien discharge/subordination

• Disposable income Installment Agreement• Maximize allowable expenses

• Minimize income

• No assets, no disposable income CNC

• What about OIC?• Assets + Disposable Income x (12 or 24) < Debt

• Fresh Start changes can be rescinded any time

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Why You Should Care

1. Only 0.37% of IRS collections cases are resolved via OIC.2. Approximately 15% of tax debtors will be CNC.3. Roughly 5-10% of cases will be resolved through full pay

or disposition/refinancing of asset(s).4. Everybody else – ¾ – will be on an Installment

Agreement.

Installment Agreement Benefits1. Enforced collections activity stops while IA request is

being reviewed.2. No enforced collections while in force.3. Potential lien removal under certain conditions.4. Potential automatic penalty reduction.5. Seasonal adjustments if necessary.6. May never have to pay full amount due.

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Downsides to Installment Agreements1. User fees:

$120 for new

$50 reinstated

$52 DDIA

$43 low income▪ Low income: 250% or less of DHHS poverty level

2. Financial disclosure: None, partial, or full.3. Mandatory monthly payments.4. Penalties and interest still accrue.5. May have to keep paying beyond CSED (PPIA) .

6 Types of Installment Agreements Guaranteed Installment Agreement Streamlined IA In-Business Trust Fund (IBTF) IA IBTF Regular Regular Installment Agreement Partial Payment Installment Agreement (PPIA)

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Pending Installment Agreements Pending status provides protection. How to request. Requirements:

Identifying information.

Identify tax liabilities to be covered.

Proposed payment terms.

Compliant with filing requirements.

Compliant with FTD requirements (businesses).

Partial Payment IA (PPIA) Dollar Limit: Any amount. Tax Type: Any. Time Limit: May require CSED extension. Financials: Full disclosure, full investigation.

▪ Biennial financial review required by law -- IRC 6159(d).

Lien Filing: Yes. Asset Disposition: Always required. IRS GM Approval: Yes. Trust Fund Recovery Penalty will be assessed. DDIA required if IA default within previous 24 months. Consider an Offer in Compromise.

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Full Financial Investigation

Full and complete Form 433-A/B required.

Income will be compared to Wage & Income data for discrepancies.

Decreases of 20% or more require explanation.

For large debts or taxpayers with equity in assets, IRS will verify all assets & look for more, pull credit reports, etc.

Conditional expenses not allowed for PPIA – only necessary.

Where possible, taxpayer will be expected to tap into asset equity to pay down liability.

▪ Failure to make good faith effort will result in denial of PPIA and exposure to seizure action.

▪ Loan denial letters are your friend.

CSED Extensions (Waivers)

May be required if IRS determines that taxpayer will acquire an asset after CSED expiration that could pay liability.

Example: Corporation completing a development project after the CSED would normally expire.

CSED waiver no longer required when only purpose of extension would be to continue making PPIA payments.

Waiver can only be secured at start of PPIA, not added later.

CSED cannot be extended as result of two year review.

Defaulting PPIA will terminate it. New PPIA afterwards could carry CSED extension consequences.

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CSED Extensions (Waivers)

CSED Extension Time Limit No longer than necessary to liquidate the future asset and for the IRS to

collect on it. Maximum of 5 years for the CSED extension itself, plus… …maximum 1 year for IRS administrative actions (especially for tax accounts

with multiple CSEDs). All tax types/periods must be included on the Form 900. Signing is optional, but PPIA will be recommended for rejection.

Managerial Review

Group Managers must ensure that: Thorough financial analysis was conducted.

Other collections action such as liquidation, levy, and OIC are not more appropriate.

Rationale for allowing taxpayer to retain assets with equity.

PPIA will not create economic hardship for taxpayer.

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Negotiating Installment Agreements Remember, must be current & compliant! Request IA by mail, fax, voicemail, email. IRS Form 9465 or letter. Specifically request IA type. Include all tax types and periods. Be ready with necessary financials.

For PPIA, be ready for full investigation. For PPIA, be ready to tap asset equity.

TFRP or ASED Waiver (Form 2750) Never sign Form 2751 without counsel!

TIGTA Report 2013-30-040 IRS failed to conduct automated 2-year review at all in 10% of

sample. IRS failed to conduct manual 2-year financial review in 52% of

the cases in which it was required. 15% of PPIAs were established without full financial review. 34% of PPIAs sampled lacked manager approval.

This can actually all be good for our clients.

TIGTA recommended that IRS offer PPIA to 230,000 CNC cases, potentially collecting $69 million annually. IRS denied implementation due to resources. (Also good!)

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Helpful Tips Have you maximized expenses? Have you minimized income? Get 3 bank loan denials in advance. Use ASED waiver (Form 2750) to bargain with. Take care of all tax accounts at the same time. Never be afraid to ask for anything. Ask your client about contracts, trusts, and other future

equity in assets that IRS may uncover during financial investigation.

Conclusion Evaluate whether OIC might be better option than PPIA.

▪ Always calculate RCP!

If the client has equity in assets, be prepared to provide loan denial letters or other proof that the taxpayer attempted to tap into that equity.

Make sure that your client is current and compliant in order to receive the protection provided by pending status.

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Presented by:

Dan Henn, CPA &

Jassen Bowman, EA


Sponsored By:

Sponsor ID #137128.

Worker Classification Cases (SS-8)

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Course Objectives

•Understand the factors behind worker classification.

•Define the consequences for misclassifying workers.

•Apply misclassification relief programs.

Why the IRS Cares

•Payroll taxes fund the day-to-day operations of the federal government.

•1099-MISC recipients often fail to file/pay, creating another stream of tax debtors.

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Worker Classification Factors

•Derived in 1996 from the 20-factor test (RR 87-41)

•Behavioral Control

•Financial Control

•Relationship of the Parties

Behavioral Control

•Who controls how the work is done?• Type of instruction given• Degree of instruction/latitude given• How is work product evaluated?• Who provides training?

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Financial Control

•Who controls the economic aspects of the work?• Who’s investment is at risk?• How are work expenses handled?• Are services offered to other businesses?• How are payments transacted?

Relationship of the Parties

•How is the relationship between entity and worker perceived by each?

• Written contract provisions• Who pays for benefits?• How permanent is the working relationship?• What is the regular activity of each party?

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No one factor is determinative.

Worker Classification

• IRC 3401(d)(1): The “employer” is whomever has control over payment of wages.

• Is the worker an employee of the contractor or a sub-contractor?

• Pro Tip: Internally document your worker classification using IRS Form SS-8 as a checklist.

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Example: Hair Stylist

• Stylist rents chair and space from salon

• Provides own equipment and license

• Salon sets prices and hours of operation

• Stylist must wear a prescribed uniform

• Stylist has a written independent contractor agreement

• Stylist works full time for the past year

Employee or Independent Contractor?

Misclassification Consequences

• Employment Tax Liability Imposed• IRC 3509(a) -- 1099 filed: employer share of FICA (7.65%) + 20% of employee’s

share (1.53%) + 1.50% for income tax = 10.68% of wages imposed as liability

• IRC 3509(b) – no 1099: employer share of FICA (7.65%) + 40% of employee’s share (3.06%) + 3% for income tax = 13.71% of wages imposed as liability

• Employer cannot recover any of these amounts from employee.

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Misclassification Consequences

• The fun doesn’t stop there…

• State income tax and penalties

• Disability insurance premiums

• Unemployment insurance premiums

• Unpaid Worker’s Compensation premiums

• Health & Retirement benefit catchups

• Minimum wage & overtime regulations

Section 530 Relief

• Not in IRC – part of Revenue Act of 1978• Terminates employer’s tax liability for:

• FICA

• RRTA

• FUTA

• FITW

• Plus interest and penalties

• Not applicable to technical workers (engineers, programmers, system administrators, network engineers, etc) that are leased employees.

Reference: IRM 4.23.5

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Section 530 Relief

• Taxpayer not required to agree to SS-8 determination of “employee” status before relief can be granted.

• Eligible regardless of examination, collection, Appeals, or even judicial proceeding status.

• IRS required by law to consider 530 relief.

• 3-factor test for relief


Section 530 Relief: Reporting Consistency

•Taxpayer must have filed all required tax returns (usually 1099-MISC).• Accidentally filing the wrong form does not exclude

relief.• Relief only available for periods that information

returns were filed.


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Section 530 Relief: Substantive Consistency

• Taxpayer must have treated all workers holding substantially similar positions the same.

• Refer to classification tests previously discussed and Form SS-8 in this regard.

• Primarily based on day-to-day services performed and methods by which they are performed.


Section 530 Relief: Reasonable Basis

• Taxpayer must have a reasonable basis for not treating worker as an employee, such as:

• Judicial precedent (federal)

• Published ruling

• Private Letter Ruling

• Reliance on a prior IRS examination (not campus or SS-8 unit)

• Long-standing industry practice (25% of industry)

• Reliance on an attorney or accountant may qualify.

• State court or other agency rulings may qualify for “other reasonable basis”

• Reasonable basis should be construed liberally in favor of the taxpayer. (IRM 4.23.5.2.2.7)


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Section 530 Relief

• What happens to the worker?• They can still file an SS-8 request.

• 530 only applies to employment tax liability.

• Income taxes and qualified benefit plan eligibility rules still apply.

• Workers remain liable for employee share of FICA.

• Workers may file for refund of difference between SECA and FICA if paid it.

• Sch. A 2% floor applies, may trigger AMT issues.

• Worker cannot adopt or maintain SEP/SIMPLE.


Classification Settlement Program

• Available to taxpayers under employment tax audit• Voluntary Classification Settlement Program – Extremely similar, but NOT for

employment tax audit situations. See Announcement 2012-45 & Form 8952

• Effort to resolve employment classification issues early and preserve 530 relief rights, which TIGTA identified issues with

• Involves a standard closing agreement


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Classification Settlement Program

• In most situations, examiner MUST offer a CSP closing agreement.

• No requirement to accept.• Binds taxpayer to worker classification for future tax periods.

• 530 relief tests get applied first and if applicable, no status change required.

• If no 530 relief, then SS-8 determination made.

• If no change, then no CSP.

• Only years in which 1099 filed are eligible.


CSP Graduated Settlement Offers

• 100% CSP Offer• Must meet the reporting consistency requirement, but not other two for 530

• Workers become employees going forward

• Pay most recent one year 3509(a) assessment in full

• 25% CSP Offer• Must meet the reporting consistency requirement PLUS taxpayer has a

“colorful argument” for either substantive consistency OR reasonable basis test.

• Pay only 25% of most recent one year 3509(a) assessment


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CSP Analysis Chart


Is TP Entitled to

Section 530 Relief?

Were Required Forms

1099 Timely Filed?

Are the Workers

Employees?Type of CSP Offer

1. Yes Yes Yes Taxpayer’s Option

2. Yes/No No No None

3. No No Yes None

4. No Yes Yes "100% CSP Offer"

5. Maybe Yes Yes "25% CSP Offer"

1.CSP ANALYSIS CHART

4.23.6.14.4 (04-22-2014)

CSP Offers

• Offers are BINDING closing agreements.

• Payment on CSP Offer serves as payment in full for 941 liabilities for all tax periods included in the agreement.

• Taxpayer will NOT be required to file W-2/W-3 information returns.

• Reference - Standard Closing Agreement Forms:• Form 14490

• Form 14491

• Form 14492


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Conclusion

• Use Form SS-8 as a guide to determine proper classification up front.

• Look for 530 relief if either a worker or the IRS makes an issue of it.

• In employment tax examination cases, look to Classification Settlement Program.

• Outside of employment tax examination (including payroll tax Collections cases), consider Voluntary CSP now if there is a potential down the road for a worker classification issue.


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Presented by:

Dan Henn, CPA &

Jassen Bowman, EA


Sponsored By:

Sponsor ID #137128.

Trust Fund Recovery Penalty Assessment:

Who’s On The Hook?

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Course Objectives

• Provide an overview of personal assessment criteria for the Trust Fund Recovery Penalty.

• Understand the conditions necessary for an individual to be declared a responsible party.

• Understand the conditions necessary for an individual to be declared a willful party.

• Review the completion of IRS Form 4180.

• Discuss defenses against personal assessment.

What is the Trust Fund Recovery Penalty?

• IRC 3505, Third Party Responsibility

• IRC 6672, Personal Assessment• Only assessable against “responsible” person.

• “Responsible” person must “willfully” fail to pay over trust fund taxes.

• Penalty is the full amount of trust fund portion of payroll tax liability

• Withheld income taxes

• Withheld Social Security taxes

• Withheld Medicare taxes

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Who’s “responsible”?• IRM 5.7.3.3.1:

• “Responsibility is a matter of status, duty, and authority. A determination of responsibility is dependent on the facts and circumstances of each case.”

• Examples:• Officers

• Bookkeeper

• PEO

• Shareholder

What “responsible” does…

• Hires

• Fires

• Makes FTD

• Signs payroll checks

• Has certain officer duties

• Directs the actions of employees in these same matters

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Delegation

•Generally, authority can be delegated, but not responsibility.

•Was the delegator removed from authority by the delegation?

Establishing Willfullness

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Was it on purpose?

•Was the failure to pay deliberate?

•Was the responsible person aware of the failure to pay?• Failure to correct the failure proves willfulness.

•4180 Question: Were other bills paid instead?

TFRP Interview

• Personal interview required by IRM• Over the phone, with representative present, is preferred.

• For 4180 NOT available online, RO not permitted to provide blank copy.

• Schedule the interview, with pre-completed Form 4180 in hand.

• Know your willful and/or responsible defense going in.

• Advise clients not to answer ANY questions about roles and responsibilities without you present if RO calls or shows up.

• Summons authority

• Never sign Form 2751 accepting assessment without a good reason.

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Form 4180

•Page 3: PSP/PEO interview

•Page 4: Additional info, RO comments, signatures

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Core Defense

Clearly separate “responsible” from “willful”.

Silo everything.

Fighting Responsibility

• Don’t play CFO

• Don’t prepare 941’s

• Don’t prepare payroll

• Don’t be on the bank account as authorized check signer

• Don’t be the name on EFTPS

• Don’t have access to online banking

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Fighting Willfullness

• Don’t be the person paying the bills.

• Don’t be the person deciding which bills to pay.

• Don’t be “in the loop” on financial matters.

• Don’t interact with the IRS.

Conclusion

• Best course of action is to set up business structure in the most advantageous way from the get go.

• For most single member LLC’s or single shareholder S corps, there is no defense.

• For other situations, dig to find somebody else to throw under the bus for the other component.

• Use the 1153/2751 as leverage.• 60 day rule

• Form 2750, ASED Extension

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Presented by:

Dan Henn, CPA &

Jassen Bowman, EA


Sponsored By:

Sponsor ID #137128.

Utilizing IRS Economic Hardship Criteria

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Course Objectives

• Apply economic hardship criteria to three relevant use cases:• Currently Not Collectible (CNC) Status

• Taxpayer Advocate Requests (Form 911)

• Reasonable Cause Penalty Abatements

Economic Harm vs Economic Hardship

• IRC 7811(a)(2) relating to Taxpayer Assistance Orders:• An immediate threat of adverse action

• Incurring significant costs (including for representation)

• Irreparable injury or long-term adverse impact

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• IRC 6343 relating to levy releases:• Levy is creating economic hardship due to taxpayer’s financial condition

• Levy on tangible business property prevents carrying on trade or business.


• 26 CFR 1.6161-1(b) pertaining to penalty relief:

• Undue hardship required for extension. An extension of the time for payment shall be granted only upon a satisfactory showing that payment on the due date of the amount with respect to which the extension is desired will result in an undue hardship. The extension will not be granted upon a general statement of hardship. The term “undue hardship” means more than an inconvenience to the taxpayer. It must appear that substantial financial loss, for example, loss due to the sale of property at a sacrifice price, will result to the taxpayer for making payment on the due date of the amount with respect to which the extension is desired. If a market exists, the sale of property at the current market price is not ordinarily considered as resulting in an undue hardship.

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We can’t discuss “economic hardship”

without discussing IRS basis for “necessary

living expenses”.

Financial Analysis

• Purpose of 433-A/B and Collection Financial Standards is to determine a taxpayer’s ability to pay.

• Think of it like a mortgage application.

• Form 433-A/B/F• Assets

• Even retirement accounts can be levied.

• Income

• Expenses• IRS National Standards

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Financial Condition Largely Determines Resolution Options

• Assets Access the equity• Loan applications/denials

• Lien discharge/subordination

• Disposable income Installment Agreement• Maximize allowable expenses

• Minimize income

• No assets, no disposable income CNC

• What about OIC?• Assets + Disposable Income x (12 or 24) < Debt

• Fresh Start changes can be rescinded any time

Collection Financial Standards

•Differentiates between necessary and unnecessary living expenses

•Designed around a middle class lifestyle

•Reviewed quarterly

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Allowance Beyond Standards• Standards intended to cover basic living expenses,

nothing more.

• Service may allow for actual expenses in rare situations.

• Taxpayers living significantly beyond standards will be required to downsize their lifestyle or obtain alternate resolution.

Expenses Never Allowed

• Private school tuition

• Higher education tuition

• Tithing

• Charitable contributions

• Retirement contributions

• Payments on unsecured debts

• 2012: Minimum credit card payments and minimum student loan payments permitted in OIC RCP calculations.

• Ref: Pub. 1854

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Food, Clothing, Misc. National Standard

• Food• Housekeeping supplies• Clothing and maintenance• Personal care products and services• Misc (the catch-all)• Allowed without questioning actuals• One person: $585• Four people: $1,513• Each additional: $378

Health Care

•Actual out of pocket costs or…

•Standard amount of $60 or $144 (65 and over) plus…

•Actual health insurance premiums

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Local Standards: Housing, Utilities, & Transportation

What’s Included

•Rent or mortgage (PITI)

•Maintenance

•Gas, electric, water, garbage

•Home phone, cell phone, cable TV, and Internet

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Basis

• US Census Bureau

• American Community Survey

• Bureau of Labor Statistics (income)

• Most localities were decreased from 2015 allowances.

• Reminder: Designed to approximate a median income lifestyle.

Example

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Exceeding the Housing Standard

•Most commonly exceeded standard

•Some taxpayers may think the standard unfair

•12-month adjustment period

Transportation Standards

• Public transit OR a car, not both

• Car free and clear? Only operating costs allowed

• Public transit: $173 per month (nationwide)

• Ownership Costs: $471/$942• This is a 9% reduction from 2015 levels.

• Operating Costs, West Region: $213/$426

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With that covered…

• We can now talk about actual use cases for economic hardship criteria.

• First up –• Currently Not Collectible

• CNC

• Status 53

• Approximately 10-15% of Collections cases end here.

Basis of CNC

Internal Revenue Policy Statement 5-71 (Nov. 19, 1980):

“If, after taking all steps in the collection process, it is determined that an account receivable is currently not

collectible, it should be so reported in order to remove it from active inventory.”

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CNC Hardship

• “As a general rule, accounts will be reported as currently not collectible when the taxpayer has no assets or income which are, by law, subject to levy.”

• “However, if there are limited assets or income but it is determined that levy action would create a hardship, the liability may be reported as currently not collectible. A hardship exists if the levy action prevents the taxpayer from meeting necessary living expenses. In each case a determination must be made as to whether the levy would result in actual hardship, as distinguished from mere inconvenience to the taxpayer.” (a reference to 26 CFR 1.6161-1(b))

In other words…

If a taxpayer owns nearly nothing and has no remaining income beyond what is required to live, they may be eligible.

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Benefits of CNC• Statute of Limitations can expire while in CNC.

• Taxpayer may never have to pay a dime they owe.

• Due to budget constraints and staffing priorities, CNC status may not come up for review for several years, perhaps even never.

• Simpler for the client in the long term than Installment Agrement (IA) or Offer in Compromise (OIC).

• For true hardship, case closure is fairly simple and quick (by IRS standards).

Downsides to CNC

• Must provide FULL financial documentation.

• Status will generally last for one year at a time.

• Annual reviews could change the status.

• Penalties and interest continue to accrue.

• Tax lien will NOT be removed.

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Actively Seeking CNCTaxpayer must demonstrate the inability to meet necessary living expenses.

1. Ensure all returns have been filed.2. Complete a full 433-A/F, Collection Information Statement, with

supporting documentation.• Pro Tip: Use 433-A(OIC) worksheets for your own calculations.

3. Look up national and local standards.4. Calculate remaining income.5. Run 656-B, Offer in Compromise Booklet, asset calculations.

• These worksheets include asset exclusions.

Actively Seeking CNC

If BOTH collectible assets andremaining income are $0 or less, the

taxpayer is CNC eligible.

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In other words…

The one time when being dead broke & unemployed

is a good thing!

But consider…

If the taxpayer can scrape together or borrow a few bucks,

might an OIC be better?

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Submit FULL financial package, with FULLdocumentation, along with a simple letter requesting the taxpayer be placed in CNC.


CNC may be granted by:• Service Centers• Automated Collection System (ACS)• Revenue Officers (RO)• Group Managers (GM)• Appeals Officers• Settlement Officers

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Business CNC• Yes, businesses can be placed in CNC!• Must be current and compliant.• Must demonstrate no equity in assets.• Must not have any accounts receivable that can be levied.• Failure to maintain Federal Tax Deposits (FTD) or filing compliance will

result in reactivation.• 18 to 24 month mandatory follow up, with new 433-B, Collection

Information Statement for Businesses, etc.• Expect Trust Fund Recovery Penalty (IRC 6672) assessment.

Reference: IRM 5.16.1.2.7

Taxpayer Advocate Service Case CriteriaIRM 13.1.7 & 21.1.3.18

Four General Categories1. Economic harm to the taxpayer

2. Systemic burden

3. Effective Tax Administration

4. “Compelling public policy”

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Taxpayer Advocate Service Case CriteriaWhat is economic harm?

The IRS definition often differs from your client’s definition.Also differs from “economic hardship” definition pertaining to levy releases (technically, but not in practicality).

Examples:1. Eviction notices already received

• Contrast with potential for eviction 4 months down the road.

2. Heat cut off in dead of winter• Contrast with overdue cable bill.

3. Paying for life-saving medication not covered by insurance• Contrast with paying premiums.

4. Incurring significant costs, such as having to hire representation.• Contrast with just return prep.

Taxpayer Advocate Service Case CriteriaBottom line…

TAS exists to resolve breakdowns in normal IRS processes.

TAS does NOT replace existing functional processes, and will NOT help you if you haven’t attempted using normal channels.

Example: Levy on business payroll tax account

Use CAP, not TAS.

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Penalty AbatementsRelief from certain penalties are possible, but limited.

• Reasonable cause

• Statutory exceptions

• Administrative waivers• Includes First Time Abate (FTA)

• Correction of IRS errors

• Appeals may also recommend abatement based on litigation potential.

Penalty Abatement

There are limited reasonable cause criteria for penalty relief:

1. Death, illness, and unavoidable absence.

2. Fire, casualty, natural disaster.

3. Loss of records beyond taxpayer’s control.

4. Erroneous advice despite exercise of ordinary care and prudence.

5. Ignorance of the law despite good faith efforts to comply.

6. Bad advice from the IRS or tax professional.

7. Undue hardship.

Notice that “the economy” isn’t on the list.

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Undue Hardship Penalty Relief• In statute, based on extension of time for payment (see Form 1127)

• “… an undue hardship must be more than an inconvenience to the taxpayer.”

• Generally does not impact ability to file, so generally not valid for Failure to File (FTF) penalties.

• Extension of time to pay (Form 1127) does not provide extension of time to file, nor provide penalty relief automatically.

Undue Hardship Penalty Relief

• 26 CFR 301.6651-1(c)• Requires exercise of ordinary business care and prudence

• Facts and circumstances of taxpayer’s financial condition

• Weighs amount and nature of other expenses• “…taxpayer will be considered to have exercised ordinary business care and prudence if he made

reasonable efforts to conserve sufficient assets in marketable form to satisfy his tax liability and nevertheless was unable to pay all or a portion of the tax when it became due.”

• If taxes had been paid, would undue hardship under 1.6161-1(b) have resulted?

• For bankruptcy cases, did the insolvency occur before tax due date?

• Did unanticipated events occur the left taxpayer without funds?

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Undue Hardship Penalty Relief

IRS personnel must consider…

1. When did the taxpayer know they couldn’t pay?

2. Why was the taxpayer unable to pay?

3. Did the taxpayer explore other means to secure necessary funds?

4. What did the taxpayer supply in the way of supporting documentation?

5. Did the taxpayer pay when funds became available?

Structuring Your Reasonable Cause Request• Skip Form 843 – send a letter

• Explain line of business

• Explain initial circumstances

• Explain why problem continued

• Explain what was done to resolve the problem

• Explain what will prevent future issues

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Structuring Your Reasonable Cause Request• Failure to pay/deposit was due to insufficient capital as a result of

_[XYZ]___.

• “The payment of Federal taxes over other absolutely necessary business expenses would have resulted in business closure. Business closure and resulting loss of livelihood would be considered “substantial financial loss” as used in the definition of “undue hardship”.

• Quote 26 CFR 1.6161-1

Structuring Your Reasonable Cause Request• Explain why taxpayer suffered business revenue loss or investment loss

that they could never recover. This is same as [XYZ].

• “Application of the reasonable person standard carries that loss of revenue due to events completely outside the taxpayer’s control that directly impact the principal business activity does establish reasonable cause for failure to pay the tax when due because of the presence of an undue hardship.”

• “As established in East Winds Industries Inc v United States, and later codified in 26 CFR 301.6651-1(c) …” then quote in it’s entirety.

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Structuring Your Reasonable Cause Request• Reference IRM 20.1.1.3.1.2 regarding determination of ordinary

business care and prudence being exercised.

• Walk through how your client demonstrates each of the four factors.• Demonstration of reasonable cause (which you already explained) under Undue

Hardship criteria.

• Taxpayer’s previous compliance history before the hardship.

• Time span between non-compliance and compliance.

• The circumstances beyond the taxpayer’s control, same as [XYZ].

Conclusion

• The IRS is not in the business of putting people on the street.

• Apply the various financial hardship criteria to help your clients get the help they need.

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Presented by:

Dan Henn, CPA &

Jassen Bowman, EA


Sponsored By:

Sponsor ID #137128.

The “New Company Flip” Resolution Strategy

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Objectives

• Identify possibility for alter ego assessments.

• Understand the process for properly closing business entity.

Alter Ego AssessmentsTaxpayer and a third party are so closely aligned that they are legally regarded as having the same identity.

Federal tax lien attaches to all property and rights to property of a taxpayer and any alter ego entities.

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Alter Ego Doctrine• “The obligations of a corporation will be recognized as those of another

person, and vice versa, where it appears that the corporation is not only influenced and governed by that person, but there is such a unity of interest and ownership that the individuality or separateness, of the person and the corporation has ceased.”

• IRM 5.12.7.6.2

• Two factor test:1. Unity of ownership and interest.

2. Failure to disregard the relationship would perpetuate a fraud or injustice.

Alter Ego Doctrine• Who has control over the entity?

• Does the entity exist to shield personal liability?

• Does the entity provide personal financial benefit?

• Has the entity assumed debts of another person or business?

• Are personal funds used to pay the business debts?

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Alter Ego Doctrine• Commingling of cash and assets

• Unclear separation of work performed

• Diversion of funds, customers, work orders, equipment from one to the other

• No distinction in treatment of corporate vs personal assets

• Failure to document stock issuance

• Failure to maintain minutes, hold board meetings, and other necessary corporate activities

• Capitalization issues

Successor Entities

• Closing one business and opening a new one with new EIN, but same assets, location, employees, customers, etc.

• State law often provides that surviving entity of merger, consolidation, or acquisition is liable for debts of predecessor.

• IRS generally asserts primary liability against successor, not a new assessment.• Original CSED applies.

• Levy action almost guaranteed, litigation highly probable to reduce assessment to judgment.

• Property transfers can invoke transferee liability and nominee/alter ego assessments.

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How does the IRS prove successor/alter ego?• Secretary of State records – same officers/members

• State employment records – shared employees

• Third party contact, such as A/R and A/P

• Contracts, leases, UCC filings

• Business licenses, sales tax licenses, DBA filings

• Web sites

• Information returns

• Bank summons (administrative)

• Changes in phone, fax, address, utilities

• Service agreements, lease agreements, financing statements

Prevention

There must be a clear, distinct, and proper SEPARATION between an old business and a new business.

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Why do this?

1. Taxpayer needs to maintain a livelihood. We all gotta eat!

2. Legitimately saves jobs and maintains services to the community.

3. Properly and permanently deals with the tax liability.

4. Non-trust fund tax debts vanish into thin air.

How?Here’s the gist of the process…

• Properly transfer all assets via IRS processes to a new, unrelated business.

• Accept Trust Fund Recovery Penalty Assessment

• Properly close out and shut down old business

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The ChecklistLet’s walk through the whole thing…

Utah Specifics• Articles of Dissolution: Must provide tally of board votes if shares were

issued.

• Application for Tax Clearance: Foreign entities only. Obtain Clearance first, then file Application for Withdrawal.

• If have employees, contact Dept. of Workforce Services to set employees up with pre-layoff counseling.

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