Pennsylvania Fiduciary Litigation : Pennsylvania Trusts and Estates Lawyer & Expert Witness : Patti Spencer Law Firm : Fiduciary Litigation, Planning : Lancaster, Harrisburg, Philadelphia, Pennsylvania

They appear on late night television and on the internet promising to reduce your tax debt, remove tax liens, and settle your unpaid taxes, interest and penalties for pennies on the dollar. Do you really believe you can pay a fee to a tax relief company and reduce your $50,000 tax bill to $2,000?

Apparently a lot of people do believe that. The California Attorney General is suing TV’s Tax Lady, Roni Deutch, for $34 million.

Attorney General Jerry Brown announced the suit last Monday saying "Tax Lady Roni Deutch…promises to significantly reduce [clients’] IRS tax debts, but instead preys on their vulnerability, taking large up-front payments but providing little or no help in lowering their tax bills."

Brown alleges that Roni Deutch regularly violates state law by making false promises about her ability to resolve disputes with the IRS. He says that Deutch overstates her advertised television claims of winning 99% of her tax battles with the IRS while in reality she reduces the amount of money her clients owe in taxes in just 10% of the cases. Most of her clients quit or are terminated by her firm and are denied refunds after her staff bills them for work that wasn't performed, the lawsuit said.

The attorney general's office says hundreds of Deutch's clients have filed complaints. In addition to not lowering their debts, consumers says she also refused to refund fees of as much as $4,700 that her firm charged.

The complaint filed against her alleges that she engaged in a scheme to swindle taxpayers, including senior citizens and disabled, who cannot afford to pay their tax debt by enticing them to engage her firm to negotiate a resolution of their tax debt with the IRS. She promises to lower the amount the clients owe the IRS, eliminate interest and penalties, establish a low monthly payment plan, or prevent the IRS from collecting on the tax debt altogether. According to the complaint, she also falsely represents that she is able to immediately stop IRS collection actions such as levies and wage garnishments.

Deutch has faced similar allegations before. In December 2006, she settled a lawsuit filed by New York City's Department of Consumer Affairs that alleged she misled consumers with her advertising. She agreed to pay $300,000, including $100,000 in fines and $200,000 in restitution to consumers.

A recent MSNBC article cautioned taxpayers against falling for tax resolution promises that sound too good to be true. According to the article, "Instead of describing the long odds [of winning a tax settlement], many tax debt settlement companies sweet talk clients. Then they take large up-front payments — prices start at $3,000 and climb fast from there – but do little or nothing to help with the tax problem."

Most people are frightened when they are in trouble with the IRS. They may have a bill that is larger than anything they ever owed and they are scared stiff. Put yourself in their shoes. There you are, watching late night TV, unable to sleep because you are so worried about your tax problem, and an angry female attorney comes on and tells you she will fight the IRS for you and win! If you call the toll free number, you reach a salesperson whose job it is to get a large up front payment from you on your credit card.

Many tax relief companies make outlandish promises about reducing their tax bill to taxpayers, collect a large fee up front, and then never do anything. They may tell the taxpayer later that they don’t qualify for relief and suggest they call the IRS themselves for a payment plan.

If you are already in debt because of unpaid taxes, you don’t need to pay a big fee for nothing to one of these outfits.

Finding competent help can be challenging. You need to do your homework, and ask lots of questions. Find out about the firm - how long it’s been in business, what kind of complaints have been lodged against it? How many tax attorneys do they have on staff? Ask for references.

If the firm offers you a guarantee. Just say "no thanks" and run away. Nobody can guarantee anything. Does the firm want all its fee up front? If they do, run away. Some money upfront as a retainer is reasonable.

Do they give you a high pressure sales pitch? If they are pushing that hard, that's a warning sign to stay away. In many cases when you get a sales pitch, you are talking with a salesperson, not a tax attorney or tax resolution specialist who can help you.

In general, when considering hiring any company or person to represent you, look for statements that seem too good to be true, claims of some kind of special advantage, or creating a fear that only they can solve. Be careful out there.

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Remember when Treasury Secretary Timothy Geithner ran into trouble because he hadn’t paid his self-employment tax? There was quite a political stir because it meant a tax-evader would be in charge of the IRS.

Geithner had worked at the International Monetary Fund from 2001 to 2004. During those four years, he paid no social security or Medicare taxes. American citizens who are IMF employees don't have FICA and Medicare tax withheld from the paychecks because it is an international agency. They are considered to be self-employed and are supposed to treat the income as "self-employment" earnings, paying both employer and employee payroll taxes on the income.

The IRS audited Geithner in 2006 and discovered the problem for his 2003 and 2004 returns. Geithner paid just under $17,000 at the time, and the IRS waived any possible penalties. A three-year statute of limitations precluded the IRS from auditing the 2001 and 2002 tax returns. Geithner didn’t volunteer to look over 2001 and 2002 returns even though they contained the same mistake as the 2003 and 2004 returns. The additional amounts for 2001 and 2002 ($25,000) were discovered by the Obama vetting team and Geithner promptly paid up.

Mr. Geithner testified before Congress that he self-prepared his returns using Turbo Tax and that the error was a careless mistake. He paid his over-due social security taxes without penalty, and went on to become the Secretary of the Treasury. Did you ever wonder if it would work for the rest of us?

On June 21, 2010, the U.S. Tax Court handed down a decision in the case of another IMF employee, David Cameron Parker. Mr. Parker also failed to pay self-employment tax, used Turbo Tax to self-prepare his tax returns, and due to that fact argued that he had reasonable cause and acted with good faith with regard to the underpayment. Mr. Parker initiated contact with the IRS and voluntarily came forward with the problem, requesting a waiver of penalties. (He wasn’t caught in an audit.)

From May 25, 2005 through 2006, Mr. Parker earned gross annual compensation of approximately $175,000 while working for the IMF. On his 2005 return, Mr. Parker reported a tax liability of $20,212, which was about $12,000 less than what he actually owed. He asserted that he believed Turbo Tax included the self-employment tax in the tax he owed. He claimed that he called TurboTax and specifically asked "an expert" if self-employment taxes were included. He claimed the "expert" said they were included.

The Court did not believe such a conversation took place, since there were no self-employment taxes shown on the return. As for acting in "good faith" by initiating contact with the IRS regarding the underpayment, good faith must be shown before and during the act of filing. No later acts are included in the "good faith" definition. The IRS refused to waive penalties and the Tax Court backed up the IRS. Here is an excerpt from the opinion, Parker v. Commissioner, T.C. Summ. Op. 2010-78 (June 21, 2010):

"We shall address briefly petitioner's contention that the IRS granted "favorable treatment" in a case involving U.S. Secretary of the Treasury Timothy Geithner, which petitioner described as "incredibly similar" to the instant case. According to petitioner, "there should not be different, or favorable rules for the well-connected". The record in this case does not establish any facts relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner. In any event, those facts would be irrelevant to our resolution of the issue presented here. Regardless of the facts and circumstances relating to the case to which petitioner refers involving U.S. Secretary of the Treasury Timothy Geithner, petitioner is required to establish on the basis of the facts and circumstances that are established by the record in his own case that there was reasonable cause for, and that he acted in good faith with respect to, the underpayment for each of his taxable years 2005 and 2006 that is attributable to his failure to report self-employment tax."

Similarly situated taxpayers should be treated similarly. The Tax Court was not necessarily wrong in the Parker case. There are other cases holding that reliance on tax preparation software is not enough to escape penalties. The problem is that Geithner should have had to pay the penalty as well.

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                                                                                                                          – Wikipedia

The Pennsylvania legislature has authorized a tax amnesty period from April 26 to June 18, 2010. During this limited, 54-day time frame, the Pennsylvania Department of Revenue will waive 100% of penalties and half of the interest for anyone who pays his or her delinquent state taxes.

Any PA taxes delinquent as of June 30, 2009, and any non-filed PA returns overdue as of June 30, 2009, are eligible for tax amnesty. Individuals and businesses are included.

All taxes administered by the PA Department of Revenue are eligible for the tax amnesty program. There are many state taxes. Here are a few: Personal Income Tax, Inheritance Tax, Capital Stock Tax, Sales and Use Tax, Corporate Net Income Tax. The tax amnesty does not include Unemployment Compensation because it is administered by the PA Department of Labor and Industry. The program does not apply to any tax administered by another state, the federal government or Internal Revenue Service.

To obtain tax amnesty, you must do the following between April 26 and June 18, 2010:

No extensions to file or to pay are available. Penalty and interest paid before the tax amnesty program begins are non-refundable.

If you are reporting and paying taxes which are completely unknown to the Department – meaning you have not registered, filed or paid the state taxes, nor have you been contacted by the department about the taxes - you could qualify for a limited filing period. In this case, only undisclosed tax delinquencies dating back to July 1, 2004, will be required to be filed and paid under the amnesty program.

If you are reporting and paying taxes which are known to the department, you must file tax returns or amended returns for all tax periods and pay all taxes due to the department.

Taxpayers with known delinquencies will receive notices from the DOR informing them about the amnesty program. The notice will include a Personal Identification Number (PIN) to be used in the application process. For delinquencies that the department does not know about, taxpayers will have to register and get a PIN online in order to file.
 

A business or individual currently under criminal investigation for violation of a tax law, or named as a defendant in a criminal complaint alleging a violation of a PA tax law is not eligible to participate in the amnesty.

After the amnesty period closes, a 5% non-participation penalty will be imposed on all un-paid tax, penalty and interest not paid in full during the amnesty period. Existing deferred payment plans, active appeals and entities in bankruptcy will not be assessed the additional 5% penalty.

In addition, if within two years after the end of the program a taxpayer that is granted amnesty becomes delinquent for certain periods in payment of any taxes that are due or in the filing of any required returns, the Department of Revenue may assess and collect all penalties and interest waived through the amnesty program.

You only get one shot at Pennsylvania tax amnesty. If another Amnesty Program is held in the future, a taxpayer participating in the 2010 Amnesty Program will be prohibited from participating in future Amnesty Programs.

The amnesty is projected to generate an additional $190 million for the state to help offset spending in the fiscal year that began July 1, 2009. Last year New Jersey had a hugely successful amnesty program which collected $725 million in six weeks.

Pennsylvania’s last tax amnesty was 14 years ago. The 1995-96 amnesty waived penalties but required full payment of taxes and interest. This year’s amnesty is better. It will waive penalties and 50% of the interest. The extra incentive for taxpayers previously unknown to state officials to come forward is that they will not be held responsible for taxes due before July 2004. The theory is that they will have to supply the department with the information it needs to tax them in the future.

While there is no question that tax amnesties work, it can provide a negative incentive to tax payers. As Kail Padgitt of The Tax Foundation in Washington D.C. says a tax amnesty is essentially "rewarding people that have not paid their taxes and have been out of compliance. So really what it does is it provides a perverse incentive to not pay your taxes."

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 “For Better, For Worse; For Richer, For Poorer”

You’ve heard of the “marriage penalty” -- two people married to each other with the same income as two single people pay more taxes. Let me tell you about another “marriage penalty.”

If you file a joint return with your spouse and there is a problem and tax, penalties and interest are due, both spouses are liable individually and jointly, and the IRS may collect the owed tax from either spouse regardless of whose income, understatement or fraud was involved.

Most married couples file a joint income tax return because this gives a lower tax than filing two returns as married filing separate. (Although still not as little as two unmarried persons with the same income). The general rule for a joint return is that both taxpayers will be responsible for any taxes, interest, and penalties owed, even if only one spouse was earning the income. Married couples are not required to file a joint return. In fact, filing a joint return is an election. Since it almost always results in a lower combined tax than if each spouse files separate returns, it is routinely and almost automatically elected by married couples. If you file separately, you and your spouse can change your mind and file a joint return within three years after your original return's due date. The converse is not true. If you file jointly, you can't switch back to separate filing (unless there is enough time to do this before the due date for the return) even if your spouse agrees and wants the same thing. When you elect to file and sign a joint income tax return, you consent to joint and several liability.

Joint liability means that both spouses are liable. Several liability means that each spouse is liable for the entire amount The IRS may collect from either spouse. They may collect the tax however they think will be fastest and easiest.

Beware: even if you file separately, you can be liable for tax on your spouse's income if you live in a community property state. When you are married, all income becomes community property income and one-half belongs to each spouse. The IRS can take ½ of your paycheck to pay an old tax bill for your spouse. In any state, the IRS can collect your spouse's taxes from you if your spouse transferred assets to you in an attempt to evade taxes. Relief provisions are not available in this case because both spouses participate in a scheme to evade taxes.

Divorce does not terminate joint liability. Let’s say you were married to Spouse # 1 for 5 years and filed joint returns. You get divorced, and after a few years, marry Spouse #2. It turns out that Spouse #1 had significantly understated his income on one of those joint income tax returns. You get a notice form the IRS that you owe $10,000 in tax, interest and penalties. Unless you can qualify for one of the relief provisions described below, you have to pay the $10,000 because you signed a joint return. Often, as part of a divorce decree or marital property settlement, the spouses will make agreements about who is to pay income taxes. These agreements are not binding on the IRS. The IRS was not a party to the agreement. You can use the agreement to collect from your spouse (if he or she has anything), but the agreement is no bar to collection from you by the IRS. Chances are, if the IRS is coming after you for the tax, it’s because your ex-spouse has no assets, and the tax is noncollectable from the ex-spouse, by you or by the IRS. Before 1998, the only relief available for a spouse in this situation was if she qualified as an “innocent spouse.”

There were many rules and technicalities and this status was hard to demonstrate. In 1998, Congress amended the Internal Revenue Code to provide other mechanisms to allow you to avoid paying taxes that should have been paid by a spouse or former spouse. There are three forms of relief:  1) one is am improved version of the innocent spouse rules, 2) another has more lenient provisions, but is only available if you are no longer married or are separated from your spouse, and 3) the third form of relief is an equitable remedy that applies if it would be unfair to collect the tax from you and you didn’t qualify under 1) or 2). The 1998 new and improved version of the innocent spouse rules require that an innocent spouse must meet the following conditions to qualify: “(1) a joint return understated taxes because of erroneous claims by the requesting party's spouse, such as unreported or under reported income, or unjustified deductions or credits; (2) when the return was signed, the innocent spouse did not know or have reason to know that there was an understatement of tax. If the spouse knew, or should have known, that there was an understatement, but did not know by what amount, partial relief may be given; and (3) in light of all of the surrounding circumstances, it would be unfair to hold the requesting party liable for the understatement of tax.”

Requests for relief under any one of these three provisions is made on Form 8857, Request for Innocent Spouse Relief. Separation of liability is an allocation between the spouses of unpaid liabilities resulting from the understatement of taxes owed. Either 1) the parties filing the joint return are no longer married or are legally separated, or 2) the joint filers were not members of the same household at any time during the 12-month period before the relief is sought. If spouses transferred assets between themselves to avoid tax, this relief does not apply. If the spouse had actual knowledge of the other spouse's erroneous items on a joint return, this relief is also not available. For those situations where the innocent spouse rule or separation of liability does not apply, a third possibility of equitable relief is there. If there has been no fraud and it is “unfair” to hold the spouse seeking relief liable, the IRS can still grant relief. Various factors are considered such as separation or divorce, economic hardship, whether or not there was knowledge of the items causing the understated tax, or whether the spouse seeking relief received a significant benefit from that understatement. Don’t depend on these rules. Even these do not always provide relief. The bottom line is, if you think something is wrong with your tax return, don’t sign it. If your spouse won't file a correct return, file a separate return with married filing separately status. It may mean paying more tax in the short run, but signing a false tax return can mean paying a lot more tax in the long run.

Maybe the marriage ceremony should go like this: "You have the right to remain silent, anything you say may be held against you, you have the right to have an attorney present. You may kiss the bride."

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Your marital status on December 31 determines your filing status for the entire preceding year. If you are still married on December 31, you have a choice. You can file jointly with your soon-to-be ex-spouse or file using married filing separately status. You might qualify to file as Head of Household even though you are still married if you have been living apart for the last 6 months of the year.

Unfortunately, using married filing separately status is not very favorable from a tax viewpoint. A joint return usually results in a lower overall tax liability.

If you file a joint return, as far as the IRS is concerned, both you and your spouse are liable for the whole amount of tax due regardless of what any agreement between the spouses states and regardless of who earned the money. This can obviously be a problem. For example, if your self-employed husband has not paid his taxes and you file a joint return with him, the IRS can collect 100% of the tax from you. It does not matter what you have agreed with him, or whether or not you earned the money - filing a joint return produces joint liability. If you are concerned that your spouse might have unreported income or be claiming improper deductions, your best route may be to forego any joint tax return savings and file separately.

There is an exception to joint liability if you can prove you were an "innocent spouse." Let’s say your husband failed to report some of his income. If you didn’t know and had no reason to know about a tax understatement, then you may not be liable. If you know that he is not reporting accurately and you sign the joint return, you are liable.

If your return shows a refund but you owe arrearages in child or spousal support payments, or student loans, all or part of your refund may be used to pay the past-due amount. If you file a joint return and your spouse owes some of these debts, you can prevent your share of a tax refund on a joint return from being applied to a debt owed by your spouse by attaching a completed Form 8379, "Injured Spouse Claim and Allocation", to your return. Also, write "Injured Spouse" in the upper left corner of Form 1040.

If you choose to file separate returns, each spouse reports his or her own income, exemptions, deductions and credits. You each report your own withholding tax from W-2's. If you and your spouse made estimated tax payments, they may be divided in whatever way you and your spouse agree. If there is no agreement, the IRS will divide them proportionately based on your two respective tax liabilities. If you paid the estimates, some may be credited to your spouse.

The advantage of filing separately is that each spouse is responsible only for the tax due shown on his or her own return. Unfortunately, separate returns often result in overall higher taxes for the couple. If one of you itemizes deductions, the other spouse will not qualify for the standard deduction and, therefore, must also itemize deductions on his/her tax return. If you file separately, you cannot take the credit for child and dependent care expenses, and IRA deductions are reduced.

If you agree to file jointly in order to save overall taxes, you and your spouse can execute an agreement on how to share any tax savings generated by filing a joint return.

If you file separately, you can change your mind, go back and amend to joint returns any time within 3 years of the due date. You cannot go the other way. If you file jointly, you cannot amend to file a separate return.

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OK so you lost a fortune with Madoff, at least you get a tax write-off.

Steve Dubner explains it in this New York Times article - click here.

See also Prof. Paul Caron's Post:

Tax Law to Provide Bailout to Madoff's Victims

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In general, any payment, whether called a gift or not, to an employee is taxable income to the employee.

Gifts of nominal value, such as a holiday turkey, are treated as de minimis fringe benefits. A gift to an employee is de minimis if the value is nominal, accounting for the item would be administratively impractical, the gift is provided infrequently, and the gift is made for the purpose of promoting health or goodwill to the employees. There is no set dollar limit, but in one particular instance a gift with a value over $100 was treated as taxable income. A de minimis employee gift is deductible as a non-wage business expense by the employer.

Regulations give these examples of gifts that qualify for de minimis treatment: birthday or holiday gifts of property (not cash) with a "low fair market value", gifts such as books or flowers under special circumstances (e.g., outstanding performance), traditional awards (such as a gold watch) upon retirement after lengthy service for an employer, and an occasional cocktail party, group meal or picnic for employees and their guests, or occasionally giving out theater or sporting event tickets.

If you give your employees cash, gift certificates or other similar items that can be converted to cash, the value of these gifts is considered additional wages or salary, regardless of the amount.

Reasonable costs of giving a holiday party for employees are fully deductible. There is no requirement to discuss business before, during, or after the event. To be fully deductible, the party must be primarily for the benefit of employees and not limited only to top executives.

When a business makes gifts to others, whether they be customers, vendors, or referral sources, other rules apply. A business may deduct up to $25 in gifts given to each recipient during any given year. Items clearly of an advertising nature such as promotional items do not count as long as the item costs $4 or less. Many companies give things like pens, frisbees, and key chains under this rule. Incidental expenses for the costs of engraving, wrapping, and mailing the gifts are also allowed as a deduction. A husband and wife are considered to be one taxpayer, so only $25 in total gifts to the two of them can be deducted.

The limit is not on the value of the gift that can be given. The limit is on how much of the cost of the gift the business can deduct. You may give a client a gift worth $100 - but you may only deduct $25.

What if you give your clients tickets to a concert or a football game? Is it a gift, or is it entertainment? If it’s a gift, only $25 is deductible. If it’s entertainment, 50% of the cost is deductible.

If you give a customer tickets to a theater performance or sporting event and you do not go with the customer to the performance or event, the IRS gives you a choice. You can treat the cost of the tickets as either a gift expense or an entertainment expense, whichever is to your advantage

If you go to the event with the client, then it's a business entertainment expense. That means no $25 limit, but you only get to deduct 50% of the total cost. You must treat the cost of the tickets as an entertainment expense. You cannot choose, in this case, to treat the cost of the tickets as a gift expense.

If you give a customer packaged food or beverages that you intend the customer to use at a later date, it is treated as a gift.

Keep accurate records of all business gift expenses, recording the date, the name of the business associate, and the cost of the gift. Make sure you can show receipts.

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2010 is the year for Throwing Momma from the Train.  In 2009 the estate tax exemption is $3.5 million.  In 2011 the estate tax exemption goes way down to $1 million.  In between?  In 2010 there is no estate tax at all.

Obviously, something has to be done.

The Urban-Brookings Tax Policy Center has published a report entitled Back from the Grave: Revenue and Distributional Effects of Reforming the Federal Estate Tax. (Blogging credit to North Carolina Estate Planning Blog.)

An outline of the presidential candidates' and other recent proposals for reform is contained in Table 11 on page 20.

Obama's proposal is an exemption of $3.5 million and a 45% rate.

McCain's proposal is an exemption of $5 million and a 15% rate.

Last March Wealth-Counsel, LLC began a contest.  They announced they would give $10,000 to the first estate planning attorney who submits the most accurate prediction that is closest to the actual result enacted by Congress and signed into law.  What did I predict?  $3.5 million and 45%.  Wonder if I was first?

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