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Sunday, September 15, 2019

More on Passport Revocation

I previously wrote about passport revocation or denial to those with significant unpaid federal tax liabilities – see, for example, the post here. Last month, an IRS News Release provided various details about the program.

Highlights include:

  • The current threshold of delinquent tax debt is $52,000 (or more)
  • When the IRS certifies a taxpayer as delinquent to the Dept. of State, the taxpayer will receive a Notice CP508C, which provides information on resolving the debt.
  • For taxpayers with current travel plans, the IRS has an expedited reversal mechanism to help get the certification reversed faster once the debt is addressed.
  • Ways to resolve the debt include payment in full, timely paying under an approved installment agreement, timely paying under an accepted offer in compromise, timely paying under a settlement agreement with the Dept. of Justice, having a pending collection due process appeal with levy, and having collection suspended based on innocent spouse relief.
  • Other exceptions from delinquent certification not directly related to paying the debt include taxpayers in bankruptcy, taxpayers that are identity theft victims, accounts that are not collectible due to hardship, taxpayers in a disaster area, pending requests for an installment agreement or offer in compromise, and an IRS accepted adjustment to satisfy the debt in full, taxpayers in a combat zone,

The Acting national Taxpayer Advocate has also shared information in a blog that taxpayers who are working with the Taxpayer Advocate Service may also avoid certification.

IR News Release 2019-141

Monday, September 02, 2019

CLAT Can Determine Charitable Lead Period by Formula

An estate tax charitable deduction under Code §2055(a) is permitted when a qualified charity first holds an interest in a trust followed by a noncharitable beneficiary, based on actuarial computations, if the lead interest is in the form of a guaranteed annuity (CLAT) or unitrust payment (CLUT). Both Code §2055(e)(2)(B) and Treas. Regs. §20.2055-2(e)(2)(vi) require that for a CLAT, the lead interest must have a specified term of years.

What happens if there is no express term of years for the lead interest, and instead the trust provides for the term to be computed by a formula included in the trust instrument? Is this sufficient?

PLR 201933007 addressed this issue, and held that a formula is sufficient if, as to a testamentary CLAT, the term of years is determinable at the date of death funding based on the formula provided.

PLR 201933007

Sunday, August 25, 2019

Late Filing Penalties Apply When Accountant Erroneously Fails to Hit “Send”

Taxpayers who file a return late are subject to penalty under Code §6651 “unless it is shown that such failure is due to reasonable cause and not due to willful neglect.” In United States v. Boyle, 469 U.S. 241 (1985), the U.S. Supreme Court adopted a bright line rule that if a taxpayer relies on a third party professional to prepare and file the return and the professional does not timely do so, that is not reasonable cause and the taxpayer can be penalized.

Boyle was adopted well before the era of electronic filing of tax returns. Indeed, Rev. Proc. 2011-25 provides that specified tax return preparers, including any paid professional planning to prepare more than 10 returns a year, MUST file returns through e-file software. Thus, more and more taxpayers are relying on professionals to file their returns electronically, instead of receiving a paper version and filing it themselves. Further, verifying that a professional return has been electronically filed is not a simple process, and not one typically undertaken by client taxpayers.

This change in circumstances resulted in taxpayers in a recent case arguing that Boyle should no longer apply. In the case, the taxpayer’s return preparer set up an extension request on April 15 on its software, but failed to hit the “send” button and thus the extension request was not sent to the IRS. When the taxpayers later filed their return in reliance on the extension but without realizing the extension had not been filed, the IRS imposed a $120,607.27 late filing penalty.

The U.S. District Court ruled that the taxpayers could be penalized, and that Boyle is still good law. The key fact that persuaded the Court that the increased use of agents to file did not necessitate a change in the law is that in both Boyle and current law, a taxpayer is not REQUIRED to file electronically. Indeed, even a return prepared by a “specified tax return preparer” can still be paper-filed by the taxpayer – it is only if the preparer files the return that it must be submitted electronically. The Court noted that if the IRS ever requires taxpayers to submit the forms electronically, then a different result might occur.

However, even then, the Court indicated that if Boyle ceased to be good law, a taxpayer still has the obligation of “reasonable reliance” on the tax preparer to file in fulfilling its duty of “ordinary business care and prudence.” This duty of “ordinary business care and prudence” is imposed under Treas. Regs. §301.6651(c)(1). It noted that:

“Irrespective of Boyle's applicability, it would never be reasonable to blindly take someone's word that he will timely file your taxes.”

That is, even without Boyle, some efforts by the taxpayer to verify filing would likely be needed  to demonstrate ordinary business care and prudence before the reasonable cause exception would apply.

Of course, this case is not just of interest to taxpayers, but to tax preparers and the professional liability insurance carriers since one would expect injured taxpayers to look to them for reimbursement of any tax penalties arising from the professional’s failure to timely file.

Intress and Steffen v. U.S. (USDC MId. Distr. of Tenn. August 2, 2019)