EisnerAmper Blog

Private Business Services Blog - An Accounting & Advisory Resource

Defending your Retirement Account

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November 21, 2014

By Dan Gibson, CPA

Gibson_NewIf an IRS Revenue Officer is threatening to levy your retirement account, know that the IRS has an internal four-step process in their Internal Revenue Manual (IRM) to use for analysis. The Service must follow this process before it can take your account.

  1. Determine if you can even get to the money.  If you can’t get to it, neither can the IRS.  Being able to borrow is not enough; you have to be able to withdraw it for the IRS to have any right to levy it.
  2. The IRM’s guidance states that the IRS can take retirement accounts only in flagrant situations of nonpayment. In other words, the IRS prefers to take retirement accounts from those with intentionally bad acts, not those who simply made a life mistake. 
  3. The IRS must then consider if there are any better alternatives to collect than taking your retirement.  The IRS prefers installment agreements or non-retirement assets as a source of payment.  The IRS won’t necessarily tell you this, but it is in the Internal Revenue Manual: As a part of your defense you can simply offer another, less severe solution.
  4. Are the funds in the retirement account needed to pay your bills in the near future?  If so, the IRS would create a financial hardship by taking your retirement funds, preventing you from paying your bills upon retirement.  Show the IRS that you will not be able to pay your expenses if the retirement is lost and this will cause them slow down.

The IRM is full of defenses and solutions to IRS problems.  When you owe the IRS, they are on offense, and you are on defense.  The rules of defense are in the IRM playbook – the IRS officer isn’t going to tell you those rules, but they are readily available.  They do share their playbook.  But we have to read it, know it, and apply it to get the results.  Do not overlook the value of the Internal Revenue Manual when formulating your defense and settlement approach.

Can the IRS Just Take My Stuff?

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October 29, 2014

By Daniel Gibson, CPA

Gibson_New(1)When you are going up against the competition, wouldn’t it be nice if you could get the other guy’s playbook? Well, when you are dealing with the IRS, you can actually do just that. The IRS issues an Internal Revenue Manual (IRM) to its employees, and the manual is available to the public. When you are dealing with the IRS’ Collection Division, this can be quite helpful. The manual is easily accessible here.   In particular, Internal Revenue Manual Section 5.10.1, Pre-Seizure Considerations, can assist you in determining how far the IRS can go. Here are just a few things noted in this section of the IRM:

  1. The IRS cannot levy you when you are in an installment agreement, including the time the payment plan is pending, or during any appeal of a rejected or terminated installment agreement.
  2. If you do not have any equity in your property, the IRS cannot take it. For example, the IRS can’t take your house if it’s worth $250,000 and you owe $250,000 on it – there is no equity.  
  3. If you have filed an Offer in Compromise, the IRS cannot levy or seize your assets while it is pending, or during any appeal of an OIC rejection.
  4. The Internal Revenue Code prevents the IRS from taking your clothing, household goods, and certain business tools and equipment. IRM 5.10.1 recognizes that the IRS cannot seize these specific assets.
  5. The IRS cannot take your house unless the government first sues you in court and receives a judge’s approval to take it.  
  6. If you have an innocent spouse claim filed with the IRS, they cannot collect until a decision is made on whether you should be held responsible for your spouse’s taxes.
  7. If you disagree with the IRS on a collection decision, you have the right to appeal it and have the IRS Office of Appeals reconsider. This includes Collection Due Process Appeals and Collection Appeals Program. The Internal Revenue Manual prevents the IRS from levying while your appeal is pending.
  8. When you are in bankruptcy, IRS collection is put on hold. This, too, is recognized by the Internal Revenue Manual.
  9. The IRS cannot levy unless they give you notice 30 days ahead of time. This is called a Final Notice of Intent to Levy. Once the IRS sends this notice, you have additional rights to file an appeal and stop the levy from occurring. Don’t lose this right by ignoring this notice. You are given 30 days to appeal the levy and the 30 days is not extendable.

When you need to know what the IRS cannot do in a collection matter, reference the Internal Revenue Manual 5.10.1, and defend yourself under the Service’s own rules.


The Tax Discharge Timeline for Bankruptcy

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October 17, 2014

By: Dan Gibson, CPA


Gibson_New(1)There is a common misconception that all income tax debt is dischargeable in bankruptcy. In fact, you can discharge your back federal, state, and local income tax debt in Chapter 7, Chapter 13, and Chapter 11 if certain criteria are met. That’s where determining which back tax debt is dischargeable can be a little complex.

The 3-Year, 2-Year, and 240-Day Rules

The Bankruptcy code sets out specific time periods that determine if you can discharge your taxes, often called the 3-year, 2-year, and 240-day rules (or the 3-2-240 rules). Under these rules, you can discharge taxes that came due 3 years before filing for bankruptcy, as long as it has been at least 2 years since you filed the tax forms and 240 days since the taxes were assessed. These rules are often misunderstood. However, the important thing to understand is that you must meet the requirements of all three rules to discharge your taxes.

The 3-Year Rule: This rule states that to discharge your back income taxes, they must become due at least three years before you file for bankruptcy. Typically, your federal and most state income taxes become due on or around April 15 of each year. In most cases, it is simply a matter of adding three years to this due date to determine the earliest date you can file for bankruptcy and still discharge your taxes.

Example: Joe’s 2008 federal income taxes are due on April 15, 2009. If Joe owes taxes for that year and wants to discharge them, the earliest he can file for bankruptcy is April 15, 2012 (April 15, 2009, plus 3 years).

The 2-Year Rule: Under the 2-year rule, your income tax returns must have been filed at least two years before filing your bankruptcy petition. This requirement allows you to discharge your taxes, even if you filed your tax forms late, as long as you file them at least two years before filing for bankruptcy.

Example: Jill’s 2008 income taxes were due on April 15, 2009. However, she did not get around to filing her tax forms until June 1, 2010. If Jill wants to discharge her 2009 taxes, she cannot file for bankruptcy until June 1, 2012 (two years from the date she filed her taxes AND more than three years from the date the taxes were due).

What if you did not file? If you did not file an income tax return in a given tax year, any taxes assessed by the IRS for that year are not dischargeable. If the tax debt is significant, you might be advised to go ahead and file the tax forms, then wait to file for bankruptcy.

The 240-Day Rule: Taxes must be assessed at least 240 days before you file for bankruptcy under this rule. As a practical matter, the date of assessment is typically on or near the date you filed your income tax form (assuming the IRS and you agree on the amount of taxes owed). However, if you file a correction or a change results from an IRS audit, the assessment date may be substantially later.
Example: Jill files her 2008 taxes on time on April 15, 2009. The IRS audits Jill’s taxes and finds that Jill made a mistake. She actually owes a few hundred dollars more than shown on her original tax form. The IRS assesses the new amount on March 1, 2011. To discharge these taxes, Jill will have to wait until October 27, 2011 to file for bankruptcy (240 days from the IRS’s new assessment).

If back taxes are an issue, it may be necessary to order an IRS “account transcript” for the tax years in question. The account transcript typically includes the assessment date. You can order an account transcript from the IRS over the phone or online, or using IRS Form 4506T. 
Other actions can add additional time to some or all of the 3-2-240 time requirements, including (a) making an offer in compromise, (b) having filed for bankruptcy previously, or (3) obtaining a taxpayer assistance order.  However, simply entering into a payment arrangement with the IRS does not toll the statute of limitations.

If you have any questions on this issue or any other bankruptcy matters, please do not hesitate to contact your tax or bankruptcy professional.

If you want to learn more about this topic and other issues when working with the IRS, please join Tim Schuster and myself in a one hour webinar titled  “Dealing with the IRS: What You Need to Know”  October 23  at Noon E.T.  - See more

New ACA Draft Forms Released

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September 19, 2014

By Dan Gibson, CPA

Gibson_New(1)The IRS has released preliminary, unofficial drafts of forms that the Affordable Care Act (ACA) compels employers, plan administrators and employees to file to certify coverages offered and provided to employees in 2015. These forms are:

Form 1095-A (Health Insurance Marketplace Statement) – Form 1095-A is filed by the ACA Exchange to the IRS and to those who enrolled in coverage through the Exchange. This will be used by enrollees in preparing Form 8962(see below).

Form 1095-B (Health Coverage) – This will be filed by health insurance issuers and employers that sponsor self-insured health plans that provide individuals with “minimum essential coverage” to report to the IRS and to enrollees information concerning the type and period of coverage offered for the purposes of administering the ACA’s individual shared responsibility provisions.

Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) – Large employers will file Form 1095-C to provide information to the IRS and to employees about the type of health coverage offered to their employees for purposes of the large employer “pay or play” mandate. The form provides information on the coverage provided, and on to whom and when the coverage was offered. The IRS will use Form 1095-C to determine whether the employer owes payments under the employer shared responsibility provisions.

As part of an effort to streamline the reporting process, applicable large employers that sponsor self-funded health plans are to report the information required of them for both the individual (1095-B) and employer mandates (1095-C) on a single combined form using Form 1095-C.

Form 8962 (“Premium Tax Credit”) – Using information from Form 1095-A, subsidized exchange purchasers will file Form 8962 with Form 1040 to determine the amount of premium tax credits they should be reporting on their Form 1040. If they took advanced credits (reduction of insurance premiums purchased on Exchange), this form will calculate whether they need to take additional credits on their Form 1040 (because not enough advanced credit was taken) or pay back amounts for taking more advanced credits than should have been taken.

Form 8965 (“Health Coverage Exemptions”) – Individual mandate exemptions are claimed on Form 8965. This form is prepared by taxpayers and will be filed with Form 1040.

The IRS release suggests that further mandate enforcement delays are not under consideration.  Though the official forms and instructions for their use will not be available for months, this early look should help employers and their benefit administration partners assess the significant administrative burdens to come.

And yes, it is true: A draft of the 2014 Form 1040 reveals that the individual mandate has been covered by way of a query on Line 61.

You Didn't File a 1099?

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September 9, 2014


By Dan Gibson, CPA

Gibson_NewHere is the scenario: You paid your subcontractors, but did not send them a Form 1099 for the payments. You’re being audited; the IRS requests verification and provides the auditor with copies of your checks verifying the payment. No problem, right? But the IRS auditor says you cannot deduct an expense if you did not send out Form 1099. 

But you paid the expense, and can prove it.

Huh? Is this possible? It seems so unfair.

It is not possible, and it’s wrong. The IRS auditor is confusing two separate rules. Here are the steps to overcome the issue:

Rule 1: Prove that the expense was a necessary part of your business, and that you paid it.

Section 162 of the Internal Revenue Code allows a deduction for ordinary and necessary business expenses that are paid or incurred during a year. In the case of subcontractors, you would need to prove to the IRS auditor that the work performed was done in the ordinary course of your business and was necessary to it, then prove that you paid the contractor.  A check to the contractor proves the payment (it is best if the check has a notation in the memo portion, notated along the lines of “labor for Smith job,” but that’s not absolutely necessary, just good practice for the future).

Rule 2:  Send a Form 1099 to the IRS so they can check that your contractor reported the payment on his tax return. 

Rule 1 is about your ability to prove your expense; Rule 2 is about the IRS tax enforcement to your contractors. They are both important, but they are two different things. Remember, proving an expense under tax code Section 162 does not require the sending of a Form 1099. Section 6041 of the Internal Revenue Code requires a business that pays more than $600 to a subcontractor providing services to send the IRS a Form 1099-MISC reporting the amount paid.

The IRS wants to know how much your subcontractor was paid, and whether your subcontractor reported the income on his tax return. The IRS takes the Form 1099 you send them, and makes a computer match to your contractor’s tax return. If the income was not reported, or if a tax return was not filed, the IRS could write to your subcontractor to collect the taxes not paid on the income. This is an essential tool to enforce compliance with our tax laws, but it is not in any way tied to your entitlement to write-off the expense on your tax return.

Not following Rule 2 has its own result for you: Under Section 6721 of the Internal Revenue Code, the IRS can charge you with a monetary penalty for every person for whom you did not send a Form 1099. This is pretty important for the IRS, so IRS auditors like to wrap it into Rule 1. That’s incorrect  – you can comply with the deduction requirements and be entitled to the deduction.

What to do if your IRS auditor will not budge

You have rights if you disagree with an IRS auditor. An IRS auditor not allowing a business expense that can be verified for which a 1099 was not issued is a definite source of disagreement. Initially, ask to speak to the auditor’s supervisor if you can’t resolve this with him or her.

If you aren’t satisfied, you have a legal right to appeal. That includes decisions of IRS auditors. Your rights include requesting an administrative hearing with an IRS appeals officer, who is separate from audit and will take a fresh and impartial view of your case. Most IRS appeals officers understand the difference between proving an expense (Rule 1) and not issuing Form 1099 (Rule 2).

Hopefully, it won’t come to this, but you also have the right to file a petition to U.S. Tax Court and have an independent judge – who is not affiliated with the IRS in any way – review your case. You can testify to the judge, tell her your story, and present your evidence. The IRS would need proof that you did not pay your subcontractors. Without this, not issuing the 1099 is not a defense for the IRS. It is the auditor’s opinion, an opinion which is subject to appeal, trial and being overturned.

Look at it this way:  If you issued a Form 1099 to your subcontractors but have no records to prove you paid the expenses, the IRS would not allow you the expense. 

Are They Really Independent Contractors?

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September 3, 2014

By Dan Gibson, CPA

Gibson_New(1)This is a drum worth beating, especially in light of the upcoming employer mandates from the Affordable Care Act that are scheduled to go online in 2015. You can bet that enforcement in this area of the law by the IRS will increase in the upcoming years.

Employers may be tempted to classify workers as independent contractors/freelancers as opposed to full-time employees. Doing so eliminates the cost of company benefits such as vacation, sick pay, health insurance and retirement funding. It also eliminates the employer’s matching share of Social Security and Medicare payroll taxes, not to mention saving on unemployment taxes and worker’s compensation insurance.

However, traveling down this road requires the utmost of caution. Just designating and then paying a worker like an independent contractor does not necessarily make him one. And if you are subsequently challenged on that classification by the IRS or your state taxing authority and lose, you’ll probably have to pay back all those savings plus penalties and interest. The company’s retirement plan could also be in jeopardy of losing its qualifying status if workers who should have been eligible to participate were excluded from the plan.

The line between independent contractor and employee is not always clear; the following are some guidelines that can be used in making the determination.

The three primary characteristics the IRS uses to determine the relationship between businesses and workers are: Behavioral Control, Financial Control and the Type of Relationship. 

  • Behavioral Control – Relates to facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means. 
  • Financial Control – Relates to facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. 
  • Type of Relationship – Relates to how the workers and the business owner perceive their relationship.  If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Here are some additional factors to consider when making a determination: 

  • Sole Employer – An independent contractor is in business for him or herself and generally will have additional clients for whom services are provided. If you are the only client and he or she is not actively pursuing work from others, then it becomes an indicator favoring employee status. 
  • Work Schedule – Independent contractors generally set their own work schedule. Requiring the worker to maintain regularly scheduled work hours is an indicator of employee status. 
  • Materials & Supplies – Independent contractors generally provide their own materials and equipment and invoice their clients for labor and materials. If you provide all of the material and supplies, that is another indicator of employee status. 
  • Work Location – Another indicator of employee status is when a worker performs services only at your work location and does not maintain an office or facilities elsewhere. 
  • Assistance – If the independent contractors uses your employees to assist in his work and does not have employees of his own, this may indicate a lack of independent contractor status.

Lastly, if you want a fighting chance in your classification battle with the IRS or your state authorities, please ensure that you are in compliance with Form 1099 filings.   If 1099s are not properly filed for unincorporated independent contractors providing $600 or more in services, your position will not have much traction.

What you need to know before moving anything to the “CLOUD”.

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August 27, 2014


“The Cloud”.  You see it everywhere.  Everyone wants to be there.  People tell you that you need to be there.  But what is it?  Why is everyone talking about it?  What does it mean for your business?  What is a Public Cloud, a Private Cloud, a Hybrid Cloud?  If you are trying to understand all this before you move there, you are not alone.  Learn what is behind “The Cloud”, who the major players are, why you should consider moving there (or not), and more importantly, what you need to know before you choose your Cloud partners.  
What “The Cloud” really is

  • Why you should (or should not) consider moving anything there
  • What problems “The Cloud” will solve (or create) for you
  • What improvements/advantages does it offer
  • Who are the major Cloud vendors, why, and what they offer
  • What SaaS and multi-tenancy mean for you
  • What are Public, Private, and Hybrid Clouds
  • What are Virtual Desktops, Virtual Servers, Published Applications
  • What is the future of the PC, the tablet, the smartphone
  • What does all this mean for your existing technology investment
  • The emergent issues re: Privacy, Security, Reliability, Performance, Disaster Recovery
  • Why studies show a significant level of dissatisfaction with “The Cloud”
  • What are the hidden costs, unforeseen issues, problems
  • All the questions that you must ask before moving anything to “The Cloud” to ensure success

If the issues above have peaked your interest, consider joining me and Bill Blum of Alpine Business Systems, Inc. on September 23, 2014 for a webinar that will broadcast between Noon and 1PM Eastern.   Stay tune for event registration early September on our event page.

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