Each year, the IRS sends millions of letters and notices to taxpayers. I frequently receive calls from panicked taxpayers regarding IRS collection notices they received in the mail. Fear is the IRS' best weapon.
These IRS collection notices serve two purposes:
(1) inform taxpayers of their rights and
(2) to demand payment.
These notices are generated now by the IRS computers, and are essentially “form notices”, but each notice conveys important information. The first and subsequent notices come regularly, often 4-5 weeks apart, with each subsequent notice promising more aggressive action by the IRS to collect the tax debt.
The first three IRS collection notices are informative in nature. The IRS wants you, the taxpayer, to know how much you owe and that the IRS expects you to pay. These notices also inform the taxpayer that if payment is not forthcoming that the IRS is going to use more aggressive collection tactics such as IRS bank levies and wage garnishments.
It is the last IRS collection notice labeled “Final Notice of Intent to Levy” that you need to be concerned about. Once you get this notice you can expect the IRS to do a bank levy or wage garnishment. No longer is the IRS seeking to inform the taxpayer, the IRS is now in tax collection mode and you can expect more aggressive action on the part of the IRS to get the taxes paid.
The collection notices you can expect to receive are listed here in the order you will receive them.
CP14 - First notice - Balance Due on Tax Return
CP501 – Second notice - You Still Owe a Balance – Reminder
CP503 – Third notice – Second reminder but sometimes the IRS skips this notice and goes directly to the fourth notice
CP504 – Fourth notice - Notice of Intent to Seize (Levy) Your Property or Rights to Property (If you have not paid your tax debt or arranged for a plan of resolution after receiving these notices, the threats get serious. If you get one of the following notices, you have little time to act before losing rights and getting your income or assets seized)
CP90 – Fifth notice - Final Notice of Intent to Levy; Notice of Your Rights to a Hearing
LT11 – Final notice - Intent to Seize Your Property or Rights to Property
If you or someone you know in the Raleigh, North Carolina has received an IRS collection notice, please feel free to contact me directly at (919) 290-1011.
With the current super-generous federal estate tax exemption of $11.4 million, estate planning may be completely off your radar.
After all, with that huge exemption, you may think there’s no way your estate would owe any federal estate tax if you happen to die—expectedly or unexpectedly. Is your thinking right?
You should probably take one very important estate planning action as soon as you finish reading this.
Check the beneficiary designations for your
If you’ve not yet turned in the forms to designate beneficiaries, please do it now. If the forms are out of date, change them to reflect current reality before it’s too late.
If you need motivation, here are two real-life horror stories to light a fire under you.
Real-Life Horror Story 1
Dad failed to change the beneficiary designations for his Boeing Corporation pension benefits and life insurance after his divorce, so Dad’s ex was still the named beneficiary.
Two months later, Dad died in a car crash. The Supreme Court ruled 7-2 that the beneficiary designations trumped a state law that would have automatically disinherited the ex. So the ex got the money, and the kids got the bills for an unsuccessful legal fight that went all the way to the Supreme Court. Oops!
Real-Life Horror Story 2
In another real-life case, the ex-spouse collected $400,000 from Dad’s company savings and investment plan even though the ex had specifically waived any interest in the plan under the divorce agreement.
Believing the divorce agreement was the last word on the subject, Dad failed to turn in the form to officially change the plan beneficiary from his ex to his daughter.
He died seven years after the divorce. The company plan document stipulated that beneficiaries could be changed only by submitting the required form.
The Supreme Court unanimously ruled that the hideously outdated beneficiary designation trumped the divorce agreement. So the ex got the $400,000, and the daughter got stiffed. Oops!
The two Supreme Court decisions were not even close calls. Pay attention to your beneficiary designations.
The Disaster Avoidance Message
Divorce is not the only situation where failing to turn in or update beneficiary designation forms can cause big problems for your intended heirs—it’s just the most obvious situation.
For example, the same basic issue exists if you become disenchanted with an adult child who has decided to become a professional Frisbee golfer on top of marrying someone you can’t stand.
Or you might now decide to leave more of your life insurance benefits to an adult child who just had twins and less to your childless offspring.
You get the idea. When things in your life change, you may need to refresh your beneficiary designations.
Another big reason to designate beneficiaries: it avoids probate.
Also, consider naming contingent beneficiaries. These are individuals who stand in line behind your primary beneficiaries.
Do not rely on a will or living trust document to override outdated beneficiary designations. As a general rule, whoever is named on the most recent beneficiary form (which may not be nearly recent enough) will get the money automatically when you die—regardless of what other documents might say.
Check your designations at least once a year or whenever significant life events occur.
It usually takes only a few minutes to conduct a checkup and make any needed changes. Often you can access the necessary forms online. But if you wait, it could be too late, as illustrated by the real-life horror stories presented earlier. Don’t wait!
If you have questions about beneficiaries, please don’t hesitate to call us at 919-290-1011.
Owing money to the IRS or state can be extremely stressful and you may be tempted to ignore the situation, but this will only make it worse. But where do you start? Let’s begin by explaining the IRS collection process.
After a tax return is filed and processed, the IRS will assess the taxpayer for any taxes due and not paid with the return. A notice or demand for payment is then mailed to the taxpayer. If this notice goes unpaid, a silent lien arises by statute, attaching to all the taxpayer’s assets owned and later acquired. This lien continues until the liability for the amount assessed is satisfied (paid) or becomes unenforceable due to the passing of the collection statute expiration date.
If these notices are ignored, a final notice of the IRS’s intent to levy the taxpayer’s income and assets is sent, beginning the statutory 30-day window for the taxpayer to request a collection due process hearing. If the taxpayer owes more than $10,000, the IRS files a Notice of Federal Tax Lien in the public records.
Assuming an appeal is not filed, and the amount assessed is not paid, the IRS begins seizing the taxpayer’s assets, including garnishing wages and seizing funds in the taxpayer’s bank accounts. This process of enforced collections continues until the taxpayer pays the liability due plus interest and penalties.
While there are several options available to you when you owe taxes to the IRS or to the state, navigating the maze of requirements can be confusing at best. If you need help getting in compliance with your IRS and state tax filings, please contact our firm at (919) 290-1011.
We focus on assisting taxpayers with IRS and North Carolina Department of Revenue issues in the greater Raleigh, North Carolina area.
If you own a condominium, cottage, cabin, lake or beach home, ski lodge, or similar property that you rent for an “average” rental period of seven days or less for the year, you have a property with unique tax attributes.
Seven days example. Say you have a beach home and you rent it 15 times during the year, for a total of 85 days. Your average rental is 5.7 days. That’s an average of seven days or less for the year.
The right type of beach home or vacation cottage can produce great tax results when the average rental period is seven days or less.
But it’s tricky because when the average rental period is seven days or less, the property is not a rental property as defined by the tax code. Instead, the property is
> a commercial hotel type property that you report on Schedule C of your tax return if you provide services in connection with the rentals, or
> a weird in-limbo property that you report on Schedule E when you don’t provide services.
If the property shows a loss, you can deduct that loss on either Schedule C or Schedule E if you can prove that you materially participate. With the seven-days-or-less-average rental, you likely have only two ways to materially participate:
(1) The combined participation by you and your spouse constitutes substantially all the participation in the seven-days-or-less-average rental activity when you consider all the individuals who participated (including contractors).
(2) The combined hours of participation by you and your spouse in the seven-days-or-less-average rental activity are (a) more than 100 hours and (b) more hours than the participation of any other individual.
Example. Your seven-days-or-less beach rental produces a $20,000 tax loss for the year. On this rental, you spend 65 hours during the year. No other person works on the rental. You materially participate in this rental, and the $20,000 is deductible—period (regardless of its location on Schedule C or E).
If you have a profit on the rental, you likely have a Section 199A deduction when you report the rental on Schedule C as a business. Although not deemed a business by Schedule E reporting, the Schedule E rental could rise to the level of a business as defined for the Section 199A deduction.
If you have one of these seven-days-or-less-average rental properties and would like to discuss it, please call us at (919) 290-1011.
Good news. The Tax Cuts and Jobs Act (TCJA) did not harm the backdoor Roth strategy.
As you likely know, the Roth IRA is a terrific way to grow your wealth with a minimum tax downside because you pay the taxes up front and then, with the proper holding period, pay no taxes after that.
But if you earn too much, you’re completely barred from contributing to a Roth IRA unless you can use the backdoor Roth technique, which involves making a nondeductible contribution to a traditional IRA and then rolling that money into a Roth.
The backdoor Roth strategy has been around for a good nine years, and it has experienced no trouble that we are aware of, so we think it’s a good strategy. We also like the recent notations in the legislative history and the comments from the IRS spokesperson that show approval of the strategy.
Keep in mind that with some planning, you can avoid any taxes on the rollover. For example, if you have an existing traditional IRA, you can move those monies to your qualified plan to avoid having the backdoor strategy trigger some taxes. And if you have no traditional IRA, the nondeductible contribution to the traditional IRA and the subsequent rollover to the Roth IRA triggers no taxes.
Tax reform’s Section 199A deduction often confuses small-business owners and tax professionals alike. It’s quite possible you’ll get a Schedule K-1 from a business that omits the information you need to calculate your deduction.
What do you do?
You have a big problem. Without a properly completed Schedule K-1, your Section 199A deduction is a big fat $0.
Best option: fix the K-1. You should request a corrected Schedule K-1 from the entity giving you the Schedule K-1 so you have the information you need to calculate your Section 199A deduction.
Not-so-great options. If you can’t get a corrected Schedule K-1, you have two options:
(1) Take no Section 199A deduction.
(2) File Form 8082 with your tax return and claim the Section 199A deduction.
You file Form 8082 with your tax return when you take a position on your tax return that is inconsistent with the Schedule K-1 you received.
Since the final regulations presume the Section 199A amounts are $0 when omitted, it is possible Form 8082 can rebut that presumption. The truth is, we do not know for sure.
You can determine qualified business income, but not W-2 wages or unadjusted basis immediately after acquisition of qualified property, from the other information on the Schedule K-1. Therefore, the Form 8082 option is likely available only if you are under the Section 199A taxable income threshold ($315,000 on a joint return or $157,500 for all other filing statuses).
You also might use Form 8082 if your Schedule K-1 has wrong Section 199A information—for example, if the K-1 indicates the business is a specified service trade or business, but it is not.
Amended return. If you did not take a Section 199A deduction and you eventually get a corrected Schedule K-1, you can claim the deduction on an amended return and obtain a refund.
Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put money in the IRS’s pocket.
Now, if you have a bad year in your business, the new NOL rules are designed to stop you from using your business loss to find some immediate cash. The new (let’s call them bad-for-you) rules certainly differ from the prior beneficial rules.
Old NOL Rules
You have an NOL when your business deductions exceed your business income in a taxable year. Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years.
Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years.
New NOL Rules
Tax reform made two key changes to the NOL rules:
> You can no longer carry back the NOL (except for certain qualified farming losses).
> Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.
The changes put more money in the IRS’s pocket by eliminating your ability to get an immediate tax benefit from your NOL carryback, and delaying your ability to get tax benefits from future NOL carryforwards.
We are bringing the NOL rules to your attention in case you need to do some planning with us. We likely have some strategies that can help you realize some immediate benefits from your business loss.
If you are a small employer (fewer than 50 employees), you should consider the qualified small-employer health reimbursement account (QSEHRA) as a good way to help your employees with their medical expenses.
If the QSEHRA is indeed going to be your plan of choice, then you have three good reasons to get that QSEHRA plan in place on or before October 2, 2018. First, this avoids penalties. Second, your employees will have the time they need to select health insurance. Third, you will have your plan in place on January 1, 2019, when you need it.
One very attractive aspect of the QSEHRA is that it can reimburse individually purchased insurance without your suffering the $100-a-day per-employee penalty. The second and perhaps most attractive aspect of the QSEHRA is that you know your costs per employee. The costs are fixed—by you.
Eligible employer. To be an eligible employer, you must have fewer than 50 eligible employees and not offer group health or a flexible spending arrangement to any employee. For the QSEHRA, group health includes excepted benefit plans such as vision and dental, so don’t offer them either.
Eligible employees. All employees are eligible employees, but the QSEHRA may exclude
> employees who have not completed 90 days of service with you,
> employees who have not attained age 25 before the beginning of the plan year,
> part-time or seasonal employees,
> employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and
> employees who are non-resident aliens with no earned income from sources within the United States.
Dollar limits. Tax law indexes the dollar limits for inflation. The 2018 limits are $5,050 for self-only coverage and $10,250 for family coverage. For part-year coverage, you prorate the limit to reflect the number of months the QSEHRA covers the individual.