Masters in Taxation
Actual Cases to Consider
All of the below are based on real client experiences.
Of course names and amounts are changed to protect confidentiality.
You received a notice you are being audited
You just received a letter from the IRS requesting that you provide supporting data for items on your tax return or that they have matched up your return with their records and find you owe additional tax. This is called a correspondence audit. You may also receive a letter from the IRS notifying you that an in-person audit has been scheduled requiring your presence along with all of your supporting data. You have a choice. You can represent yourself. However, this is not the best idea, not because the IRS is evil, but because there are complexities that can confuse and overwhelm you. The best thing to do is locate a tax professional that can navigate the audit in your behalf. This not only saves you time and anxiety but ensures that your tax return is defended correctly. In other words, the audit should not result in you paying more tax than is necessary.
Case #1 - A letter audit
The letter indicated a tax increase was due in the amount of $14,000. If the letter is ignored the IRS will go through statutory time frames, issue more notices, assess the tax and begin collection. In this particular case the taxpayer had prepared their own return and the husband left out some expenses, not deliberately, just not aware. The IRS also had income on file the taxpayer forgot to report. I reviewed the return as filed and collected data from the taxpayer and discovered that after reporting all income and expenses that a refund of $4,000 was actually due. An amended return was filed, and the refund was obtained. In short, the IRS was not simply trying to collect $14,000, the IRS prefers that an accurate and honest return be filed, and they respect that.
Case # 2 - You received a Taxpayer Compliance Measurement audit notice
Taxpayers return was fairly complex and ordinarily not subject to a TCM audit, but it happened. Taxpayer immediately hired me to navigate the audit. The audit took over a year to complete. The IRS Agent requested extensive income and expense supporting data. The Agent also disagreed with the way the taxpayer had reported certain income and expenses. The cumulative Income Tax Examination Change Reports (ITEC) claimed taxpayer owed an additional $132,400. Some of this amount was not defensible as supporting documents for certain expenses could not be located. However, there were some income issues related to complex transactions that we did not agree with the Agent on. In the end the Agent accepted the taxpayer's position on the income issues and the net result of the audit was a tax due of $7,900.
Case #3 - Significant penalties were assessed during an audit
Taxpayer was audited and certain deductions taken on the return were based on inflated valuations. In fact, based upon the way in which the deductions were claimed on the return, the taxpayer was facing potential fraud penalties for overstating deductions with no support for same. The Agent closed the ITEC report disallowing the deductions, adding the additional tax owed, and added considerable accuracy related penalties. I suggested that the taxpayer appeal the addition of penalties, and while the taxpayer did have to pay the additional taxes owed, the Appeals Officer agreed to waive penalties that amounted to 20% of the tax assessed.
Is your Charitable Trust (CRT) underperforming?
The IRS does allow for dissolution of charitable trusts based on valuation tables. The process of completing dissolution must navigate several steps. Charities must agree to accept lump sum payments, and income beneficiaries will pay income taxes on early dissolution. However, there are situations where this is a favorable outcome for both charities and income beneficiaries. Upon dissolution final tax returns are completed and assets are distributed for the immediate use of the beneficiaries.
A case where CRT Dissolution was warranted and completed
Parents Julius and Maya, on the advice of an estate planner, set up a CRT in the 1970s for the benefit of their children and named charities. Cash, marketable securities, and real estate funded the trust. In succeeding years income from the trust was insufficient to meet the needs of the beneficiaries. The assets in the trust were of good quality, they just did not generate sufficient income to meet expenses and allow for distributions to the children and charities.
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If you think your charities and beneficiaries would benefit from dissolution and distribution of assets to each please contact me and we can discuss this further.