Articles Posted in Recent News

The world has had to learn a new vocabulary in recent weeks. In an effort to slow the spread of the coronavirus and the disease it causes, COVID-19, public health officials across the globe have urged people to practice “social distancing.” Non-essential businesses are closed, and thousands if not millions of people have quickly learned how to work remotely. In the midst of all of this, the federal government has offered some relief by delaying Tax Day for three months. Instead of income tax returns and payments being due on April 15, they will now be due on July 15.

Why April 15?

April 15 has been the due date for federal income taxes for a little less than seventy years. Income taxes themselves have only been an inevitable part of life nationwide for a bit more than a century.

The Sixteenth Amendment to the U.S. Constitution first authorized the federal government to levy an income tax in 1913. Eight years earlier, the Supreme Court had ruled that an income tax contained in a tariff bill was unconstitutional. Amending the Constitution overruled the court.
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Our tax advocates know that investing in an individual retirement account (IRA) can be an excellent way to set money aside for retirement and save on federal income taxes. An important caveat for traditional IRAs is the required minimum distribution (RMD). As the name implies, you must withdraw a minimum amount by a certain date, based on your age. A bill signed into law last year, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, raises the age for the RMD, and removes an obligation for banks to notify their IRA customers of an upcoming RMD date.. The new law took effect almost immediately, which might catch some banks by surprise. The IRS has therefore issued a notice giving latitude to banks that issue incorrect notices in 2020, provided they also issue a correction to those customers.

What Is a Required Minimum Distribution?

With a “traditional” IRA, you can contribute money before taxes up to a certain amount each year, but you must withdraw a minimum amount by a specified date. Prior to the SECURE Act, the Internal Revenue Code (IRC) required an RMD by April 1 of the calendar year following whichever occurs later:  the account owner reaches the age of 70½; or the account owner retires. This can be confusing for many people:

– If a person turned 70 years old on February 1, 2017, they would turn 70½ on August 1, 2017, and their RMD date would be April 1, 2018.
– If, however, they turned 70 on August 1, 2017, then they would turn 70½ on February 1, 2018, and their RMD date would be April 1, 2019.

This might be why the law required banks to notify customers with traditional IRAs of an upcoming RMD. Banks use IRS Form 5498 to show IRA contributions during the year. Box 11 shows whether an IRA owner must make an RMD. Boxes 12a and 12b show the RMD date and amount, respectively. Banks must send these forms out by January 31 of each year.

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The IRS must follow a series of procedures to collect unpaid taxes. The first step is to send written correspondence to the taxpayer informing them that their tax return is overdue and advising them of the penalties for continuing to fail to file. From there, the IRS may place a lien on a taxpayer’s property, followed by the execution of a levy. It could hand long-delinquent cases over to private debt collectors. Our Los Angeles tax advisors have observed that the IRS recently announced that revenue officers (ROs) will be visiting high-income taxpayers with at least one unfiled tax return in 2020. “High-income” in this instance means annual income of more than $100,000.

What Is a Revenue Officer?

ROs work at IRS field collection offices located around the country. Their job is to collect unpaid taxes, but their powers in that regard are somewhat limited. They are civilian employees, not law enforcement officers. They therefore do not wear a uniform or carry a firearm, and they cannot make arrests. They carry identification cards, not badges.

If an RO has reason to believe a criminal offense, such as tax fraud, has occurred, they must refer the matter to the IRS’s Criminal Investigation Division (CID). CID agents carry badges and can make arrests.

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As of November 2019, Senator Elizabeth Warren of Massachusetts is one of the front runners in the Democratic primary contest to determine the party’s 2020 presidential nominee. She has released detailed proposals for programs she would support as president. One initiative that has caught the attention of our California tax advisors involves proposed changes to the Internal Revenue Code (IRC) that would provide additional revenue to the federal government. Rather than expand the longstanding trend of taxing individual and business income, Senator Warren’s proposals would tax wealth and eliminate a major loophole with regard to the taxable value of inherited property.

What Is a Wealth Tax?

The Sixteenth Amendment to the U.S. Constitution, ratified in 1913, authorized Congress to impose an income tax at the federal level. This has been the primary source of tax revenue for the federal government ever since. The idea, for many, is that people with greater income would pay larger amounts of tax in order to benefit society as a whole. The IRS collects taxes on income, and on capital gains from the sale of assets.

Unlike income tax, which looks at how much a person earns in a particular year, a wealth tax would look at how much wealth a person has accumulated. A high net worth does not necessarily mean that a person has a high income, and vice versa. The New York Times notes that one of the richest people in the United States (and the world) has a net worth of about $84 billion, but an annual salary of only $100,000, plus capital gains on assets he actually sells. Under current tax law, he only pays tax on that income.

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The IRS has many options for collecting unpaid taxes, but a limited budget means that the agency must prioritize its enforcement and collection efforts. For most taxpayers who are in arrears, penalties and interest accrue as the IRS sends notices by mail. Eventually, the IRS might place liens on a taxpayer’s property, and then execute a levy. This can be costly and time-consuming, and the agency would rather obtain unpaid taxes by other means. It recently announced that IRS revenue officers will be conducting in-person visits with delinquent taxpayers in several states. While this will not affect California taxpayers right away, that could change in the future. If you are behind in filing and/or paying taxes, you may want to speak with a California tax advisor about your situation.

IRS Debt Collection

Federal law gives the agency two main options for pursuing tax debt that has remained on the books for some time. These may apply to both individual taxpayers and businesses. The Taxpayer’s Bill of Rights (TBOR) applies in all cases.

Revenue Officers

The IRS describes revenue officers (ROs) as “civil enforcement employees” assigned to cases involving unpaid taxes or missing tax returns. A RO’s involvement in a case typically begins with another written notice sent by mail. The RO’s job, according to the IRS, is to help bring taxpayers into compliance, “not to make threats or demand some unusual form of payment for a nonexistent liability.”

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Virtual currency, which the IRS defines as “a digital representation of value” that does not represent the U.S. dollar or any other national currency, has gained in popularity in recent years. For some, it offers an alternative to “real currencies” like the dollar for financial transactions. For others, virtual currencies offer investment opportunities. The IRS has held since 2014 that virtual currency is “property” for the purposes of federal income tax. A recent ruling, Rev. Rul. 2019-24, offers further guidance for investors and California tax advisors alike. The ruling addresses two specific events, known as “hard forks” and “airdrops.”

What Is Cryptocurrency?

Several key features define cryptocurrency and distinguish it from other virtual currencies:
Cryptography: Encryption protects cryptocurrency from forgery and other forms of manipulation. Many cryptocurrencies use blockchain technology, which creates a new and unique record every time a unit of currency is transferred.
Decentralization: Cryptocurrencies are not issued by any centralized financial authority. Instead, they are created through computing processes known as “mining.” Cryptocurrency transactions are logged on databases known as “distributed ledgers,” which are maintained across multiple computer systems, or “nodes.” This also protects against forgery or falsification of records.

Taxable Gross Income

Section 61 of the Internal Revenue Code (IRC) identifies various forms of “gross income” that is subject to federal income tax. This includes “gains derived from dealings in property.” The IRS ruled in 2014 that cryptocurrency is “property” for the purpose of calculating gross incomes.

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The IRS has estimated that U.S. taxpayers underpay their taxes by around $300 billion each year. Each taxpayer is responsible for calculating their own tax bill, but the IRS also uses other sources of information. It compares the information provided on taxpayer returns to that other information. If it finds a discrepancy, it sends a notice to the taxpayer. For years, the IRS used a form known as the CP2000 Notice, or the “Notice of Underreported Income.” The IRS recently began to use another form, the CP2057. Taxpayers should be aware of both notices, and our California tax advisors urge you to be aware of what you should do if you receive either one.

Warning Letters

Federal law gives the IRS extensive authority to collect unpaid taxes, but the process involves a lengthy series of notices. CP2000 and CP2057 are preliminary notices. They are not “bills,” in the sense that receiving one of these notices does not immediately trigger an obligation for the taxpayer to send money to the IRS. Instead, they are ways for the IRS to notify a taxpayer about discrepancies in their file, and to give them an opportunity to correct the information.

In order for the IRS to pursue a collection action against a taxpayer, they must send a formal notice and demand for payment, known as a CP501 Notice. This notice identifies a specific amount owed and gives a deadline for payment. If the taxpayer fails to pay by the deadline, or otherwise fails to respond to the notice, the IRS can file a tax lien. If the IRS intends to levy the taxpayer’s property, it must send a CP504 Notice.

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The Taxpayer First Act (TFA) of 2019, which became law on July 1, makes a variety of changes to the Internal Revenue Code (IRC). Title II, Subtitle A of the TFA, entitled “Cybersecurity and Identity Protection,” addresses taxpayer identity theft. As more and more tax preparation and filing activities move into online spaces, cybersecurity is a growing concern. The TFA directs the IRS to work with the private sector to improve data security, and to standardize and improve its policies and practices regarding taxpayer data. It also increases penalties for misuse of confidential taxpayer information.

What Is Identity Theft?

Identity theft involves the unauthorized use of personally identifying information (PII)—name, address, date of birth, Social Security number, etc.—for financial gain. An identity thief might, for example, purchase items with a credit card in someone else’s name, and leave that person with the debt. In many cases, a person hacks into a private company’s servers steals a large volume of data and tries to sell that data to others. A hacker allegedly gained access to the records of over 100 million people stored on a server owned by Capital One in March 2019. Federal prosecutors allege that the hacker attempted to share this information with others.

Several massive data breaches have occurred in the private sector in recent years. Consumers have incurred losses due to identity theft, and banks, credit card companies, retailers, and other businesses have faced substantial liability. Taxpayer information transmitted online to the IRS, as well as data stored by the IRS, includes numerous forms of PII. Section 6103(a) of the IRC prohibits the disclosure of “returns and return information” by government employees, contractors, and others, except as specifically authorized by law.

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In 2003, Congress allowed eligible taxpayers to deduct contributions up to a certain amount to a health savings account (HSA). In order to qualify for the HSA deduction, a taxpayer must be covered by a high-deductible health plan (HDHP). This means that the plan must require the covered individual to pay a rather large amount out-of-pocket before the insurer must contribute. The HDHP is not, however, required to have a high deductible for services deemed “preventive care.” In July 2019, the IRS issued Notice 2019-45, which describes an expanded list of medical services and medications that will be considered preventive care for the purposes of HSA deductions. This is hopefully good news for people who need various preventive medical services.

What Is a Health Savings Account?

Congress created HSA’s in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Title XII of the bill, entitled “Tax Incentives for Health and Retirement Security,” adds a new § 223 to the Internal Revenue Code (IRC), codified at 26 U.S.C. § 223. It allows “eligible individuals” to deduct contributions to an HSA, with an annual limit of $2,250 for a health insurance plan with single coverage, or $4,500 for a family plan. Additional contributions are allowed for people who are 55 years old or older. In order to be an “eligible individual,” they must be covered by an HDHP.

What Is a High-Deductible Health Plan?

Section 223(c)(2) of the IRC defines an HDHP as a health insurance plan with an annual deductible of at least $1,000 for a single individual, or $2,000 for a family; and an annual sum of the deductible and out-of-pocket expenses of no more than $5,000 for an individual or $10,000 for a family.
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