Taxpayer Awarded Attorneys' Fees Where IRS Refuses to Reverse Math Error

A taxpayer was entitled to attorneys' fees because the IRS wasn't substantially justified in refusing to abate an assessment attributable to an invalid change in filing status.

U.S. Tax Court Judge Buch says the IRS was required to abate an assessment that it made under Section 6213 as resulting from a mathematical or clerical error but was based on its changing taxpayer Michael Swiggart's filing status from head of household.

The IRS wasn't substantially justified in requiring Swiggart to prove head of household status when he had timely requested an abatement under Section 6213, Buch says.

Background

On May 19, 2011, Mr. Swiggart filed a 2010 Form 1040, U.S. Individual Income Tax Return. Mr. Swiggart claimed head of household filing status, reported tax due of $15,766, and reported tax withheld of $13,617. Mr. Swiggart did not pay the remaining $2,149. Moreover, Mr. Swiggart did not report the name of the dependent who qualified him for the head of household filing status because he had agreed to allow the child’s mother to claim the dependency exemption deduction for the child for 2010.

On June 20, 2011, the IRS issued a math error notice to Mr. Swiggart, stating that the IRS had changed his filing status because the name of the dependent who qualified him for head of household filing status was not reported on his tax return. As a result, the IRS recalculated Mr. Swiggart’s tax using a filing status of single and determined that Mr. Swiggart instead owed $4,354, an increase of $2,205 to the amount Mr. Swiggart had reported as due on his return.

In the notice, the IRS stated: “If you contact us in writing within 60 days of the date of this notice, we will reverse the change we made to your account.”

Sixteen days later, on July 6, 2011, the IRS issued a Final Notice of Intent to Levy and Notice of Your Right to a Hearing, seeking to collect the amount from the math error notice plus penalties and interest.

On August 5, 2011, 46 days after the IRS issued the math error notice, Mr. Swiggart’s counsel, Mr. Johnson, mailed a request for abatement by certified mail to the address listed on the math error notice. Also on August 5, 2011, Mr. Johnson mailed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, by certified mail to the “person to contact” listed on the notice of intent to levy. Mr. Johnson attached a supporting statement to the request for a hearing listing the reasons he believed Mr. Swiggart was entitled to head of household filing status, stating why he believed the IRS’ change in Mr. Swiggart’s filing status was not a proper mathematical or clerical error under section 6213(g)(2), and stating that he had timely requested abatement under section 6213(b)(2)(A).

On September 15, 2011, respondent issued Mr. Swiggart a letter stating that the IRS was unable to process his claim for abatement because his supporting information was not complete and the additional information Mr. Swiggart provided did not give the IRS a basis to change the assessment.


On October 24, 2011, Mr. Johnson contacted the settlement officer assigned to the CDP

hearing by letter informing him that the request for abatement had been denied despite his timely request and again requesting that the assessment be abated and that deficiency procedures be followed.

During the CDP hearing Mr. Swiggart provided a signed affidavit dated September 13, 2011, identifying his child by name and Social Security number and stating that his child spent the greater number of nights in 2010 with him but that he had an agreement with the child’s mother to waive the dependency exemption deduction for certain years, including 2010. The settlement officer agreed that claiming the child as a dependent was not required to qualify as a head of household, but the settlement officer also concluded that he could not abate the tax attributable to the change in filing status until Mr. Swiggart provided additional documents showing that the child had lived with him for more than half of the year. On February 8, 2012, IRS issued a notice of determination sustaining

the proposed levy because Mr. Swiggart had not proven that he was entitled to head of household filing status and because he had not proposed a collection alternative or provided financial information showing whether he was eligible for a collection alternative.

Mr. Swiggart, residing in Minnesota at the time, timely filed a petition disputing the notice of determination and asserting that the assessment respondent attempted to collect was invalid as to the portion relating to his filing status. Mr. Swiggart asserted that the change in filing status was not properly subject to a math error notice, that he had timely requested abatement, that the IRS had

erroneously concluded that he was required to prove his entitlement to the filing status before abatement, and that respondent had erroneously determined the assessment was valid. Respondent’s answer alleges that “the settlement officer provided the opportunity to contest liability which would cure any procedural issues” Mr. Swiggart raised.

On November 19, 2012, Mr. Swiggart filed a motion for summary judgment, requesting the Court to conclude that the portion of the assessment attributable to the change in filing status is void and that respondent may not levy to collect that portion. Mr. Swiggart 5 did not dispute the portion of the assessment attributable to the amount reported as due but unpaid with his return. On December 11, 2012, respondent filed an objection to Mr. Swiggart’s motion for summary judgment, stating that he did not object to abating the portion of the assessment attributable to the change in filing status but did object to abating the portion Mr. Swiggart reported as due on his return, which he acknowledged Mr. Swiggart was not disputing. On March 8, 2013, respondent filed a supplement to his notice of objection, informing the Court that he agreed that Mr. Swiggart’s motion for summary judgment should be granted only in part, as to the portion of the assessment attributable to the change in filing status. Respondent also stated in his supplement that the abatement had been approved but had not yet appeared on the certificate of assessment; respondent included a separate document showing that the abatement of $2,142 had been approved.

At trial on April 23, 2013, the parties filed a stipulation of settled issues. In the stipulation, the parties agreed that respondent had abated $2,142 of the assessment without prejudice to his right to reassess the amount using deficiency procedures and that the collection action is sustained as to the $2,149 that Mr. Swiggart reported as due but unpaid on his original return, plus penalties and

interest. After trial Mr. Swiggart filed a motion for an award of costs and a memorandum in support of his motion. Respondent filed a response asserting that Mr. Swiggart was not the prevailing party and that he is not entitled to attorney’s fees in excess of the statutory rate.

Conclusion

Mr. Swiggart was the prevailing party in this case, and the IRS was not substantially justified in failing to abate the assessment attributable to the change in filing status. As a result, we will grant Mr. Swiggart’s motion for an award of reasonable litigation and administrative costs under section 7430 in that he is awarded $3,256.50.

Feel like You're Not Getting a Square Deal from the IRS?

 

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Swiggart v. Commissioner (T.C.)

K-1 Income - Is It Subject to Self Employment Tax?

Your taxpayer client received a K-1 from a Limited Liability Company (LLC) in which he is a member. On line 14 of the K-1, there is a number being reported as self-employment earnings.

Is it correct? Should your client be reporting his/her share of LLC income as self-employment earnings? If the taxpayer does, they have an additional tax to pay, called the self-employment tax. This self-employment tax is imposed in addition to the regular income tax you already pay, and is imposed on your self-employment earnings. For self-employment income earned in 2013 and 2014, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Generally, a taxpayer’s share of ordinary income reported on a Schedule K-1 from a partnership engaged in a trade or business is subject to the self-employment tax. However, like any general rule, there are a myriad of exceptions, including one excepting a limited partner's share of ordinary income from a partnership. Should the term “limited partner” be interpreted to include members of a LLC? How about partners in a Limited Liability Partnership (LLP)?

The revised partnership statutes in most states have redefined the term limited partner to expand significantly the extent to which such a partner may participate in the control or activities of the partnership without jeopardizing the partner's limited liability. Also all states have added at least two new types of legal entities since the exception found its way into the Internal Revenue Code: LLCs and LLPs. While there are similarities between LLCs, LLPs, and traditional limited partnerships, the comparison is far from exact.

In a LLC, each member enjoys limited liability. Depending on the type of LLC (i.e., member-managed versus manager-managed), as well as provisions of the operating agreement, members are free to participate in the control and activities of the LLC to any extent.

LLPs arose as a means of protecting professionals from the liability of their partners engaging in negligent acts. Unlike a limited partnership, there is no need in a LLP for a general partner that remains wholly liable for the liabilities of the partnership; rather, each partner remains liable only for his or her own acts. In some states, the privilege of operating within the LLP form is reserved to certain professions (e.g., lawyers, doctors, architects, etc.) but in all cases, the partners of a LLP are free to participate in the control and activities of the entity without jeopardizing their liability protection.

So what is the right answer to the question of whether ordinary income on a K-1 constitutes self-employment earnings? Perhaps the reason why Congress, Treasury, IRS and Courts have found this to be such a vexing issue is that finding the right answer is so highly dependent on the facts and circumstances of each case.

Recent Tax Court cases seems to have focused on the nature of the taxpayer’s activities, and not on the title “limited,” or the liability protection enjoyed. In determining self-employment earnings, it would seem that, such a tack is appropriate. Unfortunately, it means that absent Congress coming forth with some bright-line definition, each situation will need to be analyzed carefully to determine whether the income constitutes self-employment earnings.

Need Help Determining Whether Your K-1 Is Subject To SE Tax? 

Contact the Tax Lawyers at

Marini & Associates, P.A.  

 

 

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ((888) 882-9243)

Source:


WTAS

IRS Simplifies Entering The New Streamline Program By Issuing New Forms 14653 & 14654!

We previously posted on Wednesday, June 18, 2014, "IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance" where we discussed that the IRS released IR-2014-73, which provides major changes in its offshore voluntary compliance programs, providing new options to help both taxpayers residing overseas and those residing in the United States.

The modified streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States.

Descriptions of the specific eligibility requirements for the streamlined procedures for both non-U.S. residents (the "Streamlined Foreign Offshore Procedures") and U.S. residents (the "Streamlined Domestic Offshore Procedures") are set forth on the IRS' Streamlined Filing Compliance Procedures web page; which originally required Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures to certify, that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.　

 
Now, the IRS has made this
 Certification Process even Easier

 by creating the following forms:

1. Form 14653 –Certification by U.S. Person Residing Outside　of the United States for Streamlined Foreign Offshore Procedures and




2. Form 14654 –Certification by U.S. Person Residing in the United States for Streamlined Foreign Offshore Procedures.

Specific Instructions for the 

Streamlined Foreign Offshore Procedures

1. For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed:
   • if a U.S. tax return has not been filed previously, submit a complete and accurate delinquent tax return using Form 1040, U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed on time, or
   • if a U.S. tax return has been filed previously, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with the required information returns (e.g., Forms 3520, 5471, and 8938) even if these information returns would normally be filed separately from the Form 1040 had the taxpayer filed a complete and accurate original return.
2. Include at the top of the first page of each delinquent or amended tax return and at the top of each information return "Streamlined Foreign Offshore" written in red to indicate that the returns are being submitted under these procedures.  This is critical to ensure that your returns are processed through these special procedures.
3. Complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (1) that you are eligible for the Streamlined Foreign Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 8 below); and (3) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.  You must submit the original signed statement and you must attach copies of the statement to each tax return and information return being submitted through these procedures.  You should not attach copies of the statement to FBARs.  Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.
4. Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts.  Your taxpayer identification number must be included on your check.  
5. If you are not eligible to have a Social Security Number and do not already have an ITIN, submit an application for an ITIN along with the required tax returns, information returns, and other documents filed under these streamlined procedures. See the ITIN page on www.irs.gov for more information.
6. If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:
   • a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
   • a dated statement signed by you under penalties of perjury describing:
     • the events that led to the failure to make the election,
     • the events that led to the discovery of the failure, and
     • if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and
   • for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission.
7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:
   
   Internal Revenue Service
   3651 South I-H 35
   Stop 6063 AUSC
   Attn:  Streamlined Foreign Offshore
   Austin, TX 78741
   
   This address may only be used for returns filed under these procedures.  For all future filings, you must file according to regular filing procedures.    

For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.  You are required to file these delinquent FBARs electronically at FinCen.  On the cover page of the electronic form, select “Other” as the reason for filing late.  An explanation box will appear.  In the explanation box, enter “Streamlined Filing Compliance Procedures.”  If you are unable to file electronically, you may contact FinCEN's Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.

Specific Instructions for the 

Streamlined Domestic Offshore Procedures

For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with any required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) even if these information returns would normally not be submitted with the Form 1040 had the taxpayer filed a complete and accurate original return. 　You may not file delinquent income tax returns (including Form 1040, U.S. Individual Income Tax Return) using these procedures.
Include at the top of the first page of each amended tax return "Streamlined Domestic Offshore" written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.


1. Complete and sign a statement on the Certification by U.S. Person Residing in the U.S. certifying: 　(1) that you are eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 9 below); (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate (see instruction 5 below). 　You must maintain your foreign financial asset information supporting the self-certified miscellaneous offshore penalty computation and be prepared to provide it upon request. 　You must submit an original signed statement and attach copies of the statement to each tax return and information return being submitted through these procedures. 　You should not attach copies of the statement to FBARs. 　Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures. 　


Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts. 　Your taxpayer identification number must be included on your check. 　You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.
Submit payment of the Title 26 miscellaneous offshore penalty as defined above. 　
If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:
a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;
a dated statement signed by you under penalties of perjury describing:
the events that led to the failure to make the election,
the events that led to the discovery of the failure, and
if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and
for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission.
The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:

Internal Revenue Service
3651 South I-H 35Stop 6063 AUSC
Attn: 　Streamlined Domestic Offshore
Austin, TX 78741

This address may only be used for returns filed under these procedures. 　For all future filings, you must file according to regular filing procedures. 　


2. For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures. 　You are required to file these delinquent FBARs electronically at FinCen. 　On the cover page of the electronic form, select "Other" as the reason for filing late. 　An explanation box will appear. 　In the explanation box, enter "Streamlined Filing Compliance Procedures." 　If you are unable to file electronically, you may contact FinCEN's Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.

Remember that for either of these streamlined programs, the taxpayer MUST be able to prove Non-Willfulness as e described in our post IRS OVDP vs. New Streamlined?

Need Help With The New Streamline Programs?

Contact the Tax Lawyers at

Marini & Associates, P.A.  

 

 

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ((888) 882-9243)

Canadian US Expats Sue To Block FATCA

A lawsuit has been filed by several Canadian citizens against the Canadian Attorney General in Federal Court in Canada. The legal claim challenges the constitutionality of the agreement the Canadian government struck with the United States. The controversial deal between nations was inked under the Foreign Account Tax Compliance Act (FATCA).

So far, 77,000 financial institutions have registered and 92 countries have too. Countries must throw their agreement behind the law or face dire repercussions. Tax havens have joined up. Even China and Russia are getting on board. To see which financial institutions are participating, see our post

Canada has violated the charter rights of nearly a million Canadians by agreeing to share their financial details with authorities in the United States, two Ontario women allege in a new lawsuit. Gwen Deegan of Toronto and Ginny Hillis of Windsor, Ont., have launched a claim against the Attorney General of Canada.

In it, they accuse Ottawa of breaching the Constitution by complying with a sweeping new American tax fraud law, known as the Foreign Account Tax Compliance Act. Under the terms of the legislation that took effect last month, banks must share all personal and joint account details of anyone deemed to be a “U.S. person.” This includes American citizens and people born in the U.S., even those with no existing ties to the country.


In Canada, financial institutions must share relevant account holder details, including personal details and financial balances, with the Canada Revenue Agency. The CRA will in turn pass that information along to the U.S. Internal Revenue Service.

Hillis and Deegan, both of whom were born in the U.S. but have lived in Canada since the age of 5, claim Canada is exposing them and others in similar circumstances to unfair tax penalties and privacy violations by complying with FATCA.

“I don’t believe that my rights as a Canadian citizen should be abrogated by my government,” Hillis said in an interview from Windsor. “I don’t believe my government should be breaching our sovereignty rights as a nation. 

We are a sovereign nation, we are not the 51st state of the United States.”

"My own Canadian government has betrayed me," said Gwendolyn Louise Deegan, 52, a Toronto resident and owner of a graphics-design business who is one of two plaintiffs named in the suit. 

The suit is funded by the Alliance for the Defence of Canadian Sovereignty and names Canada's attorney general as the defendant.

“It’s the account information itself that would be relayed by CRA to the IRS, so indirectly all parties are facing the same issue,” he said. “The non-U.S. person would presumably not have any potential liability to the U.S., but nevertheless, they would have the intrusion of their privacy.”

The lawsuit is arguing that the federal government has breached the Charter of Rights and Freedoms in three ways:

1. by violating affected people’s right to liberty and security, 
2. by failing to protect them from unreasonable search and seizure, and 
3. by discriminating against them on the grounds of their country of birth.

“There’s a distinction drawn in the law between Canadian citizens who fall within this definition of a U.S. person and other Canadian citizens, in that the first class of people have this intrusion into their privacy and the other class will not,” he said. “That differential treatment of Canadian citizens, we say, is discriminatory.”

This lawsuit is accompanied by a separate submission of a complaint to the United Nations, by concerned citizens worldwide, that the unique U.S. style ‘place of birth taxation’, for which FATCA is an enforcement tool, violates fundamental human rights. Who is funding this? The Alliance for the Defense of Canadian Sovereignty (ADCS), though it appears donations are coming from many.

"The government is confident that the legislation in question [which implements the agreement] is constitutionally valid," said a spokesperson for the Canadian Department of Finance. "The government is prepared to defend the legislation in court."  

Last month, a spokesman for Canada's Finance Department, which sets bank regulations, said Canada obtained "a number of concessions" as part of the agreement with the U.S. One key win was the exemption of registered retirement-savings plans, or the Canadian equivalent of the U.S. 401(k). See our post Canada Limits Model I FATCA Agreement.

Foreign banks that fail to comply with FATCA face a 30% withholding tax 

on any payments from U.S. sources to the banks or their account holders.

The effort has also affected middle-class Americans living overseas. U.S. tax law currently exempts up to about $100,000 of income earned abroad, but Washington has stepped up enforcement of a requirement that Americans report foreign accounts to the U.S. government. Under Fatca, foreign banks and financial institutions are also required to disclose information about U.S. customers.

Amid the crackdown, US Expatriation Increased At a Record Pace in 2014! Canada is home to one of the largest populations of Americans living abroad, with an estimated one million residents holding U.S. citizenship.

Are You A US Citizen living in Canada?

Do You Have Foreign Income Not Reported to the IRS?

Contact the Tax Lawyers at 

Marini & Associates, P.A.  

 

for a FREE Tax Consultation

at: www.TaxAid.us or www.TaxLaw.ms or

Toll Free at 888-8TaxAid ((888) 882-9243)

Sources:

Toronto Star

Forbes

The Wall Street Journal