Hurricane Tax Relief and IRS Collection Activity

September 18, 2017  |   Posted by :   |   Casualty Loss   |   0 Comments

Under the IRS Internal Revenue Manual (Section 5.1.12.2) disaster areas are entitled to special IRS tax collection relief. These types of cases are considered to require special handling with extreme sensitivity for taxpayer’s circumstances. The key issues are IRS collection activity, penalty and interest due. In a federally declared disaster area, as in the case of Hurricane Harvey, if a taxpayer is unable to meet filing deadlines or make federal tax payments due, the IRS may cease collection activity in total, or maintain collection activity but not assess interest and penalty on the delinquent taxes due.

As of 5/20/08 under IRM 5.1.12.2.1(1), (2), an “O-freeze” may be instituted which stops IRS compliance notices and collection activity (including the IRS assessment of penalty and interest due on the taxes owed). An “S-freeze” does not include suspension of IRS collection activity but does include interest and penalty relief.

During the “O-freeze”, the cases remain in inactive status. The IRS Group Manager may move these cases out of the Revenue Officer inventory into a “hold file” pending release of the “O-freeze”. During the “O-freeze” IRS taxpayer contact is restricted unless there are exigent circumstances (e.g. statute of limitations expiration). During an “O-freeze”, a Taxpayer may initiate IRS contact but any agreements are voluntary and not enforceable for the period the “O-freeze” is in effect.

Under IRM 5.1.12.2.3 (as of 8/5/14) IRS Field Collection Management is given guidelines for response to disasters. Within 48 hours following a major disaster, the Field Collection Territory Manager (TM) has options which include:

1) Initiate a “soft contact procedure” (IRM 5.1.12.2.7) with taxpayer to determine impact status of disaster prior to resumption of collection activity);

2) Initiate an initial suspension of all collection activity (including soft contact) pending the initial determination of the exact disaster zip codes and disaster magnitude which includes no Taxpayer contact whatsoever.

Under IRM 5.1.12.2.3(2) once the TM receives the IRS Disaster Relief Memorandum, the TM must follow the guidance which may include that the IRS be required to suspend compliance actions in the covered disaster area.

The most favorable IRS position for the Taxpayer is the “O-freeze” (i.e. collection activity suspended and no interest or penalty imposed on delinquent tax due).

Under IRM 5.1.12.2.4 (3) at the end of the “suspension period” the IRS may resume normal taxpayer contacts within the covered disaster area (which is better for the Taxpayer than the “S-freeze” which never suspended IRS Collection Activity.

Taxpayers in this precarious position due to taxes due and Hurricanes creating a federally declared disaster area may seek to have the IRS freeze collection and request thru counsel that the IRS consider initiation of an “O- freeze”. Once this designation is applied then the IRS computers will redirect collection activity away from the affected taxpayers.

Taxpayers may wish to cite IRM 5.1.12.2.5 (3) and request that any IRS Revenue Officers who contact them regarding federal taxes due both implement and retain an “O-freeze” on their taxpayer IRS account until the disaster area is reclassified as a “non-disaster area”. In addition, request the IRS not pursue collection activity until either the pre-determined release date has passed, or if it passed any new information that may impact collection.

For those taxpayers who are seriously damaged by the hurricanes, which damage may prove irreparable, request the IRS consider the identification of a “long-term” hardship that may indicate a currently not collectible claim and a case closure. Under the IRS rules they have 10 years to collect a tax due, once the tax is assessed. After the 10 year period elapses, the tax collection is precluded by the IRS’ ten year statute of limitations.

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Florida and Texas: Hurricane Irma and Hurricane Harvey Tax Relief

September 11, 2017  |   Posted by :   |   Casualty Loss   |   0 Comments

For our American Brothers and Sisters in Texas and Florida, tax relief can help you.

The IRS may be of great help for you. See IRS Publication #2194: Disaster Resource Guide for Individuals and Businesses. The extant problem in Texas is as follows:

80% of Texans affected by Hurricane Harvey apparently have no flood insurance (homes, businesses). So their risk insurance policies will not pay them for their damages from Hurricane Harvey.

This failure to insure for floods means that many Texans will get no insurance recovery and will be forced to use their own resources to pay for their damages including replacing their irreparably damaged cars, homes, businesses and personal property.

What to Do?

First and foremost all affected Texans and Floridians should claim unreimbursed casualty losses on property that was damaged or destroyed.

Hurricane Harvey has been declared a Presidentially Declared Federal Disaster Area. Texans may immediately get tax refunds for prior taxes paid.

For all Texans who paid taxes in Tax Year 2016, the tax year immediately preceding Tax Year 2017 (which is the tax year Hurricane Harvey occurred) you can elect to deduct the tax loss (a casualty loss from storms under IRC 165) on Form 1040x (amended individual tax return for 2016) and receive a tax refund of some or all the taxes paid in Tax Year 2016.

If the casualty losses (damages to property) are in excess of your income for 2016, the losses may be carried back to three prior tax years (2013, 2014, 2015) and declared as Net Operating Losses and result in tax refunds for prior 3 tax years.

If the losses are in excess of the income for the year 2016 and 3 prior tax years, the losses may be carried forward for tax year 2017 and up to 20 additional future tax years (under the carryforward NOL tax rules) through 2037 and give the taxpayer tax free income up to the amount of the tax losses.

Do Not Wait! File amended Tax Returns immediately for tax year 2016 (and prior 3 tax years in available.)

For taxpayers who will receive insurance recovery, do not wait to receive the recovery to declare your tax losses and get the tax refunds. Instead amend tax year 2016 (and prior 3 tax years) and receive the tax refunds. In the year that the insurance recovery is received, declare the insurance recovery as taxable income and pay any tax due (from the insurance proceeds received).

How?

Contact your tax preparers immediately and request they file amended tax returns for tax year 2016 and include Form 4684 (for casualty loss)

When?

In the words of Paul McCartney, do it “YESTERDAY”.

For any questions have your tax preparers contact the IRS (don’t try to do it yourselves you have already had enough stress, let the “pros take over”).

The IRS announced on 8/29/17 (TX-2017-09) that the President declared a major disaster area in Texas, which will afford affected taxpayers tax relief.

The tax relief includes the following (See IRS: IR 2017-135)

1) For tax year 2016 filings due on extension (businesses 9/15/17; individuals 10/15/17) the IRS extended the tax filing deadline to 1/31/18 (a 3-4 month extension);

2) For tax year 2017, quarterly estimated tax payments originally due either 9/15/17(3rd payment) or 1/16/18 (4th payment) may now be paid by 1/31/18 without penalty.

3) These new tax relief rules apply to both affected taxpayers who live in the covered disaster areas and to those who reside elsewhere but whose records are located in the covered disaster area.

For all affected taxpayers who seek tax refunds for uninsured casualty losses, please consider the “silver lining”; if you qualify for a casualty loss you may receive up to 4 years of income tax refunds (tax loss year and 3 carryback tax loss years), up to 20 years tax free income (20 year carryforward losses).

In addition, the IRS becomes the “Bank”, your federal income taxes paid in the current year (and prior 3 tax years) becomes a “rainy day” savings account which you get to make withdrawals from up to the amount of the taxes saved from the casualty loss.

How can the IRS go from “Public Foe to New Friend” simple: every year they issue billions of dollars in tax refunds so they are just doing their job (which they do better than any taxing agency in the world.

According to the IRS 2012 Data Fact Book (for Fiscal Year 2012 through 9/30/12) the IRS collected $2.51 Trillion in Taxes, processed 237.3 million tax returns and issued $373.4 billion in tax refunds.

The IRS has tax refund capability in place now. With proper tax planning and the right tax compliance they can be the “Tax Cavalry” coming to the immediate aid of distressed Texans (and other state residents) making the difference between financial “life or death” for those brave Americans suffering the hurricane horrors and their aftermath.

So, what to do? Follow one of my favorite Beatles, Sir Paul McCartney and file those tax refund claims for uninsured casualty losses “YESTERDAY”.

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Tax Planning for Texas and Other States: Post-Hurricane Harvey

September 06, 2017  |   Posted by :   |   Casualty Loss   |   0 Comments

As a Californian, I normally do not consider tax planning for Texas. Due to the horrors of Hurricane Harvey, I have decided to “stretch” and offer Tax Planning Advice for our American Brothers and Sisters devastated by the widespread destruction caused by Hurricane Harvey including: homes, cars, jewelry, personal property, heirlooms, art and clothing whether in Texas, or other states. In addition, damages to their businesses, as well.

What do you do in the face of catastrophe? Act quickly, be smart and protect yourselves and your family. If you are in Texas or neighboring states that are storm & flood ravaged and worry about survival take comfort in these truths: All things must pass (George Harrison got it right), insurance may pay for much of your losses, what is not covered by insurance may be recouped thru tax refunds or tax free future income. Money can solve many problems but not if you lack a plan or give up hope.

Tax Plan

Simply put use your casualty loss from the Texas storms to save taxes and get tax refunds. With the current federal income tax rate up to 45% (39.6% top tax rate, plus 3.8% Medicare tax, with additional tax due from the phase out of personal exemptions and itemized deductions) every $1 lost can bring in up to 45 cents in tax refunds or tax free income (which when combined with insurance recovery may make the “pain of loss” recede and in time be replaced by new choices).

The federal government has a special rule for storm losses. Under IRC Sec. 165 (a): “Any loss sustained during the taxable year may be deducted if it is not compensated by insurance or otherwise. The losses are limited to losses from “fire, STORM, shipwreck, or other casualty, or from theft”. Taxpayers may receive a trifecta of tax breaks: reimbursement by tax planning for storm related damages, any thefts of property from lawlessness, and non-taxable insurance recovery.

The math is simple: Losses = All Hurricane Harvey storm & related losses. Getting back to “even” may include insurance recovery, tax refunds or tax-free income. If not “able to get back to 100% even”, then every $1 recouped is a “win”.

How to Proceed

First, make up a list of all losses. If you have no receipts to confirm purchase do a timeline of the dates purchased (oldest one on top) with description of the property, amount paid (to the best of your recollection) and put this information in a sworn affidavit or a declaration under penalty of perjury.

Second, attach this article to your affidavit or declaration as a legal basis to take these tax losses, which you were first made aware of by this article. Third, request your CPA to prepare IRS Form 4864, attach it to Form 1040 (2017) and file any time after January 1, 2018 declaring the amount of the loss (with any records, appraisals or other evidence of value attached to the Affidavit or Declaration in support).

A Special Tax rule applies for disaster area losses (e.g. Texas). A taxpayer that sustains a loss occurring in a disaster area and attributable to a federally declared disaster can either (1) deduct the loss on the tax return for the year in which the loss occurred or (2) elect to deduct the loss on the return for the preceding tax year (IRC 165(i); Treas. Reg. Sec. 1.165-11.

The election to deduct a disaster area loss in the tax year prior to the loss year is made by filing a return, an amended return, or a refund claim and the election applies to the entire loss sustained by the taxpayer in the disaster area during the disaster period.

The IRS has a special rule for personal residences, which is treated as a disaster loss if the personal residence is rendered unsafe by a disaster in an area determined by the President (US) to warrant federal government assistance. The taxpayer must have been ordered by the state or local government within 120 days after the area is declared a disaster area to demolish or relocate the residence (IRC 165(k). The amount of the deduction is reduced for state partial payments made for disaster aid.

A casualty loss is an ordinary loss and offsets ordinary income, including wages and investment earnings. If your loss is $1m and the federal income tax rate is the maximum 45%, you are entitled to a tax refund of $450,000 (subject to tax audit so be complete and thorough in your loss calculation and include all available records which support the claim).

Under IRC 165(c)(3) an individual may deduct a loss from non-business property (e.g. home, car, furniture) only if it arises from “fire, storm, shipwreck, or other casualty or from theft”. The deduction for a personal casualty loss is limited to the amount that the loss from each casualty (or theft) is in excess of $100 (IRC 165(h)(1); Treas. Reg. Sec. 1.165-7(b)(4). The $100 floor applies only once against the sum of the allowable losses (the aggregate of all items lost).

Under IRC 165(h)(2) if a taxpayer’s personal casualty loss exceed their income, the excess may be deductible only to the extent it exceeds 10% of their adjusted gross income (AGI) for the year.  The $100 floor and 10% of the AGI limit do not apply to a business or income-producing property. The amount of a casualty loss which may be deducted for income-producing property, business property or non-business property is the lesser of:

1. The Fair Market Value of the property immediately before the casualty reduced by its FMV immediately after the casualty, or

2. The Adjusted Basis of the property immediately before the casualty (Treas. Reg. Sec. 1.165-7(b).

If business or income-producing property is totally destroyed, the casualty loss is the adjusted basis of the property if the property FMV immediately before the casualty is less than its adjusted basis.

A Casualty Loss is generally deductible only for the tax year in which the loss is sustained (Treas. Reg. Sec. 1.165-7(a)(1). If the damages cannot be reasonably ascertained in the year of occurrence, the deduction can be taken in later year when the extent of the damage is known. If the loss is in a federally declared disaster area the loss a special election allows the loss to be deducted in the immediately preceding tax year.

Insurance and Casualty Losses are linked. A Casualty loss is reduced by any insurance or other compensation received by the taxpayer. The loss is also reduced by any salvage value. An individual cannot claim a personal casualty loss to the extent the loss is covered by insurance unless a timely insurance claim is filed with respect to the loss (IRC 165(h)(4)(E).

A Casualty Loss can generate a Net Operating Loss, which for the tax year is the excess of allowable deductions over gross income (IRC 172(c); Treas. Reg. 1.172-1).

If the Casualty Losses from Hurricane Harvey exceed gross income the taxpayer will have a Net Operating Loss. An NOL from a trade or business may be claimed as a deduction to the current tax year equal to the aggregate amount of NOLs carried back or carried forward from other tax years (IRC 172(a); Treas. Reg. 1.172-1)

An NOL deduction may not exceed the amount of taxable income for the year of the deduction. An NOL arises in any tax year when the taxpayer’s deductible expenses for the year exceed its gross income.

Generally, a Net Operating Loss must be carried back to the two years preceding the loss year and then carried forward 20 years following the loss year. A special rule applies for casualty losses and disasters, which allows for a 3-year carryback period for an NOL arising from a casualty (e.g. Storm).

The IRS offers excellent guidance in Pub 584, 584B for individuals and businesses.

For now, the rules for Texans and other Americans ravaged by Hurricane Harvey are as follows:

1. Prepare your lists/schedules of lost property and amounts lost.

2. Submit insurance claims.

3. Work with your CPA to prepare the Form 4864 to confirm your losses and provide necessary Affidavits, Declarations and other Supporting Documentation in either your possession or from third parties.

4. File the Form 4864 with your Form 1040 for either tax year 2017 (in Jan 2018 or later) or if appropriate as a Federal Disaster Area file the claim for tax year 2016.

The key decisions are whether to carryback losses for 3 years and seek tax refunds as required (which is only viable if taxes were paid those tax years), and carrying the losses forward for 20 years eliminating tax due on income up to the amount of losses. For wage earners, review reduced federal income tax withholding for carry forward years. For investors and business owners reduce estimate tax payments based on tax projections from your tax advisors.

Most importantly remember America, our great country was fought for and earned by heroic men and women who built the freest, wealthiest most prosperous democracy in history. You are part of a great country whose values of life, liberty and the pursuit of happiness should be your bulwark in dark times. Get on with your life, celebrate your freedom (which is unlike many other countries), get back on your feet and pursue your happiness.

Lastly, since Texans are huge football fans, I leave you with words of wisdom from the great coach, Vince Lombardi, “It is not whether you get knocked down but whether you get back up”. Words to live by.

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The US and World Wide Tax Evasion

August 31, 2017  |   Posted by :   |   FATCA/FBAR,Tax Evasion   |   0 Comments

Although with the implementation of the Foreign Account Tax Compliance Act (FATCA), America has taken the lead in attacking US taxpayers who evade taxes by hiding assets offshore (held thru anonymous companies) in 2017 America has become the world’s biggest tax haven. In America, today 14 states allow US Companies to be formed without the need to disclose or identify the names of shareholders, directors or officers. At the same time, foreign investors hold nearly $17 Trillion ($16.75 Trillion as of 2013) in foreign owned assets held in the US with another $3 Trillion in foreign direct investment in the US.

While on the one hand combatting tax evasion, money laundering and foreign corrupt practices (e.g. bribery), America greatly profits from these tax and other crimes (which are serious felonies with jail time). According to the 3/17 Report from the European Parliament title “The Role of the US as a Tax Haven; Implications for Europe.” The US has built a huge cottage industry offering financial services to non-residents HNW global investors and maintains 20% of the global market for financial services.

The recent OECD/CRS rules take effect 9/17 and by 9/18 over 100+ countries worldwide will automatically and digitally share respective taxpayer bank account information for those accounts held outside their country of origin (or citizenship/residence). The US has declined to participate and is not a signatory to the CRS rules preferring that their 113 FATCA tax treaties remain their sole tax compliance method for undisclosed offshore assets and earnings from those assets.

Tax evasion bankrupts cities, states and countries (CA major cities have gone bankrupt, Detroit went bankrupt, the State of Illinois is insolvent, while internationally Greece imploded after 89% of their taxes assessed were never paid, while Spain, Italy and other countries face similar fates). With 2017 a new era has commenced where cross-border taxpayer information sharing will be the new “digital rule” which may be the final straw that destroys centuries of offshore tax evasion by the wealthiest taxpayers, who could well afford to contribute to their country revenues but chose to instead violate the tax laws. For many years, their risk of apprehension was slight which made their “bet worthwhile”.

Seems like that story has now changed for good with the exception of 14 US states including Delaware, Nevada, Wyoming, South Dakota who still are open for “business” for international tax cheats, money launderers and gangsters of all types who continue to cheat and get away with it while their facilitators (banks, professionals) get well paid. America must address this tax issue or they will continue to be part of the problem (and not the solution).

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California Real Estate and Cannabis

August 14, 2017  |   Posted by :   |   International Investors   |   0 Comments

In January 2018, California is preparing to license the cannabis businesses. Investors view cannabis (aka “pot” or marijuana) as a “Pot of Gold”. Real estate values explain why: currently, in Sonoma County an acre of planted wine grapes according to realtor, John Bergman is valued at no more than $200,000. In contrast CNBC reports in an 8/13/17 article that an acre of planted cannabis is valued at more than $1m.

To put in perspective, currently  two of the world’s leading wine regions (and California) are Napa Valley where the per square foot price of an acre of land is approximately $7 per square foot and Paso Robles where the per square foot price of an acre of land is as little as $1 per square foot (due to drought and other factors). In 2016 Paso Robles was voted the best wine town in 13 western states (ahead of Napa) by industry leader Sunset Magazine. So in 2017, the land in Napa is worth 7x that of Paso Robles.

In 2017, Sonoma land (a 3rd winemaking capital) is valued at $200,000 per acre of planted wine ($4.6 per square foot) while the same land planted with Cannabis is worth nearly $23 per square foot. Appears that Cannabis is a “gold rush” for both land and the product which has multiple uses from consumer ingestion, to foods, to medicinal research. Related industries include: consumer products (eg. hemp), wellness facilities, and research centers.

If this “good math” holds true, in January 2018 a new gold rush begins, California is the epi-center and it all starts with the land which is viewed as highly favorable for the growth of cannabis due to the propitious California Mediterranean climate which is both lucrative for wine and cannabis production. Stands to reason that once investors do the math, any land undervalued wineries (due to drought, over-saturation of the market for wine or other reasons) may be converted to richly rewarding cannabis farms, so stay tuned.

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