New Location for Tax and Tribute

I've moved to http://bottomlylaw.com/taxandtribute/

Long-term tax advice not "promotion" of tax shelters

Note taking while talking with your Federally Authorized Tax Practitioner (FATP) is still confidential, as long as your FATP is giving advice and not “promoting” a tax shelter.

In a case addressing the confidentiality of notes taken during meetings with a tax professional regarding the tax consequences of certain business transactions, the Tax Court recently decided that the limited privilege of Section 7525(b) of the Internal Revenue Code does not apply to personal notes because they are not written communications given to someone else:

“The notes were not communicated to anyone. Therefore, they do not constitute a written communication that can satisfy that element of the section 7525(b) exception. The FATP privilege accorded to the notes is not subject to the exception in section 7525(b.)”

However, the Tax Court decided that they were privileged anyway because they were not promotions of a tax shelter. The long time relationship between the FATP and the taxpayer weighed against the argument that the FATP was “promoting” a tax shelter and in favor of the argument that the FATP was providing tax privileged tax advice. Noting differences among District Courts in defining the meaning of the term “promotion” in section 7525(b), it turned to the legislative history for guidance. It noted that the conferees of the House and Senate committee stated:

“The Conferees do not understand the promotion of tax shelters to be part of the routine relationship between a tax practitioner and a client. Accordingly, the Conferees do not anticipate that the tax shelter limitation will adversely affect such routine relationships.”

Following this guideline, the Tax Court ruled that the communications from the FATP to his client remained privileged because they were not “promotion” of a tax shelter. The factors it noted were that the FATP:

“has had a long, close relationship with the Winn organization, preparing returns, assisting with tax planning when asked, answering questions when asked, and responding to notices and inquiries from Federal and State tax officials. His advice with respect to the partnership redemptions and associated transactions under review in these cases was furnished (as was similar advice with respect to similar transactions) as part of a long-standing, ongoing, and, hence, routine relationship with the Winn organization.”

Valuing a conservation easement

If you are in the mood to get a tax deduction for donating a conservation easement, (or any real estate for that matter) valuation is a substantial concern. The Tax Court just issued a decision that outlines in great detail how it looks at valuation in cases where there isn't comparable sales data:

Kiva Dunes Conservation v. Commissioner

It's a good look into how the Tax Court evaluates the valuation opinion of experts.

Lurking unfiled 941 returns?

Business owners who have employees should be filing their quarterly 941 returns in a timely fashion. Of course, they should be paying the tax withholding as well. Perhaps that goes without saying, but I’ve received a few calls lately regarding unfiled 941 returns from small businesses.

First off, the penalties for failing to file these returns are substantial. There is the failure-to-file penalty of 5% of the tax due for each month or part of the month it wasn’t reporting (up to 25% maximum). If you receive a penalty notice, you may be able to provide a reasonable cause, but reasonable cause is not the fact that you spent the money on something else (it’s called a “trust” fund for a reason).

The IRS can, and does, seize business assets, close bank accounts, and garnish accounts receivables to get what is owed.

Even more ominous is the 100% “Trust Fund Penalty”, which is applied to any “Responsible Person” such as owners, officers, or check-signers. This is personal liability, the corporate shield will not protect from the IRS’s collection activities.

Finally, of course, there is the potential for criminal prosecution for failure to file. Section 7203 of the Internal Revenue Code states:

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both . . . .

Indeed the IRS takes failing to file the 941 return and failing to pay withholding tax to be a serious thing.

The simple advice: if you are cash-strapped, do not, under any circumstances, use employee withholdings for anything else but to pay the IRS. It is better, in the long run, to default on your rent or on your business loan than to default with the IRS.

And, if you haven’t filed, you should file the return as soon as possible to avoid the possibility of criminal prosecution. Consult with a tax professional soon so as to arrange with the IRS to an agreement to not prosecute and enter into a payment arrangement.

Policy Paper

I finally got around to getting my musings on the Morality of Taxation on the internet.