Federal Tax News

IRS Weighs in on Virtual Currency

Online cryptocurrencies like bitcoin have been around a few years now and every few months they end up in the news, often when the value of one virtual currency spikes or drops.

Two days ago, the IRS issued Noticed 2014-21 which addresses how the IRS will treat virtual currency for tax purposes.  The long and short of it is that the Department of Treasury and the IRS do not treat virtual currencies like bitcoin as currency.  Instead for purposes of tax they are treated as property.  This means virtual currency is not applicable for the various sorts of tax situations that could arise, for example, from the changing relative values of Euros and US Dollars.  As property, however, the changing value of virtual currency counts as gains or losses.  Virtual currency received as compensation for employment is considered wages.  For both purposes, the fair market value in US dollars has to be calculated.  The IRS further explained that payments  made in virtual currency incur the same reporting requirements as payments made through other means. Failure to treat virtual currency transactions in accordance with the notice may leave taxpayers subject to penalties, the same failing to comply with any other tax laws.

Horowitz Law Offices represents individual and corporate taxpayers before the Internal Revenue Service, Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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Supreme Court Rules: Severence Pay Taxable

Yesterday, the Supreme Court ruled on the case of United States v. Quality Stores.  Reversing the decision of the lower courts, the Supreme Court found that severance pay are taxable wages for FICA purposes.  The justices ruled 8-0, with Justice Kagan recusing herself from the case.

The case arose during the bankruptcy proceedings of Quality Stores, Inc. and its affiliates.  As part of the Chapter 11 proceedings, Quality Stores made severance payments to employees who were involuntarily terminated.  Quality Stores withheld taxes as required under the Federal Insurance Contributions Act (FICA).  These taxes are collected to fund Medicare and Social Security.  Later, Quality Stores sought a refund of those taxes, believing FICA did not actually apply to severance payments.  The IRS did not allow or deny the refund, so Quality Stores brought action in the Bankruptcy Court, which ruled in Quality Stores’s favor.  The District Court and the Sixth Circuit Court of Appeals upheld that decision.  The Supreme Court reversed it.

The decision is uncomplicated.  FICA defines wages as “all remuneration for employment” and the Supreme Court holds that severance payments plainly fit that standard.  They are paid in consideration for employment, thus they are subject to the tax.  The opinion further points out that within the Act’s lengthy list of exceptions, severance payments made because of retirement for disability are specifically exempted.  There would be no need for such a provision unless severance payments were generally subject to tax.

Horowitz Law Offices represents individuals and businesses before the IRS, the Illinois Department of Revenue, and the Chicago Board of Finance.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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IRS Releases FATCA Amendments

Last week, the IRS and the Department of the Treasury, released a set of amendments to the final regulations to implement the Foreign Account Tax Compliance Act (FATCA).  The final regulations had been released the beginning of last year and the law is slated to go into effect beginning in July.  These recent amendments address concerns raised since the release of the final regs.

Passed in 2010 as part of the HIRE Act, FATCA aims to combat tax evasion by allowing the IRS to create agreements to work with foreign governments or financial institutions to obtain information on US depositors.  To date 22 countries have signed FATCA agreements with the US, with many others at various stages of completing agreements.  There are two models for these agreements, one in which the IRS deals with foreign governments who in turn communicate with the financial institutions in their countries, and a second where the IRS talks directly to the foreign financial institutions.  In either model the end goal is the same, gathering information on US depositors to identify tax evasion.

FATCA has received criticism and resistance since it was first passed.  Some have blamed it for the spike in US citizens renouncing their citizenship since 2010.  Some foreign financial institutions have also pushed back against the law, while others have decided no longer to accept US depositors.

Treasury officials have said they expect FATCA to be a model for future laws in other countries, for there eventually to be an established framework of information sharing among countries and financial institutions to combat tax evasion.  Earlier this month, the Organization for Economic Cooperation and Development announced new standards for the automatic, FATCA-like exchange of financial information across borders.

Augmented in their efforts by FATCA, the IRS continues an aggressive stance toward US citizens who keep money offshore to evade paying tax or who fail to report those assets.  The penalties for failing to declare foreign financial assets or evading taxes through offshore accounts are severe and can include time in prison.  Since 2009, the IRS has continued its Offshore Voluntary Disclosure Program, which allows taxpayers to “come clean” regarding previously undisclosed offshore bank accounts and other assets and to receive a reduction in penalties and to avoid criminal prosecution.

Horowitz Law Offices represents taxpayers before the IRS in connection with offshore disclosure, reporting requires (including FBARs), and for other tax concerns.  You are welcome to contact us as (312) 787-5533 or info@hwchicagolaw.com

Who Says The IRS Lacks Humor?

We have been treated over the years to memorable quotes by Yogi Berra.  Among some of the  more well known  are:  “if you come to a fork in the road, then take it” and “déjà vu all over again.”  One of his lesser known quotes is “nobody goes to that restaurant anymore because it’s too crowded.”  The IRS inadvertently treaded on that quote this week when it announced to the public: “We do not want anyone calling the IRS next week because too many people will be calling.”

The rationale is a combination of budget cuts affecting staffing IRS phones and the Federal Holiday on Monday crunching calls into four days instead of five.

Notwithstanding, the rationale, one has to admit the IRS does have a sense of humor.

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Swiss Banks Offer Up Their U.S. Depositors and Employees To Save Themselves

A critical deadline is coming up for Swiss banks on December 31st.  Under agreements put in place last summer, the IRS has implemented a bank version of its offshore voluntary disclosure programs (OVDP /OVDI) that have been in place for individuals since 2009.

The programs offered to these Swiss banks may have serious ramifications for their depositors.  These programs provide for the banks to obtain non-prosecution agreements from the IRS.  Banks may also seek non-target letters.  What’s perhaps most important is what these agreements do not include.  They provide protection only for the banks, not for any of their depositors.

Part of the requirements for a Swiss bank to obtain one or more of these agreements is a for the Swiss bank to offer up (“hand over”) information regarding its U.S. depositors and its employees and agents.  In some if not many cases, this information  will provide the IRS with a road map of how Swiss bank employees and agents may have advised U.S. depositors to commit criminal violations of the Internal Revenue Code.  It also provides a quite literal road map to the front door of U.S. depositors who may have not disclosed their foreign offshore accounts and or failed to report income from those accounts.

In our practice we are aware of stepped up pressure by certain Swiss banks to encourage their U.S. account holders to enter into the IRS Offshore Voluntary Disclosure Program.  Examining the details of the IRS Non-Prosecution Agreements may provide the motivation for this.   One of the requirements s of the program is for the Swiss bank to pay penalties for its potentially criminal actions.  One way for the Swiss banks to reduce the amount of the penalties is to show substantial efforts to encourage U.S. depositors to enter into the IRS disclosure (OVDP) initiative.  Moreover the first deadline for submitting an application for a Non-Prosecution Agreement is December 31, 2013 thereby providing a possible reason for Swiss banks to ramp up pressure on its U.S. Offshore Account Holders.

Horowitz Law Offices represents U. S. taxpayers who maintain foreign offshore bank accounts.  You are welcome to contact us at:  312 787 5533 or info@hwchicagolaw.com .

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Foreign Bank Account Holders Beware

We have written frequently written about the FATCA statute.  Every month, more and more FATCA agreements are being negotiated between the U.S. and foreign governments.  These agreements provide for foreign banks to disclose U.S. depositor information to the U.S. government.  To this point, we are aware of several major foreign banks that have sent letters to their depositors which state that either via FATCA or separate unrelated agreements, the bank is going to release their information to the IRS.  The letters advise that if the depositors have not properly reported their foreign income and or accounts to the IRS, they ought to seek tax advice.

Recently it’s not just large bank that are issuing these types of disclosure letters. Rather, smaller banks are beginning to issue letters to the same effect..  In other words, the IRS is digging deeper.

Horowitz Law Offices has represented clients with offshore bank account issues for several years.  If you have an offshore account disclosure question, or other tax matter, you are welcome to contact us at 312 787 5533 or info@hwchicagolaw.com.

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This Hybrid Isn’t Environmentally Friendly

The core provisions of the Affordable Care Act (ACA), aka “Obamacare,” are now coming into effect.  The health insurance exchanges went live at the beginning of this month and the personal mandate to have health insurance goes into effect January 1, 2014.  The penalty connected to that mandate is widely misunderstood and has been incorrectly reported.

In 2014, the penalty is $95 or 1% of taxable income, whichever amount is more.  By 2016, the penalty will rise to $695 ($2085 for jointly filing spouses) or 2.5% of income, again whichever is higher.  The penalty, however, is a hybrid.  And just like the ability of the Toyota Prius or other hybrid cars to fight global warming is debated, so too there is doubt about whether or not this penalty really has teeth.

For most tax related penalties, the IRS has the legal authority to garnish wages and file liens in order to collect those amounts.  The IRS is unable to do so with the ACA penalty, however.  The personal mandate penalty is only taken out of your Federal tax refund.  If you had no tax refund, the IRS would not be able to collect the penalty.  Moreover, while there are penalties for failure to pay taxes, there are no penalties on failure to pay other penalties.   This does not mean, however, that you can carry such a penalty indefinitely.  You never know when the need will arise to show you have no open liabilities on your taxes to the IRS.

There is something else very important to keep in mind here (aside from the fact that living without health insurance is probably not advisable).  If someone in tax year 2014 has no health insurance and is thus subject to the $95 penalty but has no tax refund, the IRS will not collect the penalty, since they can only deduct it from a refund, but the penalty is still due.  And like all other outstanding amounts owed to the IRS, that penalty will continue to accrue interest.  The IRS interest is currently low, 3%, but it has risen much higher historically and could do so again.  $95 could become very unwieldy if left unaddressed for five or ten years.

Horowitz Law Offices has helped numerous taxpayers navigate their specifc tax situations and deals regularly with the Internal Revenue Service, the Illinois Department of Revenue, and the Chicago Finance Department.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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Supreme Court to Take Up Severance Pay

At first glance, Federal income tax is fairly simple.  Tax is due on all wages and the term wages includes more than just salary, but the full spectrum of compensation.  When an employee is offered severance pay, this is treated the same ordinary wages and subject to income tax.  On that point, there isn’t much debate.

There is disagreement, however, concerning severance pay and another federal tax, FICA.  FICA stands for Federal Insurance Contributions Act.  It’s a tax that helps finance Social Security and Medicare.  Both employers and employees have FICA contributions.  Typically the employee portion is withheld from their paychecks, same as income tax.

But on whether severance pay is subject to FICA tax, opinions differ.  The IRS has held that severance pay is to be treated like any other wages and thus subject to FICA.  In 2008, a federal appeals court upheld the IRS position in a case dealing with the railroad company CSX Corp.  In 2012, however, the 6th U.S. Circuit Court of Appeals ruled that Quality Stores, Inc and its former employees, could claim a refund from the IRS for FICA tax paid on severance payments.  It is that Quality Stores case which is now brought before the Supreme Court.

The Supreme Court’s current session began this month and runs through June.

For more on FICA, other federal taxes, or other tax law matters, please contact Horowitz Law Offices at 312-787-5533 or info@hwchicagolaw.com

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Same Sex Marriages and Gifts – It’s a Date

IRS Revenue Ruling 2013-17  implements the June decision by the Supreme Court that struck down parts of the Defense of Marriage Act and opened the way for federal recognition of same sex marriages.  The Ruling provides that same sex couples who have been legally married in a state that permits same sex marriages (as opposed to civil unions), will be able to file their tax year 2013 returns as married-joint.

The effects of the Supreme Court decision, however, begin even even sooner than next April.  The IRS has circulated its proposed 2013 Gift Tax Return.  Although the current form does not address same sex marriages, it is expected that the final form will.  In addition to the lifetime gift tax exception, currently at $5,250,000 and indexed to inflation, and the annual gift tax exception, currently at $14,000, there is also an unlimited exemption from gift tax for spousal gifts.  That is, gifts from one spouse to another are never subject to gift tax.

The IRS Ruling applies to transactions on and after September 16, 2013, which means beginning that date, gifts between same sex spouses enjoy the spousal exemption from gift tax.  Any transactions before that date will not be covered by the spousal exemption.

Horowitz Law Offices represent individuals and businesses in a variety of tax situations including Gift Tax.  You are welcome to contact us with your questions at 312 787 5533 or info@hwchicagolaw.com .

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Innocent Spouse Relief

Generally, if a married couple file a joint return, each spouse is liable for the tax and for interest and penalties that may arise (with a few exceptions).  The Internal Revenue Code, however, provides relief for some spouses if it is deemed inequitable to hold them liable.  To take one common example, if tax was underpaid, a spouse can be relieved of the tax burden if the requesting spouse did not know and had no reason to know that money intended to pay the tax had instead been used elsewhere.

The IRS recently released new and clarified regulations regarding innocent spouse relief.  These include changing the time frame from two years after the first collection notice is received to the full statute of limitations for collection of the tax.  The new guidelines give afford greater weight to the presence of abuse and how it can affect other relevant factors.  For example, absent abuse the requesting spouse’s knowledge of the underpayment or deficiency weighs against the request for relief, but in cases of abuse the knowledge can actually weight in the spouse’s favor.

The IRS has clarified how economic hardship — that is, how the requesting spouse would be negatively effective economically if denied relief — is factored in, including minimum standards for determining economic hardship.  The lack of such a hardship is no longer a mark against the spouse seeking relief.

Previously, a requesting spouse’s compliance with subsequent tax laws was always treated as neutral toward relief.  Now compliance will weigh in their favor.

Horowitz Law Offices represents taxpayers before the Internal Revenue Service and the Illinois Department of Revenue for innocent spouse relief and other tax matters.  You are welcome to contact us at (312) 787-5533 or info@hwchicagolaw.com

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