Philip Falco, Attorney, CPA Tax Law Blog

S Corp Shareholder Basis Tracking Form 7203

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Philip Falco
S Corp Shareholder Basis Tracking Form 7203

Form 7203 must be filed by virtually every S Corp 1120S shareholder on his or her 1040 to track adjusted basis.

Who must file per the Instructions:

  • If shareholder receives a distribution, he or she must file Form 7203,
  • Are claiming a deduction for their share of an aggregate loss from an S corporation (including an aggregate loss not allowed last year because of basis limitations),
  • Disposed of stock in an S corporation (whether or not gain is recognized),
  • Received a loan repayment from an S corporation.

Good Practice to just file Form 7203

  • Even shareholders with minimal activity should file to avoid future tax headaches.
  • Shareholders who received a Schedule K-1 (Form 1120S) from the S-Corp.
  • Even if the K-1 shows $0 activity, it’s good practice to file to document your basis.
  • Shareholders that never received distributions still benefit from tracking basis for future losses or sales.

Here is a link to form 7203 and instructions.

Shareholder basis should be coordinated with the underlying Form 1120-S, Schedule K-1, distributions, loans, and the shareholder’s individual return. See our S corporation tax return preparation page for the broader return-preparation issues.

Related S Corporation Tax Resources

S corporation basis affects loss deductions, distributions, taxable gain, return preparation, and the treatment of shareholder transactions.

S Corp 1120S and Partnership 1065 Colorado filing Requirement DR 0106

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Philip Falco
S Corp 1120S and Partnership 1065 Colorado filing Requirement DR 0106

S Corps 1120S & Partnerships 1065 that meet Colorado Revised Statute 39-22-301(1) must file Colorado DR 0106. If your S Corp or Partnership was organized or commercially domiciled in Colorado, among others, then it must file DR 0106. CRS 38-22-201(1).

The DR0106 effectively captures Colorado state income tax on nonresident shareholders and partners. In additional, in enables taxpayers who wish to use the SALT Parity Act.

Colorado House Bill 23-1277, “CONCERNING THE FILING OF INCOME TAX RETURNS BY BUSINESS ENTITIES” made changes to CRS 39-22-601. The good news is that pursuant to CRS 39-22-302, “An S corporation shall not be subject to taxation under this article.” This is the flow-through S Corp tax concept written into Colorado law.

However, nonresident shareholders are subject to Colorado income tax. In the instance where an S Corp or Partnership has Colorado nonresident shareholders it generally must pay income tax on their behalf. They could also file an agreement.

Pursuant to CRS 39-5-102, county assessors must beam a list of nonresident property owners to the Colorado Department of Revenue (CDR). If the nonresident is running a short term rental, you could be sure they will get notice from the CDR. If the nonresident is a shareholder of an S Corp, the CDR can then file a DR 0106 and assess tax. There is also a hefty penalty for nonpayment of Colorado tax that surely will be applied.

There is a new focus to tax nonresidents of Colorado income. This focus is embodied in the changes to 39-22-601.

Colorado DR 0106 reporting should be coordinated with the federal return. We prepare both S corporation Form 1120-S returns and partnership Form 1065 returns, including related Colorado reporting.

Colorado pass-through entity reporting is one part of broader business tax preparation, which should coordinate the federal entity return, Colorado filings, shareholder or partner reporting, and the owner’s individual return.

Related Colorado Business Tax Resources

Colorado pass-through entity filing requirements should be coordinated with federal returns, ownership reporting, shareholder basis, and entity classification.

Missing IRS Refund

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Philip Falco
Missing IRS Refund

If you did not receive IRS refunds, check the refund status here: https://www.irs.gov/wheres-my-refund.

If you are sure about the missing refund, you need to start a refund trace by calling and speaking to an IRS agent 800-829-1040. You could also fill out IRS form 3911. You could fax the form to the appropriate number here: https://www.irs.gov/forms-pubs/about-form-3911.

You should place an identity protection pin on your file with an agent.

Related IRS Collection Options

The appropriate collection strategy may depend on the taxpayer’s finances, filing compliance, assets, collection deadlines and current IRS enforcement activity.

The real problem with Colorado graduated tax proposal

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Philip Falco
The real problem with Colorado graduated tax proposal

The real problem with the Colorado graduated tax proposal is that it converts a Colorado Constitution limitation to a statutory enablement.

The proposal would permit the Colorado legislature to increase taxes on income at any time. This would be very dangerous for the State of Colorado. The proposal deletes a key provision of the Colorado Constitution that limits the Colorado legislature from changing the approximate 4.5% tax rate. The Colorado Constitution provision that would be deleted is as follows: “Any income tax law change after July 1, 1992 shall also require all taxable net income to be taxed at one rate, excluding refund tax credits or voter-approved tax credits, with no added tax or surcharge.”

Once deleted, the Colorado legislature could raise the tax rate as they see fit. The proposal entices voter approval of the key Constitution provision by proposing a tax cut on approxamately 98% of Coloradans. Yes this is enticing. However, going forward the legislature could raise taxes on those 98% at any time since the key Colorado Constitutuion would be gone forever.

As such, the proposal enables the Colorado legislature to tax at will, while deleting the Colorado Constitution limitation to tax.

Whether you are for or against this is up to you. You decide.

Related Colorado and Federal Tax Resources

These related articles address additional Colorado, federal and business-tax issues that may affect planning or compliance.

Related Colorado Tax Resources

Colorado tax policy affects individuals, businesses, real estate owners, and the preparation of Colorado income tax returns.

Partnership 1065 and S Corp 1120S Filing Deadline and Penalties

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Philip Falco
Partnership 1065 and S Corp 1120S Filing Deadline and Penalties

The deadline to file the Partnership 1065 and S Corporation 1120S tax returns is September 15, one month before the extended personal 1040 deadline of October 15. This assumes that a timely extension was filed on or before March 15. The 1065 and 1120S are information tax returns, no tax is due with these returns. Typically, a K1 is issued, which reports income and expenses to the individual partners or shareholders. This is referred to as “flow through” taxation.

The penalties are steep for not filing timely. They are $250 per month, per partner per shareholder. By October 2, there would be two penalty assessments, so if there are 4 partners, the penalty would be $2,000 on October 2. This can quicky add up and become a material, nondeductible expense for small businesses.

The September 15 cannot be extended.

For preparation of the underlying returns, see our services for Form 1120-S S corporation tax returns and Form 1065 partnership tax returns.

Related Partnership and S Corporation Resources

Partnership and S corporation filing deadlines interact with state returns, shareholder basis, penalties, entity classification, and tax preparation.

Employment Tax Audit – 941, 940, W2. Footnote on IRS downsizing

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Philip Falco
Employment Tax Audit – 941, 940, W2. Footnote on IRS downsizing

We recently represented several taxpayers in employment tax audits stemming from irreconcilable 941′ ‘s to W2’s.

Employment tax should have zero errors: quarterly 941’s should match year-end W-2’s and the W-3. The 940 should also match. Finally, the income tax return (1040 schedule C, 1120S, 1065, 1120) should match as far as wages, payroll tax. If any of these are inconsistent, a payroll tax audit could follow suit.

Typically there are gaps in 941’s filed. There might be gaps in 941 payments. In other words, if the tax shown in the W-2 plus the employer side (15.3 percent) does not match deposits, an audit could be triggered.

Once an audit is triggered, it is more expansive in scope and years. The income tax return is reviewed for irregularities, and the years reviewed is expanded. In addition, state issues are reviewed such as state unemployment tax payment, rate. Employee benefits are reviewed such as health insurance, pension/profit sharing plans, automobile use, allowances, reimbursements.

Employee records are checked triggering potential illegal alien employment audit such as with employee forms I9, W4. Cash disbursements are checked, vendor payments, 1099’s. All books and records acan be checked, including accounting software. These audit exams are handled by IRS Revenue Agents with vast power.

It has been my recent experience that the IRS downsizing efforts have taken a toll. I have heard repeatedly from various agents about the stress and affects throughout the entire country. I recently heard of an effort of 40% downsizing. Many agents do now know if they can complete an audit because they might be terminated. I just thought it was interesting to note the real time effect.

Payroll filings should be reconciled with the underlying business income-tax return before inconsistencies attract IRS attention. Our tax compliance review can examine returns, payroll filings, information returns, and supporting records for discrepancies before an examination begins.

Related Employment Tax and IRS Audit Resources

Employment tax examinations can involve Forms 941 and 940, payroll deposits, worker reporting, trust-fund taxes, penalties, and possible collection action.

Paid Tax Return Preparer Audits

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Philip Falco
Paid Tax Return Preparer Audits

Over the years we have represented several tax preparers who the IRS selects for examination as part of the Paid Preparer Due Diligence Program. The IRS has gotten better at zeroing in on the preparers who abuse refundable tax credits. These audits can be frightening with the serious potential to lead to criminal investigation.

If you file returns with PTIN and/or EFIN, the IRS is tracking you. These are very effective audits. The IRS can select one preparer with a pattern of abuse and audit several hundred returns. Oftentimes, the preparers are unlicensed. They are not CPA’s, attorneys, or enrolled agents. They may have taken some courses over the years but really do not know what they are doing.

The preparers are often high volume preparers with clients in the hundreds. Oftentimes, their clients have earned income credit, head of household, or the child tax credit along with Schedule C. The dependents may be questionable, such as being on more than one return or not living with the taxpayer. A pattern of using Schedule C to optimize these credits is identified, examined, and seriously questioned. Schedule C abuse is serious in the eyes of the IRS.

The legal basis for these audits is the requirement to be compliant with the due diligence requirements by the regulations under the Internal Revenue Code Section 6695(g). There are penalties under IRS 6695(g) and the quickly add up to be draconian.

Form 8867, Paid Preparer’s Due Diligence Checklist, is implicated. Retention of records and substantiation of credits, schedule C. Various records will be probed by the agent under different scenarios. Worksheets and documentation are critical to persuade the agent of the exercise of due diligence. The credibility of the preparer is on the line.

Feel free to call us if you would like representation.

Related IRS Audit and Tax Preparer Resources

Tax preparer examinations may involve due diligence, return patterns, substantiation, client files, penalties, and potential civil or criminal exposure.

Charitable Remainer Annuity Trust – High Value, Low Basis Property for Income Stream

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Philip Falco
Charitable Remainer Annuity Trust – High Value, Low Basis Property for Income Stream

So you are getting older and have been successful in life. Now you own property, perhaps real estate, that has substantially increased in value but has a low adjusted basis. If you were to liquidate that property you would incur a large tax liability.

You want to tap into that value by way of income stream. One solution is to contribute that property to a Charitable Remainer Annuity Trust (CRAT), the CRAT then sells the property tax free and purchases an annuity. But is the receipt of the annuity income tax free (perhaps a single premium immediate annuity SPIA)? That would be too good to be true, unfortunately per Internal Revenue Code 664. Here’s how that breaks down.

What is a Charitable Remainder Annuity Trust – CRAT?

The basic concept of a CRAT involves a grantor’s transfer of property to an irrevocable trust, the terms of which provide for the payment of a specified amount, at least annually, to the grantor or other designated noncharitable beneficiaries for life or another predetermined period of time up to twenty years. I.R.C. § 664(d). What remains in the trust after the expiration of that period (which cannot be less than 10 percent of the initial net fair market value of all property placed in the trust, I.R.C. § 664(d)(1)(D)) must be transferred to one or more qualified charitable organizations or continue to be held in the trust for the benefit of such organizations. In short, unlike an immediate gift to charity, a contribution to
a CRAT blends the philanthropic intentions of a donor with his or her financial needs or the financial needs of others.

As a rule, the grantor recognizes no gain when transferring appreciated property to a CRAT. Moreover,
because CRATs are exempt from income tax, a CRAT can sell appreciated property without itself paying tax on the sale. See I.R.C. § 664(c)(1); Treas. Reg. § 1.664-1(a)(1)(i).

But that does not mean that the grantor or other noncharitable CRAT beneficiaries do not have to pay tax with respect to distributions from the CRAT. “Although a [CRAT] is itself exempt from income tax
and, therefore, pays no tax on any of its taxable income, the annuity . . . payments made to the noncharitable beneficiaries carry out taxable income that is subject to tax at the beneficiary level.” Alpha I, L.P. v. United States, 682 F.3d 1009, 1015 (Fed. Cir. 2012) (stating the rule and citing section 664(b) and (c)(1)). This is so because when property is transferred to a CRAT, the basis of the property in the CRAT’s hands generally is the same as it would be in the hands of the grantor. See I.R.C. § 1015(a) and (b); Treas. Reg. §§ 1.1015-1(a)(1), 1.1015-2(a)(1).

And when the CRAT sells the property, it realizes gain to the extent the amount realized from the sale exceeds its adjusted basis. I.R.C. § 1001; see also Treas. Reg. § 1.664-1(d)(1)(i) (discussing the assignment of income to categories at the CRAT level). Although not taxable to the CRAT, that gain must be tracked and affects the treatment of distributions from the CRAT.30 See, e.g., Treas. Reg. § 1.664-1(d)(1)(viii)
(providing examples illustrating the rules).

Congress has established specific ordering rules that govern the characterization and reporting of annuity amounts distributed by a CRAT to its income beneficiaries. See I.R.C. § 664(b). Under this regime, distributions from a CRAT to income beneficiaries are deemed to have the following character and to be distributed in the following order:
(1) as ordinary income, to the extent of the CRAT’s current and previously undistributed ordinary income;
(2) as capital gain, to the extent of the CRAT’s current and previously undistributed capital gain;
(3) as other income, to the extent of the CRAT’s current and previously undistributed other income; and
(4) as a nontaxable distribution of trust corpus.

CRATs are subject to strict reporting requirements to ensure compliance with the statutory ordering rules. See I.R.C. § 4947(a); Treas. Reg. § 1.664-1(a)(1)(ii). A CRAT must file an annual information return on Form 5227 reflecting its income, deductions, accumulations, and distributions for the year. See I.R.C. § 6011(a); Treas. Reg. § 53.6011-1(d). And it must issue to each income beneficiary a Schedule K–1 properly describing the tax character of all distributions. See I.R.C. § 6034A(a); Treas. Reg. § 1.6034-1(a).

For example, what CRAT earned was ordinary income because the properties the CRATs sold were subject to the rules of section 1245—hence, distributions to grantor would be ordinary income.

Charitable remainder trusts can affect capital-gain reporting, basis, Schedule K-1 income, charitable deductions, and the beneficiary’s individual tax return. These issues often arise as part of high-net-worth tax preparation and planning.

Transactions involving highly appreciated property, charitable structures, trusts, or the timing of a sale can also benefit from advance tax strategy and planning before the structure or disposition is finalized.

Related Trust, Asset Protection, and Tax Planning

Charitable remainder trust planning may involve appreciated property, income taxation, estate planning, asset protection, and the timing of a sale.

Gotcha: IRS Tax Return Proposed Changes CP2000 – Omitted 1099

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Philip Falco
Gotcha: IRS Tax Return Proposed Changes CP2000 – Omitted 1099

We have handled the following situation many times so I figured I would write a post about it. This is very common.

The bad news. Taxpayer receives CP2000 from the IRS, which is IRS’s proposed changes to the 1040 tax return. IRS has a before (shown on return) and after column (as corrected by the IRS). Typically taxpayer has forgotten to include a 1099, such as a 1099-S from the sale of a home, or perhaps a 1099-MISC as to schedule C income.

Taxpayer is scratching his/her head thinking well no tax is owed since the gain from the sale of my home was less than the principal residence tax exclusion of $250,000 or $500,000 for married couples. True but the IRS wants to see the steps.

Also, you might think that the 1099-MISC income was included in schedule C gross income. True but the IRS wants to see the 1099 tied to gros income and reported with the return. In truth, IRS proposed change would double include that 1099 income since it was already included on your schedule C, but the IRS does not know that.

The IRS does not give taxpayers the benefit of the doubt. Taxpayers must apply appropriate tax rules in their return. The IRS assumes worst case scenario when proposing changes, which must then be disproved by the taxpayer. Give us a call to handle this for you.

If you go at it alone, you would have to correct the return and provide the correct documentation to the IRS. If the IRS accepts your corrections, the assessment will be adjusted correctly and you win, or at least set the record straight.

Related IRS Notice and Audit Resources

A CP2000 proposed adjustment may require document review, reconciliation of information returns, amended reporting, penalty analysis, and a timely response.

Tax Debt Collection: Statute of Limitations Tolling

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Philip Falco
Tax Debt Collection: Statute of Limitations Tolling

The IRS has a limited amount of time to collect your tax debt. This blog post discusses some of the your actions or reasons why that time period could be extended (tolled). To put it in simple terms, tolling is bad or hurts the taxpayer.

The IRS through the United States Department of Justice can file an action in the United States District Court pursuant to 26 U.S.C. 7401 to reduce your tax debt to judgment on the very last day of the expiration of the statute of limitations. If the action is timely, the statute of limitations is no longer relevant since (assuming a judgment is entered) the tax debt is reduced to judgment. As such, exact calculation of the statute of limitations is critical. Here are some matters that could have extended your period.

Absent events that toll the statute of limitations, 26 U.S.C. § 6502(a) provides a general ten-year collection statute of limitations starting on the date a tax is assessed. The collection statute of limitations is tolled under 26 U.S.C. § 6330(e) anytime there is pending a collection due process hearing under 26 U.S.C. § 6330(a)(3)(B). A taxpayer is entitled to request such a hearing before the IRS levies. See 26 U.S.C. § 6330(e).

The collection statute of limitations is further tolled under 26 U.S.C. § 6330(e) for 90 days after the day on which there is a final determination of a collection due process hearing under 26 U.S.C. § 6330(a)(3)(B).

The collection statute of limitations is also tolled when an offer to enter into an installment agreement is pending between the taxpayer and the IRS. See 26 U.S.C. §§ 6502(a)(2), 6331(i), (k). The collection statute of limitations is tolled for thirty days following the rejection or termination of an installment agreement. See 26 U.S.C. § 6331(i), (k).

So if your installment is pending for a year and then terminated, the statute of limitations would be tolled for a year plus thirty days.

The statute of limitations tolling begins on the day you th taxpayer request an installment agreement even though it could take months for the IRS to accept or reject that request. For example, assume the IRS receives your request on July 20, 2015, to enter into an installment agreement for tax years 2011 and 2012. That request was pending until December 16, 2015 when the IRS granted the installment agreement request for tax years 2011 and 2012. Accordingly, the pending installment agreement request tolled the collection statute of limitations for tax years 2011 and 2012 for at least 149 days (July 20, 2015 to December 16, 2015).

There is some debate over the 90 day period. Under 26 U.S.C. § 6330(e), the statute of limitation period shall not expire “before the 90th day after the day on which there is a final determination in such hearing.” The collection statute of limitations is not further tolled for 90 days but if the final determination is less than 90 days from the date the period expires, then the statute of limitation period is from the 90th day after the date of final determination. See also Reg. § 301.6330-1(g)(3).

related content:

Unpaid taxes – Offers in Compromise

Tax Liens, Tax Levies, Collection Due Process Hearings

If you would like an analysis of your collection period statute of limitations, please contact me (303) 626-7000 phil@coloradolegal.com.

New Entity EIN and Tax Classification

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Philip Falco
New Entity EIN and Tax Classification

This is one of the most important steps that could impact the entire future of your new business. Take your time before applying for an EIN with the Internal Revenue Service. Severe adverse tax consequences could impact the future of your entity.

Entity classification is a tax-planning decision, not merely an administrative filing. Our tax strategy and planning service evaluates entity choice and other decisions before they create long-term tax consequences.

Name selection. If you choose a name with Corp, or Inc, the default entity will likely be a C Corporation. Taxpayers almost always do not intend on being C Corporations.

If you choose LLC (limited liability company) and you are a sole owner it will most likely default to schedule C on your 1040.

In addition, if you answer questions indicating that you will have payroll, and you very well could, it will trigger the filing of payroll forms typically 940 and 941 with automatic filing dates required, which in turn trigger Colorado state withholding filings, Colorado Department of Labor and Employment, and possibly the Denver Head Tax. In additional, it could trigger worker’s compensation insurance.

Save the letter you get from the IRS SS-4 or IRS CP 575 A for the life of your business.

Tax Tips:

  • Avoid Corp or Inc unless you know exactly what you are doing
  • Be prepared to set up State and local payroll accounts if you have employees
  • Most LLC’s will be on schedule C of your 1040, or form 1065 if you have more than just you as a partner

Once the entity classification is established, the ongoing filing obligations should be coordinated with the business and owner returns. See our business tax preparation service for LLC, S corporation, partnership, and closely held business filings.

Related Business Legal and Tax Services

Business decisions often involve overlapping legal, tax, financial-reporting, ownership and entity-structure considerations.

S Corp Requirements (disproportionate distributions)

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Philip Falco
S Corp Requirements (disproportionate distributions)

S Corporations can only have one class of stock. An argument can be unsuccessfully made that uneven de facto distributions to shareholders would be more than one class of stock. However, so long as the corporate documents call for even distributions all is ok even if uneven distibutions subsequently occur.

The gegal basis for this is found in the regulations: the regulation tells the IRS to focus on shareholder rights under a corporation’s governing documents, not what shareholders actually do. The regulation states that uneven distributions don’t mean that the corporation has more than one class of stock. Treas. Reg. § 1.1361-1(l)(2) (“[A] corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights . . . .”).

Taking a step back, the first rule is that shareholders have to choose to be taxed as an S corporation. Shareholders do so by filling out a Form 2553, Election by a Small Business Corporation, that they file with the IRS. See Treas. Reg. § 1.1362-6(a)(2)(i). Once the IRS approves, the election remains effective indefinitely. § 1362(c); see Mourad v. Commissioner, 121 T.C. 1, 4 (2003), aff’d, 387 F.3d 27 (1st Cir. 2004).

A great many small and medium-sized businesses elect S corporation status because the Code affords them special treatment—income earned by the corporation escapes corporate-level taxation. Mourad, 121 T.C. at 3; see §§ 1363, 1366. That income is instead “passed through” to its shareholders pro rata. See §§ 1363, 1366. But electing to be an S corporation is not enough. The Code has several other requirements. These include having no more than 100 shareholders, having only shareholders who are individuals—or certain trusts or nonprofits—and not having any nonresident alien shareholders. § 1361(b)(1). The parties don’t dispute that Schricker met these requirements.

There’s one other requirement. Section 1361(b)(1)(D) allows a corporation to be an S corporation only if it has no more than one class of stock. What does that mean? Section 1361 doesn’t say, but we know that run-of-the-mill debt isn’t a second class of stock. § 1361(c)(5)(A). And neither are differences in common-stock voting rights. § 1361(c)(4).

The regulation gives us a little more help. It generally treats a corporation as having only one class of stock so long as all the shares confer equal rights to dividends and liquidation proceeds. Treas. Reg. § 1.1361-1(l)(1) (“[A] corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds”).

The regulation also tells us to determine whether stock confers identical rights to distributions and liquidation proceeds based on the corporation’s governing provisions. Id. subpara. (2)(i). These are
documents like a corporate charter, articles of incorporation, and bylaws. Id. The IRS has said it won’t treat any disproportionate distributions made by a corporation as violating the one-class-ofstock requirement if the governing provisions provide for identical rights. Rev. Proc. 2022-19, § 3.02, 2022-41 I.R.B. 282, 286.

As you can see this is a topic that of a Pandora’s Box. Luckily we have some common-sense regulations to pave the way forward, thank you Department of Treasury 🙂

Distribution issues should also be reviewed as part of S corporation tax return preparation, because distributions interact with shareholder basis, Schedule K-1 reporting, and the shareholder’s Form 1040.

Related Business Legal and Tax Services

Business decisions often involve overlapping legal, tax, financial-reporting, ownership and entity-structure considerations.

Guilty until Proven Innocent? Tax Court Burden of Proof

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Philip Falco
Guilty until Proven Innocent? Tax Court Burden of Proof

Who has the upper hand in Tax Court, the IRS or the Taxpayer? You decide.

You are considering filing a petition with the United States Tax Court perhaps regarding your Notice of Deficiency post IRS audit. Here are a few rules of play to be aware of.

The IRS’s determinations in a notice of deficiency are generally presumed correct, and taxpayers bear the burden of proving them erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). This puts the main hurdle on the Taxpayer. To put it in common terms, the Taxpayer is presumed guilty, not innocent (these are civil matters, not criminal so this is an analogy). Walking into Tax Court, Taxpayer must prove the IRS’s position is wrong.

All is not hopeless. However, if a taxpayer produces credible evidence with respect to one or more factual issues relevant to the taxpayer’s tax liability, the burden of proof may shift to the IRS as to that issue or issues. § 7491(a)(1). Likewise, the IRS’s determination does not receive a presumption of correctness if the determination is shown to be arbitrary and capricious. Helvering v. Taylor, 293 U.S. 507, 514 (1935); 9 [*9] Cohen v. Commissioner, 266 F.2d 5, 11 (9th Cir. 1959), remanding T.C. Memo. 1957-172. Also, the IRS bears the burden of proving new matters asserted in its answer. See Rule 142(a).

Tax Court proceedings are conducted in accordance with the Federal Rules of Evidence. § 7453; Rule 143(a).

Section 7491(a)(1) provides that if, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the IRS shall have the burden of proof with respect to that issue. See Higbee v. Commissioner, 116 T.C. 438, 440–41 (2001). For the burden to be placed on the IRS under this section, however, the taxpayer must demonstrate that he has: (1) complied with the requirements under the Code to substantiate any item, (2) maintained all records required under the Code, and (3) cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews. See § 7491(a)(2); Higbee, 116 T.C. at 440–41.

Related IRS Audit and Tax Controversy Resources

Tax Court disputes often arise from audits, notices of deficiency, evidentiary issues, penalties, and the taxpayer’s obligation to substantiate return positions.

CFO and Board Service

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Philip Falco
CFO and Board Service

Chief Financial Officer for your company. Given the dual licensing as a Certified Public Accountant and Attorney, this background and 30 years of business experience is a good fit. Your company could add tremendous value in terms of tax guidance, financial planning, and legal guidance.

For larger companies:

-keeping on track of internal audits

-integrating recommendations into policy

-internal fraud prevention and detection

-Legal exposure prevention.

Smaller companies:

-tax compliance and strategy

-legal compliance

-legal structure

Give us a call to discuss (303) 626-7000

Ongoing CFO and advisory work is most effective when financial reporting, payroll, tax planning, and annual returns are coordinated. Our business tax preparation service handles that annual filing component for closely held businesses and their owners.

Businesses that need recurring tax guidance without a full CFO engagement may also use our year-round tax advisory service for proactive tax planning and ongoing coordination throughout the year.

Related Business Legal and Tax Services

Business decisions often involve overlapping legal, tax, financial-reporting, ownership and entity-structure considerations.

City & County of Denver Taxes

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Philip Falco
City & County of Denver Taxes

So what are these mysterious taxes? Here they are:

Sales Tax – On the purchase price for all sales and purchases of tangible personal property, etc. Return due on or before the twentieth (20 th ) day of each month for sales occurring in the preceding calendar month

Use Tax – There is levied and there shall be collected and paid a tax in the amount stated in this article, by every person exercising the taxable privilege of storing, using, distributing or consuming in the city tangible personal property, or a product or service subject to the provisions of this article, purchased at retail, for said exercise of said privilege, etc. Return due on or before the twentieth (20 th ) day of each month for sales occurring in the preceding calendar month.

Lodger’s Tax –  There is hereby levied and shall be collected and paid a tax by every person exercising the taxable privilege of purchasing lodging, etc. Return due on or before the twentieth (20 th ) day of each month for sales occurring in the preceding calendar month.

Employee Occupational Privilege Tax – There is hereby levied by the city upon and there shall be collected monthly from and paid to the manager by each employee who performs services within the city for any period of time in a calendar month for an employer, an employee’s occupational privilege tax, at the rate of five dollars and seventy-five cents ($5.75) per month for each and every month in which such employee is, for any period of time, so employed. Return due on or before the last day of each month for the taxes required to be remitted for the preceding calendar month.

Business Occupational Privilege Tax – There is hereby levied by the city upon, and there shall be collected monthly from and paid to the manager by, every person engaged in any business, trade, occupation, profession or calling of any kind having a fixed or transitory situs within the city, for any period of time in a calendar month within the city, a business occupational privilege tax in the sum of four dollars ($4.00) per month for the first owner, partner, manager or employee, and the additional sum of four dollars ($4.00) per month for each and every additional owner, partner, manager or employee who performs within the city for any period of time in a calendar month any services or other activities in the operation of such business, trade, occupation, profession or calling within the city. Return due on or before the last day of each month for taxes required to be withheld for the preceding calendar month.

Facilities Development Admissions Tax – “Admission” shall mean the right to an entrance and an occupancy of a seat or an entrance alone, of a person who, for a consideration by whatever name known, including involuntary “contributions,” uses, possesses or has the right to use or possess entrance and occupancy of a seat or an entrance alone to any entertainment, amusement, athletic event, exhibition or other production or assembly staged, produced, convened or held at or on any facility or property owned or leased by the city, including, but not limited to, the following facilities: the Denver Coliseum Complex; the Red Rocks Theatre; Phipps Auditorium; the Denver Performing Arts Complex; the National Western Stock Show Complex; and the Colorado Convention Center. Return due on or before the fifteenth day of each month for sales occurring in the preceding calendar month

Telecommunications Tax – There is levied a tax on the privilege of engaging in the telecommunications business within the city upon each business so engaged one and twelve-hundredths dollars ($1.12) for each account of such business regarding a customer for which local exchange telecommunications are provided by said business within the city. Return due on or before the twentieth (20 th ) day of each calendar month for taxes required to be remitted for the preceding calendar month.

Buyer beware!  Returns required upon sale of business; purchaser subject to lien. (a) Any taxpayer who shall sell out a business or stock of goods or shall quit business shall be required to make out a return as provided in this chapter within ten (10) days after the date the taxpayer sold out the business or stock of goods or quit business, and a successor in business shall be required to withhold sufficient of the purchase money to cover the amount of the tax due and unpaid until such time as the former owner shall produce a receipt from the manager showing that the taxes have been paid or a certificate that no taxes are due. (b) If the purchaser of a business or stock of goods shall fail to withhold the purchase money as provided in subsection (a), and the tax shall be due and unpaid after the ten (10) day period allowed, the purchaser, as well as the taxpayer, shall be personally liable for the payment of the taxes unpaid by the former owner. Likewise, anyone who takes any stock of goods or business fixtures of or used by any employer under lease, title-retaining contract or other contract arrangement, by purchase, foreclosure sale or otherwise, takes same subject to the lien for any delinquent taxes owed by such employer and shall be liable for the payment of all delinquent taxes of such prior owner, not, however, exceeding the value of the property so taken or acquired.

Related Denver and Colorado Tax Resources

Denver businesses and residents may encounter local taxes in addition to Colorado and federal filing obligations.

Cryptocurrency Tax Compliance

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Posted by
Philip Falco
Cryptocurrency Tax Compliance

We are now performing tax compliance for taxpayers with Cryptocurrency, the Cryptocurrency net worth of which exceeds 1 million (U.S. convertible).  We are the best at what we do.

Tax year 2017 is a critical tax year for Cryptocurrency.  Getting 2017 correct will provide a foundation for huge gains in later years.  You must seize the moment.

The Internal Revenue Service is focusing on noncompliant taxpayers in this space.  This is evident by the John Doe Summons issued on Coinbase.  As many of us have read, the Internal Revenue Service has obtained information about 14,355 Coinbase account holders.  Coinbase has been ordered to provide the IRS with the taxpayer’s name,etc, for those individuals who have bought, sold, sent, or received more than $20,000.  In addition, the Securities and Exchange Commission is paying attention, which is evident by statements made about Initial Coin Offerings (ICO’s).

The day of tax reckoning is inevitable.  Time is of the essence to properly disclose huge transactions.  Please feel free to call us.  (303) 626-7000.

 

 

 

Related Cryptocurrency and International Tax Resources

Cryptocurrency reporting can involve basis, transaction history, foreign accounts, information reporting, return preparation, and IRS examination exposure.

S.A.L.T. deduction cap of $10,000 effect in Colorado

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Posted by
Philip Falco
S.A.L.T. deduction cap of $10,000 effect in Colorado

The State and local tax (SALT) deduction is limited to $10,000 for tax years beginning 2018.  As such there has been confusion as to whether a taxpayer can prepay 2018 SALT in 2017 and take a full deduction in 2017 thereby avoiding the $10,000 limitation in 2018.  As to Colorado, this has been my experience.

To put this in context, this refers to cash method taxpayers.  Under certain circumstances, cash method taxpayers may prepay liabilities to take a deduction in the year paid as compared with year accrued.  As such, if a Colorado county would not accept payment of a 2018 tax due, then the cash method defeats the prepayment strategy, not the new tax bill.

The cap includes both real estate and income tax.  State income tax cannot be prepaid because of the second to last sentence of the amendment below.  However, real property tax can possibly be prepaid.  Whether the real property tax can be prepaid depends on whether 2018 real property tax has been assessed by that particular county.  Denver has assessed 2018 and it is payable now so Denver could be prepaid.   I checked some other counties and visibility is not clear so call to check with your particular county as to whether the real property tax has been ASSESSED.  If so, and the combined anticipated 2018 SALT (income and property tax) exceeds $10,000), go pay that real estate tax for some tax savings.

It has been my experience in real estate transactions to provide a credit to purchasers for the prior year real estate taxes because they were assessed although not yet due.  This provides further basis to make the case that prepaying 2018 tax is a deduction in 2017.

I have received a case example from a reader of this post.  Taxpayer went to the Arapahoe County Treasurer today, December 29, 2017.  The Treasurer informed taxpayer that Arapahoe considers the tax assessed on May 1, when they value properties.  He promptly paid his 2017 taxes due 2018 and the treasurer gave him a receipt with 2017 printed on it.

Colorado does seem perfectly aligned to prepay your taxes due 2018 in 2017 for a deduction in 2017 to thereby avoid the $10,000 cap in  the new bill.  Of course, there is AMT!

Here’s the text:

SEC. 11042. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. TAXES. (a) IN GENERAL.-Subsection (b) of section 164 is amended by adding at the end the following new paragraph: ”(6) LIMITATION ON INDIVIDUAL DEDUCTIONS FOR TAXABLE YEARS 2018 THROUGH 2025.-In the case of an individual and a taxable year beginning after December 31, 2017, and before January 1, 2026- ”(A) foreign real property taxes shall not be taken into account under subsection (a)(1), and ”(B) the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return). The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212. For purposes of subparagraph (B), an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed.”.  (b) EFFECTIVE DATE.-The amendment made by this section shall apply to taxable years beginning after December 31, 2016.

Also review the IRS bulletin on this topic: https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017.

Related Colorado and Federal Tax Resources

State and local tax deductions interact with Colorado filing obligations, federal return preparation, real estate ownership, and business taxation.

Panama Papers: The Case for FATCA Global Adoption

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Posted by
Philip Falco
Panama Papers: The Case for FATCA Global Adoption

The disclosure of the Panama Papers promises to cause global unrest as exemplified by the recent protests in Iceland.  As more and more leaders are tied to illicit offshore bank accounts, continued unrest is sure to follow.  FATCA, the Foreign Account Tax Compliance Act, at first appeared to be a time-consuming nuisance for banks is now proving to be a potent weapon of democratic society.

FATCA was implemented to target non-compliant United States taxpayers by forcing banks around the world to report bank balances of U.S. taxpayers to the United States government. U.S. taxpayers of every type must come forward and not only declare foreign accounts but also pay undeclared tax.  It forces all U.S. taxpayers to play by the same rules.  A true democracy cannot be had unless monetary rules are leveled for all involved.

The reportable bank balances are those of United States taxpayers, but not of foreign nationals who have no duty to report under United States laws.  As a result, many of those identified in the Panama Papers were unlikely reportable taxpayers pursuant to FATCA.  Consequently, countries throughout the world would find it prudent to contemplate adopting a FATCA-like disclosure model to maintain peace, disrupt political corruption, and level the monetary playing field.

Related Offshore Account and International Tax Resources

Foreign account reporting may involve FATCA, FBAR filing, willfulness, voluntary disclosure, penalties, and possible criminal-tax exposure.

Keep your sanity during tax season.

Date
Posted by
Philip Falco
Keep your sanity during tax season.

There are a lot of pressures surrounding our voluntary tax system. There are deadlines and then there is honesty, to name a couple. What, however, is most important is your portrayal of your taxes to the IRS. This is the empowering moment of taxpaying Americans. At this moment you have the liberty to express your capitalist side as a business. You take the liberty to deduct business expenses in that regard while reporting the winnings of your entrepreneurial spirit. Tax is very much a positive vote for your future, so as you disclose and pay your tax, note to yourself that you are investing in your future and your family’s future.

Related Tax Preparation and Compliance Resources

Careful preparation, complete records, and early attention to compliance concerns can reduce tax-season stress and prevent larger IRS problems.

Willful vs. Non-Willful FBAR Violations

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Posted by
Philip Falco
Willful vs. Non-Willful FBAR Violations

Whether an FBAR violation is willful or non-willful can dramatically affect potential penalties and the appropriate method of correcting prior foreign account reporting failures. Willfulness is therefore one of the most important issues to evaluate before making a Streamlined certification, filing delinquent foreign account reports, or considering the IRS Voluntary Disclosure Practice.

For qualifying non-willful offshore reporting failures, the appropriate Streamlined path depends in part on residency and the applicable IRS eligibility requirements. See the Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Colorado Legal assists taxpayers with FBAR compliance, offshore reporting problems, Streamlined submissions, IRS examinations, and potential voluntary disclosure matters. Philip M. Falco is both a Colorado attorney and Certified Public Accountant.

Do not assume that “I didn’t know about the FBAR” automatically resolves the willfulness issue. Civil FBAR willfulness can involve knowing conduct, reckless conduct, or willful blindness. Conversely, the existence of a reporting failure does not by itself establish willfulness. The determination depends on the complete facts and circumstances.

What Is an FBAR Violation?

The Report of Foreign Bank and Financial Accounts, FinCEN Form 114, generally applies when a U.S. person has a financial interest in or signature or other authority over qualifying foreign financial accounts and the aggregate value exceeds the applicable reporting threshold.

For a detailed discussion of who must file, account aggregation, filing deadlines, late FBARs, and related requirements, see our FBAR Filing and FinCEN Form 114 page.

What Does “Willful” Mean for a Civil FBAR Penalty?

The IRS Internal Revenue Manual states that, for civil FBAR purposes, the test for willfulness includes situations in which a person:

  • knowingly violated a legal duty;
  • recklessly violated a legal duty; or
  • acted with willful blindness by consciously avoiding learning about a legal duty.

This is important because civil willfulness is not necessarily limited to a taxpayer who expressly admits knowing about the FBAR requirement and intentionally deciding not to file.

The IRS bears the burden of establishing willfulness when asserting a willful FBAR penalty.

Knowing FBAR Violations

A knowing violation presents the most direct form of willfulness. The issue may arise where evidence shows that the taxpayer knew of the foreign account reporting requirement and consciously chose not to report an account accurately or timely.

Evidence can include written communications, prior filings, professional advice, account-opening documents, tax organizer responses, prior FBAR filings, correspondence with financial institutions, or other evidence demonstrating actual knowledge.

Recklessness and FBAR Willfulness

The civil FBAR analysis can also encompass reckless conduct.

The IRS describes recklessness as an objective inquiry into whether the taxpayer recklessly disregarded the reporting requirements. Consequently, a taxpayer’s statement that he or she did not subjectively intend to violate the law may not end the inquiry.

This is one reason offshore compliance should not be reduced to a single question such as, “Did you know what an FBAR was?”

Willful Blindness

Willful blindness generally concerns a conscious effort to avoid learning about a legal duty.

Potential evidence may involve circumstances suggesting that a taxpayer deliberately avoided information concerning reporting obligations. As with recklessness, the analysis depends on actual facts rather than labels.

What Is a Non-Willful FBAR Violation?

For purposes of the IRS Streamlined Filing Compliance Procedures, the IRS describes non-willful conduct as conduct resulting from negligence, inadvertence, mistake, or a good-faith misunderstanding of the requirements of the law.

Non-willful does not mean that no filing failure occurred. Instead, it addresses the nature of the conduct that produced the failure.

Taxpayers seeking Streamlined treatment must certify under penalties of perjury that the relevant failures resulted from non-willful conduct.

See our Streamlined Filing Compliance Procedures guide for more information.

Facts the IRS May Consider in Evaluating Willfulness

There is no single universal checklist that decides every FBAR case. Relevant facts can include:

  • whether the taxpayer previously filed FBARs;
  • whether foreign income was reported on the federal income tax return;
  • answers on Schedule B concerning foreign accounts;
  • what information was provided to the return preparer;
  • whether a CPA, attorney, financial adviser, or bank discussed U.S. reporting requirements;
  • the taxpayer’s education, occupation, and financial sophistication;
  • the reason the foreign account was opened;
  • whether the taxpayer inherited the account or had longstanding family assets overseas;
  • whether statements were mailed to the United States;
  • whether funds were moved between foreign institutions;
  • whether entities, trusts, foundations, nominees, or other structures were used;
  • whether the account was disclosed to other government agencies or financial institutions;
  • the taxpayer’s citizenship and residence history;
  • whether Forms 8938, 5471, 3520, 8621, 8865, or other international returns were filed;
  • prior IRS contacts or examinations; and
  • the credibility and consistency of the taxpayer’s explanation.

The significance of any one fact depends upon the surrounding circumstances.

Schedule B and Foreign Account Questions

Individual income tax returns can contain questions concerning foreign financial accounts and foreign trusts on Schedule B.

How those questions were answered may become relevant to an IRS willfulness analysis, but the answer is not necessarily dispositive by itself. Other facts can include who prepared the return, whether the taxpayer reviewed it, the information supplied to the preparer, the taxpayer’s understanding of the question, and whether foreign income or other international forms were reported.

Reliance on a CPA or Tax Return Preparer

A taxpayer may have relied on an accountant or other return preparer, but merely having a professional preparer does not automatically establish either willfulness or non-willfulness.

Important questions can include what the taxpayer told the preparer, what questions the preparer asked, what documents were provided, and whether the taxpayer had information suggesting additional foreign reporting obligations.

Contemporaneous emails, tax organizers, engagement correspondence, and copies of prior returns can be important evidence.

Non-Willful FBAR Penalties

Federal law authorizes civil penalties for non-willful FBAR violations, subject to the applicable statutory maximum as adjusted for inflation.

Following the Supreme Court’s decision concerning non-willful FBAR penalties, the IRS treats the failure to file a legally compliant FBAR as a single non-willful reporting violation rather than imposing a separate non-willful penalty for every account omitted from the same annual FBAR.

The IRS also recognizes a reasonable-cause exception for qualifying non-willful violations when the statutory conditions are satisfied.

Willful FBAR Penalties

The potential civil penalty exposure for a willful FBAR violation is substantially greater.

For applicable violations, federal law authorizes a maximum penalty for each willful violation of the greater of the inflation-adjusted statutory dollar amount or 50% of the amount in the account at the time of the violation.

IRS examination procedures also include mitigation guidelines and examiner discretion. Actual penalty exposure therefore requires analysis of the number of violations, account balances, years at issue, mitigation criteria, and the specific facts of the case.

The possibility of willful penalties is one reason a taxpayer with substantial unreported foreign accounts should evaluate the compliance strategy before making new filings.

Willful vs. Non-Willful: Why the Difference Matters

Issue Non-Willful Potentially Willful
Nature of conduct May involve negligence, inadvertence, mistake, or good-faith misunderstanding May involve knowing conduct, recklessness, or willful blindness
Streamlined procedures Potentially available if all eligibility requirements are satisfied Generally inconsistent with the required non-willfulness certification
FBAR penalty exposure Lower statutory structure; reasonable cause may be relevant Potentially much greater civil penalties
Criminal exposure Generally not the defining concern of the Streamlined procedures May require evaluation of the IRS Criminal Investigation Voluntary Disclosure Practice

Streamlined Filing Compliance Procedures

The Streamlined Filing Compliance Procedures are intended for qualifying taxpayers whose failures resulted from non-willful conduct.

A Streamlined submission requires more than preparing amended returns and delinquent FBARs. The taxpayer must provide a certification explaining the relevant conduct.

The certification should be based on the taxpayer’s actual facts and history rather than generic or boilerplate language.

What If the Conduct May Have Been Willful?

A taxpayer with facts suggesting possible willfulness should consider the consequences before filing a Streamlined certification or making a quiet disclosure.

The IRS maintains a separate Criminal Investigation Voluntary Disclosure Practice for taxpayers with potentially willful tax noncompliance who seek to come forward before they are detected.

Voluntary disclosure is not an automatic immunity program and does not guarantee that prosecution will never occur. Eligibility, timeliness, truthfulness, cooperation, and the particular facts matter.

Can Filing Delinquent FBARs Fix the Problem?

Filing delinquent FBARs may be part of a compliance strategy, but simply filing the forms does not automatically determine penalty treatment or resolve a willfulness issue.

Before making delinquent filings, the taxpayer should identify:

  • the years for which FBARs were required;
  • whether foreign income was omitted;
  • whether Forms 8938 or other international information returns were required;
  • whether the conduct was non-willful;
  • whether reasonable cause may exist;
  • whether Streamlined treatment is available; and
  • whether potentially willful conduct requires a different approach.

Attorney-Client Privilege and Offshore Compliance

When a taxpayer is concerned about potential willfulness, substantial civil penalties, or criminal exposure, legal advice can become particularly important.

International tax problems frequently require reconstruction of tax returns and foreign account history while simultaneously evaluating the legal implications of the taxpayer’s past conduct.

Colorado Legal approaches these matters as both a legal and tax compliance problem. Philip M. Falco is licensed as both an attorney and CPA.

Frequently Asked Questions

Does forgetting to file an FBAR mean the violation was non-willful?

Not necessarily. A genuine mistake may support non-willfulness, but the determination depends on all surrounding facts. The IRS can also assert civil willfulness based on reckless conduct or willful blindness.

Does checking the wrong box on Schedule B automatically prove willfulness?

No single fact necessarily determines willfulness. Schedule B can be important evidence, but the analysis can also involve how the return was prepared, what the taxpayer knew, what information was given to the preparer, prior filings, and other circumstances.

Can the IRS impose a willful FBAR penalty without proving criminal tax fraud?

Yes. Civil FBAR willfulness and criminal tax liability involve different legal standards and consequences. A civil willfulness determination does not require a criminal conviction.

Can reliance on an accountant establish non-willfulness?

Professional reliance can be relevant, but the facts matter. The analysis includes what information the taxpayer supplied, what advice was given, and whether the taxpayer had reason to understand that additional reporting might be required.

Should I use Streamlined if I am uncertain whether my conduct was willful?

A taxpayer should evaluate the facts before signing a Streamlined non-willfulness certification. Where facts create substantial concern about willfulness, the IRS Voluntary Disclosure Practice and other options should be considered before filing.

Official Resources

Discuss an FBAR Willfulness or Offshore Disclosure Matter

If you have unreported foreign accounts or are concerned about prior FBAR filings, the distinction between willful and non-willful conduct should be evaluated before selecting a correction procedure.

Philip M. Falco, Attorney & CPA
Denver, Colorado
(303) 626-7000

Schedule a Tax Attorney Consultation

This page provides general information and does not determine whether a particular FBAR violation is willful or non-willful. Willfulness and penalty exposure depend on the individual facts and applicable law.