Tax Court Rules That Tax Refunds Are Included in Decedant's Estate

A matter recently litigated in the United States Tax Court, in Estate of Badgett v. Commissioner, clarifies the situation which most people don't even think about when they prepare a 706 for a US  decedent.  At the time of his death this decedent had not yet filed a 1040 for the year in which he died. Subsequent to his death, a 1040 was filed resulting in a refund to the estate in excess of $400,000.

 

The estate, on the 706, opined that the $400,000 refund was not an asset of the estate and did not include it in the estate. The IRS took umbrage at this position. The IRS's position, supported by section 2031, indicates that all property, real, personal, tangible or intangible wherever situated is includable in the decedent's gross estate. 

The estate, in the tax court case, took the position that in order to be included in the decedent's estate, the refund must already have been in existence at the date of death, not merely a possibility or expectation. Clearly this flies in the face of a number of cases in which the decedent was to have been a beneficiary of a contract or a shows in action. Although the receipt of the money is merely a possibility or an expectation, it is still includable in the decedent's estate. In the case of a tax refund, the amount is finite. In the case of a shows in action or contractual obligation, one could argue, depending on the facts and circumstances, that the amount to be included in the gross estate was less than 100% of the value listed on the contractual obligation since a possibility of litigation exists, the right of which may well diminish the contractual obligation from the amount listed on the contract. 

The  estate's final argument, one which fell on deaf ears, was that there was no guarantee that the IRS would refund the full amount of the refund. Clearly this is a misunderstanding of tax refunds.  In the case that the IRS has no outstanding liens or assessments against a taxpayer, the amount of the refund is 100% of the amount listed on the tax return (barring mathematical error).  It is true however, that if there is an outstanding lien or obligation to the IRS, the amount of the obligation will be netted against the refund. In this particular case, the decedent  had no outstanding obligations to the IRS so the full amount of the refund is includable in the decedent's estate.

 

 

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Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.

 

IRS Denies Deductions For Certain Settlement Payments to a Foreign Country in FAA 20154702F

The taxpayer had a subsidiary that participated in a business in a foreign country. The foreign country's government claimed that improper payments were made to other government officials in connection with contracts awarded to the subsidiary's business relating to specific projects.

 

The foreign country filed an indictment charging the taxpayer and other participants, including the taxpayer's subsidiary, with conspiracy to commit a felony in violation of the laws of the foreign country. The indictment charged that the subsidiary paid various foreign government officials in exchange for favorable contracts.

 

No trial was not held on the charges.  Instead the taxpayer and the foreign country entered into a settlement and non-prosecution agreement resolving all matters relating to the criminal charges contained in the indictments.

The agreement specifically stated that the taxpayer was to make the payment “in consideration of the withdrawal of the Criminal Charges and the other promises” and that the parties put their disagreement with respect to the charges aside “to avoid the burden, inconvenience and expense of further protracted and costly litigation.”

 

The Chief Counsel's Office advised in 20154702F  that the exception in §162(f) states that no deduction is allowed for any fine or similar penalty paid to the government of a foreign country, and that a “fine or similar penalty” includes an amount paid in settlement of a taxpayer's actual or potential liability for a civil or criminal fine or penalty. According to the Chief Counsel's Office, the settlement amount payment is therefore a fine or similar penalty paid to a government for violation of law, and the taxpayer's deduction for that payment is prohibited under §162(f).

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More Than 170,000 Banks In More Than 200 Countries Are Reporting US Taxpayer's Foreign Accounts!

Foreign banks received a new version of the IRS's Guide to registering online to Report U.S. Owned Bank Accounts under Foreign Account Tax Compliance Act (FATCA). The guide has been reformatted to make it shorter and easier to read. The Internal Revenue Service announced in IR-2015-131 that it has upgraded FATCA's Online Registration System to:

1. Enable sponsoring entities to register their sponsored entities to obtain a global intermediary identification number.
2. Aid users to update their information, download registration tables and change their financial institution type. and
3. Include an updated jurisdiction list.  

The Foreign Account Tax Compliance Act (FATCA) Online Registration System is a secure, web-based system that financial institutions and other entities can use to register for FATCA purposes.

The system allows the IRS to identify Foreign Financial Institutions and certain other entities with FATCA obligations. These entities generally report on foreign financial accounts held by U.S. taxpayers under the terms of FATCA or pursuant to the provisions of specific intergovernmental agreements (IGAs).  

More than 170,000 Financial Institutions

worldwide have registered with the IRS.

 

 

These Financial Institutions are located in

> 200 Jurisdictions.

 

In most cases, those foreign financial institutions that do not comply with FATCA or participate through an IGA are subject to 30 percent withholding on certain U.S. source payments.  

The update to the system occurred on November 16, 2015. The improvements to the system and additional features to manage user accounts include the following:

• New questions have been added, such as asking foreign financial institutions to indicate their tax identification number in their country or jurisdiction, if they have one. Other questions relate to identifying the common parent entity of the expanded affiliated group.
• Certain financial institutions can now change their “Financial Institution Type.”
• Member financial institutions can now transfer to another expanded affiliated group without having to cancel their current agreement and re-register.  

The FATCA Online Registration System User Guide and FAQs have been updated for these enhancements. Additional information on this system is available at www.irs.gov/fatca. 

Do You Have Undeclared Income
From One of These 170,000 Banks

 Who Are Handing Over Your Name to the IRS?

 

 

Want to Know if the OVDP Program is Right for You?

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

The Often Overlooked 1st Time Penalty Abatement Waiver.

Using the First-Time Penalty Abatement Waiver, This article explores the IRS first-time penalty abatement waiver and explains how to help clients remove certain penalties using it.

 

12 years ago, the IRS created the first-time penalty abatement administrative waiver (FTA), which allows compliant individual and business taxpayers to request abatement, or removal, of certain penalties that the IRS has assessed against them for the first time.

 

Despite the advantages of this IRS waiver, few taxpayers who qualify for FTA request it, according to a 2012 report by the Treasury Inspector General for Tax Administration (TIGTA).

 

According to the report, the problem is twofold:

 

1. Most taxpayers and tax professionals do not know FTA exists, and
2. IRS representatives often incorrectly disallow an FTA when using the IRS’s faulty automated decision tool to make penalty determinations.

In effect, FTA is hidden to most taxpayers and tax practitioners, who may not be aware of how it works, how to request it, or even its existence. Through persistence, a practitioner can often persuade the IRS to reverse an initial incorrect determination that a taxpayer does not qualify for an FTA.

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

  

 

IRSAC Releases Its 2015 Annual Report

Internal Revenue Service Advisory Council (IRSAC) held its annual public meeting today and released its annual report for 2015 to the IRS Commissioner. The report includes recommendations on a wide range of tax administration issues.

The IRSAC is an advisory group to the entire agency. The IRSAC’s primary purpose is to provide an organized public forum for the Commissioner, senior IRS executives and representatives of the public to discuss relevant tax administration issues.

“Members of IRSAC volunteer their time and energy to provide us with valuable feedback and suggestions regarding the most important issues affecting all types of taxpayers," said IRS Commissioner John Koskinen.

Advisory council members convey the public’s perception of professional standards and best practices for tax professionals and IRS activities, offer constructive observations regarding current or proposed IRS policies, programs, and procedures, as well as suggest improvements to IRS operations.

Based on its report findings and discussions over the last year, the IRSAC made several recommendations on a broad range of issues and concerns including:

• The IRS needs sufficient funding to operate efficiently and effectively, provide timely and useful guidance and assistance to taxpayers, and enforce current law, so that the integrity of, and respect for, our voluntary tax system is maintained.
• Identity authentication of the Form 1040 series.
• Third-party payer arrangements for employment taxes
• Continuity of independence, strength and visibility of the Office of Professional Responsibility.
• Statutory authority of the IRS to regulate tax practice.
• International Information Return Penalties.

Commissioner Koskinen congratulated and thanked seven members of the Council ending their three-year terms this year:

• Fred Murray, IRSAC Chairman – Managing Director, Tax Accounting Risk Advisory & International Tax Service at Grant Thornton, LLP, Washington D.C.
• Michele Gaines – Jackson, Jackson & Jackson, Pittsburgh, P.A.
• Luis Parra – Key Accounting, Bronx, N.Y.
• Mark Mesler – Ernst & Young, LLP, Atlanta, G.A.
• Andre’ Re – Andre’ L. Re, McDonough, G.A.
• Karen Salemi – Zero Chaos, Pepperell, M.A.
• Sherrill Trovato – Sherrill L. Trovato, Fountain Valley, C.A.

The IRSAC is administered by the National Public Liaison Office.  The IRSAC draws its members from the taxpaying public, the tax professional community, small and large businesses and the payroll community.

The 2015 Internal Revenue Service Advisory Council Public Report can be found on IRS.gov.

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Contact the Tax Lawyers at 

Marini & Associates, P.A.

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

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

  

Tax Delinquents May Have Passports Canceled - Take 2!

We previously posted on Thursday, May 31, 2012 Tax Delinquents May Have Passports Canceled & Be Questioned at Air & Sea Ports  where we discussed that almost unnoticed, Congress is close to approving a law under which the Internal Revenue Service (IRS) will be able to revoke the passports of Americans who owe substantial unpaid taxes. Nothing has happened until now.

 

A GAO report found that for the 2008 tax year, the State Department issued passports to more than 224,000 citizens who owed about $6 billion in tax. Most of it was for individual income taxes, and nearly two-thirds was more than three years old.  The biggest Tax Debtor owed $46.6 million and was part-owner of a professional sports team. Another owed nearly $40 million and had traveled to 10 foreign countries in the recent past. The report said that the IRS had filed tax liens against both individuals but large amounts of tax still were uncollected.

 

Currently, if a taxpayer has an outstanding tax debt but can't be found, the IRS can alert Homeland Security officials to question the person on his way into the U.S. Typically, they will ask where the person is going and for how long, so the IRS can get in touch, but they can't arrest a taxpayer.
IRS Tax Liens are almost automatic.  The IRS can file a Notice of Federal Tax Lien after: 1. It assesses the liability, 2. They send you a Notice and Demand for Payment and 3. You fail to fully pay within 10 days.

A tax lien can be issued in error. Even where there is no mistake and the IRS lien is valid, occasionally the person might not actually owe the taxes and may just need to straighten out some paperwork. 
 

Recently the bill, known as the Trade Facilitation and Trade Enforcement Act of 2015 (S. 1269), was approved by on May 13, 2015.

It includes amendments to the tax code that would allow authorities to revoke or deny the passport of any US taxpayer who has unpaid taxes in excess of $50,000 or who have not obtained or won’t provide a Social Security number.

The concept is hardly new as we discussed above, similar proposals tying passports to tax liability have been kicked around the halls of Congress for several years.

An advocacy group for U.S. expatriates, American Citizens Abroad, wrote a letter to congressional leaders to strongly oppose the inclusion of the passport revocation provision in the legislation. 

It has been argued that this is an illegal infringement on a US citizen’s right to travel and is unconstitutional. Others fear that this provision could result in administrative nightmares and glitches that could hold up lines at airports and the Hill has expressed doubts that this bill will ever make it to President Obama’s desk.

Have A Tax Problem?

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.

for a FREE Tax Consultation

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

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

  

Sources:

AccountingToday

Accountingweb

Forbes

 

Ex-Deutsche Broker Cuts Deal In Jenkens Tax Fraud Case

Ex-Deutsche Broker Let Off Hook In Jenkens Tax Fraud Case

law360.com• Former Deutsche Bank AG broker David Parse was essentially set free Monday from charges of conspiring with two convicted Jenkens & Gilchrist PC attorneys in a $7 billion tax fraud scheme after the government agreed to a deferred prosecution agreement.

Have A Tax Problem?

 

  

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.

for a FREE Tax Consultation

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

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