Source: http://goodattorneysatlaw.com/2010/05/
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May 2010 | Good Attorneys At Law
Good Attorneys At Law > Tax law blog > 2010 > May
The IRS Statute of Limitations – How Long Does The IRS Have To Collect A Tax Debt?
The IRS usually has 3 years, usually…
The IRS Statute of Limitations – In most cases, the IRS may “assess additional tax” for the last three tax years, but that doesn’t mean they can’t look
Under IRC section 6501(a), the statue of limitations (SOL) for assessment of taxes expires three (3) years from the due date of the return or the date that you file your return, whichever is later. Extending the due date for filing the return does not change the date the SOL starts to run.
The IRS statute of limitations does begin to run until you file your return, even if it relates to a year long past. In such cases the taxes can be assessed at any time.
The statute does not run if you file a false or fraudulent return or are willfully attempting to evade tax. Here too the tax may be assessed or collected at any time.
If you substantially understate your gross income (more than 25%), the IRS statute of limitations is extended to six (6) years.
With respect to collections, the IRS generally has ten (10) years after the date of the assessment of tax or levy to collect. That applies to assessments made after November 5, 1990.
There are other exceptions and special circumstances that affect the IRS statute of limitations. If you’ve been outside of the US for a significant period of time, for example, or agreed to an extension with IRS, your SOL deadlines may be different. The rules governing the statues of limitations begin at IRC Section §6501.
Audit Tip For Tax Practitioners: Always be aware of the statutes of limitations for years adjoining your client’s audit years. The examiner may wish to “open up” prior years that have closed. Also, the IRS may examine tax returns extending well before the three year assessment period, even if no exception applies, to gain additional information about the taxpayer and his affairs.
Ari Good has considerable experience in federal income and excise tax issues, and in state sales, use, property, intangibles and franchise tax matters. Good Attorneys At Law, PA defends taxpayers facing tax audits in industries ranging from aviation to hospitality. Mr. Good has a proven track record in complex tax transactions and in serving businesses of all sizes.
Analysis of the 2010 Small Business Jobs Act
The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business, paid for with various revenue raisers. Here’s a brief overview of the tax changes in the new law.
100% exclusion of gain from the sale of small business stock for qualifying stock acquired after Sept. 27, 2010 and before Jan. 1, 2011. Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don’t exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after Sept. 27, 2010 and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.
Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after Sept. 27, 2010, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).
Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of Sept. 27, 2010.
Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after Sept. 27, 2010 are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.
What Constitutes A “Hardship” Distribution From My Retirement Account?
Qualified Deferred Compensation Plans Under 401(k), 403(b) and 457(b)
The rules for hardship distributions vary by the type of plan from which you intend to take a hardship withdrawal. What constitutes a “hardship” is typically set forth in the plan itself. If your 401(k), 403(b) and 457(b) plan permits hardship withdrawals, for example, the plan may permit distributions for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses.
What is the IRS definition of “hardship”?
While similar, the specific tests for hardship withdrawals vary slightly according to the type of plan. A hardship distribution from a 401(k) plan, for example, depends on an “immediate and heavy financial need of the employee” and/ or the employee’s family (See Reg. §1.401(k)-1(d)(3)(i))). Under the provisions of the Pension Protection Act of 2006, the need of the employee also may also include the need of the employee’s non-spouse, non-dependent beneficiary. The amount of the distribution may not exceed the amount of the need, however, the distribution may include funds necessary to cover any taxes or penalties that may result from the distribution. (Reg. §1.401(k)-1(d)(3)(iv)(A)). The rules for hardship distributions from 403(b) plans are similar to those for hardship distributions from 401(k) plans.
Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence. Expenses for the purchase of consumer goods such as a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee. (Reg. §1.401(k)-1(d)(3)(iii)). If your hardship distribution is from a 457(b) plan, in contrast, you must be able to show “unforeseeable emergency.” (Reg. § 1.457-6(c)(2))
A distribution is not considered necessary to satisfy an immediate and heavy financial need of an employee if the employee has other resources available to meet the need, including assets of the employee’s spouse and minor children. Whether other resources are available is determined based on facts and circumstances. Thus, for example, a vacation home owned by the employee and the employee’s spouse generally is considered a resource of the employee, while property held for the employee’s child under an irrevocable trust or under the Uniform Gifts to Minors Act is not considered a resource of the employee. (Reg. §1.401(k)-1(d)(3)(iv)(B))
What Do I Need To Provide In Order To Prove I Have An Immediate And Heavy Financial Need?
Most 401(k) plans follow “deemed necessary” rules, which in plain terms means it is not necessary to provide personal financial information to your employer or plan administrator to prove hardship. Generally, if a 401(k) plan provides for hardship distributions, the plan will specify what information must be provided to the employer to demonstrate a hardship. An employer may generally rely on the employee’s representation that he or she is experiencing an immediate and heavy financial need that cannot be relieved from other resources, unless the employer is actually aware that the employee can meet his immediate need:
(2) By liquidation of the employee’s assets;
(3) By stopping elective contributions or employee contributions under the plan;
(4) By other currently available distributions (such as plan loans) under plans maintained by the employer or by any other employer; or
(5) By borrowing from commercial sources. (Reg. §1.401(k)-1(d)(3)(iv)(C))
What is the maximum amount that can be distributed as a hardship from a 401(k) plan?
The amount allowable as a hardship distribution cannot be more than your total elective contributions – including Roth contributions – as of the date of the withdrawal, less any prior elective distributions you’ve taken for prior hardships or other reasons. This is referred to as the “maximum distributable amount”. This amount generally does not include earnings, non-elective contributions (such as required minimum distributions) or matching contributions. Other amounts under the plan, if any, such as your employer’s matching contributions and discretionary profit-sharing contributions may also be distributed on account of hardship if the plan so provides. (Reg. §1.401(k)-1(d)(3)(ii)).
What are the tax consequences of taking a hardship distribution from a 401(k) plan?
Hardship distributions are includible in gross income unless they consist of designated Roth contributions. In addition, they may be subject to an additional tax on early distributions of elective contributions. Unlike loans, hardship distributions are not repaid to the plan. Hardship distributions permanently reduce the employee’s account balance under the plan.
A hardship distribution cannot be rolled over into an IRA or another qualified plan. (Code § 402(c)(4))
What is a distribution on account of an “unforeseeable emergency” under a 457(b) plan?
Unlike 401(k) and 403(b) plans, a hardship distribution under a 457(b) plan can only occur when the participant is faced with an unforeseeable emergency. (Code § 457(d)(1)(iii)). An unforeseeable emergency is a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Examples include imminent foreclosure on, or eviction from, the employee’s home, medical expenses, and funeral expenses. Generally, the purchase of a home and the payment of college tuition are not unforeseeable emergencies.
Whether a participant or beneficiary is faced with an unforeseeable emergency depends on the facts and circumstances. However, a distribution is not considered an unforeseeable emergency to the extent that the emergency can be relieved through insurance, liquidation of the participant’s assets, or cessation of deferrals under the plan. (Reg. § 1.457-6(c)(2)(ii)). A distribution on account of an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need. (Reg. § 1.457-6(c)(2)(iii))
Are hardship distributions allowed from IRAs?
There is generally no limit on whether or when an IRA owner may take a distribution from his or her IRA. There may, however, be considerable tax consequences from taking an “early distribution” absent a hardship. The rules defining “hardship” for IRA withdrawals are similar to those pertaining to qualified retirement plans. If qualified, hardship distributions from IRAs and Roth IRAs will be exempt from the additional tax.
Certain other types of withdrawals from an IRA account would not subject you to the extra tax. These include withdrawals for higher education expenses or to finance a first-time home purchase. (Code § 72(t)(2)(E),(F))
Preserve Deductibility of Your Home Office Expenses Through Careful Bookkeeping and Records
There are a number of universal “truths” when it comes to home office deductions and the “mixed” use of property that can serve both personal and business uses, like vehicles:
(1) Do not commingle funds. It goes without saying that having multiple accounts for multiple business ventures, and your personal affairs, can be a hassle. Keeping separate accounts for these needs is nevertheless one of the essentials. You can often administer multiple accounts relatively easily online if you maintain your personal and business accounts at the same bank.
(2) Make sure the deductions you claim match your books and receipts. It is not difficult for there to be some “slippage” in how well you keep your receipts and the deductions you take on your tax return, however, an auditor will be looking for these discrepancies. Most accounting software such as Quickbooks allows you to automatically download credit card activity into your accounts. It is then up to you to match the entries to the correct accounts, or to delete the entries if they do not relate to your business. As with online banking and multiple bank accounts, it pays to keep separate credit cards for your business and personal affairs. This helps you avoid the commingling problems identified above.
The IRS is unfortunately fond of jargon and acronyms. In order to be efficient, auditors will look for “LUQ” items, or “large, unusual or questionable” expenses. There is no precise definition of what these items are, but when it comes to reviewing your own books, consider the following approach:
Do you have deductions for certain types of expenses that are much larger than others?
Do you have deductions that repeat more frequently than others? You may need to replenish your paper supply frequently, for example. There is nothing to say this is not deductible if used for business purposes, however, it might be wise to order in bulk if multiple orders stick out relative to your other expenses.
Does the amount of the deduction match the item to which it relates? A $700.00 deduction for renting a conference room for a hotel seminar probably “looks right”. A $700.00 deduction for office supplies might not.
Beware of the difference between capital and ordinary expenditures. If you purchase capital equipment such as a computer, for example, you may not be able to deduct the full purchase price in full. Rather, you must depreciate this type of equipment and take your deductions over the equipment’s “recovery period”.
Please do not hesitate to contact us for further information and tax guidance in managing your home office and “dual use” property tax issues.
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