FAQs - Frequently Asked Tax Questions
The US Tax System
is Voluntary tax protester found Guilty
Irwin Schiff, an anti-tax crusader, and an associate
were found guilty on October 24, 2005 of multiple charges including
conspiracy, tax evasion and tax fraud.
Mr. Schiff, 77, who
argues that paying taxes is voluntary, was handcuffed and led from
United States District Court after a jury found him guilty of all 13
charges. Schiff has written books and maintained a lucrative
business convincing gullible people that his convoluted ramblings
were valid legal research. 10/28/05
The IRS is hiring private debt
The Internal Revenue Service
plans to turn over the names of people who owe $7.7 billion to debt
collection agencies starting in June. If the extra heat pays off,
the agency gradually will add to the list as it whittles away
roughly $50.7 billion in unpaid taxes.
The move will give
many Americans one more reason to hate the IRS.
enough making it as it is, and then you're going to have a
government agency hiring collectors to hound people?" said Christina
Hess, 24, a catering administrative assistant who doesn't owe any
back taxes. "It just seems like another way to screw us any way they
IRS officials say turning over the names of deadbeat
taxpayers to professional collectors is necessary to slow the
growing debt of the most recalcitrant taxpayers. Their overdue taxes
grew 86 percent to $13 billion between 2000 and 2003.
believe that many of these taxpayers have simply chosen not to pay,
even though they have the means to do so," IRS Commissioner Mark
Everson said in congressional testimony. "This is unfair to every
hard-working taxpayer who has paid his or her fair
Congress voted to allow the IRS to use debt collectors
last year as a way to generate more income in light of the
ballooning budget deficit.
The agency is reviewing bids and
plans to pick between one and three collection agencies by
To minimize scams, IRS employees will send letters
notifying taxpayers that a debt collector will be contacting
A similar plan failed miserably when it was tested
about a decade ago, costing the government about $21 million to
collect just $3.1 million, according to a Government Accountability
Office report. 1/2/06
Is Debt Discharged in
Bankruptcy Taxable Income?
===========Question: We have recently had our bankruptcy
discharged. We are giving back the house, will the discharged debt
be considered income? If so how are we supposed to be able to pay
those taxes when we are broke?thanks,Josh
Normally, Cancellation of Indebtedness is considered Taxable Income.
The exception is if the taxpayer is bankrupt or insolvent. Since you
filed a Chapter 7 Bankruptcy Liquidation, you will not be taxed on
the COD income.
A Telecommuter Can be
Taxed in the Employer's State
The US Supreme Court refused to hear an appeal from a
Tennessee resident who telecommuted for a New York company. Even for
the time the worker was not in NY, the Empire State taxed his wages.
This certainly discourages telecommuting for NY companies and
suggests that subsidiaries should be established in more tax
friendly states. Huckaby v. New York State Division of Tax Appeals,
IRS Audits are now
focusing on Executive Fringe Benefits. The purpose
is to deny the deduction for the business and to include the
expenses as income for the Executive. Areas scrutinized in the
- Athletic Skyboxes and Cultural Entertainment Suites Awards
- Bonuses Club Memberships
- Corporate Credit Cards
- Employee Discounts
- Paid Vacations
- Employer-Paid Parking
- Loans Executive Dining Room
- Relocation Costs
- Financial Planning
- Outplacement Services
- Transportation/ Company Cars
- Spousal/ Dependent Travel
- Private Jet Use
- Transfer of Property (such as real estate, stock, computers,
furniture and cell phones)
- Personal Use of "Listed" Property (such as computers, cell
phones, and home office items) 10/25/05
Reporting Foreign Bank Accounts
to the IRS
Taxpayers must use Form 8300 (see TD F 90-22.1) to report
transactions over $10,000 in cash and to report a foreign bank
TD F 90-22.1 requires insurance companies to report
if a taxpayer has cash surrender value in a insurance policy over
$10,000 if the company is foreign
The policy could have been purchased in the
USA with a foreign company or with a USA company that later got
brought out by a foreign company or you may actually live out of the
USA and brought your policy from a foreign insurance
This is part of the continuing attempt to by the IRS
to tax all worldwide income of taxpayers.
The IRS Defines a Qualifying
Child for Tax Purposes
Beginning in 2005, the Internal Revenue Service (IRS) defines a
qualifying child as someone who meets the same four tests: the
relationship test, the residency test, the age test and the support
test. The qualifying child designation applies to the:
- Dependency exemption
- Head of household filing status
- Earned income credit
- Child tax credit, and
- Credit for child and dependent care expenses.
To meet the relationship test, the child must be the taxpayer’s
child (including an adopted child, stepchild, or eligible foster
child) brother, sister, stepbrother, stepsister, or a descendent of
one of these relatives.
The child must live with the taxpayer at least half of the year
to meet the residency test, with the exceptions of a child who was
born or died during the year, or who was absent for special reasons,
including attending school, or for medical care, etc. Certain
exceptions are made for children of divorced parents.
The age of the qualifying child will differ depending on the tax
benefit. The child must be under 19, or a full time student under
age 24 at the end of the year, to be a qualifying child for the
dependency exemption, head of household filing status, and the
earned income credit. The child must be under the age of 17 for the
taxpayer to claim a child tax credit, and under the age of 13 for
the credit for child and dependent care expenses.
A child cannot have provided over half of his or her own support
during the year to meet the support test.
In addition, the qualifying child must also be a U.S. citizen,
U.S. national, or a resident of the United States, Canada, or
Mexico. An exception applies for certain adopted children.
When a child can be the qualifying child of more than one person,
only one person can treat the child as a qualifying child. When
individuals cannot agree on who will claim the child, the IRS uses
the Tie-Breaker Rule.
If the qualifying child is married, he or she cannot file a joint
return unless the return is filed only as a claim for refund. No tax
liability would exist for either spouse it they had filed separate
Additional information about children of divorced or separated
parents is found in IRS Publication 501, Exemptions, Standard
Deduction, and Filing Information. For additional rules that apply
to child tax credit and dependent care expenses, the taxpayers and
practitioners may refer to Publication 972, Child Tax Credit and
Publication 503, Child and Dependent Care Expenses, and the IRS
What Happens if the IRS Rejects an Offer
An OIC rejected by Appeals can be challenged in Tax Court - see
section 6330(d) and _Fowler v. Commissioner_, T.C. Memo 2004-163.
The standard of review in Tax Court is "abuse of
Section 6630(d) states that a person shall
have 30 days to file with the Tax Court.
Question from another Attorney:
I would really appreciate any guidance on this question as
it's out of my
Facts: Real Estate Broker
receives a Notice of Levy from the IRS against an
Agent. Agent is not an employee of the Broker, and
commissions are not paid to Agent but are paid to Agent's
Question: Should Real Estate
Broker STILL turn over to the IRS the
commissions that are due to
the Agent's corporation?
I am inclined to advise that the
Broker has no obligation to turn over the
commissions to the IRS
b/c the commissions are NOT due to the Agent but are
due to the
The Broker must comply with the SPECIFICS of the levy. If
the levy is not against the agent's corporation, then there is no
problem paying the money to the corporation. Have the broker note no
$ are being paid to the agent in the response to the Revenue
Officer. I have an article about this on my web site.
Jail for Unreported
Category: Tax and
Subject: 10 years unpayed
rental income tax
Would a 68 year old woman in failing health
be put in jail for selling 2 homes she has rented out for 10 years
without claiming that income?
Will unexplainable monthly bank
deposits be questioned in the sale of the homes? Mom is ready for a
nursing home but we are afraid if we try to sell her properties she
will instead go to jail.
and Taxation Law
Subject: Re: 10 years
unpayed rental income tax
Do not discuss this in a public
forum such as this.
Please call a tax lawyer.
more information at www.taxesq.com
I hope this
Buying a Horse - Business or
Subject: LLC for horse
A couple of friends and myself want to buy a
horse. Over time if we are sucessful we may invite others to
join us. if that was to happen we would take a small percenage of
the horses winnings as a fee to cover costs. Should we become a
LLC? If yes, is it something we can do over the
Category: Business Law
Subject: Re: LLC for horse partnership?
need a LLC and an attorney-drafted Operating Agreement to spell out
the rights and obligations of the parties. Also, you have to be very
careful of the IRS "hobby loss" provisions. If your business does
not show a profit, it will eventually be deemed a "hobby" for tax
purposes and the loses will not be deductible.
I have more
information on LLC formation and tax law at www.taxesq.com
hope this helps!
Category: Tax and Taxation Law
Subject: 2 people claiming same child
a letter from the IRS claiming that someone else claimed the same
child I did and requesting that one of us amend our return. I will
not be amending my return because I believe I'm entitled to claim
the child as I meet all of the criteria. I suspect the other
person will just ignore the letter. Do I just sit and wait for
the IRS to contact me again or do I send a letter explaining why I
feel I'm entitled to claim the child? I want to get this
resolved as soon as possible as I don't want this to affect my 2006
and Taxation Law
Subject: Re: 2 people
claiming same child
The status of a child as a dependent
causes more IRS audits than any other issue. The criteria for 2005
If you claim a child, he or she must meet three
Residency Test – The child must have lived
with you in the United States for more than half of 2005.
Relationship Test – The child must be your son, daughter,
stepchild, foster child, brother, sister, stepbrother, stepsister,
or a descendant of any of them. Your child includes:
child who was placed with you by an authorized placement agency, or
by judgment, decree, or other order of any court of competent
A legally adopted child or a child lawfully placed
with you for legal adoption.
Age test – At the end of 2005,
the child must have been under age 19, a full-time student under age
24 or any age if permanently and totally disabled at anytime during
I have more detail abpout this
Subject: Small business (mobile
I am starting a mobile motorcycle
detailing business from my home part time. I would like to
know what business structure would best protect my business assets
as well as my personal assets, Sole Proprietorship, S Corporation,
or LLC? And what type of insurance would best suit that structure?
Subject: Re: Small business
(mobile motorcycle detailing)
The Limited Liability Company
would be your best business structure in New Jersey. It is
treated as a "disregarded entity" for federal and state tax purposes
yet you have liability protection similar to a corporation. I have
more information on Choice of Business entity on my website at
I hope this helps!
I am currently
seeking to purchase a business with a corrupt tax history due to
accountant negligence. If purchased will the corrupt tax history
Category: Business Law
Subject: Re: Business
You need a tax and business
attorney before you proceed. Many businesses have tax problems. That
does not mean you cannot purchase the business. You just need to
investigate the taxes due and to have the acquisition carefully
structured. This is not the type of transaction you can go forward
without expert help
I have more information on my web
I hope this helps!