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ALERT: New Phishing Scam

November 8, 2017

The Internal Revenue Service is alerting the public to a fake insurance tax form scam that is being used to access annuity and life insurance accounts. Cybercriminals currently are combining several tactics to create a complex scheme through which both tax professionals and taxpayers have been victimized.

There may be variations but here’s how one scam works: The cybercriminal, impersonating a legitimate cloud-based storage provider, entices a tax professional with a phishing email. The tax professional, thinking they are interacting with the legitimate cloud-based storage provider, provides their email credentials including username and password. With access to the tax professional’s account, the cybercriminal steals client email addresses. The cybercriminal then impersonates the tax professional and sends emails to their clients, attaching a fake IRS insurance form and requesting that the form be completed and returned. The cybercriminal receives replies by fax and/or by an email very

similar to the tax professional’s email, using a different email service provider or a slight variation to the tax pro’s address.

The subject line varies but may be “urgent information” or a similar request. The awkwardly worded text of the email states:

Dear Life Insurance Policy Owner,

Kindly fill the form attached for your Life insurance or Annuity contract details and fax back to us for processing in order to avoid multiple tax bill.

The cybercriminal, using data from the completed form, impersonates the client and contacts the individual’s insurance company. The cybercriminal then attempts to obtain a loan or make a withdrawal from those accounts.

The IRS reminds tax professionals to be aware of phishing emails, free offers and other common tricks by scammers. Those tax professionals who have data breaches should contact the IRS immediately through their Stakeholder Liaison. Individuals who receive the insurance tax form scam email should forward it to phishing@irs.gov and then delete it. Individuals who completed and returned the fake tax form should contact their insurance carrier for assistance.

Financial Planning Tips

Bad Debt-Business or Personal Deduction?

October 18, 2017

You loan someone money and they don’t pay you back. What’s the proper tax treatment for deducting the debt?

A business bad debt is deductible on the business tax return of the taxpayer (i.e. Schedule C) as an ordinary loss and can generate a net operating loss (NOL). A non-business bad debt is deductible as a short-term capital loss (Schedule D), subject to the $3,000 per year net capital loss limitation.

The taxpayer in this case made a career out of lending money for profit, both through business entities and out of his personal funds. One of his personal loans to a commercial laundry wound up going bad. He deducted the loss as a business bad debt which in turn created NOL carrybacks and carryforwards. The IRS claimed it was a personal bad debt because the taxpayer’s private lending was not a trade or business.

According to IRC section 166, for a money lending activity to be considered a trade or business, the taxpayer must have been involved in the activity with continuity and regularity, with the primary purpose of earning income or making a profit. The courts have developed a non-exhaustive list of facts and circumstances to consider in deciding whether a taxpayer is in the business of lending money.

The IRS argued that even if the taxpayer had made enough loans over the years, his source of funds was a family limited partnership (FLP) he managed with his two sisters. Out of 89 loans made over a 14 year period, only 8 listed the taxpayer as the lender. The rest listed the FLP as the lender.

The court disagreed with the IRS based on the fact that the majority of those alleged to be FLP loans were in fact made from the taxpayer’s personal trust. The taxpayer made at least 66 loans over this period of time (either alone, or acting as trustee of his trust) to a multitude of borrowers, easily exceeding $24 million. These figures were more than sufficient to support the finding that the taxpayer’s personal lending activities were continuous and regular by themselves. Unless motivated by some hidden whimsy or charitable purpose, the number of personal loans made and the money he tied up in them proves he spent a sufficient amount of time on them.

Financial Planning Tips

Son Sells House To Parents To Avoid Foreclosure. What’s Taxable?

October 18, 2017

The son was unable to make his mortgage payments that became due on his house. In order to avoid foreclosure, he sold his house to his parents. His parents financed the purchase by taking out a loan that was used to pay off $664,048 of the taxpayer’s outstanding mortgage debt. The closing statement showed that “Total Consideration” for the sale and purchase was $975,000. The IRS claimed that the amount realized on the transaction was $975,000. The son argued that the amount realized should be his $664,048 liability relief.

IRC section 1001(b) states that the amount realized from the sale of property is the sum of any money received plus the fair market value of property other than money that is received. The regulations for this code section state that the amount realized includes the amount of liabilities from which the transferor is discharged as a result of the sale.

The son argued that the amount realized should be the $664,048 of liability relief because the transaction was in part a sale and in part a gift to his parents. The IRS argued the total consideration of $975,000 shown on the closing statement controls the determination of the amount realized.

The tax court rejected the IRS argument saying that the son received no cash and no other property from his parents as a result of the sale other than the mortgage debt that was discharged. The court said the IRS failed to understand that the transaction was in part a sale and in part a gift. [Reg. §1.1001-1(e)(1)]

The tax court ruled that the amount realized on the sale was the $664,048 of mortgage debt relief, minus the son’s settlement costs at closing. (Son must report the gift on Form 709)

If you’re in a similar bind and need tax help, contact Steve Siesser for advice. ssiesser@verizon.net

Financial Planning Tips

IRS Announces New Simplified Portability Election Method

July 18, 2017

For purposes of the Federal Estate and Gift tax, a portability election allows a surviving spouse to add the decedent’s unused estate and gift tax exclusion amount to the surviving spouse’s own exclusion amount.

Generally, since December 31, 2014, executors needed to apply via a private letter ruling to request the IRS to grant an extension of time to make the election. However, as a result of numerous requests for relief, the IRS has issued a new revenue procedure for a new simplified method to make the election, effective June 9, 2017.

For decedent’s dying in 2017, the inflation adjusted exclusion amount is $5,490,000. This means that for decedent’s dying in 2017, lifetime gifts plus the value of assets included in the gross estate up to $5,490,000 are excluded from the Federal Estate tax. For example, if a decedent dies in 2017 with total lifetime gifts and a gross estate of $3 million, the surviving spouse can elect to add $2,490,000 ($5,490,000 minus $3,000,000) to his or her own exclusion amount.

The executor of the estate of the deceased spouse must elect portability of the unused estate and gift tax exclusion amount by filing an estate tax return for the decedent within nine months of the decedent’s date of death (plus extensions) and include a calculation of the unused exclusion amount on that return. A return must be filed by the executor to elect portability even if the decedent was not otherwise required to file a Federal Estate tax return. Regulation section 301.9100-3 provides relief for executors who fail to make the election by the due date of the return by allowing an extension of time to make the election under certain circumstances.

The new simplified method is available to the executor of the estate of a decedent if:

1) The decedent:

a) Was survived by a spouse,

b) Died after December 31, 2010, and

c) Was a citizen or resident of the United States on the date of death.

2) The executor is not required to file an estate tax return based on the value of the gross estate and adjusted taxable gifts and without regard to the need to file for portability purposes,

3) The executor did not file an estate tax return by the due date of the estate tax return, and

4) The executor satisfies the following requirements:

a) The executor must file a complete and properly prepared Form 706 on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death.

b) The executor filing the Form 706 states at the top of the Form 706 that the return is “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER Sec. 2010(c)(5)(A).”

If the executor does not satisfy the above requirements, the executor can still request relief by requesting a private letter ruling under the provisions of Regulation section 301.9100-3.

This simplified method does not extend the period during which the surviving spouse or the surviving spouse’s estate may make a claim for credit or refund as a result of making the portability election under this revenue procedure.

Tax Tips

When The IRS Comes Knocking At Your Door

May 24, 2017

The IRS initiates most contacts through regular mail delivered by the United States Postal Service. However there are special circumstances in which the IRS will call or come to a home or business. Even then, taxpayers will generally first receive several letters from the IRS in the mail.

Note that the IRS does not call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card, or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. Tax payments should be made payable to the “United States Treasury.” Specific guidelines on how to make a tax payment are also listed at www.irs.gov/payments.

The IRS also does not demand that the individual pay taxes without the opportunity to question or appeal the amount the IRS says is owed. The IRS should also advise the taxpayer of his or her rights. The IRS will never threaten to bring in local police, immigration officers, or other law enforcement to have the individual arrested for not paying. The IRS also cannot revoke an individual’s driver’s license, business licenses, or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.

If an IRS representative does visit a taxpayer, he or she will always provide two forms of official credentials called a pocket commission and a HSPD-12 card. HSPD-12 is a government-wide standard for secure and reliable forms of identification for federal employees and contractors. A taxpayer has the right to see these credentials when an IRS employee visits a taxpayer in person.

Visits typically fall into three categories:

IRS revenue officers will sometimes make unannounced visits to a taxpayer’s home or place of business to discuss taxes owed or tax returns due. Revenue officers are IRS civil enforcement employees whose role involves education, investigation, and when necessary, appropriate enforcement.

IRS revenue agents will sometimes visit a taxpayer who is being audited. That taxpayer would have first been notified by mail about the audit and set an agreed-upon appointment time with the revenue agent. Also, after mailing an initial appointment letter to a taxpayer, an auditor may call to confirm and discuss items pertaining to the scheduled audit appointment.

IRS criminal investigators may visit a taxpayer’s home or place of business unannounced while conducting an investigation. However, these are federal law enforcement agents, and they will not demand any sort of payment. Criminal investigators also carry law enforcement credentials, including a badge.

Private debt collection

IRS collection employees may call or come to a home or business unannounced to collect a tax debt. They will not demand that the taxpayer make an immediate payment to a source other than the “United States Treasury.” The IRS can also assign certain cases to private debt collectors but only after giving the taxpayer and his or her representative written notice. Private collection agencies will not ask for payment on a prepaid debit card or gift card. Taxpayers can learn about the IRS payment options on www.irs.gov/payments. Payment by check should be payable to the “United States Treasury” and sent directly to the IRS, not the private collection agency.

The IRS has created a special new page on www.irs.gov to help taxpayers determine if a person visiting their home or place of business claiming to be from the IRS is legitimate or an imposter. With continuing phone scams and in-person scams taking place across the country, the IRS reminds taxpayers that IRS employees do make official, sometimes unannounced, visits to taxpayers as part of their routine casework. Taxpayers should keep in mind the reasons these visits occur and understand how to verify if it is the IRS knocking at their door.

Tax Pro