Present State of the IRS…

Our firm recently hosted a tax event featuring a newly retired IRS Taxpayer Advocate who had been instrumental in breaking a log-jammed case for us. She was supposed to talk about the Taxpayer Advocate Service’s mission.

The plan was to inform our guests - fellow financial professionals, attorneys and some of our clients – of the unique advocacy duty of the IRS Taxpayer Advocate Service (“TAS”). Their service is free to help taxpayers or their representatives when IRS is not processing a case correctly, not at all, or even exerting personal bias on a case, as had happened with one of ours. Begun in 2000, TAS is staffed by former IRS personnel who put their experience and skill to work on behalf of the taxpayer…

When asked her opinion of the safety of E-Filing by one of our guests, the retired IRS Advocate nearly burst into a passionate and (obviously) long-frustrated expression of what she felt were some of the largest problems facing IRS today:

• The outrageous ease and growth of identity theft, due to IRS’s insistence that taxpayers e-file – and, that TAS staff is now being forced to deal with criminals asking them to obtain fraudulent refunds – taking away time for them to do their real job - dealing with genuine taxpayer problems
• The quitting or retirement by seasoned IRS personnel grown weary of either the complexity of the Code, and/or a too-heavy workload due to the continued staff reduction within IRS
• A dramatic stall or slowdown of claims and amended returns processing
• An apparent growing anti-taxpayer bias, reminiscent to those of us in practice in the1980’s.

And now we have news of a few employees in the tax-exempt qualifying unit “targeting” certain politically conservative 501(c)(4) applications. This is a rogue unit move, and at best, an outrageous abuse of power.

We represent clients in matters of error correction and amendment of all sorts of tax returns; problem resolution; penalty abatement, etc in addition to customized tax strategy. We are able to work through IRS staff behavioral issues because we know how. The degree of difficulty in tax resolution problems has unquestionably increased for the reasons cited above. I did not expect, nor was it the plan for our (retired) IRS Taxpayer Advocate speaker to make this the focal point of her discussion. To have her do so with such conviction was a dismaying surprise.

Estate Planning - the New Way?

But, what about the issue of income tax on capital gains, while still living? With the new higher capital gains tax rates, federally, effective Jan 1, 2013 of 20%, plus the new ACA/Medicare surtax of 3.8% if one’s taxable income is greater than $400,000 (single) or $450,000 (married filing joint). Further, if one lives in California, under newly passed Proposition 30, after $1,000,000 in capital gains this state’s tax rate can be as high as 13.3%. Before deduction of state income tax paid from federal taxable income, if you are fully able to,, the total capital gains tax rate for a California resident with more than $1 million in capital gain is now 37.1%. For low tax basis property, this will be a larger number than most of us have paid in a long time. It amounts to a combined 41% increase in total capital gains taxes for federal and California.

Isn’t it also the task of good estate planning to reduce income tax while the client is still alive? All realized capital gains are forgiven at the moment of death. How do we plan to “do this,” and also have the same assets then receive a “stepped-up tax basis” at the moment of death?

IRC Code Section 1031 is still alive and well. It allows a “tax-deferred exchange” for sales of real estate and other property, held for use in a trade or business, or for investment. Not easy to do, but feasible with good strategic deal planning and proper tax planning. The time allowed to nominate up to (generally) three replacement properties is very tight. The problem is the taxpayer’s inability to do proper due diligence on any nominee property before they are in contract, and comfortable nominating the property. Defects or misrepresentations, are always found later. The Seller knows you are in an exchange and is unwilling to renegotiate the purchase contract.

And last: IRC Section 1031 is mandatory. There may be a loss, which could be deducted, depending on the tax basis. Some people do a 1031 exchange without realizing that they are; like when they trade in one car, for another.

We can work with you to resolve these problems. Please contact us and we can show you how.